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, 2007
( ) 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 past twelve months (or
for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark whether the registrant is a Shell Company (as
defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
As of August 1, 2007, there were 1,293,608 shares issued and 1,293,001
shares 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, 2007
(unaudited) and December 31, 2006 3
Condensed Consolidated Statements of Income for the Three and
Six Months Ended June 30, 2007 and 2006 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2007 and 2006 (unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
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 2007 2006
- ------ ----------- ------------
(Unaudited)
Cash and due from banks $ 2,619,164 $ 1,057,602
Interest-bearing demand deposits with other banks 728 587
Federal funds sold 1,335,000 40,000
------------ -----------
Total cash and cash equivalents 3,954,892 1,098,189
Interest-bearing time deposit in other bank 100,000 100,000
Investments in available-for-sale securities (at fair value) 35,226,991 38,319,846
Federal Home Loan Bank stock, at cost 1,418,800 1,328,300
Loans, net of allowance for loan losses of $373,736 as of June 30, 2007
and $334,917 as of December 31, 2006 58,118,429 53,709,317
Premises and equipment 816,070 786,815
Goodwill 132,293 132,293
Core deposit intangible 71,125 81,625
Accrued interest receivable 439,610 427,679
Other assets 223,919 200,672
------------ -----------
Total assets $100,502,129 $96,184,736
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 5,394,704 $ 5,261,639
Interest-bearing 60,186,972 56,100,270
------------ -----------
Total deposits 65,581,676 61,361,909
Federal Home Loan Bank advances 25,099,287 24,965,119
Other liabilities 254,866 181,908
------------ -----------
Total liabilities 90,935,829 86,508,936
------------ -----------
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; 1,293,608 shares issued, 1,293,001 and 1,293,608 outstanding
at June 30, 2007 and December 31, 2006, respectively 12,936 12,936
Paid-in capital 7,734,132 7,725,786
Retained earnings 2,682,208 2,627,752
Unearned compensation - ESOP (431,445) (431,445)
Unearned compensation - Recognition and Retention Plan (310,249) (139,104)
Accumulated other comprehensive loss (117,154) (120,125)
Treasury stock, at cost (607 shares at June 30, 2007) (4,128)
------------ -----------
Total stockholders' equity 9,566,300 9,675,800
------------ -----------
Total liabilities and stockholders' equity $100,502,129 $96,184,736
============ ===========
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,
------------------------ ------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Interest and dividend income:
Interest and fees on loans $ 973,404 $ 789,055 $1,900,205 $1,506,358
Interest on investments-taxable 430,326 260,807 881,177 521,953
Other interest income 58,968 19,381 87,361 44,339
---------- ---------- ---------- ----------
Total interest and dividend income 1,462,698 1,069,243 2,868,743 2,072,650
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits
566,332 415,895 1,085,015 740,810
Interest on Federal Home Loan Bank advances 270,378 149,573 550,219 324,895
---------- ---------- ---------- ----------
Total interest expense 836,710 565,468 1,635,234 1,065,705
---------- ---------- ---------- ----------
Net interest and dividend income 625,988 503,775 1,233,509 1,006,945
Provision (benefit) for loan losses 21,000 (725) 44,923 12,282
---------- ---------- ---------- ----------
Net interest and dividend income
after provision (benefit) for loan losses 604,988 504,500 1,188,586 994,663
---------- ---------- ---------- ----------
Noninterest income:
Service charges on deposits 50,677 50,364 103,572 103,281
Net gain on sales of available-for-sale securities 16,081
Loan commissions 2,246 2,246
Other income 11,513 17,218 27,055 30,272
---------- ---------- ---------- ----------
Total noninterest income 64,436 67,582 148,954 133,553
---------- ---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 326,962 282,477 650,995 545,258
Occupancy expense 37,954 37,823 76,532 76,464
Equipment expense 22,031 21,237 43,526 44,232
Data processing 46,640 48,995 97,489 98,774
Blanket bond insurance 4,727 4,988 6,796 10,499
Professional fees 42,915 29,136 85,625 64,143
Supplies and printing 7,634 9,636 20,339 19,465
Telephone expense 12,843 13,186 25,794 25,816
Marketing expense 24,162 17,039 36,393 32,136
Postage expense 10,066 10,129 19,509 19,585
Other expense 98,656 84,240 176,356 156,531
---------- ---------- ---------- ----------
Total noninterest expense 634,590 558,886 1,239,354 1,092,903
---------- ---------- ---------- ----------
Income before income tax expense 34,834 13,196 98,186 35,313
Income tax expense 16,583 726 43,730 5,677
---------- ---------- ---------- ----------
Net income $ 18,251 $ 12,470 $ 54,456 $ 29,636
========== ========== ========== ==========
Shares used in computing net income per share:
Basic 1,202,866 1,250,855 1,207,512 1,250,227
Diluted 1,240,035 1,285,441 1,240,019 1,284,183
Net income per share - basic $ 0.02 $ 0.01 $ 0.05 $ 0.02
Net income per share - diluted $ 0.01 $ 0.01 $ 0.04 $ 0.02
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,
---------------------------
2007 2006
----------- -----------
Cash flows from operating activities:
Net income $ 54,456 $ 29,636
Adjustments to reconcile net income to net cash provided
by operating activities:
Net gains on sales of available-for-sale securities (16,081)
Net amortization of securities 36,679 39,460
Change in deferred loan origination costs, net (16,446) (50,949)
Provision for loan losses 44,923 12,282
Recognition of stock option expense 13,531 10,579
Depreciation and amortization 53,160 53,183
Increase in accrued interest receivable (11,931) (23,213)
Amortization of core deposit intangible 10,500 11,500
Increase in other assets (114) (17,040)
Decrease in loan servicing rights and interest-only strips, net 12,704 3,610
Increase in prepaid expenses (43,409) (69,541)
Decrease in taxes receivable 7,299 5,719
Increase in taxes payable 15,670
Deferred income tax benefit (1,675) (1,127)
Increase in accrued ESOP and Recognition and Retention Plan 22,951 16,916
(Decrease) increase in accrued expenses (10,794) 95,420
Decrease in accrued interest payable (1,856) (8,068)
Increase in other liabilities 46,987 8,822
----------- -----------
Net cash provided by operating activities 216,554 117,189
----------- -----------
Cash flows from investing activities:
Purchases of available-for-sale securities (7,072,624) (3,395,103)
Proceeds from sales of available-for-sale securities 2,645,150
Principal payments received on available-for-sale securities 7,504,650 3,795,753
Redemption of Federal Home Loan Bank stock 250,400
Purchase of Federal Home Loan Bank stock (90,500)
Loan originations and principal collections, net (4,171,472) (2,906,975)
Loans purchased (532,813) (1,944,536)
Loan participations sold 265,024
