UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2008
( ) 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 Registrant 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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 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 large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definition of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer ( ) Accelerated filer ( )
Non-accelerated filer ( ) Smaller reporting company (X)
Indicate by check mark whether the registrant is a Shell Company (as
defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
As of May 1, 2008, there were 1,218,958 shares issued and 1,293,608
shares outstanding of the issuer's common stock.
INDEX
Monadnock Bancorp, Inc. and Subsidiary
Part I. Financial Information Page
--------------------- ----
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2008 (unaudited)
and December 31, 2007 3
Consolidated Statements of Income for the
Three Months Ended March 31, 2008 and 2007 (unaudited) 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2008 and 2007 (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 18
Part II. Other Information
-----------------
Item 1. Legal Proceedings 18
Item 1A. Risk Factors 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits 19
SIGNATURES 20
2
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED BALANCE SHEETS
---------------------------
March 31, December 31,
ASSETS 2008 2007
- ------ ------------ ------------
(Unaudited)
Cash and due from banks $ 1,273,377 $ 1,181,206
Massachusetts Municipal Cash Trust 14,006
------------ ------------
Total cash and cash equivalents 1,287,383 1,181,206
Interest-bearing time deposit in other bank 100,000 100,000
Investments in available-for-sale securities (at fair value) 47,064,481 36,595,813
Federal Home Loan Bank stock, at cost 2,139,300 1,607,700
Loans, net of allowance for loan losses of $361,369 as of March 31, 2008
and $389,770 as of December 31, 2007 64,935,226 64,030,781
Premises and equipment 783,496 809,493
Goodwill 132,293 132,293
Core deposit intangible 56,750 61,250
Accrued interest receivable 544,855 442,749
Other assets 171,537 214,674
------------ ------------
Total assets $117,215,321 $105,175,959
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest-bearing $ 4,961,974 $ 5,286,039
Interest-bearing 59,587,516 59,531,823
------------ ------------
Total deposits 64,549,490 64,817,862
Federal Home Loan Bank advances 42,864,649 30,537,976
Other liabilities 429,756 383,533
------------ ------------
Total liabilities 107,843,895 95,739,371
------------ ------------
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 at March 31, 2008 and December 31, 2007;
1,218,958 and 1,228,958 outstanding at March 31, 2008 and
December 31, 2007 12,936 12,936
Paid-in capital 7,767,352 7,755,439
Retained earnings 2,733,782 2,710,788
Unearned compensation - ESOP (402,683) (402,683)
Unearned compensation - Recognition and Retention Plan (298,799) (298,799)
Treasury stock, at cost (74,650 shares at March 31, 2008 and 64,650
shares at December 31, 2007) (495,687) (431,687)
Accumulated other comprehensive income 54,525 90,594
------------ ------------
Total stockholders' equity 9,371,426 9,436,588
------------ ------------
Total liabilities and stockholders' equity $117,215,321 $105,175,959
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
3
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Three Months Ended
March 31,
------------------------
2008 2007
---------- ----------
(Unaudited)
Interest and dividend income:
Interest and fees on loans $1,058,252 $ 926,801
Interest on investments-taxable 517,071 450,851
Other interest income 31,664 28,393
---------- ----------
Total interest and dividend income 1,606,987 1,406,045
---------- ----------
Interest expense:
Interest on deposits 553,082 518,683
Interest on Federal Home Loan Bank advances 384,342 279,841
---------- ----------
Total interest expense 937,424 798,524
---------- ----------
Net interest and dividend income 669,563 607,521
Provision for loan losses 59,508 23,923
---------- ----------
Net interest and dividend income
after provision for loan losses 610,055 583,598
---------- ----------
Noninterest income:
Service charges on deposits 54,383 52,895
Net gain on sales of available-for-sale securities 83,864 16,081
Other income 22,932 18,845
---------- ----------
Total noninterest income 161,179 87,821
---------- ----------
Noninterest expense:
Salaries and employee benefits 364,494 324,033
Occupancy expense 40,859 38,578
Equipment expense 23,035 21,495
Data processing 68,811 54,152
Blanket bond insurance 1,654 2,069
Professional fees 47,954 42,710
Supplies and printing 7,027 12,705
Telephone expense 12,820 12,951
Marketing expense 41,735 12,231
Postage expense 9,910 9,443
Other expense 108,706 77,700
---------- ----------
Total noninterest expense 727,005 608,067
---------- ----------
Income before income tax expense 44,229 63,352
Income tax expense 21,235 27,147
---------- ----------
Net income $ 22,994 $ 36,205
========== ==========
Shares used in computing net income per share:
Basic 1,128,225 1,212,209
Diluted 1,173,308 1,240,003
Net income per share - basic $ 0.02 $ 0.03
Net income per share - diluted $ 0.02 $ 0.03
The accompanying notes are an integral part of these
consolidated financial statements.
