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, 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 November 1, 2007, there were 1,293,608 shares issued and 1,228,351
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 September 30, 2007
(unaudited) and December 31, 2006 3
Condensed Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 2007 and 2006 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 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 2007 2006
- ------ ------------- ------------
(Unaudited)
Cash and due from banks $ 758,416 $ 1,057,602
Interest-bearing demand deposits with other banks 295 587
Federal funds sold 40,000
------------ -----------
Total cash and cash equivalents 758,711 1,098,189
Interest-bearing time deposit in other bank 100,000 100,000
Investments in available-for-sale securities (at fair value) 40,865,858 38,319,846
Federal Home Loan Bank stock, at cost 1,488,400 1,328,300
Loans, net of allowance for loan losses of $382,663 as of September 30, 2007
and $334,917 as of December 31, 2006 60,416,097 53,709,317
Premises and equipment 822,332 786,815
Goodwill 132,293 132,293
Core deposit intangible 65,875 81,625
Accrued interest receivable 472,836 427,679
Other assets 180,051 200,672
------------ -----------
Total assets $105,302,453 $96,184,736
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest-bearing $ 6,110,666 $ 5,261,639
Interest-bearing 61,109,735 56,100,270
------------ -----------
Total deposits 67,220,401 61,361,909
Federal Home Loan Bank advances 28,305,224 24,965,119
Other liabilities 365,690 181,908
------------ -----------
Total liabilities 95,891,315 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, 1,243,001 and 1,293,608 outstanding
at September 30, 2007 and December 31, 2006, respectively 12,936 12,936
Paid-in capital 7,746,087 7,725,786
Retained earnings 2,716,879 2,627,752
Unearned compensation - ESOP (431,445) (431,445)
Unearned compensation - Recognition and Retention Plan (310,249) (139,104)
Accumulated other comprehensive income (loss) 13,858 (120,125)
Treasury stock, at cost (50,607 shares at September 30, 2007) (336,928)
------------ -----------
Total stockholders' equity 9,411,138 9,675,800
------------ -----------
Total liabilities and stockholders' equity $105,302,453 $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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Interest and dividend income:
Interest and fees on loans $1,032,659 $ 860,173 $2,932,864 $2,366,531
Interest on investments-taxable 491,450 311,256 1,372,627 833,209
Other interest income 53,709 47,697 141,070 92,036
---------- ---------- ---------- ----------
Total interest and dividend income 1,577,818 1,219,126 4,446,561 3,291,776
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits 624,185 495,817 1,709,200 1,236,627
Interest on Federal Home Loan Bank advances 290,971 151,775 841,190 476,670
---------- ---------- ---------- ----------
Total interest expense 915,156 647,592 2,550,390 1,713,297
---------- ---------- ---------- ----------
Net interest and dividend income 662,662 571,534 1,896,171 1,578,479
Provision for loan losses 13,830 254 58,753 12,536
---------- ---------- ---------- ----------
Net interest and dividend income
after provision for loan losses 648,832 571,280 1,837,418 1,565,943
---------- ---------- ---------- ----------
Noninterest income:
Service charges on deposits 42,597 47,697 146,169 150,978
Net gain on sales of available-for-sale securities 16,081
Loan commissions 2,246
Other income 20,828 20,418 54,359 54,176
---------- ---------- ---------- ----------
Total noninterest income 63,425 68,115 218,855 205,154
---------- ---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 349,149 313,503 1,000,144 858,761
Occupancy expense 38,053 37,950 114,585 114,414
Equipment expense 21,647 22,216 65,173 66,448
Data processing 55,245 54,872 159,210 157,132
Blanket bond insurance 4,727 4,727 11,523 15,226
Professional fees 47,586 40,683 133,211 104,826
Supplies and printing 6,376 9,802 26,715 29,267
Telephone expense 12,609 13,244 38,403 39,060
Marketing expense 22,589 9,353 58,982 41,489
Postage expense 9,691 9,237 29,200 28,822
Other expense 81,475 72,493 257,831 229,024