Recoveries of previously charged off loans 1,672 59
Capital expenditures - premises and equipment (82,415) (51,483)
----------- -----------
Net cash used in investing activities (1,533,328) (4,251,885)
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, savings and NOW deposits 1,595,370 (1,471,755)
Net increase in time deposits 2,624,397 6,197,252
Net change on short-term advances from Federal Home Loan Bank (1,000,000)
Long-term advances from Federal Home Loan Bank 5,326,168 1,610,411
Payments on long-term advances from Federal Home Loan Bank (4,192,000) (3,815,339)
Liquidation of Monadnock Mutual Holding Company 50,000
Net proceeds from issuance of common stock (total proceeds of $5,661,448,
less offering costs of $808,497) 4,852,951
Purchase of common stock for treasury (4,128)
Purchase of 25,931 shares for MRP (176,330)
----------- -----------
Net cash provided by financing activities 4,173,477 7,423,520
----------- -----------
5
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
Six Months Ended June 30, 2007 and 2006
---------------------------------------
(UNAUDITED)
(continued)
2007 2006
----------- -----------
Net increase in cash and cash equivalents 2,856,703 3,288,824
Cash and cash equivalents at beginning of period 1,098,189 855,026
----------- -----------
Cash and cash equivalents at end of period $ 3,954,892 $ 4,143,850
=========== ===========
Supplemental disclosures:
Interest paid $ 1,637,090 $ 1,073,773
Income taxes paid 32,300 2,456
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, 2007
Note 1. Nature of Business and Significant Accounting Policies
Nature of Operations: Monadnock Community Bank (the "Bank") provides a
variety of financial services to corporations and individuals from its offices
in Peterborough, New Hampshire and Winchendon, Massachusetts. 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, 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 Company sold 707,681 shares, par value of $.01 per share
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. All per share amounts, references to common stock and
stockholders' equity amounts have been restated as if the conversion had
occurred as of the earliest period presented.
Basis of Presentation: The consolidated financial statements presented in
this quarterly report include the accounts of the Bank. The consolidated
financial statements of the Company have been prepared in conformity with
accounting principles generally accepted in the United States of America
("GAAP") for interim financial information and predominant practices followed
by the financial services industry, and are unaudited. Interim statements are
subject to possible adjustment in connection with the annual audit of the
Company for the year ending December 31, 2007. 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, 2007 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,
2007. 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, 2006.
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, 2007, 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, 2006.
Note 2. Earnings Per Share
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
issuance. Weighted average options to purchase 2,602 shares of common stock
were outstanding during the first and second quarters of 2007, but were not
included in the computation of weighted average
7
common shares outstanding for purposes of computing diluted earnings per share,
because the effect would have been antidilutive.
Note 3. Investments
The Company classifies its investments in debt securities as securities
held-to-maturity, securities available-for-sale or trading securities.
Securities held-to-maturity are carried at amortized cost, securities
available-for-sale are carried at fair value with unrealized gains and losses
shown in accumulated other comprehensive income (loss) as a separate component
of stockholders' equity, net of related tax effects, and trading securities are
carried at fair value with unrealized gains and losses reflected in earnings.
The Company had no securities classified as held-to-maturity or trading
securities during 2007 or 2006.
The amortized cost and estimated fair value of securities at June 30,
2007 and December 31, 2006 are as follows:
Amortized Estimated
Cost Basis Fair Value
----------- -----------
June 30, 2007:
U. S. Government agency obligations $ 2,000,000 $ 1,981,250
Mortgage-backed securities:
FNMA 13,353,812 13,232,008
FHLMC 5,919,177 5,891,703
GNMA 14,147,998 14,122,030
----------- -----------
Total mortgage-backed securities 33,420,987 33,245,741
----------- -----------
Total investments in available-for-sale securities $35,420,987 $35,226,991
=========== ===========
December 31, 2006:
U. S. Government agency obligations $ 3,000,000 $ 2,969,063
Mortgage-backed securities:
FNMA 11,669,332 11,659,816
FHLMC 3,921,455 3,869,891
GNMA 19,927,974 19,821,076
----------- -----------
Total mortgage-backed securities 35,518,761 35,350,783
----------- -----------
Total investments in available-for-sale securities $38,518,761 $38,319,846
=========== ===========
Note 4. Loans
Loans consist of the following at:
June 30, December 31,
2007 2006
----------- ------------
One- to four-family residential $29,197,383 $27,413,968
Home equity 5,479,876 5,825,299
Commercial real estate 11,827,220 9,251,740
Multifamily 1,395,246 1,224,684
Construction and land development loans 738,800 1,108,258
Commercial loans 7,349,186 7,010,047
Consumer loans 2,188,274 1,910,504
----------- -----------
58,175,985 53,744,500
Allowance for loan losses (373,736) (334,917)
Deferred costs, net 316,180 299,734
----------- -----------
Net loans $58,118,429 $53,709,317
=========== ===========
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.
8
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 for the six
months ended June 30:
2007 2006
-------- --------
Balance at beginning of period $334,917 $311,250
Recoveries of loans previously charged off 1,672 59
Provision for loan losses 44,923 12,282
Charge offs (7,776) (10,823)
-------- --------
Balance at end of period $373,736 $312,768
======== ========
Information with respect to impaired loans consisted of the following at:
June 30, December 31,
2007 2006
-------- ------------
Recorded investment in impaired loans $340,448 $60,434
======== =======
Impaired loans with specific loss allowances $239,556 $60,434
======== =======
Loss allowances reserved on impaired loans $ 68,000 $ 9,065
======== =======
The Company's policy for interest income recognition on impaired loans is
to recognize income on impaired loans on the cash basis when the loans are both
current and the collateral on the loan is sufficient to cover the outstanding
obligation to the Company; if these factors do not exist, the Company will not
recognize income. The average recorded investment in impaired loans was
$137,000 and $154,000 for the six months ended June 30, 2007 and 2006,
respectively. During the three and six months ended June 30, 2007 and 2006, the
Company recognized no income on impaired loans.