4
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Three Months Ended
March 31,
-----------------------------
2008 2007
------------ -----------
(Unaudited)
Cash flows from operating activities:
Net income $ 22,994 $ 36,205
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sales of available-for-sale securities (83,864) (16,081)
Net amortization of securities 43,688 17,418
Change in deferred loan origination costs, net (6,850) 153
Provision for loan losses 59,508 23,923
Recognition of stock option expense 11,913 5,382
Depreciation and amortization 28,082 26,174
(Increase) decrease in accrued interest receivable (102,106) 20,268
Amortization of core deposit intangible 4,500 5,250
Decrease in other assets 7,572 1,933
Decrease in loan servicing rights and interest-only strips, net 375 1,667
Decrease (increase) in prepaid expenses 23,048 (23,354)
Decrease in taxes receivable 12,142 7,299
Increase in taxes payable 24,261
Deferred income tax benefit (1,449) (675)
Increase in accrued ESOP and Recognition and Retention Plan expense 14,307 10,629
Increase (decrease) in accrued expenses 19,428 (637)
Increase in accrued interest payable 39,295 4,407
Decrease in other liabilities (1,699) (4,237)
------------ -----------
Net cash provided by operating activities 90,884 139,985
------------ ------------
Cash flows from investing activities:
Purchases of available-for-sale securities (23,901,754) (893,429)
Proceeds from sales of available-for-sale securities 10,396,533 2,645,150
Principal payments received on available-for-sale securities 3,017,001 3,125,085
Purchase of Federal Home Loan Bank stock (531,600) (62,900)
Loan originations and principal collections, net (958,091) (2,193,555)
Recoveries of previously charged off loans 988 706
Capital expenditures - premises and equipment (2,085) (47,190)
------------ -----------
Net cash (used in) provided by investing activities (11,979,008) 2,573,867
------------ -----------
Cash flows from financing activities:
Net increase in demand deposits, savings and NOW deposits 2,422,782 210,495
Net decrease in time deposits (2,691,154) (901,376)
Net change on short-term advances from Federal Home Loan Bank 2,290,000 (1,000,000)
Long-term advances from Federal Home Loan Bank 10,490,041 2,002,090
Payments on long-term advances from Federal Home Loan Bank (453,368) (650,000)
Purchase of common stock for treasury (64,000)
------------ -----------
Net cash provided by (used in) financing activities 11,994,301 (338,791)
------------ -----------
5
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Three Months Ended March 31, 2008 and 2007
------------------------------------------
(continued)
2008 2007
------------ -----------
(Unaudited)
Net increase in cash and cash equivalents 106,177 2,375,061
Cash and cash equivalents at beginning of period 1,181,206 1,098,189
------------ -----------
Cash and cash equivalents at end of period $ 1,287,383 $ 3,473,250
============ ============
Supplemental disclosures:
Interest paid $ 898,129 $ 794,117
Income taxes paid 7,000 1,800
The accompanying notes are an integral part of these consolidated financial statements.
6
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
Part I - Financial Information
Item 1. - Financial Statements
Condensed Notes to Unaudited Consolidated Financial Statements
--------------------------------------------------------------
March 31, 2008
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. 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.
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, 2008. In the opinion of the Company's
management, all adjustments consisting of normal recurring accruals necessary
for a fair presentation of the financial condition and results of operations
for the interim periods included herein have been made.
The results of operations for the three month period ended March 31, 2008
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, 2008.
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, 2007.
Use of Estimates: The preparation of the consolidated financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect amounts reported in the consolidated financial
statements. Changes in these estimates and assumptions are considered
reasonably possible and may have a material impact on the financial statements
and thus actual results could differ from the amounts reported and disclosed
herein. The Company considers the allowance for loan losses, the amortization
of loan purchase premiums and amortization of mortgage-backed purchase premiums
on investment securities to be critical accounting estimates.
At March 31, 2008, 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, 2007.
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 73,102 and 2,602 shares of
common stock were outstanding during the first quarter of 2008 and 2007,
respectively, 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 2008 or 2007.