---------- ---------- ---------- ----------
Total noninterest expense 649,147 588,080 1,894,977 1,684,469
---------- ---------- ---------- ----------
Income before income tax expense 63,110 51,315 161,296 86,628
Income tax expense 28,439 14,978 72,169 20,655
---------- ---------- ---------- ----------
Net income $ 34,671 $ 36,337 $ 89,127 $ 65,973
========== ========== ========== ==========
Shares used in computing net income per share:
Basic 1,164,567 1,212,505 1,193,040 1,237,515
Diluted 1,214,929 1,242,322 1,231,564 1,270,076
Net income per share - basic $ 0.03 $ 0.03 $ 0.07 $ 0.05
Net income per share - diluted $ 0.03 $ 0.03 $ 0.07 $ 0.05
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,
-----------------------------
2007 2006
------------ ------------
Cash flows from operating activities:
Net income $ 89,127 $ 65,973
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 57,196 56,165
Change in deferred loan origination costs, net (30,310) (61,561)
Provision for loan losses 58,753 12,536
Recognition of stock option expense 25,487 16,113
Depreciation and amortization 79,898 80,147
Increase in accrued interest receivable (45,157) (39,363)
Amortization of core deposit intangible 15,750 17,250
Decrease (increase) in other assets 1,638 (13,620)
Decrease in loan servicing rights and interest-only strips, net 13,298 5,173
Increase in prepaid expenses (53,709) (72,010)
Decrease in taxes receivable 7,299 23,027
Increase in taxes payable 45,772
Deferred tax benefit (3,124) (1,787)
Increase in accrued ESOP and Recognition and Retention Plan 37,658 25,106
Increase in accrued expenses 24,244 55,349
Increase in accrued interest payable 17,212 6,637
Increase (decrease) in other liabilities 26,235 (3,255)
------------ ------------
Net cash provided by operating activities 351,186 171,880
------------ ------------
Cash flows from investing activities:
Purchases of available-for-sale securities (15,276,190) (8,670,488)
Proceeds from sales of available-for-sale securities 2,645,150
Principal payments received on available-for-sale securities 10,265,775 5,987,209
Redemption of Federal Home Loan Bank stock 250,400
Purchase of Federal Home Loan Bank stock (160,100)
Loan originations and principal collections, net (6,181,759) (5,221,785)
Loans purchased (821,813) (3,079,519)
Loan participations sold 265,024
Recoveries of previously charged off loans 3,325 1,818
Capital expenditures - premises and equipment (115,415) (67,700)
------------ ------------
Net cash used in investing activities (9,376,003) (10,800,065)
------------ ------------
5
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
Nine Months Ended September 30, 2007 and 2006
---------------------------------------------
(UNAUDITED)
(continued)
2007 2006
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, savings and NOW deposits 1,500,239 (2,388,412)
Net increase in time deposits 4,358,253 9,697,331
Net change on short-term advances from Federal Home Loan Bank (237,000)
Long-term advances from Federal Home Loan Bank 9,769,105 4,095,556
Payments on long-term advances from Federal Home Loan Bank (6,192,000) (4,695,339)
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 $820,753) 4,840,695
Purchase of common stock for treasury (336,928)
Purchase of 42,460 shares for ESOP (331,531)
Purchase of 25,931 shares for MRP (176,330)
------------ ------------
Net cash provided by financing activities 8,685,339 11,268,300
------------ ------------
Net (decrease) increase in cash and cash equivalents (339,478) 640,115
Cash and cash equivalents at beginning of period 1,098,189 855,026
------------ ------------
Cash and cash equivalents at end of period $ 758,711 $ 1,495,141
============ ============
Supplemental disclosures:
Interest paid $ 2,533,178 $ 1,706,660
Income taxes paid 40,051 2,456
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, 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 nine month periods ended
September 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 September 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 while 73,102 shares of
common stock were outstanding during the third quarter of 2007, 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.