Note 5. Deposits
Interest-bearing deposits consisted of the following at:
June 30, December 31,
2007 2006
----------- ------------
NOW accounts $ 4,885,222 $ 3,447,510
Savings accounts 2,244,375 2,271,000
Money market deposit accounts 9,676,808 9,625,590
Time certificates 43,380,567 40,756,170
----------- -----------
$60,186,972 $56,100,270
=========== ===========
Note 6. Recent Events
On July 25, 2007, the Company announced a Stock Repurchase Program
("Program"), whereby the Company's Board of Directors authorized the repurchase
of up to 5.0% of its outstanding common stock or up to 64,650 shares of common
stock. These shares will be purchased at prevailing market prices from time to
time over a twelve-month period depending upon market conditions. Any
repurchased shares will be held as treasury stock and will be available for
general corporate purposes.
9
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, 2007
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. (or the "Company") and its wholly owned
subsidiary, Monadnock Community Bank (or the "Bank"). These forward-looking
statements are generally identified by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar words. Our ability to
predict results or the actual effect of future plans or strategies is
uncertain. Factors which could have a material adverse effect on our operations
include, but are not limited to, changes in interest rates, general economic
conditions, economic conditions in the states of New Hampshire or
Massachusetts, legislative and regulatory changes, monetary and fiscal policies
of the U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, fiscal policies of the New Hampshire or Massachusetts State
Government, the quality or composition of our loan or investment portfolios,
demand for loan products, competition for and the availability of loans that we
purchase for our portfolio, deposit flows, competition, demand for financial
services in our market areas and accounting principles and guidelines,
acquisitions and the integration of acquired businesses, asset-liability
management, the financial and securities markets and the availability of and
costs associated with sources of liquidity.
We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. We wish to
advise readers that the factors listed above could affect our financial
performance and could cause our actual results for future periods to differ
materially from any opinions or statements expressed with respect to future
periods in any current statements. We do not undertake and specifically decline
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 Monadnock Bancorp, Inc. and
Monadnock Community Bank. On June 28, 2006, Monadnock Bancorp, Inc. succeeded
Monadnock Community Bancorp, Inc. as the holding company of Monadnock Community
Bank. Financial information in this report prior to June 28, 2006 is of
Monadnock Community Bancorp, Inc. on a consolidated basis. The information
contained in this section should be read in conjunction with other sections of
management discussion and analysis, including these consolidated financial
statements.
As a community based financial institution, our principal business has
historically consisted of attracting deposits from the general public and the
business community and making loans secured by various types of collateral,
including residential and commercial real estate and general business assets.
Deposit flows are influenced by a number of factors, including interest rates
paid on competing investments, account maturities, fee structures, and level of
personal income and savings. Lending activities are influenced by the demand
for funds, interest rate levels, the number and quality of lenders, and
regional economic cycles. Our sources of funds for lending activities include
deposits, borrowings, payments on loans, maturities of securities and income
provided from operations.
Our earnings are primarily dependent upon our net interest income, which
is the difference between interest income on interest-earning assets, which
principally consist of loans and investment securities, and interest expense on
interest-bearing liabilities, which principally consist of deposits and
borrowings. Our results of operations also are affected by the level of our
provisions for loan losses, non-interest income and non-interest expenses.
Non-interest income consists primarily of service charges on deposit accounts,
point of sale income from debit and credit card transactions and any gain on
sale of loans and investments. Non-interest expense consists primarily of
salaries and employee benefits, occupancy, equipment, data processing and ATM
expense. 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 ("FHLB") 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
10
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. On June 28, 2006, we completed our conversion to full stock
ownership in order to raise additional capital to continue our growth.
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 $8.7 million, or 17.6%,
from $49.4 million at June 30, 2006 to $58.1 million at June 30, 2007. We plan
to continue to grow our loan portfolio with the net proceeds raised in the
stock offering.
Expanding Market Presence Through a New Office. Total assets have grown
$17.2 million, or 20.6%, from $83.3 million at June 30, 2006 to $100.5 million
at June 30, 2007, 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
2006 stock offering to appeal to a wide base of prospective customers. The
efforts to increase our market presence have included the Winchendon branch
acquisition in October 2004 and evaluating a potential new office in the
future. Our business plan contemplates opening a new office at a future date.
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 possible branch acquisitions, or the establishment of a new office
although we currently have no arrangements or understandings regarding any
specific transaction. Our deposits increased $7.6 million, or 13.1%, to $65.6
million at June 30, 2007 from $58.0 million at June 30, 2006.
Improving NonInterest Income. Noninterest income consists primarily of
fees, service charges and gains from securities sales. We plan to target
programs to increase noninterest income such as the overdraft checking program
we instituted in December 2005.
Maintaining Our Strong Asset Quality. Our high asset quality is reflected
in our ratio of non-performing assets to total assets, which was 0.34% and
0.06%, respectively, at June 30, 2007 and December 31, 2006. We have introduced
new loan products only when we were confident that our staff had the necessary
expertise and sound underwriting and collection procedures were in place. In
addition to these lending practices, we invest in high grade securities.
Improving Our Efficiency Ratio. Our infrastructure and fixed operating
costs can support a larger asset base. We believe the conversion and offering
described above will allow us to increase our asset base through greater loan
production which should help improve our efficiency ratio (noninterest expense
divided by net interest and dividend income and noninterest income) by
generating additional income. Our efficiency ratio was 91.91% and 89.65% for
the three and six months ended June 30, 2007 compared with 97.82% and 95.83%
for the three and six months ended June 30, 2006.
All of these initiatives are designed to improve our profitability in
future years.
11
Changes in Financial Condition from December 31, 2006 to June 30, 2007
Cash and cash equivalents. Cash and cash equivalents increased $2.9
million to $4.0 million at June 30, 2007 from $1.1 million at December 31,
2006. Cash and due from banks increased $1.5 million to $2.6 million at June
30, 2007 from $1.1 million at December 31, 2006 and interest-bearing demand
deposits with other banks, including Federal funds sold, increased $1.3 million
to $1.3 million at June 30, 2007 from $41,000 at December 31, 2006. 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 FHLB advances fluctuate. Interest-bearing deposits are also used to fund
cash and due from bank requirements. The increase in cash and due from banks
during the six months ended June 30, 2007 was due to an increase in the amount
of items processed through our depository bank accounts that settled subsequent
to the end of the reporting period.