The amortized cost and estimated fair value of securities at March 31,
2008 and December 31, 2007 are as follows:
Amortized Estimated
Cost Basis Fair Value
----------- -----------
March 31, 2008:
Mortgage-backed securities:
FNMA $17,188,530 17,190,231
FHLMC 19,371,951 19,400,651
GNMA 10,413,712 10,473,599
----------- -----------
Total mortgage-backed securities 46,974,193 47,064,481
----------- -----------
Total investments in available-for-sale securities $46,974,193 $47,064,481
=========== ===========
December 31, 2007:
Mortgage-backed securities:
FNMA $13,639,059 $13,752,814
FHLMC 8,370,811 8,397,971
GNMA 14,435,927 14,445,028
----------- -----------
Total mortgage-backed securities 36,445,797 36,595,813
----------- -----------
Total investments in available-for-sale securities $36,445,797 $36,595,813
=========== ===========
Note 4. Loans
Loans consist of the following at:
March 31, December 31,
2008 2007
----------- ------------
One- to four-family residential $31,944,025 $31,526,555
Home equity 5,557,281 5,350,078
Commercial real estate 14,636,149 14,693,410
Multifamily 1,589,124 1,704,787
Construction and land development loans 1,012,188 1,141,352
Commercial loans 7,519,614 7,065,867
Consumer loans 2,700,011 2,607,149
----------- -----------
64,958,392 64,089,198
Allowance for loan losses (361,369) (389,770)
Deferred costs, net 338,203 331,353
----------- -----------
Net loans $64,935,226 $64,030,781
=========== ===========
Interest on loans is accrued and credited to operations based upon the
principal amount outstanding. When management determines that significant doubt
exists as to the collectibility of principal or interest on a loan, the loan is
placed on nonaccrual status. In addition, loans past due 90 days or more as to
principal or interest are placed on nonaccrual status, except for those loans
which, in management's judgment, are fully secured and in the process of
collection. Interest accrued but not received on loans placed on nonaccrual
status is reversed and charged against current operations. Interest
subsequently received on nonaccrual loans is either applied against principal
or recorded as income according to management's judgment as to the
collectibility of principal.
Loans considered to be uncollectible are charged against the allowance
for loan losses. The allowance is increased by charges to current operations in
amounts sufficient to maintain the adequacy of the allowance. The adequacy of
the allowance is determined by management's evaluation of the extent of losses
inherent in the loan portfolio and prevailing economic conditions.
8
Changes in the allowance for loan losses are as follows:
Three months ended
March 31,
-----------------------
2008 2007
-------- --------
Balance at beginning of period $389,770 $334,917
Recoveries of loans previously charged off 988 706
Provision for loan losses 59,508 23,923
Charge offs (88,897) (4,508)
-------- --------
Balance at end of period $361,369 $355,038
======== ========
Information with respect to impaired loans consisted of the following at:
March 31, December 31,
2008 2007
--------- ------------
Recorded investment in impaired loans $849,028 $269,725
======== ========
Impaired loans with specific loss allowances $241,559 $242,804
======== ========
Loss allowances reserved on impaired loans $ 41,260 $ 37,448
======== ========
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
$413,000 and $60,000 for the three months ended March 31, 2008 and 2007,
respectively. During the three months ended March 31, 2008 and 2007, the
Company recognized no income on impaired loans.
Note 5. Deposits
Interest-bearing deposits consisted of the following at:
March 31, December 31,
2008 2007
----------- ------------
NOW accounts $10,235,812 $ 7,613,526
Savings accounts 2,470,925 2,448,071
Money market deposit accounts 8,446,305 8,344,598
Time certificates 38,434,474 41,125,628
----------- -----------
$59,587,516 $59,531,823
=========== ===========
Note 6. Fair Value Measurement Disclosures
The following table presents the fair value disclosures of assets and
liabilities in accordance with SFAS 157, "Fair Value Measurements" (SFAS 157)
which became effective for the Company's consolidated financial statements on
January 1, 2008:
Fair Value Measurements at Reporting Date
Using
-----------------------------------------------
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
Description 03/31/08 (Level 1) (Level 2) (Level 3)
- ----------- ----------- ------------- ----------- ------------
Available-for-sale securities $47,064,481 $47,064,481 $ $
----------- ----------- ------- -------
Total $47,064,481 $47,064,481 $ $
=========== =========== ======= =======
9
Monadnock Bancorp, Inc. and Subsidiary
Part I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 2008
Forward-Looking Statements
This Quarterly Report on Form 10-Q 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. 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 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 expanding
our deposit base. This growth may include the establishment of a new office,
either by acquisition or by exploring
10
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
may emphasize originating commercial real estate, both permanent and
construction, commercial business loans and one- to four-family residential
real estate loans. Commercial real estate and commercial business loans provide
higher returns but 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 $9.1
million, or 16.3%, from $55.9 million at March 31, 2007 to $65.0 million at
March 31, 2008. We plan to continue to grow our loan portfolio with the net
proceeds raised in the 2006 stock offering.