7
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 available-for-sale
securities at September 30, 2007 and December 31, 2006 were as follows:
Amortized Estimated
Cost Basis Fair Value
----------- -----------
September 30, 2007:
U. S. Government agency obligations $ 2,000,000 $ 1,991,876
Mortgage-backed securities:
FNMA 17,712,443 17,715,710
FHLMC 6,308,759 6,344,174
GNMA 14,821,709 14,814,098
----------- -----------
Total mortgage-backed securities 38,842,911 38,873,982
----------- -----------
Total investments in available-for-sale securities $40,842,911 $40,865,858
=========== ===========
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:
September 30, December 31,
2007 2006
------------- ------------
One- to four-family residential $30,484,172 $27,413,968
Home equity 5,478,569 5,825,299
Commercial real estate 12,541,722 9,251,740
Multifamily 1,448,042 1,224,684
Construction and land development loans 861,848 1,108,258
Commercial loans 7,249,415 7,010,047
Consumer loans 2,404,948 1,910,504
----------- -----------
60,468,716 53,744,500
Allowance for loan losses (382,663) (334,917)
Deferred costs, net 330,044 299,734
----------- -----------
Net loans $60,416,097 $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.
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
8
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 nine
months ended September 30,
2007 2006
-------- --------
Balance at beginning of period $334,917 $311,250
Recoveries of loans previously charged off 3,325 1,818
Provision for loan losses 58,753 12,536
Charge offs (14,332) (13,049)
-------- --------
Balance at end of period $382,663 $312,555
======== ========
Information with respect to impaired loans consisted of the following at:
September 30, December 31,
2007 2006
------------- ------------
Recorded investment in impaired loans $387,569 $60,434
======== =======
Impaired loans with specific loss allowances $329,136 $60,434
======== =======
Loss allowances reserved on impaired loans $ 65,401 $ 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 $205,000
and $102,000 for the nine months ended September 30, 2007 and 2006,
respectively. During the three and nine months ended September 30, 2007 and
2006, the Company recognized no income on impaired loans.
Note 5. Deposits
Interest-bearing deposits consisted of the following at:
September 30, December 31,
2007 2006
------------- ------------
NOW accounts $ 4,376,727 $ 3,447,510
Savings accounts 2,356,095 2,271,000
Money market deposit accounts 9,262,490 9,625,590
Time certificates 45,114,423 40,756,170
----------- -----------
$61,109,735 $56,100,270
=========== ===========
9
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, 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's 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 and dividend
income, which is the difference between interest and dividend 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 provision 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, ATM fees 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.
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
10
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 $7.6 million, or 14.4%, from $52.8 million at
September 30, 2006 to $60.4 million at September 30, 2007. We plan to continue
to grow our loan portfolio with the net proceeds raised in the 2006 stock
offering.
Expanding Market Presence Through a New Office. Total assets have grown
$18.0 million, or 20.6%, from $87.3 million at September 30, 2006 to $105.3
million at September 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 deposit 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 $6.7 million, or 11.1%, to $67.2
million at September 30, 2007 from $60.5 million at September 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
0.37% and 0.06%, respectively, at September 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 89.40% and 89.60% for the
three and nine months ended September 30, 2007 compared with 91.94% and 94.44%
for the three and nine months ended September 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 September 30, 2007
Cash and cash equivalents. Cash and cash equivalents decreased $339,000 to
$759,000 at September 30, 2007 from $1.1 million at December 31, 2006. Cash and
due from banks decreased $300,000 to $758,000 at September 30, 2007 from $1.1
million at December 31, 2006. The decrease in cash and due from banks during the
nine months ended September 30, 2007 was due to a decrease 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 at September 30, 2007 and December 31, 2006.
Our investment portfolio increased $2.6 million, or 6.8%, to $40.9 million
at September 30, 2007 from $38.3 million at December 31, 2006. The increase was
due to the purchase of $15.3 million in mortgage-backed securities for the nine
months ended September 30, 2007, partially offset by $9.3 million in principal
paydowns of mortgage-backed securities, $2.6 million in sales of mortgage-backed
securities and $1.0 million in matured U.S. Government agency obligations. The
net increase in the investment portfolio was funded with FHLB advances.
At September 30, 2007, the weighted average maturity of mortgage-backed
securities available-for-sale was 307 months, based upon their final maturities.
However, principal prepayments of mortgage-backed securities are received
regularly, substantially reducing their weighted average maturities.
Loans. Our net loan portfolio increased $6.7 million, or 12.5%, from $53.7
million at December 31, 2006 to $60.4 million at September 30, 2007. Loan growth
during the first nine months of 2007 was primarily concentrated in commercial
real estate loans and one- to four-family residential loans which grew $3.2
million and $3.1 million, respectively.