Investments. Monadnock Bancorp, Inc. classifies its investments in debt
securities as securities held-to-maturity, securities available-for-sale or
trading securities. Securities held-to-maturity are carried at amortized cost,
securities available-for-sale are carried at fair value with unrealized gains
and losses shown in accumulated other comprehensive income (loss) as a separate
component of stockholders' equity, net of related tax effects, and trading
securities are carried at fair value with unrealized gains and losses reflected
in earnings. Monadnock Bancorp, Inc. had no securities classified as
held-to-maturity or trading securities at June 30, 2007 and December 31, 2006.
Our investment portfolio decreased $3.1 million, or 8.1%, to $35.2
million at June 30, 2007 from $38.3 million at December 31, 2006. The decrease
was due to $6.5 million in principal paydowns of mortgage-backed securities,
$2.6 million in sales of mortgage-backed securities, $1.0 million in matured
U.S. Government agency obligations, partially offset by $7.1 million in
purchases of mortgage-backed securities. The net proceeds from the investment
portfolio were used to fund loans during the first six months of 2007.
At June 30, 2007, the weighted average maturity of mortgage-backed
securities available-for-sale was 305 months, based upon their final
maturities. However, principal prepayments of mortgage-backed securities are
received regularly, substantially reducing their weighted average maturities.
The majority of our adjustable rate mortgage-backed securities are one-year
adjustable rate securities with a weighted average term to next repricing
adjustment of 10 months on average.
Loans. Our net loan portfolio increased $4.4 million, or 8.2%, from $53.7
million at December 31, 2006 to $58.1 million at June 30, 2007. Loan growth
during the first six months of 2007 was primarily concentrated in commercial
real estate loans and one- to four-family residential loans which grew $2.6
million and $1.8 million, respectively. Our business plan anticipates that loan
originations for 2007 will primarily be concentrated in commercial real estate
and commercial business loans.
Deposits. Our total deposits increased $4.2 million, or 6.8%, to $65.6
million at June 30, 2007 from $61.4 million at December 31, 2006.
Interest-bearing deposits increased $4.1 million, to $60.2 million at June 30,
2007 from $56.1 million at December 31, 2006, while non-interest-bearing
deposits increased $133,000 to $5.4 million at June 30, 2007 from $5.3 million
at December 31, 2006. The increase in interest-bearing deposits was primarily
attributable to time certificates and NOW accounts which increased $2.6 million
and $1.4 million, 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 increase in NOW accounts was primarily
due to a large deposit account received at the end of the second quarter.
Borrowings. FHLB advances increased $134,000 to $25.1 million at June 30,
2007 from $25.0 million at December 31, 2006.
Principal payments due on FHLB advances after June 30, 2007 are $1.5
million in 2007, $425,000 in 2008, $3.9 million in 2009, $5.5 million in 2010,
$3.6 million in 2011 and $10.1 million in years thereafter. The FHLB will
require the repayment of $4.0 million of borrowings during 2007 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 FHLB will require the repayment of $1.0
million of borrowings during 2007 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, 2007, the three month LIBOR was at 5.36%. During the fourth quarter of 2006
and the second quarter of 2007, Monadnock Community Bank borrowed $6.0 million
in callable advances from the FHLB. The FHLB has the right to call $2.0 million
in borrowings in the third quarter of 2007 of which borrowing is at an interest
rate of 4.18% maturing in 2017. In addition, the FHLB has the right to call
$4.0 million in borrowings in the fourth quarter of 2007 of which borrowings is
at a weighted average interest rate of
12
4.14% maturing in 2016. Should the FHLB 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 decreased $110,000 to
$9.6 million at June 30, 2007 from $9.7 million at December 31, 2006. The
decrease in stockholders' equity was attributable to a decrease of $180,000
related to the purchase of 26,538 shares of common stock that were used to fund
the 2007 Equity Incentive Plan, partially offset by net earnings of $54,000 for
the first six months of 2007. Our equity to assets ratio was 9.52% at June 30,
2007 compared to 10.06% at December 31, 2006.
On May 25, 2007, the Company announced a Stock Repurchase Program
("Program"), whereby the Company's Board of Directors authorized the repurchase
of up to 2.05% or 26,538 shares of the Company's outstanding common shares. The
purpose of the repurchase was to fund the Monadnock Bancorp, Inc. 2007 Equity
Incentive Plan for restricted stock awards approved by stockholders at the 2007
annual meeting of stockholders. As of June 30, 2007, the Company had completed
the Stock Repurchase Program, noted above, having purchased 26,538 shares of
common stock for $180,458, or a weighted average per share price of $6.80.
Comparison of Results of Operations for the Three Months Ended June 30, 2007
and 2006
General. We recorded net income of $18,000 for the three months ended
June 30, 2007 compared with net income of $12,000 for the three months ended
June 30, 2006. The increase in earnings for the three months ended June 30,
2007 compared with the same period a year earlier was primarily attributable to
an increase in net interest and dividend income of $122,000, partially offset
by an increase in noninterest expense of $76,000, an increase in the provision
for loan losses of $22,000 and an increase in income tax expense of $16,000.
Net income for the second quarter of 2006 was $9,000 ($14,000 on a pre-tax
basis) lower than anticipated as a result of a change in the FHLB dividend
schedule.
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
and dividend income and noninterest income we generated and our comparatively
low net interest margin (net interest and dividend 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 97.82% and 95.83%
for the three and six months ended June 30, 2006, respectively, to 91.91% and
89.65% for the three and six months ended June 30, 2007, respectively. The
existing operating platform we have in place relative to the size of our
customer base and asset base has tended to negatively impact our profitability.
In the event we are unable to generate continued commercial and residential
loan volume in 2007, or become reliant on investments in securities,
certificates of deposit or FHLB borrowings, our net interest margin may be
negatively impacted along with our net earnings potential. Net earnings may
also be negatively impacted during the last six months of 2007 due to the costs
associated with becoming compliant with Section 404 of the Sarbanes-Oxley Act
of 2002 by December 31, 2007 as a non-accelerated filer.