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. In an effort to increase core deposits and become more
competitive, the Bank implemented a Reward Checking account product in October
2007. At March 31, 2008, this product totaled $6.5 million. Our deposits
increased $3.8 million, or 6.3%, to $64.5 million at March 31, 2008 from $60.7
million at March 31, 2007.
Maintaining Asset Quality. Our asset quality is reflected in our ratio of
non-performing assets to total assets, which was 0.72% at March 31, 2008 and
0.26% at December 31, 2007, respectively. The increase in nonperforming assets
for the quarter ended March 31, 2008 was primarily due to a commercial loan
relationship with an outstanding balance of $575,000 at March 31, 2008, of
which loans are guaranteed by the United States Small Business Administration
covering $319,000 of the balance outstanding. Management is striving to
continue to maintain good asset quality. 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 Non-Interest Income. Non-interest income consists primarily of
service charges on deposit accounts, point of sale income from debit and credit
transactions, ATM fees and any gain on sale of loans and investments. We plan
to target programs to increase non-interest income such as the overdraft
checking program we instituted in December 2005.
Improving Our Efficiency Ratio. Our infrastructure and fixed operating
costs can support a larger asset base. We believe the conversion and offering
described above will allow us to increase our asset base through greater loan
production which should help improve our efficiency ratio (non-interest expense
divided by net-interest income and non-interest income) by generating
additional income. Our efficiency ratio was 87.51% and 87.45% for the quarter
ended March 31, 2008 and March 31, 2007, respectively.
All of these initiatives are designed to improve our profitability in
future years.
11
Changes in Financial Condition from December 31, 2007 to March 31, 2008
General. Total assets increased $12.0 million, or 11.4%, to $117.2
million at March 31, 2008 compared with $105.2 million at December 31, 2007. We
increased our assets in the first quarter of 2008, by increasing our investment
portfolio by $10.5 million while funding this leverage with $12.4 million in
Federal Home Loan Bank advances in an attempt to counteract our net interest
margin compression as a result of the recent Federal Reserve actions to lower
the federal funds rate by 300 basis points since September 2007.
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 March 31, 2008 or at December 31,
2007.
Our investment portfolio increased $10.5 million, or 28.7%, to $47.1
million at March 31, 2008 from $36.6 million at December 31, 2007. The increase
was due to the purchase of $23.9 million in mortgage-backed securities,
partially offset by $10.4 million in sales of mortgage-backed securities and
$3.0 million in principal paydowns of mortgage-backed securities. The increase
in investment securities was funded by Federal Home Loan Bank advances.
At March 31, 2008, the weighted average maturity of mortgage-backed
securities available-for-sale was 321 months, based upon their final
maturities. However, normal principal repayments and prepayments of
mortgage-backed securities are received regularly, substantially reducing their
weighted average maturities. All of our mortgage-backed securities are
adjustable with a weighted average term to next repricing adjustment of 28
months on average.
Loans. Our net loan portfolio grew by $904,000, or 1.4%, to $64.9 million
at March 31, 2008 from $64.0 million at December 31, 2007. Loan growth during
the quarter ended March 31, 2008 was primarily concentrated in commercial, one-
to four-family residential and home equity lending which grew $454,000,
$417,000 and $207,000, respectively.
Deposits. Our total deposits decreased $268,000 to $64.5 million at March
31, 2008 from $64.8 million at December 31, 2007. Interest-bearing deposits
were virtually unchanged at $59.6 million and $59.5 million at March 31, 2008
and December 31, 2007, respectively, while noninterest-bearing deposits
decreased $324,000 during the first quarter of 2008. NOW accounts increased
$2.6 million during the first quarter of 2008 which was due to the
implementation of our Rewards Checking account product in the fourth quarter of
2007. Rewards Checking accounts increased $3.1 million during the first quarter
of 2008 and totaled $6.5 million at March 31, 2008, which was partially offset
by a decrease in a large NOW account balance during the first quarter of 2008.
Money market deposit accounts increased $102,000 during the first quarter of
2008, while time certificates decreased $2.7 million. The decrease in time
certificates was attributable to customers transferring these deposits to other
deposit products at Monadnock Community Bank as well as interest rate sensitive
customers leaving due to competitive rates being offered elsewhere.