Deposits. Our total deposits increased $5.8 million, or 9.4%, to $67.2
million at September 30, 2007 from $61.4 million at December 31, 2006.
Interest-bearing deposits increased $5.0 million, to $61.1 million at September
30, 2007 from $56.1 million at December 31, 2006, while non-interest-bearing
deposits increased $849,000 to $6.1 million at September 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
$4.3 million and $929,000, 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 increase in NOW accounts and demand
deposit accounts was primarily due to several large deposit accounts at
September 30, 2007.
Borrowings. FHLB advances increased $3.3 million to $28.3 million at
September 30, 2007 from $25.0 million at December 31, 2006. The increase in FHLB
advances was used to fund the increase in the investment portfolio.
Principal payments due on FHLB advances after September 30, 2007 are $1.3
million in 2007, $425,000 in 2008, $5.0 million in 2009, $5.5 million in 2010,
$3.6 million in 2011 and $12.4 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
September 30, 2007, the three month LIBOR was at 5.22%. During the fourth
quarter of 2006 and the second and third quarters of 2007, Monadnock Community
Bank borrowed $7.0 million in callable advances from the FHLB. The FHLB has the
right to call $5.0 million in borrowings in the fourth quarter of 2007, $4.0
million of which borrowings is at a weighted average interest rate of 4.14%
maturing in 2016 and $1.0 million of which borrowings is at an interest rate of
4.25% maturing in 2017. In addition, the FHLB has the right to call $2.0 million
of borrowings in 2008, $1.0 million of which borrowing is at an interest rate of
4.05% maturing in 2012 and $1.0 million of which borrowings is at an interest
rate of 3.69% maturing in 2014. 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 $265,000 to
$9.4 million at September 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, a decrease of
12
$333,000 related to the purchase of 50,000 shares of common stock for treasury,
partially offset by net earnings of $89,000 for the first nine months of 2007
and an increase in accumulated comprehensive income of $134,000 for the nine
months ended September 30, 2007.
On May 25, 2007, the Company announced a Stock Repurchase 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.
On July 25, 2007, the Company announced a second Stock Repurchase Program
whereby the Company's Board of Directors authorized the repurchase of up to 5.0%
or 64,650 shares of the Company's outstanding common shares. 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. As of
September 30, 2007, the Company had purchased 50,000 shares of common stock for
$332,801, or a weighted average per share price of $6.66.
Comparison of Results of Operations for the Three Months Ended
September 30, 2007 and 2006
General. We recorded net income of $35,000 for the three months ended
September 30, 2007 compared with net income of $36,000 for the three months
ended September 30, 2006. The decrease in earnings for the three months ended
September 30, 2007 compared with the same period a year earlier was primarily
attributable to the FHLB dividend schedule. The FHLB of Boston declared and paid
a half year dividend in the third quarter of 2006 rather than a quarterly
dividend in the second and third quarters of 2006. The decrease was also the
result of an increase in noninterest expense of $61,000, an increase in the
provision for loan losses of $14,000, an increase in income tax expense of
$13,000 and a decrease in noninterest income of $5,000, partially offset by an
increase in net interest and dividend income of $91,000.
Our profitability has been marginal during the last few years primarily
due to our high fixed operating costs in relation to the amount of net interest
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 and dividend income plus
noninterest income, commonly referred to as our efficiency ratio improved from
91.94% and 94.44% for the three and nine months ended September 30, 2006,
respectively, to 89.40% and 89.60% for the three and nine months ended September
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 quarter
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.
In the third quarter of 2007, the Company had expended $8,000 on Section 404
costs and anticipates spending up to an additional $30,000 in the fourth quarter
of 2007.
Net Interest and Dividend Income. Net interest and dividend income
increased $91,000, or 15.9%, to $663,000 for the three months ended September
30, 2007 compared with $572,000 for the three months ended September 30, 2006.
This increase reflected a $359,000, or 29.5%, increase in interest and dividend
income, and a $267,000, or 41.2%, increase in interest expense. Our interest
rate spread was 2.05% for the three months ended September 30, 2007 compared to
2.15% for the three months ended September 30, 2006 and 2.04% for the three
months ended June 30, 2007. Our net interest margin was 2.61% for the three
months ended September 30, 2007 compared to 2.75% for the three months ended
September 30, 2006 and 2.64% for the three months ended June 30, 2007. The
impact of the delay in the declaration of the FHLB dividend noted above in 2006
resulted in an increase in the interest rate spread and net interest margin of 7
and 8 basis points, respectively, for the quarter ended September 30, 2006. The
decrease in the interest rate spread for the three months ended September 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
the average balance of interest-earning assets by $18.5 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 September 30, 2007 when
compared with the quarter ended September 30, 2006.