Net Interest and Dividend Income. Net interest and dividend income
increased $122,000, or 24.2%, to $626,000 for the three months ended June 30,
2007 compared with $504,000 for the three months ended June 30, 2006,
reflecting a $394,000, or 36.9%, increase in interest and dividend income, and
a $272,000, or 48.1%, increase in interest expense. Our interest rate spread
decreased to 2.04% for the three months ended June 30, 2007 compared to 2.23%
for the three months ended June 30, 2006 and 2.06% for the three months ended
March 31, 2007. The impact of the delay in the declaration of the FHLB dividend
noted above in 2006 resulted in a decrease in the interest rate spread of 7
basis points for the quarter ended June 30, 2006. The decrease in the interest
rate spread for the three months ended June 30, 2007 compared with the same
period a year earlier was due to a change in the mix of assets to lower
yielding investment securities as a result of our increasing average
interest-earning assets by $18.6 million during this period. In addition, the
change in the mix of liabilities to more interest rate sensitive products such
as time certificates and FHLB advances resulted in net interest margin
compression for the quarter ended June 30, 2007 when compared with the quarter
ended June 30, 2006.
Interest and Dividend Income. Total interest income increased by
$394,000, or 36.9%, to $1.5 million for the three months ended June 30, 2007
compared with $1.1 million for the three months ended June 30, 2006. The
increase of $394,000 was due to an increase in the average balance of assets of
$18.6 million, or 24.3%, to $95.3 million for the three months ended June 30,
2007 from $76.7 million for the three months ended June 30, 2006 coupled with
an increase in the yields on interest-earning assets from 5.59% for the three
months ended June 30, 2006 to 6.16% for the three months ended June 30, 2007.
Interest and fees on loans increased $184,000, or 23.3%, to $973,000 for the
three months ended June 30, 2007 from $789,000 for the same period in 2006,
primarily due to a $8.4 million increase in the average balance of loans from
$48.5 million for the three months ended June 30, 2006 to $56.9 million for the
same period in 2007, and to a lesser
13
extent an increase in loan yields from 6.53% for the three months ended June
30, 2006 to 6.87% for the same period in 2007. The increase in the average
balance of loans was primarily attributable to an increase in the average
balance of $4.8 million in one- to four-family residential loans, a $2.8
million increase in the average balance of commercial, commercial real estate
and short-term construction loans as well as a $754,000 increase in the average
balance of multifamily real estate loans. The increase in average loan yields
from 6.53% for the three months ended June 30, 2006 to 6.87% for the same
period in 2007 was due to an increase in the prime rate of 50 basis points
since March 2006, the repricing of teaser home equity loans to their fully
indexed interest rate as well as the addition of new loans at higher rates
during the last two quarters of 2006 and the first two quarters of 2007.
Interest income on investment securities, FHLB stock and interest-bearing
deposits with other banks increased $209,000 for the three months ended June
30, 2007 to $489,000 from $280,000 for the three months ended June 30, 2006.
The increase of $209,000 was due to an increase in the average balance of the
portfolio by $10.2 million to $38.4 million for the three months ended June 30,
2007, from $28.2 million for the same period in 2006, coupled with an increase
in the overall yield on total investments from 3.99% for the three months ended
June 30, 2006 to 5.11% for the same period in 2007. The increase in the average
balances in the investment portfolio was the direct result of our leveraging
the balance sheet with an increase in funding with time deposits and FHLB
advances. The increase in overall yield was due to the repricing of Ginnie Mae
adjustable-rate mortgage backed securities by 1% on their reset dates and the
purchase of higher yielding securities during the last two quarters of 2006 and
the first two quarters of 2007.
Interest Expense. Total interest expense increased by $272,000, or 48.1%,
to $837,000 for the three months ended June 30, 2007 from $565,000 for the
three months ended June 30, 2006. The increase of $272,000 was due to an
increase in the average balance of interest-bearing liabilities of $13.9
million to $81.4 million for the three months ended June 30, 2007 from $67.5
million for the same period in 2006, coupled with an increase in the average
overall cost of interest-bearing liabilities to 4.12% for the three months
ended June 30, 2007 from 3.36% for the same period in 2006. Interest expense on
deposits increased $150,000 to $566,000 for the three months ended June 30,
2007 from $416,000 for the same period in 2006. The increase was due to an
increase in the average balance of time certificates of $6.6 million to $41.5
million for the three months ended June 30, 2007 from $34.9 million for the
same period in 2006, coupled with an increase in the average cost of time
certificates to 4.86% for the three months ended June 30, 2007 from 4.18% for
the same period in 2006. Time certificates comprised 73.6% of the average
balance of interest-bearing deposits for the three months ended June 30, 2007
compared with 69.2% for the same period in 2006. The increase in the average
balance of time certificates was the direct result of our advertising interest
rate specials and offering competitive rates on time certificates. The average
balance of savings deposits decreased $633,000 to $14.9 million for the three
months ended June 30, 2007 from $15.5 million for the same period in 2006. The
decrease in the average balance of savings deposits was primarily in money
market and savings accounts which decreased $581,000 and $309,000,
respectively, and was attributable to customers transferring these deposits to
more attractive short-term time certificates.
Interest expense on FHLB advances increased $121,000 to $270,000 for the
three months ended June 30, 2007 from $149,000 for the three months ended June
30, 2006. The increase was due to an increase in the average balances of FHLB
advances of $7.9 million to $25.0 million for the three months ended June 30,
2007 from $17.1 million for the same period in 2006, coupled with an increase
in the borrowing costs to 4.35% for the three months ended June 30, 2007 from
3.52% for the same period in 2006. We used the additional funding from FHLB
advances to increase our investment securities portfolio. The increase in
borrowing costs was primarily due to higher funding costs associated with
replacing matured, callable or putable FHLB advances as well as higher costs
related to the funding of new borrowings.