Borrowings. FHLB advances increased $12.4 million, or 40.7%, to $42.9
million at March 31, 2008 from $30.5 million at December 31, 2007. The increase
in FHLB advances was used to fund the purchase of investment securities, and to
a lesser extent, net loan growth during the first quarter of 2008.
Principal payments due on other borrowings after March 31, 2008 are $3.8
million in 2008, $5.4 million in 2009, $7.3 million in 2010, $4.0 million in
2011, $5.8 million in 2012 and $16.5 million in years thereafter. The FHLB will
require the repayment of $4.0 million of borrowings during 2008 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 2008 if the three-month LIBOR exceeds 6.50% of
which borrowings is at an interest rate of 3.99% maturing in 2014. As of March
31, 2008, the three month LIBOR was at 2.69%. During the first quarter of 2008,
the Bank borrowed an additional $6.5 million in callable advances from the
FHLB. These advances are callable at the discretion of the FHLB on the call
date noted and most are callable continuously on a quarterly basis thereafter.
The FHLB has the right to call $8.5 million in borrowings during 2008, of which
borrowings have a weighted interest rate of 3.71% and a weighted average
maturity of 87 months. The FHLB has the right to call $2.0 million in
borrowings during 2009, of which borrowings have a weighted interest rate of
3.08% and a weighted average maturity of 57 months. The FHLB has the right to
call $3.0 million in borrowings during 2010, of which borrowings have a
weighted interest rate of 2.90% and a weighted average maturity of 58 months.
In addition, the FHLB has the right to call $1.0 million in borrowings during
2011, of which borrowings are at an interest rate of 3.09% and maturity of 59
months.
12
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 $65,000 to
$9.37 million at March 31, 2008 from $9.44 million at December 31, 2007. The
decrease in stockholders' equity was primarily attributable to the repurchase
of 10,000 shares of common stock for treasury for $64,000. Our equity to assets
ratio was 8.00% at March 31, 2008 compared to 8.97% at December 31, 2007.
Comparison of Results of Operations for the Three Months Ended
March 31, 2008 and 2007
General. We recorded net income of $23,000 for the quarter ended March
31, 2008 compared with net income of $36,000 for the quarter ended March 31,
2007. The decrease in earnings for the three months ended March 31, 2008
compared with the same period a year earlier was primarily attributable to an
increase in noninterest expense of $119,000, an increase in the provision for
loan losses of $36,000, partially offset by an increase in noninterest income
of $73,000, an increase in net interest and dividend income of $62,000 and a
decrease in income tax expense of $6,000.
Our profitability has been marginal during the last few years primarily
due to our high fixed operating costs in relation to the amount of net interest
income and non-interest income we generated and our comparatively low net
interest margin (net interest income divided by average interest earning
assets). Our efficiency ratio was 87.51% for the three months ended March 31,
2008 compared to 87.45% for the three months ended March 31, 2007. The existing
operating platform we have in place relative to the size of our customer base
and asset base has tended to negatively impact our profitability. Our net
interest margin for the quarter ended March 31, 2008 was 2.47% compared to
2.62% for the three months ended March 31, 2007 and 2.67% for the three months
ended December 31, 2007. The decrease in the net interest margin for the three
months ended March 31, 2008 compared with the same period a year ago was due to
an increase in nonperforming loans during the first quarter of 2008 which
reduced loan income by $15,000 and contributed to a decrease in the interest
rate spread and net interest margin of 6 basis points. In addition, the
interest margin was negatively impacted by recent Federal Reserve actions which
resulted in the reduction of the Prime Rate by 2.00% since late January 2008.
In the event we are unable to generate continued commercial and residential
loan volume in 2008, 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 Interest and Dividend Income. Net interest and dividend income
increased $62,000, or 10.2%, to $670,000 for the three months ended March 31,
2008 compared to $608,000 for the three months ended March 31, 2007. This
increase reflected a $201,000, or 14.3%, increase in interest and dividend
income, and a $138,000, or 17.3%, increase in interest expense. The interest
rate spread was 2.03% for the three months ended March 31, 2008 compared to
2.06% for the three months ended March 31, 2007 and 2.15% for the three months
ended December 31, 2007.
Interest and Dividend Income. Total interest and dividend income
increased by $201,000, or 14.3%, to $1.6 million for the three months ended
March 31, 2008 compared with $1.4 million for the three months ended March 31,
2007. The increase of $201,000 was due to an increase in the average balance of
interest-earning assets of $14.9 million, or 15.9%, to $108.8 million for the
three months ended March 31, 2008 from $93.9 million for the three months ended
March 31, 2007, partially offset by a decrease in the yields on
interest-earning assets to 5.94% for the three months ended March 31, 2008 from
6.07% for the three months ended March 31, 2007. Interest income on loans
increased $131,000, or 14.1%, to $1.1 million for the three months ended March
31, 2008 from $927,000 for the same period in 2007, primarily due to a $10.1
million increase in the average balance of loans from $54.6 million for the
three months ended March 31, 2007 to $64.7 million for the same period in 2008.