13
Interest and Dividend Income. Total interest and dividend income increased
by $359,000, or 29.5%, to $1.6 million for the three months ended September 30,
2007 compared with $1.2 million for the three months ended September 30, 2006.
The increase of $359,000 was primarily due to an increase in the average balance
of interest-earning assets of $18.5 million, or 22.5%, to $100.9 million for the
three months ended September 30, 2007 from $82.4 million for the three months
ended September 30, 2006, and to a lesser extent an increase in the yields on
interest-earning assets from 5.87% for the three months ended September 30, 2006
to 6.20% for the three months ended September 30, 2007. Interest and fees on
loans increased $173,000, or 20.1%, to $1.0 million for the three months ended
September 30, 2007 from $860,000 for the same period in 2006, primarily due to a
$8.4 million increase in the average balance of loans from $51.7 million for the
three months ended September 30, 2006 to $60.1 million for the same period in
2007, and to a lesser extent an increase in loan yields from 6.60% for the three
months ended September 30, 2006 to 6.82% 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 $4.3 million in one- to four-family
residential loans and a $4.0 million increase in the average balance of
commercial and commercial real estate loans. The increase in average loan yields
from 6.60% for the three months ended September 30, 2006 to 6.82% for the same
period in 2007 was due to new loans at higher interest rates during the last
quarter of 2006 and the first three quarters of 2007 as well as the repricing of
teaser home equity loans to their fully indexed interest rate.
Interest income on investment securities, FHLB stock and interest-bearing
deposits with other banks increased $186,000 for the three months ended
September 30, 2007 to $545,000 from $359,000 for the three months ended
September 30, 2006. The increase of $186,000 was due to an increase in the
average balance of the portfolio by $10.1 million to $40.8 million for the three
months ended September 30, 2007, from $30.7 million for the same period in 2006,
coupled with an increase in the overall yield on total investments from 4.64%
for the three months ended September 30, 2006 to 5.30% 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 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 quarter of 2006
and the first three quarters of 2007.
Interest Expense. Total interest expense increased by $267,000, or 41.2%,
to $915,000 for the three months ended September 30, 2007 from $648,000 for the
three months ended September 30, 2006. The increase of $267,000 was due to an
increase in the average balance of interest-bearing liabilities of $18.4 million
to $87.4 million for the three months ended September 30, 2007 from $69.0
million for the same period in 2006, coupled with an increase in the average
overall cost of interest-bearing liabilities to 4.15% for the three months ended
September 30, 2007 from 3.72% for the same period in 2006. Interest expense on
deposits increased $128,000 to $624,000 for the three months ended September 30,
2007 from $496,000 for the same period in 2006. The increase was primarily due
to an increase in the average balance of time certificates of $6.4 million to
$45.0 million for the three months ended September 30, 2007 from $38.6 million
for the same period in 2006, coupled with an increase in the average cost of
time certificates to 4.87% for the three months ended September 30, 2007 from
4.56% for the same period in 2006. Time certificates comprised 73.4% of the
average balance of interest-bearing deposits for the three months ended
September 30, 2007 compared with 72.7% 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 increased $1.8 million to
$16.3 million for the three months ended September 30, 2007 from $14.5 million
for the same period in 2006. The increase in the average balance of savings
deposits was primarily in NOW accounts which increased $1.6 million during the
three months ended September 30, 2007 compared with the same period in 2006. The
increase in NOW accounts was due to a large deposit account received at the end
of the second quarter.