Allowance for Loan Losses. We recorded a provision for loan losses of
$21,000 for the three months ended June 30, 2007 compared with a benefit for
loan losses of $1,000 for the three months ended June 30, 2006. The provision
for loan losses of $21,000 consisted of $1,000 related to an overdraft program
which was initiated in December 2005 for consumer and business checking
customers and $20,000 related to the loan portfolio. The provision for loan
losses of $20,000 recorded during the second quarter of 2007 was attributable
to the weakness of a commercial loan relationship totaling $282,000, of which
$86,000 is guaranteed by the United States Small Business Administration as
well as loan volume that was recorded during the second quarter of 2007. The
benefit for loan losses of $1,000 for the three months ended June 30, 2006
related specifically to the overdraft program mentioned above. The allowance
for loan losses as a percent of total loans was 0.64% at June 30, 2007 compared
with 0.63% at June 30, 2006. The mix of the loan portfolio continues to be
weighted in one- to four-family residential and home equity loans which
accounted for 59.6% and 62.9% of total loans at June 30, 2007 and 2006,
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
14
loans and is based on historical loss experience and qualitative and
quantitative factors unique to the Bank for consumer, residential and
commercial loans. Total nonperforming assets increased $340,000 to $340,000
($137,000 of which is guaranteed by the United States Small Business
Administration), or 0.34% of total assets at June 30, 2007 from $0 or, 0.00% of
total assets at June 30, 2006. 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 $4,000, or 5.9%,
to $64,000 for the three months ended June 30, 2007 from $68,000 for the three
months ended June 30, 2006. The decrease was primarily attributable to
increased amortization expense on servicing rights related to the repurchase of
a United States Small Business Administration loan that originally had been
sold.
Total Noninterest Expenses. Noninterest expense increased $76,000, or
13.6% to $635,000 for the three months ended June 30, 2007 compared with
$559,000 for the three months ended June 30, 2006. Salaries and employee
benefits expense increased $45,000 from $282,000, or 50.4%, of total
noninterest expense for the three months ended June 30, 2006 to $327,000, or
51.5%, of total noninterest expense for the three months ended June 30, 2007.
This increase in salaries and employee benefits expense resulted from an
increase in staffing for the commercial lending area, normal salary increases,
increases related to stock benefit plans, partially offset by an increase in
the deferrals of loan origination costs. Other increases in noninterest expense
related to a $14,000 increase in professional fees and a $15,000 increase in
other expenses primarily related to enhanced internet security and certain one
time non-recurring expenses.
Comparison of Results of Operations for the Six Months Ended June 30, 2007
and 2006
General. We recorded net income of $54,000 for the six months ended June
30, 2007 compared with net income of $30,000 for the six months ended June 30,
2006. The increase in earnings for the six months ended June 30, 2007 compared
with the same period a year earlier was primarily attributable to an increase
in net interest and dividend income of $227,000, an increase in noninterest
income of $15,000, partially offset by an increase in noninterest expense of
$146,000, an increase in the provision for loan losses of $33,000 and an
increase in income tax expense of $38,000.
Net Interest and Dividend Income. Net interest and dividend income
increased $227,000, or 22.5%, to $1.2 million for the six months ended June 30,
2007 compared with $1.0 million for the six months ended June 30, 2006,
reflecting a $796,000, or 38.4%, increase in interest and dividend income, and
a $569,000, or 53.4%, increase in interest expense. Our interest rate spread
decreased to 2.05% for the six months ended June 30, 2007 compared to 2.32% for
the six months ended June 30, 2006. The net interest margin for the six months
ended June 30, 2007 was 2.63% compared to 2.68% for the six months ended June
30, 2006. The impact of the delay in the declaration of the FHLB dividend in
2006 noted earlier resulted in a decrease in the interest rate spread and net
interest margin of 3 basis points each for the six months ended June 30, 2006.
The decrease in the interest rate spread for the six months ended June 30, 2007
compared with the same period a year earlier was due to a change in the mix of
assets to lower yielding investment securities as a result of our increasing
average interest earning assets by $18.8 million during this period. In
addition, the change in the mix of liabilities to more interest rate sensitive
products such as time certificates and FHLB advances resulted in net interest
margin compression for the six months ended June 30, 2007 when compared with
the six months ended June 30, 2006.
Interest and Dividend Income. Total interest income increased by
$796,000, or 38.4%, to $2.9 million for the six months ended June 30, 2007
compared with $2.1 million for the six months ended June 30, 2006. The increase
of $796,000 was due to an increase in the average balance of assets of $18.8
million, or 24.8%, to $94.6 million for the six months ended June 30, 2007 from
$75.8 million for the six months ended June 30, 2006 coupled with an increase
in the yields on interest-earning assets from 5.51% for the six months ended
June 30, 2006 to 6.12% for the six months ended June 30, 2007. Interest and
fees on loans increased $394,000, or 26.2%, to $1.9 million for the six months
ended June 30, 2007 from $1.5 million for the same period in 2006, primarily
due to a $8.4 million increase in the average balance of loans from $47.3
million for the six months ended June 30, 2006 to $55.7 million for the same
period in 2007, and to a lesser extent an increase in loan yields from 6.43%
for the six months ended June 30, 2006 to 6.88% for the same period in 2007.
The increase in the average balance of loans was primarily attributable to an
increase in the average balance of $4.5 million in one- to four-family
residential loans, a $2.7 million increase in the average balance of commercial
loans as well as a $690,000 increase in the average balance of multifamily real
estate loans. The increase in average loan yields from 6.43% for the six months
ended June 30, 2006 to 6.88% for the same period in 2007 was due to an increase
in the prime rate of 100 basis points since December 2005, the repricing of
teaser home equity loans to their fully indexed interest rate as well as the
addition of new loans at higher rates during the last two quarters of 2006 and
the first two quarters of 2007.
15
Interest income on investment securities, FHLB stock and interest-bearing
deposits with other banks increased $402,000 for the six months ended June 30,
2007 to $968,000 from $566,000 for the six months ended June 30, 2006. The
increase was due to an increase in the average balance of the portfolio by
$10.3 million to $38.9 million for the six months ended June 30, 2007, from
$28.6 million for the same period in 2006, and to a lesser extent an increase
in the overall yield on total investments from 4.00% for the six months ended
June 30, 2006 to 5.02% for the same period in 2007. The increase in the average
balance in the investment portfolio was the direct result of our leveraging the
balance sheet with an increase in funding with time deposits and FHLB advances.
The increase in overall yield was due to the repricing of Ginnie Mae
adjustable-rate mortgage backed securities by 1% on their reset dates and the
purchase of higher yielding securities for the last two quarters of 2006 and
the first two quarters of 2007.
