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 June 30, 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 August 1, 2008, there were 1,293,608 shares issued and 1,163,958
shares outstanding of the issuer's common stock.
INDEX
Monadnock Bancorp, Inc. and Subsidiary
Part I. Financial Information Page
--------------------- ----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2008
(unaudited) and December 31, 2007 3
Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 2008 and 2007 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2008 and 2007 (unaudited) 5
Condensed 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 20
Item 4. Controls and Procedures 20
Part II. Other Information
-----------------
Item 1. Legal Proceedings 21
Item 1A. Risk Factors 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits 22
SIGNATURES 23
2
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
Part I - Financial Information
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
June 30, December 31,
ASSETS 2008 2007
- ------ ----------- ------------
(Unaudited)
Cash and due from banks $ 1,432,953 $ 1,181,206
Interest-bearing demand deposits with other banks 1,736
Federal Home Loan Bank overnight deposit 665,000
------------ ------------
Total cash and cash equivalents 2,099,689 1,181,206
Interest-bearing time deposits in other bank 200,000 100,000
Investments in available-for-sale securities (at fair value) 38,388,117 36,595,813
Federal Home Loan Bank stock, at cost 2,218,700 1,607,700
Loans, net of allowance for loan losses of $381,343 as of June 30, 2008
and $389,770 as of December 31, 2007 67,780,160 64,030,781
Premises and equipment 766,286 809,493
Other real estate owned 474,349
Goodwill 132,293 132,293
Core deposit intangible 52,250 61,250
Accrued interest receivable 493,171 442,749
Other assets 130,830 214,674
------------ ------------
Total assets $112,735,845 $105,175,959
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest-bearing $ 5,461,570 $ 5,286,039
Interest-bearing 54,591,979 59,531,823
------------ ------------
Total deposits 60,053,549 64,817,862
Federal Home Loan Bank advances 42,945,219 30,537,976
Other borrowings - ESOP loan 400,000
Other liabilities 367,121 383,533
------------ ------------
Total liabilities 103,765,889 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 June 30, 2008 and December 31, 2007;
1,163,958 and 1,228,958 outstanding at June 30, 2008 and
December 31, 2007, respectively 12,936 12,936
Paid-in capital 7,779,245 7,755,439
Retained earnings 2,753,488 2,710,788
Unearned compensation - ESOP (402,683) (402,683)
Unearned compensation - Recognition and Retention Plan (281,684) (298,799)
Treasury stock, at cost (129,650 shares at June 30, 2008 and 64,650
shares at December 31, 2007) (842,238) (431,687)
Accumulated other comprehensive (loss) income (49,108) 90,594
------------ ------------
Total stockholders' equity 8,969,956 9,436,588
------------ ------------
Total liabilities and stockholders' equity $112,735,845 $105,175,959
============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
Part I - Financial Information
Item 1 - Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
Interest and dividend income:
Interest and fees on loans $1,068,667 $ 973,404 $2,126,919 $1,900,205
Interest on investments-taxable 504,910 430,326 1,021,981 881,177
Other interest income 24,108 58,968 55,772 87,361
---------- ---------- ---------- ----------
Total interest and dividend income 1,597,685 1,462,698 3,204,672 2,868,743
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits
453,474 566,332 1,006,556 1,085,015
Interest on FHLB advances and other borrowings 423,840 270,378 808,182 550,219
---------- ---------- ---------- ----------
Total interest expense 877,314 836,710 1,814,738 1,635,234
---------- ---------- ---------- ----------
Net interest and dividend income 720,371 625,988 1,389,934 1,233,509
Provision for loan losses 24,347 21,000 83,855 44,923
---------- ---------- ---------- ----------
Net interest and dividend income
after provision for loan losses 696,024 604,988 1,306,079 1,188,586
---------- ---------- ---------- ----------
Noninterest income:
Service charges on deposits 51,558 50,677 105,941 103,572
Net gain on sales of available-for-sale securities 12,588 96,452 16,081
Loan commissions 2,246 2,246
Other income 26,180 14,686 49,112 33,531
---------- ---------- ---------- ----------
Total noninterest income 90,326 67,609 251,505 155,430
---------- ---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 371,521 326,962 736,015 650,995
Occupancy expense 39,522 37,954 80,381 76,532
Equipment expense 22,635 22,031 45,670 43,526
Data processing 66,550 49,813 135,361 103,965
Blanket bond insurance 4,727 4,727 6,381 6,796
Professional fees 51,214 42,915 99,168 85,625
Supplies and printing 10,221 7,634 17,248 20,339
Telephone expense 12,730 12,843 25,550 25,794
Marketing expense 39,259 24,162 80,994 36,393
Postage expense 9,699 10,066 19,609 19,509
Other expense 117,299 98,656 226,005 176,356
---------- ---------- ---------- ----------