Interest expense on FHLB advances increased $139,000 to $291,000 for the
three months ended September 30, 2007 from $152,000 for the three months ended
September 30, 2006. The increase was due to an increase in the average balances
of FHLB advances of $10.1 million to $26.0 million for the three months ended
September 30, 2007 from $15.9 million for the same period in 2006, coupled with
an increase in the borrowing costs to 4.43% for the three months ended September
30, 2007 from 3.78% 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
$14,000 for the three months ended September 30, 2007 compared with no provision
or benefit for the three months ended September 30, 2006. The provision for loan
losses of $14,000 consisted of $4,000 related to an overdraft program which was
initiated in December 2005 for consumer and business checking customers and
$10,000 related to the loan portfolio. The provision for loan losses of $10,000
recorded during the third quarter of 2007 was attributable to loan volume that
was recorded during the third quarter of 2007. The allowance for loan losses as
a percent of total loans was 0.63% at September 30, 2007 compared with 0.59% at
September 30, 2006. The mix of the loan portfolio continues to be weighted in
one- to four-family residential and home
14
equity loans which accounted for 59.5% and 62.4% of total loans at September 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 $388,000 to $388,000
($164,000 of which is guaranteed by the United States Small Business
Administration), or 0.37% of total assets at September 30, 2007 from $0 or,
0.00% of total assets at September 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 $5,000, or 7.4%, to
$63,000 for the three months ended September 30, 2007 from $68,000 for the three
months ended September 30, 2006 as a result of a decrease in fees collected on
the Bank's overdraft privilege program.
Total Noninterest Expenses. Noninterest expense increased $61,000, or
10.4% to $649,000 for the three months ended September 30, 2007 compared with
$588,000 for the three months ended September 30, 2006. Salaries and employee
benefits expense increased $35,000, or 11.1%, to $349,000, or 53.8% of total
noninterest expense for the three months ended September 30, 2007 from $314,000,
or 53.4% of total noninterest expense for the three months ended September 30,
2006. 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 as well as a decrease in the deferrals
of loan origination costs. Other increases in noninterest expense primarily
related to a $14,000 increase in marketing expenses and a $7,000 increase in
professional fees.
Comparison of Results of Operations for the Nine Months Ended
September 30, 2007 and 2006
General. We recorded net income of $89,000 for the nine months ended
September 30, 2007 compared with net income of $66,000 for the nine months ended
September 30, 2006. The increase in earnings for the nine months ended September
30, 2007 compared with the same period a year earlier was primarily attributable
to an increase in net interest and dividend income of $318,000, an increase in
noninterest income of $14,000, partially offset by an increase in noninterest
expense of $211,000, an increase in the provision for loan losses of $46,000 and
an increase in income tax expense of $51,000.
Net Interest and Dividend Income. Net interest and dividend income
increased $318,000, or 20.2%, to $1.9 million for the nine months ended
September 30, 2007 compared with $1.6 million for the nine months ended
September 30, 2006, reflecting a $1.1 million, or 33.3%, increase in interest
and dividend income, and a $837,000, or 48.9%, increase in interest expense. Our
interest rate spread decreased to 2.05% for the nine months ended September 30,
2007 compared to 2.26% for the nine months ended September 30, 2006. The net
interest margin for the nine months ended September 30, 2007 was 2.62% compared
to 2.70% for the nine months ended September 30, 2006. The decrease in the
interest rate spread for the nine months ended September 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 the average balance
of interest earning assets by $18.7 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 nine months ended September 30, 2007 when compared with the
nine months ended September 30, 2006.
Interest and Dividend Income. Total interest and dividend income increased
by $1.1 million, or 33.3%, to $4.4 million for the nine months ended September
30, 2007 compared with $3.3 million for the nine months ended September 30,
2006. The increase of $1.1 million was due to an increase in the average balance
of interest-earning assets of $18.7 million, or 24.0%, to $96.7 million for the
nine months ended September 30, 2007 from $78.0 million for the nine months
ended September 30, 2006 coupled with an increase in the yields on
interest-earning assets from 5.64% for the nine months ended September 30, 2006
to 6.15% for the nine months ended September 30, 2007. Interest and fees on
loans increased $566,000, or 23.9%, to $2.9 million for the nine months ended
September 30, 2007 from $2.4 million for the same period in 2006, primarily due
to a $8.4 million increase in the average balance of loans from $48.8 million
for the nine months ended September 30, 2006 to $57.2 million for the same
period in 2007, and to a lesser extent an increase in loan yields from 6.49% for
the nine months ended September 30, 2006 to 6.86% 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 $4.6 million in one- to four-family
residential loans and a $3.5 million increase in the average balance of
commercial and commercial real estate loans. The increase in average
15
loan yields from 6.49% for the nine months ended September 30, 2006 to 6.82% for
the same period in 2007 was due to an increase in the prime rate of 100 basis
points since December 2005 to the middle of September 2007, the repricing of
teaser home equity loans to their fully indexed interest rate as well as the
addition of new loans at higher interest rates during the last quarter of 2006
and the first three quarters of 2007.