This increase on interest income on loans was partially offset by a decrease in
loan yields from 6.88% for the three months ended March 31, 2007 to 6.58% for
the same period in 2008. The increase in the average balance of loans is
primarily attributable to an increase in the average balance of $5.3 million in
commercial real estate loans, a $3.9 million increase in the average balance of
one- to four-family residential loans as well as a $731,000 increase in
consumer loans. The decrease in average loan yields from 6.88% for the three
months ended March 31, 2007 to 6.58% for the same period in 2008 was due to the
repricing of some adjustable rate loans downward due to a decrease in the prime
rate of 3% since September 2007. The addition of $607,000 of nonperforming
loans during the first quarter of 2008 also lowered loan income by $15,000.
Interest income on investment securities, FHLB stock and interest-bearing
deposits with other financial institutions increased $70,000 for the three
months ended March 31, 2008 to $549,000 from $479,000 for the three months
ended March 31, 2007. The increase was due to an increase in the average
balance of the investment portfolio by $4.9 million to $44.2 million for the
three months ended March 31, 2008, from $39.3 million for the same period in
2007, and to a lesser extent an increase in the overall yield on total
investments from 4.94% for the three months ended
13
March 31, 2007 to 5.00% for the same period in 2008. The increase in the
average balances in the investment portfolio is the direct result of our
leveraging the balance sheet with an increase in funding from FHLB advances.
Interest Expense. Total interest expense increased by $138,000, or 17.3%,
to $937,000 for the three months ended March 31, 2008 from $799,000 for the
three months ended March 31, 2007. The increase of $138,000 was due to an
increase in the average balance of interest-bearing liabilities of $15.7
million to $96.5 million for the three months ended March 31, 2008 from $80.8
million for the same period in 2007, partially offset by a decrease in the
average overall cost of interest-bearing liabilities to 3.91% for the three
months ended March 31, 2008 from 4.01% for the same period in 2007. Interest
expense on deposits increased $34,000 to $553,000 for the three months ended
March 31, 2008 from $519,000 for the same period in 2007. The increase was due
to an increase in the average rate on savings deposits to 2.18% for the three
months ended March 31, 2008 from 1.49% for the same period in 2007 coupled with
an increase in the average balance of savings deposits of $4.4 million to $19.3
million for the three months ended March 31, 2008 from $14.9 million for the
same period in 2007. The increase in the average balances and cost on savings
deposits for the three months ended March 31, 2008 compared to the same period
in 2007 was primarily attributable to the introduction of a Rewards Checking
product in October 2007. The average balance of time certificates remained
virtually unchanged at $39.8 million for both periods, while the average cost
of time certificates decreased from 4.73% for the three months ended March 31,
2007 to 4.53% for the same period in 2008. The decrease in the cost on time
certificates is the direct result of maturing time certificates repricing at
lower rates during the first quarter of 2008 due to the lower interest rate
environment.
Interest expense on FHLB advances increased $104,000 to $384,000 for the
three months ended March 31, 2008 from $280,000 for the three months ended
March 31, 2007. The increase was due to an increase in the average balance of
FHLB advances of $11.2 million to $37.3 million for the three months ended
March 31, 2008 from $26.1 million for the same period in 2007, partially offset
by a decrease in the borrowing costs to 4.14% for the three months ended March
31, 2008 from 4.35% for the same period in 2007. We used the additional funding
from the average balance increase of FHLB advances to increase our net loan
portfolio, and to a lesser extent, our investment securities portfolio. The
decrease in borrowing costs was primarily due to the lower interest rate
environment which allowed us to refinance matured borrowings at lower costs
while funding new borrowings at lower costs than was available in the first
quarter of 2007.