Total noninterest expense 745,377 637,763 1,472,382 1,245,830
---------- ---------- ---------- ----------
Income before income tax expense 40,973 34,834 85,202 98,186
Income tax expense 21,267 16,583 42,502 43,730
---------- ---------- ---------- ----------
Net income $ 19,706 $ 18,251 $ 42,700 $ 54,456
========== ========== ========== ==========
Shares used in computing net income per share:
Basic 1,103,380 1,202,866 1,115,803 1,207,512
Diluted 1,147,184 1,240,035 1,160,246 1,240,019
Net income per share - basic $ 0.02 $ 0.02 $ 0.04 $ 0.05
Net income per share - diluted $ 0.02 $ 0.01 $ 0.04 $ 0.04
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
Part I - Financial Information
Item 1 - Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
-----------------------------
2008 2007
------------ -----------
(Unaudited)
Cash flows from operating activities:
Net income $ 42,700 $ 54,456
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gains on sales of available-for-sale securities (96,452) (16,081)
Net amortization of securities 103,010 36,679
Change in deferred loan origination costs, net 4,432 (16,446)
Provision for loan losses 83,855 44,923
Amortization of unearned compensation - restricted stock award plans 17,115
Recognition of stock option expense 23,806 13,531
Depreciation and amortization 55,713 53,160
Increase in accrued interest receivable (50,421) (11,931)
Amortization of core deposit intangible 9,000 10,500
Decrease (increase) in other assets 39,395 (114)
Decrease in loan servicing rights and interest-only strips, net 751 12,704
Decrease (increase) in prepaid expenses 22,719 (43,409)
Decrease in taxes receivable 20,979 7,299
Increase in taxes payable 15,670
Deferred income tax benefit (2,897) (1,675)
Increase in accrued ESOP and restricted stock award plans expense 15,484 22,951
Increase (decrease) in accrued expenses 10,853 (10,794)
Increase (decrease) in accrued interest payable 45,432 (1,856)
Increase in other liabilities 6,349 46,987
------------ -----------
Net cash provided by operating activities 351,823 216,554
------------ -----------
Cash flows from investing activities:
Purchase of interest-bearing time deposits in other bank (100,000)
Purchases of available-for-sale securities (25,174,061) (7,072,624)
Proceeds from sales of available-for-sale securities 15,667,539 2,645,150
Principal payments received on available-for-sale securities 7,476,325 7,504,650
Purchase of Federal Home Loan Bank stock (611,000) (90,500)
Loan originations and principal collections, net (4,313,988) (3,906,448)
Loans purchased (532,813)
Recoveries of previously charged off loans 1,973 1,672
Capital expenditures - premises and equipment (12,507) (82,415)
------------ -----------
Net cash used in investing activities (7,065,719) (1,533,328)
------------ -----------
Cash flows from financing activities:
Net increase in demand deposits, savings and NOW deposits 5,045,097 1,595,370
Net (decrease) increase in time deposits (9,809,410) 2,624,397
Net change on short-term advances from Federal Home Loan Bank (24,000) (1,000,000)
Long-term advances from Federal Home Loan Bank 12,971,997 5,326,168
Payments on long-term advances from Federal Home Loan Bank (540,754) (4,192,000)
Refinance ESOP loan with another financial institution 400,000
Purchase of common stock for treasury (410,551) (4,128)
Purchase of 25,931 shares for MRP (176,330)
Net cash provided by financing activities 7,632,379 4,173,477
------------ -----------
5
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
(continued)
Six Months Ended
June 30,
-----------------------------
2008 2007
------------ -----------
(Unaudited)
Net increase in cash and cash equivalents 918,483 2,856,703
Cash and cash equivalents at beginning of period 1,181,206 1,098,189
------------ -----------
Cash and cash equivalents at end of period $ 2,099,689 $ 3,954,892
============ ===========
Supplemental disclosures:
Interest paid $ 1,769,306 $ 1,637,090
Income taxes paid 13,250 32,300
Transfer of loans to other real estate owned 474,349
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
Part I - Financial Information
Item 1. - Financial Statements
Condensed Notes to Unaudited Consolidated Financial Statements
--------------------------------------------------------------
June 30, 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 and the Company. 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 1) for a fair presentation of the financial condition and
results of operations for the interim periods included herein have been made
and 2) in order to make the financial statements not misleading have been made.
The results of operations for the three and six month periods ended June
30, 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 June 30, 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 shares of common stock
were outstanding during the first and second quarters of 2008 compared with
weighted average options to purchase 2,602 shares of common stock were
outstanding for the first and second quarters 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 2008 or 2007.