Interest income on investment securities, FHLB stock and interest-bearing
deposits with other banks increased $589,000 for the nine months ended September
30, 2007 to $1.5 million from $925,000 for the nine months ended September 30,
2006. The increase was due to an increase in the average balance of the
investment portfolio by $10.2 million to $39.5 million for the nine months ended
September 30, 2007, from $29.3 million for the same period in 2006, and to a
lesser extent an increase in the overall yield on total investments from 4.22%
for the nine months ended September 30, 2006 to 5.12% 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 FHLB advances and time deposits. 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
quarter of 2006 and the first three quarters of 2007.
Interest Expense. Total interest expense increased by $837,000, or 48.9%,
to $2.6 million for the nine months ended September 30, 2007 from $1.7 million
for the nine months ended September 30, 2006. The increase of $837,000 was due
to an increase in the average balance of interest-bearing liabilities of $15.4
million to $83.2 million for the nine months ended September 30, 2007 from $67.8
million for the same period in 2006, coupled with an increase in the average
overall cost of interest-bearing liabilities to 4.10% for the nine months ended
September 30, 2007 from 3.38% for the same period in 2006. Interest expense on
deposits increased $472,000 to $1.7 million for the nine months ended September
30, 2007 from $1.2 million for the same period in 2006. The increase was due to
an increase in the average balances of time certificates of $7.5 million to
$42.1 million for the nine months ended September 30, 2007 from $34.6 million
for the same period in 2006, coupled with an increase in the average cost of
time certificates to 4.82% for the nine months ended September 30, 2007 from
4.17% for the same period in 2006. Time certificates comprised 73.3% of the
average balance of interest-bearing deposits for the nine months ended September
30, 2007 compared with 68.9% 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.
Interest expense on FHLB advances increased $364,000 to $841,000 for the
nine months ended September 30, 2007 from $477,000 for the nine months ended
September 30, 2006. The increase was due to an increase in the average balance
of FHLB advances of $8.1 million to $25.7 million for the nine months ended
September 30, 2007 from $17.6 million for the same period in 2006, coupled with
an increase in borrowing costs to 4.38% for the nine months ended September 30,
2007 from 3.61% 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
$59,000 for the nine months ended September 30, 2007 compared with $13,000 for
the nine months ended September 30, 2006. The provision for loan losses of
$59,000 consisted of $8,000 related to an overdraft program which was initiated
in December 2005 for consumer and business checking customers and $51,000
related to the loan portfolio. The provision for loan losses of $51,000 during
the first nine months of 2007 was attributable to the weakness of two commercial
loan relationships totaling $329,000, of which $113,000 is guaranteed by the
United States Small Business Administration as well as loan volume that was
recorded during the first nine months of 2007. The provision for loan losses of
$13,000 for the nine months ended September 30, 2006 related specifically to the
overdraft program mentioned above. The allowance for loan losses as a percent of
total loans was 0.63% at September 30, 2007 compared with 0.59% at September 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 59.5% and
62.4% of total loans at September 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 $388,000 to $388,000 ($164,000 of
which is guaranteed by the United States Small Business Administration), or
0.37% of total assets at September 30, 2007 from $0 or, 0.00% of total assets at
September 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.
16
Total Noninterest Income. Noninterest income increased $14,000, or 6.8%,
to $219,000 for the nine months ended September 30, 2007 from $205,000 for the
nine months ended September 30, 2006. The increase was primarily attributable to
net gains on sales of available-for-sale securities of $16,000 for the nine
months ended September 30, 2007 compared with no gain on sales for the same
period in 2006.