Allowance for Loan Losses. We recorded a provision for loan losses of
$60,000 for the three months ended March 31, 2008 compared with $24,000 for the
three months ended March 31, 2007. The increase in the provision was primarily
due to an increase in the level of net charge-offs to $88,000 for the three
months ended March 31, 2008 compared with $4,000 for the three months ended
March 31, 2007, partially offset by a decrease in net loan volume for the three
months ended March 31, 2008 compared with the same period a year earlier as
well as the classification of loans into more favorable risk ratings due to the
seasoning of real estate owner occupied first mortgage loans. The allowance for
loan losses as a percent of total loans was 0.56% for March 31, 2008 compared
with 0.63% at March 31, 2007. The mix of the loan portfolio continues to be
weighted in one- to four-family residential and home equity loans which
accounted for 57.7% and 62.2% of total loans at March 31, 2008 and 2007,
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
quantitative and qualitative factors unique to the Bank for consumer,
residential and commercial loans. 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 $73,000, or
82.95%, to $161,000 for the three months ended March 31, 2008 from $88,000 for
the three months ended March 31, 2007. The increase was primarily attributable
to net gains on sales of available-for-sale securities of $84,000 for the three
months ended March 31, 2008 compared with $16,000 for the three months ended
March 31, 2007.
Total Noninterest Expense. Noninterest expense increased $119,000, or
19.6% to $727,000 for the three months ended March 31, 2008 compared with
$608,000 for the three months ended March 31, 2007. Salaries and employee
benefits expense increased $40,000 from $324,000, or 53.3%, of total
noninterest expense for the three months ended March 31, 2007 to $364,000, or
50.1%, of total noninterest expense for the three months ended March 31, 2008.
This increase in salaries and employee benefits expense resulted from an
increase in staffing for the commercial lending area, normal salary increases
and increases related to stock benefit plans for employees, partially offset by
an increase in the deferrals of loan origination costs. Other increases in
noninterest expense related primarily to a $30,000 increase in marketing
expenses which primarily related
14
to the marketing of our Rewards Checking account product which was introduced
in the fourth quarter of 2007 along with the promotion of a new service for our
customers known as Identity Theft 911. Additional increases were attributable
to a $31,000 increase in other expenses which related to higher FDIC assessment
premiums in 2008 compared with 2007, additional ongoing expenses related to the
Rewards Checking product and increased expenses related to fees and stock
benefit plans for Directors. In addition, data processing costs increased
$15,000 due to increased service bureau costs as well as computer related costs
due to internal controls compliance under Sarbanes-Oxley and other technical
support costs.
Income Tax Expense. Income tax expense decreased $6,000, or 22.2%, to
$21,000 for the first quarter of 2008 from $27,000 for the first quarter of
2007. The effective tax rate was 48.0% for the first quarter of 2008 compared
to 42.9% for the first quarter of 2007.
Risk Elements
Total nonperforming loans increased $579,000 to $849,000 or 1.31% of
total loans at March 31, 2008 compared with $270,000 or 0.42% of total loans at
December 31, 2007. The nonperforming loans carry a guarantee by the United
States Small Business Administration covering $457,000 and $165,000 of the
balance outstanding, respectively, at March 31, 2008 and December 31, 2007. The
increase in nonperforming assets for the quarter ended March 31, 2008 was
primarily due to a commercial loan relationship with an outstanding balance of
$575,000 at March 31, 2008, of which loans are guaranteed by the United States
Small Business Administration covering $319,000 of the balance outstanding.
As shown in the following table, nonperforming assets as a percentage of
total assets were 0.72% and 0.26%, as of March 31, 2008 and December 31, 2007,
respectively.
March 31, December 31,
2008 2007
--------- ------------
($ in Thousands)
Loans 90 days or more past due and still accruing $ 0 $ 0
===== =====
Total nonperforming loans and nonperforming assets $ 849 $ 270
===== =====
Nonperforming loans as a percent of total loans 1.31% 0.42%
Nonperforming assets as a percent of total assets 0.72% 0.26%
The following table is a break down of nonperforming loans by loan type
that have a government guaranty for the periods noted below:
March 31, December 31,
2008 2007
--------- ------------
($ in Thousands)
Commercial business loans with a SBA guarantee $162 $184
Commercial real estate loans with a SBA guarantee 426 -
---- ----
Total nonperforming loans with a SBA guarantee $588 $184
==== ====
Guaranteed portion of nonperforming loans $457 $165
==== ====
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
15
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 March 31, 2008, the total approved loan commitments unfunded
amounted to $9.1 million, which includes the unadvanced portion of loans of
$7.3 million. Certificates of deposit and advances from the FHLB of Boston
scheduled to mature in one year or less at March 31, 2008, totaled $32.8
million and $3.8 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.
During the first quarter of 2008, the Bank secured a repo line of credit
with a brokerage firm for $5.0 million, in the event additional liquidity were
needed.
At March 31, 2008, we had total collateral available to support an
additional $17.5 million in additional advances from the FHLB of Boston, but
the Bank's internal policy limits FHLB advances to 50% of total assets which
amounts to an additional $13.3 million in borrowing capacity at March 31, 2008.