The amortized cost and estimated fair value of securities at June 30,
2008 and December 31, 2007 are as follows:
Amortized Estimated
Cost Basis Fair Value
----------- -----------
June 30, 2008:
Mortgage-backed securities:
Fannie Mae $13,388,652 $13,395,827
Freddie Mac 15,308,831 15,218,885
Ginnie Mae 9,771,953 9,773,405
----------- -----------
Total mortgage-backed securities 38,469,436 38,388,117
----------- -----------
Total investments in available-for-sale securities $38,469,436 $38,388,117
=========== ===========
December 31, 2007:
Mortgage-backed securities:
Fannie Mae $13,639,059 $13,752,814
Freddie Mac 8,370,811 8,397,971
Ginnie Mae 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:
June 30, December 31,
2008 2007
----------- ------------
One- to four-family residential $33,267,608 $31,526,555
Home equity 5,916,885 5,350,078
Commercial real estate 14,419,808 14,693,410
Multifamily 1,577,747 1,704,787
Construction and land development loans 597,169 1,141,352
Commercial loans 9,050,663 7,065,867
Consumer loans 3,004,702 2,607,149
----------- -----------
67,834,582 64,089,198
Allowance for loan losses (381,343) (389,770)
Deferred costs, net 326,921 331,353
----------- -----------
Net loans $67,780,160 $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:
Six months ended
June 30,
-----------------------
2008 2007
-------- --------
Balance at beginning of period $389,770 $334,917
Recoveries of loans previously charged off 1,973 1,672
Provision for loan losses 83,855 44,923
Charge offs (94,255) (7,776)
-------- --------
Balance at end of period $381,343 $373,736
======== ========
Information with respect to impaired loans consisted of the following at:
June 30, December 31,
2008 2007
-------- ------------
Recorded investment in impaired loans $288,839 $269,725
======== ========
Impaired loans with specific loss allowances $288,839 $242,804
======== ========
Loss allowances reserved on impaired loans $ 58,803 $ 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
$626,000 and $137,000 for the six months ended June 30, 2008 and 2007,
respectively. During the three and six months ended June 30, 2008 and 2007, the
Company recognized no income on impaired loans.
Note 5. Deposits
Interest-bearing deposits consisted of the following at:
June 30, December 31,
2008 2007
----------- ------------
NOW accounts $12,221,281 $ 7,613,526
Savings accounts 2,481,652 2,448,071
Money market deposit accounts 8,572,828 8,344,598
Time certificates 31,316,218 41,125,628
----------- -----------
$54,591,979 $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 06/30/08 (Level 1) (Level 2) (Level 3)
- ----------- ----------- ------------- ----------- ------------
Available-for-sale securities $38,388,117 $ $38,388,117 $
----------- ------- ---------- --------
Total $38,388,117 $ $38,388,117 $
=========== ======= =========== ========
9
Monadnock Bancorp, Inc. and Subsidiary
Part I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 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 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 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
10
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 nearly 30 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 $9.7
million, or 16.7%, from $58.1 million at June 30, 2007 to $67.8 million at June
30, 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 June 30, 2008, this product totaled $8.5 million.
Maintaining Asset Quality. Our asset quality is reflected in our ratio of
non-performing assets to total assets, which was 0.68% at June 30, 2008 and
0.26% at December 31, 2007, respectively. The increase in nonperforming assets
for the six months ended June 30, 2008 was primarily due to a commercial loan
relationship secured by an inn for $474,000 being transferred to other real
estate owned at the end of the second quarter of 2008. 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 91.94% and 89.70% for the three and
six months ended June 30, 2008, respectively, compared with 91.95% and 89.70%
for the three and six months ended June 30, 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 June 30, 2008
General. Total assets increased $7.5 million, or 7.1%, to $112.7 million
at June 30, 2008 compared with $105.2 million at December 31, 2007. We
increased our assets by $12.0 million during the first quarter of 2008, by
leveraging with $12.4 million in Federal Home Loan Bank advances and purchasing
net investment securities of $10.5 million during the first quarter of 2008.
During the second quarter of 2008, we reduced our total assets by $4.5 million,
thereby increasing our Tier1 leverage capital ratio to 7.69% at June 30, 2008.
This reduction in assets was accomplished by selling $5.3 million in investment
securities while time certificates over $100,000 were reduced by $4.6 million
during the second quarter of 2008 as a result of these interest rate sensitive
customers withdrawing their deposits due to competitive rates being offered
elsewhere.