Interest Expense. Total interest expense increased by $569,000, or 53.4%,
to $1.6 million for the six months ended June 30, 2007 from $1.1 million for
the six months ended June 30, 2006. The increase of $569,000 was due to an
increase in the average balance of interest-bearing liabilities of $13.8
million to $81.1 million for the six months ended June 30, 2007 from $67.3
million for the same period in 2006, coupled with an increase in the average
overall cost of interest-bearing liabilities to 4.07% for the six months ended
June 30, 2007 from 3.20% for the same period in 2006. Interest expense on
deposits increased $344,000 to $1.1 million for the six months ended June 30,
2007 from $741,000 for the same period in 2006. The increase was due to an
increase in the average balances of time certificates of $8.1 million to $40.7
million for the six months ended June 30, 2007 from $32.6 million for the same
period in 2006, coupled with an increase in the average cost of time
certificates to 4.80% for the six months ended June 30, 2007 from 3.94% for the
same period in 2006. Time certificates comprised 73.2% of the average balance
of interest-bearing deposits for the six months ended June 30, 2007 compared
with 66.8% for the same period in 2006. The increase in the average balance of
time certificates was the direct result of our advertising interest rate
specials and offering competitive rates on time certificates. The average
balance of savings deposits decreased $1.3 million to $14.9 million for the six
months ended June 30, 2007 from $16.2 million for the same period in 2006. The
decrease in the average balance of savings deposits was primarily in money
market and savings accounts which decreased $1.1 million and $400,000,
respectively, and was attributable to customers transferring these deposits to
more attractive short-term time certificates.
Interest expense on FHLB advances increased $225,000 to $550,000 for the
six months ended June 30, 2007 from $325,000 for the six months ended June 30,
2006. The increase was due to an increase in the average balance of FHLB
advances of $7.0 million to $25.5 million for the six months ended June 30,
2007 from $18.5 million for the same period in 2006, coupled with an increase
in the borrowing costs to 4.35% for the six months ended June 30, 2007 from
3.54% for the same period in 2006. We used the additional funding from FHLB
advances to increase our investment securities portfolio. The increase in
borrowing costs was primarily due to higher funding costs associated with
replacing matured, callable or putable FHLB advances as well as higher costs
related to the funding of new borrowings.
Allowance for Loan Losses. We recorded a provision for loan losses of
$45,000 for the six months ended June 30, 2007 compared with $12,000 for the
six months ended June 30, 2006. The provision for loan losses of $45,000
consisted of $4,000 related to an overdraft program which was initiated in
December 2005 for consumer and business checking customers and $41,000 related
to the loan portfolio. The provision for loan losses of $41,000 during the
first six months of 2007 was attributable to the weakness of a commercial loan
relationship totaling $285,000, of which $86,000 is guaranteed by the United
States Small Business Administration as well as loan volume that was recorded
during the first six months of 2007. The provision for loan losses of $12,000
for the six months ended June 30, 2006 related specifically to the overdraft
program mentioned above. The allowance for loan losses as a percent of total
loans was 0.64% at June 30, 2007 compared with 0.63% at June 30, 2006. The mix
of the loan portfolio continues to be weighted in one- to four-family
residential and home equity loans which accounted for 59.6% and 62.9% of total
loans at June 30, 2007 and 2006, 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 and qualitative and quantitative factors unique to
the Bank for consumer, residential and commercial loans. Total nonperforming
assets increased $340,000 to $340,000 ($137,000 of which is guaranteed by the
United States Small Business Administration), or 0.34% of total assets at June
30, 2007 from $0 or, 0.00% of total assets at June 30, 2006. 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 $15,000, or 11.2%,
to $149,000 for the six months ended June 30, 2007 from $134,000 for the six
months ended June 30, 2006. The increase was primarily attributable to net
gains on
16
sales of available-for-sale securities of $16,000 for the six months ended June
30, 2007 compared with no gain on sales for the same period in 2006.
Total Noninterest Expenses. Noninterest expense increased $146,000, or
13.4% to $1.2 million for the six months ended June 30, 2007 compared with $1.1
million for the six months ended June 30, 2006. Salaries and employee benefits
expense increased $106,000 from $545,000, or 49.9%, of total noninterest
expense for the six months ended June 30, 2006 to $651,000, or 52.5%, of total
noninterest expense for the six months ended June 30, 2007. This increase in
salaries and employee benefits expense resulted from an increase in staffing
for the commercial lending area, normal salary increases, increases related to
stock benefit plans, and a decrease in the deferrals of loan origination costs.
Other increases in noninterest expense primarily related to a $22,000 increase
in professional fees and a $19,000 increase in other expenses related to
enhanced internet security and certain one time non-recurring expenses.
Risk Elements
Total nonperforming loans increased from $60,000 or 0.11% of total loans
at December 31, 2006, to $340,000 or 0.58% of total loans at June 30, 2007. The
nonperforming loans shown below carry a guarantee by the United States Small
Business Administration covering $137,000 and $51,000 of the balance
outstanding, respectively, at June 30, 2007 and December 31, 2006.
As shown in the following table, nonperforming assets as a percentage of
total assets were 0.34% and 0.06%, as of June 30, 2007 and December 31, 2006,
respectively.
June 30, December 31,
2007 2006
-------- ------------
($ in Thousands)
Loans 90 days or more past due and still accruing $ 0 $ 0
======== ============
Total nonperforming loans and nonperforming assets $ 340 $ 60
======== ============
Nonperforming loans as a percent of total loans 0.58% 0.11%
Nonperforming assets as a percent of total assets 0.34% 0.06%
Liquidity and Commitments
Historically, we have maintained liquid assets at levels believed to be
adequate to meet the requirements of normal operations, including potential
deposit outflows. We regularly review cash flow projections and update them to
assure that adequate liquidity is maintained. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans.