Total Noninterest Expenses. Noninterest expense increased $211,000, or
12.5% to $1.9 million for the nine months ended September 30, 2007 compared with
$1.7 million for the nine months ended September 30, 2006. Salaries and employee
benefits expense increased $141,000, or 16.4%, to $1.0 million, or 52.8% of
total noninterest expense for the nine months ended September 30, 2007 from
$859,000, or 51.0% of total noninterest expense for the nine months ended
September 30, 2006. 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 $28,000 increase in professional fees, $18,000 increase
in marketing expenses and a $29,000 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 $388,000 or 0.64% of total loans at September 30, 2007.
The nonperforming loans shown below carry a guarantee by the United States Small
Business Administration covering $164,000 and $51,000 of the balance
outstanding, respectively, at September 30, 2007 and December 31, 2006.
As shown in the following table, nonperforming assets as a percentage of
total assets were 0.37% and 0.06%, as of September 30, 2007 and December 31,
2006, respectively.
September 30, December 31,
2007 2006
------------- ------------
($ in Thousands)
Loans 90 days or more past due and still accruing $ 0 $ 0
===== ======
Total nonperforming loans and nonperforming assets $ 388 $ 60
===== =====
Nonperforming loans as a percent of total loans 0.64% 0.11%
Nonperforming assets as a percent of total assets 0.37% 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 September 30, 2007, the total approved loan commitments unfunded
amounted to $10.5 million, which includes the unadvanced portion of loans of
$7.5 million. Certificates of deposit and
17
advances from the FHLB of Boston scheduled to mature in one year or less at
September 30, 2007, totaled $37.9 million and $1.7 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, 2007, we had total collateral available to support an
additional $26.4 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 $11.2 million in borrowing capacity at September 30, 2007.
Stockholders' Equity
Our stockholders' equity totaled $9.4 million or 8.94% of total assets at
September 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, a decrease of $333,000
related to the purchase of 50,000 shares of common stock for treasury, partially
offset by net earnings of $89,000 for the first nine months of 2007 and an
increase in accumulated comprehensive income of $134,000 for the nine months
ended September 30, 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 September 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 September 30, 2007 were as follows:
total risk-based capital 16.54%, Tier I risk based 15.84% and Tier I leverage
(core capital) 8.07%. 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
18
repricing terms of our interest-earning assets and interest-bearing liabilities.
The board of directors sets and recommends the asset and liability and funds
management policies of the Bank, which are implemented by the asset/liability
management committee.
The purpose of the asset/liability committee is to communicate, coordinate
and control asset/liability management consistent with our business plan and
board approved policies. The committee establishes and monitors the volume and
mix of assets and funding sources taking into account relative costs and
spreads, interest rate sensitivity and liquidity needs. The objectives are to
manage assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk and profitability goals.
The asset/liability management committee generally meets quarterly to
review, among other things, economic conditions and interest rate outlook,
current and projected liquidity needs and capital position, anticipated changes
in the volume and mix of assets and liabilities and interest rate risk exposure
limits versus current projections using a net present value of portfolio equity
analysis and income simulations. The asset/liability management committee
recommends appropriate strategy changes based on this review.
In order to manage our assets and liabilities and achieve the desired
liquidity, credit quality, interest rate risk, profitability and capital
targets, we have focused our strategies on:
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 September 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 August 2007 relate to the stock
repurchase plan that was approved by the Company's Board of Directors on July
25, 2007. 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. As of September 30, 2007, the Company had purchased
50,000 shares of common stock at a weighted average share price of $6.66.
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
- -------------------------------------- ------------ -------------- ------------------- ------------------
July 1, 2007 through July 31, 2007 - - - 64,650
August 1, 2007 through August 31, 2007 50,000 6.66 50,000 14,650
September 1, 2007 through
September 30, 2007 - - - 14,650
------ ----- ------ ------
Total 50,000 $6.66 50,000 14,650
====== ===== ====== ======
As of October 31, 2007, the Company had completed the Stock Repurchase
Program, noted above, having purchased the remaining 14,650 shares of common
stock for $98,888, or a weighted average per share price of $6.75.
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
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Monadnock Bancorp, Inc.
Date: November 9, 2007 /s/ William M. Pierce, Jr.
--------------------------
William M. Pierce, Jr.
President and Chief Executive Officer
Date: November 9, 2007 /s/ Karl F. Betz
----------------
Karl F. Betz
Senior Vice President and Chief
Financial Officer
21