Cash and cash equivalents. Cash and cash equivalents increased $919,000
to $2.1 million at June 30, 2008 from $1.2 million at December 31, 2007. Cash
and due from banks increased $252,000 to $1.4 million at June 30, 2008 from
$1.2 million at December 31, 2007 and interest-bearing demand deposits with
other banks, including Federal funds sold, increased $667,000 to $667,000 at
June 30, 2008. The level of interest-bearing deposits, which are short-term
overnight investments, fluctuates as investments are made in other interest
earning assets such as loans and investments, and as balances of
interest-bearing liabilities such as deposits and FHLB advances fluctuate.
Interest-bearing deposits are also used to fund cash and due from bank
requirements. The increase in cash and due from banks during the six months
ended June 30, 2008 was due to an increase in the amount of items processed
through our depository bank accounts that settled subsequent to the end of the
reporting period.
Investments. Monadnock Bancorp, Inc. classifies its investments in debt
securities as securities held-to-maturity, securities available-for-sale or
trading securities. Securities held-to-maturity are carried at amortized cost,
securities available-for-sale are carried at fair value with unrealized gains
and losses shown in accumulated other comprehensive income (loss) as a separate
component of stockholders' equity, net of related tax effects, and trading
securities are carried at fair value with unrealized gains and losses reflected
in earnings. Monadnock Bancorp, Inc. had no securities classified as
held-to-maturity or trading securities at June 30, 2008 or at December 31,
2007.
Our investment portfolio increased $1.8 million, or 4.9%, to $38.4
million at June 30, 2008 from $36.6 million at December 31, 2007. The increase
was due to the purchase of $25.2 million in mortgage-backed securities,
partially offset by $15.7 million in sales of mortgage-backed securities and
$7.5 million in principal paydowns of mortgage-backed securities. The increase
in investment securities was funded by Federal Home Loan Bank advances.
At June 30, 2008, the weighted average maturity of mortgage-backed
securities available-for-sale was 316 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 27
months on average.
Loans. Our net loan portfolio grew by $3.8 million, or 5.9%, to $67.8
million at June 30, 2008 from $64.0 million at December 31, 2007. Loan growth
during the second quarter of 2008 totaled $2.9 million compared with $904,000
for the first quarter of 2008. Loan growth for the first six months of 2008 was
primarily concentrated in commercial and one- to four-family residential loans
which grew $2.0 million and $1.7 million, respectively. Other significant loan
increases for the six months ended June 30, 2008 were in home equity loans of
$567,000 and consumer loans of $398,000, which was partially offset by a
decrease in construction and land development loans of $544,000.
Deposits. Our total deposits decreased $4.7 million, or 7.3%, to $60.1
million at June 30, 2008 from $64.8 million at December 31, 2007.
Interest-bearing deposits decreased $4.9 million to $54.6 million at June 30,
2008 from $59.5 million at December 31, 2007, while noninterest-bearing
deposits increased $176,000 during the six months ended June 30, 2008. The
decrease in interest-bearing deposits was primarily due to a decrease in time
certificates of $9.8 million, partially offset by an increase in NOW accounts
of $4.6 million. The decrease in time certificates was due to a $4.6 million
decrease in time certificates over $100,000 as a result of customers
transferring these deposits to other deposit products at the Bank as well as
interest rate sensitive customers withdrawing their deposits due to competitive
rates being offered elsewhere. The increase in NOW accounts during the first
six months of 2008 was due to the implementation of our Rewards Checking
account product in the fourth quarter of 2007. Rewards Checking accounts
increased $5.1 million during the first six months of 2008 and totaled $8.5
million at June 30, 2008.
12
Borrowings. FHLB advances increased $12.4 million, or 40.7%, to $42.9
million at June 30, 2008 from $30.5 million at December 31, 2007. The increase
in FHLB advances was used to fund the purchase of net investment securities,
and to a lesser extent, net loan growth during the first quarter of 2008.
Principal payments due on other borrowings after June 30, 2008 are $2.4
million in 2008, $5.4 million in 2009, $7.3 million in 2010, $4.0 million in
2011, $7.3 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 June
30, 2008, the three month LIBOR was at 2.78%. 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 84 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 54 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 55 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 56
months. 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 $467,000 to
$8.97 million at June 30, 2008 from $9.44 million at December 31, 2007. The
decrease in stockholders' equity was primarily attributable to the repurchase
of 65,000 shares of common stock for treasury for approximately $411,000, the
decrease in accumulated other comprehensive income of $140,000, partially
offset by net income of $43,000 for the six months ended June 30, 2008 and a
$41,000 increase related to the recognition of stock option expense as well as
restricted stock award amortization. Our equity to assets ratio was 7.96% at
June 30, 2008 compared to 8.97% at December 31, 2007.