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 FHLB
advances to leverage our capital base and provide funds for our lending and
investment activities, and enhance our interest rate risk management.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, we maintain a strategy of
investing in various lending products such as residential, commercial and
consumer loans. We use our sources of funds primarily to meet ongoing
commitments, to pay maturing time deposits and savings withdrawals, to fund
loan commitments and to maintain our portfolio of mortgage-backed and related
securities. At June 30, 2007, the total approved loan commitments unfunded
amounted to $10.9 million, which includes the unadvanced portion of loans of
$7.2 million. Certificates of deposits and advances from the FHLB of Boston
scheduled to mature in one year or less at June 30, 2007, totaled $37.4 million
and $1.9 million, respectively. Based on historical experience, we believe that
a significant portion of maturing deposits will remain
17
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, 2007, we had total collateral available to support an
additional $22.4 million in additional advances from the FHLB of Boston, but
the Bank's internal policy limits FHLB advances to 40% of total assets which
amounts to an additional $13.1 million in borrowing capacity at June 30, 2007.
Stockholders' Equity
Our stockholders' equity totaled $9.6 million or 9.52% of total assets at
June 30, 2007 compared to $9.7 million or 10.06% of total assets at December
31, 2006. The decrease in stockholders' equity was attributable to a decrease
of $180,000 related to the purchase of 26,538 shares of common stock that were
used to fund the 2007 Equity Incentive Plan, partially offset by net earnings
of $54,000 for the first six months of 2007.
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. As of June 30, 2007, the most recent
notification from the OTS categorized the Bank as "well-capitalized" under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the subsidiary bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios of 10%, 6% and 5%, respectively.
The Bank's regulatory capital ratios at June 30, 2007 were as follows: total
risk-based capital 17.22%, Tier I risk based 16.50% and Tier I leverage (core
capital) 8.39%. 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. Expense items such
as employee compensation, employee benefits and occupancy and equipment costs
may be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that we have made. We are unable to determine the extent, if
any, to which properties securing our loans have appreciated in dollar value
due to inflation.
Our Risk When Interest Rates Change. The rates of interest we earn on
assets and pay on liabilities generally are established contractually for a
period of time. Market interest rates change over time. Our loans generally
have longer maturities than our deposits. Accordingly, our results of
operations, like those of other financial institutions, are impacted by changes
in interest rates and the interest rate sensitivity of our assets and
liabilities. The risk associated with changes in interest rates and our ability
to adapt to these changes is known as interest rate risk and is our most
significant market risk.
How We Measure Our Risk of Interest Rate Changes. As part of our attempt
to manage our exposure to changes in interest rates and comply with applicable
regulations, we monitor our interest rate risk. In monitoring interest rate
risk we continually analyze and manage assets and liabilities based on their
payment streams and interest rates, the timing of their maturities, and their
sensitivity to actual or potential changes in market interest rates.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on our results of operations, we have
adopted asset/liability and funds management policies to better match the
maturities and repricing terms of our interest-earning assets and
interest-bearing liabilities. The board of directors sets and recommends the
asset and liability and funds management policies of the Bank, which are
implemented by the asset/liability management committee.
18
The purpose of the asset/liability committee is to communicate,
coordinate and control asset/liability management consistent with our business
plan and board approved policies. The committee establishes and monitors the
volume and mix of assets and funding sources taking into account relative costs
and spreads, interest rate sensitivity and liquidity needs. The objectives are
to manage assets and funding sources to produce results that are consistent
with liquidity, capital adequacy, growth, risk and profitability goals.
The asset/liability management committee generally meets quarterly to
review, among other things, economic conditions and interest rate outlook,
current and projected liquidity needs and capital position, anticipated changes
in the volume and mix of assets and liabilities and interest rate risk exposure
limits versus current projections using a net present value of portfolio equity
analysis and income simulations. The asset/liability management committee
recommends appropriate strategy changes based on this review.
In order to manage our assets and liabilities and achieve the desired
liquidity, credit quality, interest rate risk, profitability and capital
targets, we have focused our strategies on:
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 FHLB 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.
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.
19
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, 2007, 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
The table below sets forth information regarding the Company's common
stock repurchase plans. Purchases made during June 2007 relate to the stock
repurchase plan that was approved by the Company's Board of Directors on May
24, 2007. The purpose of the stock repurchase plan was to fund the Monadnock
Bancorp, Inc. 2007 Equity Incentive Plan for restricted stock awards which was
approved by stockholders at the 2007 Annual Meeting of Stockholders. As of June
30, 2007, the Company had completed the Stock Repurchase Program, noted above,
having purchased 26,538 shares of common stock at a weighted average share
price of $6.80.
Total Number of Maximum Number
Shares Purchased of Shares that May
Total Number as Part of Publicly Yet Be Purchased
of Shares Average Price Announced Plans Under the Plans or
Period Purchased Paid per Share or Programs Programs
- ------------------------------------ ------------ -------------- ------------------- ------------------
April 1, 2007 through April 30, 2007 - - - 26,538
May 1, 2007 through May 31, 2007 - - - 26,538
June 1, 2007 through June 30, 2007 26,538 6.80 26,538 -
------------ -------------- ------------------- ------------------
Total 26,538 $ 6.80 26,538 -
============ ============== =================== ==================
On July 25, 2007, the Company announced a Stock Repurchase Program
("Program"), whereby the Company's Board of Directors authorized the repurchase
of up to 5.0% of its outstanding common stock or up to 64,650 shares of common
stock. These shares will be purchased at prevailing market prices from time to
time over a twelve-month period depending upon market conditions. Any
repurchased shares will be held as treasury stock and will be available for
general corporate purposes.
Item 3. Defaults Upon Senior Securities
Not applicable
20
Item 4. Submission of Matters to a Vote of Security Holders
On May 10, 2007, 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) Kenneth A. Christian 1,166,191 N/A 57,406 N/A
B) Jack Goldstein 1,154,629 N/A 68,968 N/A
C) Thomas C. LaFortune 1,165,841 N/A 57,756 N/A
2) Approval of the Monadnock Bancorp, Inc.
2007 Equity Incentive Plan 664,545 104,729 18,605 505,729
3) Ratification of Shatswell, MacLeod & Company, P.C.
as the Company's auditors for the fiscal year ended
December 31, 2007 1,188,165 34,581 851 N/A
Directors Kenneth A. Christian, Jack Goldstein and Thomas C. LaFortune
continued in office in their current terms.
Item 5. Other Information
Not applicable
Item 6. Exhibits
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act
21
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, 2007 /s/ William M. Pierce, Jr.
--------------------------
William M. Pierce, Jr.
President and Chief Executive Officer
Date: August 10, 2007 /s/ Karl F. Betz
----------------
Karl F. Betz
Senior Vice President and Chief
Financial Officer
22