Stockholders' Equity
Our stockholders' equity decreased $65,000 to $9.37 million at March 31,
2008 from $9.44 million at December 31, 2007. The decrease in stockholders'
equity was primarily attributable to the repurchase of 10,000 shares of common
stock for treasury for $64,000. Our equity to assets ratio was 8.00% at March
31, 2008 compared to 8.97% at December 31, 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 March 31, 2008, the most recent
notification from the OTS categorized the Bank as "well-capitalized" under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the subsidiary bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios of 10%, 6% and 5%, respectively.
The Bank's regulatory capital ratios at March 31, 2008 were as follows: total
risk-based capital 15.03%, Tier I risk based 14.43% and Tier I leverage (core
capital) 7.34%. 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-Q 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.
16
Our Risk When Interest Rates Change. The rates of interest we earn on
assets and pay on liabilities generally are established contractually for a
period of time. Market interest rates change over time. Our loans generally
have longer maturities than our deposits. Accordingly, our results of
operations, like those of other financial institutions, are impacted by changes
in interest rates and the interest rate sensitivity of our assets and
liabilities. The risk associated with changes in interest rates and our ability
to adapt to these changes is known as interest rate risk and is our most
significant market risk.
How We Measure Our Risk of Interest Rate Changes. As part of our attempt
to manage our exposure to changes in interest rates and comply with applicable
regulations, we monitor our interest rate risk. In monitoring interest rate
risk we continually analyze and manage assets and liabilities based on their
payment streams and interest rates, the timing of their maturities, and their
sensitivity to actual or potential changes in market interest rates.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on our results of operations, we have
adopted asset/liability and funds management policies to better match the
maturities and repricing terms of our interest-earning assets and
interest-bearing liabilities. The board of directors sets and recommends the
asset and liability and funds management policies of the Bank, which are
implemented by the asset/liability management committee.
The purpose of the asset/liability committee is to communicate,
coordinate and control asset/liability management consistent with our business
plan and board approved policies. The committee establishes and monitors the
volume and mix of assets and funding sources taking into account relative costs
and spreads, interest rate sensitivity and liquidity needs. The objectives are
to manage assets and funding sources to produce results that are consistent
with liquidity, capital adequacy, growth, risk and profitability goals.
The asset/liability management committee generally meets quarterly to
review, among other things, economic conditions and interest rate outlook,
current and projected liquidity needs and capital position, anticipated changes
in the volume and mix of assets and liabilities and interest rate risk exposure
limits versus current projections using a net present value of portfolio equity
analysis and income simulations. The asset/liability management committee
recommends appropriate strategy changes based on this review.
In order to manage our assets and liabilities and achieve the desired
liquidity, credit quality, interest rate risk, profitability and capital
targets, we have focused our strategies on:
o Using FHLB advances and pricing on fixed-term non-core deposits to
align maturities and repricing terms,
o Purchasing adjustable rate securities,
o Originating and purchasing adjustable rate loans,
o Originating and purchasing a reasonable volume of fixed rate
mortgages, and
o Managing our deposits to establish stable deposit relationships.
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. Quantitative and Qualitative Disclosures about Market Risk
This item is not applicable to the Company because we are a smaller
reporting company.
17
ITEM 4. Controls and Procedures
Our management evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined in
Rules 13a-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934)
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved, from time to time, as plaintiff or defendant in various
legal actions arising in the normal course of business. At March 31, 2008, 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 1A. Risk Factors
This item is not applicable to the Company because we are a smaller
reporting company.
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 February and March 2008 relate to the
stock repurchase plan that was approved by the Company's Board of Directors on
February 14, 2008. 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 March 31, 2008, the Company had purchased
10,000 shares of common stock at a weighted average share price of $6.40.
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
- -------------------------------------- ------------ -------------- ------------------- ------------------
January 1, 2008 through January 31, 2008 - $ - - 65,000
February 1, 2008 through February 29, 2008 5,000 6.25 5,000 60,000
March 1, 2008 through March 31, 2008 5,000 6.55 5,000 55,000
------ ----- ------
Total 10,000 $6.40 10,000 55,000
====== ===== ======
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
18
Item 5. Other Information
Not applicable
Item 6. Exhibits
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act
19
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: May 6, 2008 /s/ William M. Pierce, Jr.
--------------------------
William M. Pierce, Jr.
President and Chief Executive Officer
Date: May 6, 2008 /s/ Karl F. Betz
----------------
Karl F. Betz
Senior Vice President and Chief
Financial Officer
20