Comparison of Results of Operations for the Three Months Ended
June 30, 2008 and 2007
General. We recorded net income of $20,000 for the quarter ended June 30,
2008 compared with net income of $18,000 for the quarter ended June 30, 2007.
The increase in earnings for the three months ended June 30, 2008 compared with
the same period a year earlier was primarily attributable to an increase in net
interest and dividend income of $94,000, an increase in noninterest income of
$22,000, partially offset by an increase in noninterest expense of $107,000, an
increase in the provision for loan losses of $3,000 and an increase in income
tax expense of $4,000.
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 non-interest income we generated and our comparatively
low net interest margin (net interest and dividend income divided by average
interest earning assets). Our efficiency ratio was 91.94% for the three months
ended June 30, 2008 compared to 91.95% for the three months ended June 30,
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 interest rate spread was 2.18% for the three months ended
June 30, 2008 compared to 2.03% for the three months ended June 30, 2007 as
well as the three months ended March 31, 2008. The increase in the interest
rate spread for the three months ended June 30, 2008 compared with the same
period a year ago was primarily due to the decrease in the average cost of our
interest-bearing liabilities by 58 basis points to 3.55% for the three months
ended June 30, 2008 compared to 4.13% for the three months ended June 30, 2007,
partially offset by a decrease of 44 basis points in the average yield of our
interest-earning assets to 5.72% for the three months ended June 30, 2008 from
6.16% for the three months ended June 30, 2007. The decrease in our average
yields on interest-earning assets as well as the decrease in our average cost
on interest-bearing liabilities was primarily due to the Federal Reserve's
decision to lower the Federal Funds rate by 325 basis points since September
2007. The net interest margin for the three months ended June 30, 2008 was
2.58% compared to 2.64% for the three months ended June 30, 2007 and 2.47% for
the three months ended March 31, 2008. During the second quarter of 2008, we
were able to improve our net interest margin and interest rate spread compared
with the first quarter of 2008 primarily due to the favorable repricing of our
time certificates to lower rates during the second quarter of 2008. In the
event we are unable to generate continued commercial and residential loan
volume for the remainder of 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.
13
Net Interest and Dividend Income. Net interest and dividend income
increased $94,000, or 15.0%, to $720,000 for the three months ended June 30,
2008 compared to $626,000 for the three months ended June 30, 2007. This
increase reflected a $135,000, or 9.2%, increase in interest and dividend
income, and a $40,000, or 4.8%, increase in interest expense. The increase in
net interest and dividend income of $94,000 was primarily due to an increase in
the average balance of interest-earning assets of $17.0 million, or 17.8% from
$95.3 million for the three months ended June 30, 2007 to $112.3 million for
the three months ended June 30, 2008.
Interest and Dividend Income. Total interest and dividend income
increased by $135,000, or 9.2%, to $1.6 million for the three months ended June
30, 2008 compared with $1.5 million for the three months ended June 30, 2007.
The increase of $135,000 was primarily due to an increase in the average
balance of interest-earning assets of $17.0 million, or 17.8%, to $112.3
million for the three months ended June 30, 2008 from $95.3 million for the
three months ended June 30, 2007, partially offset by a decrease in the yields
on interest-earning assets to 5.72% for the three months ended June 30, 2008
from 6.16% for the three months ended June 30, 2007. Interest income on loans
increased $96,000, or 9.9%, to $1.1 million for the three months ended June 30,
2008 from $973,000 for the same period in 2007, primarily due to a $10.1
million increase in the average balance of loans from $56.9 million for the
three months ended June 30, 2007 to $67.0 million for the same period in 2008.
This increase on interest income on loans was partially offset by a decrease in
loan yields from 6.87% for the three months ended June 30, 2007 to 6.41% for
the same period in 2008. The increase in the average balance of loans was
primarily attributable to an increase in the average balance of $5.0 million in
commercial real estate loans, a $3.5 million increase in the average balance of
one- to four-family residential loans as well as a $761,000 increase in the
average balance of consumer loans related to mobile home loan financing. The
decrease in average loan yields from 6.87% for the three months ended June 30,
2007 to 6.41% 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 3.25%
since September 2007. Interest income on investment securities, FHLB stock and
interest-bearing deposits with other financial institutions increased $40,000
for the three months ended June 30, 2008 to $529,000 from $489,000 for the
three months ended June 30, 2007. The increase was due to an increase in the
average balance of the investment portfolio by $6.9 million to $45.3 million
for the three months ended June 30, 2008, from $38.4 million for the same
period in 2007, partially offset by a decrease in the overall yield on total
investments from 5.11% for the three months ended June 30, 2007 to 4.70% for
the same period in 2008. 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 from FHLB advances.
Interest Expense. Total interest expense increased by $40,000, or 4.8%,
to $877,000 for the three months ended June 30, 2008 from $837,000 for the
three months ended June 30, 2007. The increase of $40,000 was due to an
increase in the average balance of interest-bearing liabilities of $18.1
million to $99.5 million for the three months ended June 30, 2008 from $81.4
million for the same period in 2007, partially offset by a decrease in the
average overall cost of interest-bearing liabilities to 3.55% for the three
months ended June 30, 2008 from 4.12% for the same period in 2007. Interest
expense on deposits decreased $113,000 to $453,000 for the three months ended
June 30, 2008 from $566,000 for the same period in 2007. Interest expense on
time certificates decreased $168,000 to $335,000 for the three months ended
June 30, 2008 from $503,000 for the same period in 2007 while interest expense
on savings deposits increased by $55,000 to $118,000 for the three months ended
June 30, 2008 from $63,000 for the same period in 2007. The decrease in
interest expense on time certificates was attributable to a decrease in the
overall average cost of time certificates by 90 basis points to 3.96% for the
three months ended June 30, 2008 from 4.86% for the same period in 2007,
coupled with a decrease in the average balance of time certificates of $7.5
million to $34.0 million for the three months ended June 30, 2008 from $41.5
million for the same period in 2007. The decrease in the cost of time
certificates was the direct result of maturing time certificates repricing at
lower rates during the second quarter of 2008 due to the lower interest rate
environment. The decrease in the average balance of time certificates was due
to customers transferring these deposits to other Bank deposit products as well
as interest rate sensitive customers withdrawing their deposits due to
competitive rates being offered elsewhere. The increase in interest expense on
savings deposits was attributable to an increase in the average balance of
savings deposits of $7.7 million to $22.6 million for the three months ended
June 30, 2008 from $14.9 million for the same period in 2007, and to a lesser
extent, an increase of 42 basis points on the average rate paid on savings
deposits to 2.11% for the three months ended June 30, 2008 from 1.69% for the
same period in 2007. The increase in the average balances and cost on savings
deposits for the three months ended June 30, 2008 compared to the same period
in 2007 was primarily attributable to the introduction of a Rewards Checking
product in October 2007.
Interest expense on FHLB advances increased $154,000 to $424,000 for the
three months ended June 30, 2008 from $270,000 for the three months ended June
30, 2007. The increase in interest expense was due to an increase in the
average balance of FHLB advances of $17.9 million to $42.9 million for the
three months ended June 30, 2008 from $25.0 million for the same period in
2007, partially offset by a decrease in the borrowing cost to 3.98% for the
three months ended June 30, 2008 from 4.35% for the same period in 2007. We
used the additional funding from the increase in FHLB advances to
14
increase our net loan portfolio, and to a lesser extent, our investment
securities portfolio. The decrease in borrowing cost was due to the Bank using
a mix of fixed rate and callable borrowings to lower the overall funding cost
for FHLB advances.
Provision for Loan Losses. We recorded a provision for loan losses of
$24,000 for the three months ended June 30, 2008 compared with $21,000 for the
three months ended June 30, 2007. The increase in the provision was primarily
due to an increase in loan volume for the second quarter of 2008 compared with
the second quarter of 2007, partially offset by the classification of certain
loans into more favorable risk ratings during 2008 due to the seasoning of real
estate owner occupied first mortgage loans. Net charge-offs for the quarter
ended June 30, 2008 were $4,000 compared with $2,000 for the same period in
2007. The allowance for loan losses as a percent of total loans was 0.56% at
June 30, 2008 compared with 0.64% at June 30, 2007. The mix of the loan
portfolio continues to be weighted in one- to four-family residential and home
equity loans which accounted for 57.8% and 59.6% of total loans at June 30,
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. The allowance for loan losses as of
June 30, 2008 was maintained at a level that represents management's best
estimate of losses inherent in the loan portfolio. Although we believe that we
have established the allowance for loan losses at levels to absorb probable and
estimable losses, future additions or deductions may be necessary if economic
or other conditions in the future differ from the current environment.
Total Noninterest Income. Noninterest income increased $22,000, or 32.4%,
to $90,000 for the three months ended June 30, 2008 from $68,000 for the three
months ended June 30, 2007. The increase was attributable to net gains on sales
of available-for-sale securities of $13,000 for the three months ended June 30,
2008 compared with no sales for the three months ended June 30, 2007, an
increase in income related to debit, credit and ATM transactions as well as a
decrease in amortization expense on servicing rights for the three months ended
June 30, 2008 compared with the three months ended June 30, 2007.
Total Noninterest Expense. Noninterest expense increased $107,000, or
16.8% to $745,000 for the three months ended June 30, 2008 compared with
$638,000 for the three months ended June 30, 2007. Salaries and employee
benefits expense increased $45,000 from $327,000, or 51.3%, of total
noninterest expense for the three months ended June 30, 2007 to $372,000, or
49.9%, of total noninterest expense for the three months ended June 30, 2008.
The increase in salaries and employee benefits expense related to salary
increases for executives and employees, increases related to stock benefit
plans for executives and employees as well as a decrease in the deferrals of
loan origination costs. Other increases in noninterest expense related to an
increase of $18,000 in other expenses, $17,000 in data processing costs as well
as a $15,000 increase in marketing expense. The increase in other expenses was
related to higher FDIC assessment premiums in 2008 compared with 2007 and
additional ongoing expenses related to the Rewards Checking product. The
increase in data processing costs related to increased maintenance and
technical support costs as well as an increase in ATM costs. The increase in
marketing expense was attributable to a marketing campaign geared towards
generating new deposits in our Winchendon branch location.
Income Tax Expense. Income tax expense increased $4,000, or 23.5%, to
$21,000 for the second quarter of 2008 from $17,000 for the second quarter of
2007. The effective tax rate was 51.9% for the second quarter of 2008 compared
to 47.6% for the second quarter of 2007.
Comparison of Results of Operations for the Six Months Ended
June 30, 2008 and 2007
General. We recorded net income of $43,000 for the six months ended June
30, 2008 compared with net income of $54,000 for the six months ended June 30,
2007. The decrease in earnings for the six months ended June 30, 2008 compared
with the same period a year earlier was primarily attributable to an increase
in noninterest expense of $226,000, an increase in the provision for loan
losses of $39,000, partially offset by an increase in net interest and dividend
income of $156,000, an increase in noninterest income of $97,000 and a decrease
in income tax expense of $1,000.
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 non-interest income we generated and our comparatively
low net interest margin (net interest and dividend income divided by average
interest earning assets). Our efficiency ratio was 89.70% for both the six
months ended June 30, 2008 as well as the six months ended June 30, 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
15
profitability. Our interest rate spread was 2.10% for the six months ended June
30, 2008 compared to 2.05% for the six months ended June 30, 2007. The increase
in the interest rate spread for the six months ended June 30, 2008 compared
with the same period a year ago was primarily due to the decrease in the
average cost of our interest-bearing liabilities by 34 basis points to 3.73%
for the six months ended June 30, 2008 compared to 4.07% for the six months
ended June 30, 2007, partially offset by a decrease of 29 basis points in the
average yield of our interest-earning assets to 5.83% for the six months ended
June 30, 2008 from 6.12% for the six months ended June 30, 2007. The decrease
in our average yield on interest-earning assets as well as the decrease in our
average cost on interest-bearing liabilities was primarily due to the Federal
Reserve's decision to lower the Federal Funds rate by 325 basis points since
September 2007. The net interest margin for the six months ended June 30, 2008
was 2.53% compared to 2.63% for the six months ended June 30, 2007. In the
event we are unable to generate continued commercial and residential loan
volume for the remainder of 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 $156,000, or 12.6%, to $1.4 million for the six months ended June 30,
2008 compared to $1.2 million for the six months ended June 30, 2007. This
increase reflected a $336,000, or 11.7%, increase in interest and dividend
income, and a $180,000, or 11.0%, increase in interest expense. The increase in
net interest and dividend income of $156,000 was primarily due to an increase
in the average balance of interest-earning assets by $15.9 million, or 16.8%
from $94.6 million for the six months ended June 30, 2007 to $110.5 million for
the six months ended June 30, 2008.
Interest and Dividend Income. Total interest and dividend income
increased by $336,000, or 11.7%, to $3.2 million for the six months ended June
30, 2008 compared with $2.9 million for the six months ended June 30, 2007. The
increase of $336,000 was primarily due to an increase in the average balance of
interest-earning assets of $15.9 million, or 16.8%, to $110.5 million for the
six months ended June 30, 2008 from $94.6 million for the six months ended June
30, 2007, partially offset by a decrease in the average yield on
interest-earning assets to 5.83% for the six months ended June 30, 2008 from
6.12% for the six months ended June 30, 2007. Interest income on loans
increased $227,000, or 11.9%, to $2.1 million for the six months ended June 30,
2008 from $1.9 million for the same period in 2007, primarily due to a $10.1
million increase in the average balance of loans from $55.7 million for the six
months ended June 30, 2007 to $65.8 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 six months ended June 30, 2007 to 6.50% for the same
period in 2008. The increase in the average balance of loans was primarily
attributable to an increase in the average balance of $5.0 million in
commercial real estate loans, a $3.6 million increase in the average balance of
one- to four-family residential loans as well as a $746,000 increase in the
average balance of consumer loans related to mobile home loan financing. The
decrease in average loan yields from 6.88% for the six months ended June 30,
2007 to 6.50% 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 3.25%
since September 2007. Interest income on investment securities, FHLB stock and
interest-bearing deposits with other financial institutions increased $109,000
to $1.1 million for the six months ended June 30, 2008 from $969,000 for the
six months ended June 30, 2007. The increase was due to an increase in the
average balance of the investment portfolio by $5.8 million to $44.7 million
for the six months ended June 30, 2008, from $38.9 million for the same period
in 2007, partially offset by a decrease in the overall yield on total
investments from 5.02% for the six months ended June 30, 2007 to 4.85% for the
same period in 2008. 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 from FHLB advances.
Interest Expense. Total interest expense increased by $180,000, or 11.0%,
to $1.8 million for the six months ended June 30, 2008 from $1.6 million for
the six months ended June 30, 2007. The increase of $180,000 was due to an
increase in the average balance of interest-bearing liabilities of $16.9
million to $98.0 million for the six months ended June 30, 2008 from $81.1
million for the same period in 2007, partially offset by a decrease in the
average overall cost of interest-bearing liabilities to 3.73% for the six
months ended June 30, 2008 from 4.07% for the same period in 2007. Interest
expense on deposits decreased $78,000 to $1.0 million for the six months ended
June 30, 2008 from $1.1 million for the same period in 2007. Interest expense
on time certificates decreased $185,000 to $783,000 for the six months ended
June 30, 2008 from $968,000 for the same period in 2007 while interest expense
on savings deposits increased by $106,000 to $223,000 for the six months ended
June 30, 2008 from $117,000 for the same period in 2007. The decrease in
interest expense on time certificates was attributable to a decrease in the
overall average cost of time certificates by 53 basis points to 4.27% for the
six months ended June 30, 2008 from 4.80% for the same period in 2007, coupled
with a decrease in the average balance of time certificates of $3.8 million to
$36.9 million for the six months ended June 30, 2008 from $40.7 million for the
same period in 2007. The decrease in the cost on time certificates was the
direct result of maturing time certificates repricing at lower rates during the
six months ended June 30, 2008 due to the lower interest rate environment. The
decrease in the average balance of time certificates was due to customers
transferring these deposits to other Bank deposit products as well as interest
rate sensitive customers withdrawing their deposits due to competitive rates
being offered
16
elsewhere. The increase in interest expense on savings deposits was
attributable to an increase in the average balance of savings deposits of $6.1
million to $21.0 million for the six months ended June 30, 2008 from $14.9
million for the same period in 2007, and to a lesser extent, an increase of 55
basis points on the average rate paid on savings deposits to 2.14% for the six
months ended June 30, 2008 from 1.59% for the same period in 2007. The increase
in the average balances and cost on savings deposits for the six months ended
June 30, 2008 compared to the same period in 2007 was primarily attributable to
the introduction of a Rewards Checking product in October 2007.
Interest expense on FHLB advances increased $258,000 to $808,000 for the
six months ended June 30, 2008 from $550,000 for the six months ended June 30,
2007. The increase in interest expense was due to an increase in the average
balance of FHLB advances of $14.6 million to $40.1 million for the six months
ended June 30, 2008 from $25.5 million for the same period in 2007, partially
offset by a decrease in the borrowing cost to 4.05% for the six months ended
June 30, 2008 from 4.35% for the same period in 2007. We used the additional
funding from the increase in FHLB advances to increase our net loan portfolio,
and to a lesser extent, our investment securities portfolio. The decrease in
borrowing costs was due to the Bank using a mix of fixed rate and callable
borrowings to lower the overall funding costs for FHLB advances.
Provision for Loan Losses. We recorded a provision for loan losses of
$84,000 for the six months ended June 30, 2008 compared with $45,000 for the
six months ended June 30, 2007. The increase in the provision was primarily due
to an increase in the level of net charge-offs to $92,000 for the six months
ended June 30, 2008 compared with $6,000 for the six months ended June 30,
2007, partially offset by a decrease in net loan volume for the six months
ended June 30, 2008 compared with the same period a year earlier as well as the
classification of certain 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% at June 30, 2008 compared
with 0.64% at June 30, 2007. The mix of the loan portfolio continues to be
weighted in one- to four-family residential and home equity loans which
accounted for 57.8% and 59.6% of total loans at June 30, 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. The allowance for loan losses as of June 30,
2008 was maintained at a level that represents management's best estimate of
losses inherent in the loan portfolio. Although we believe that we have
established the allowance for loan losses at levels to absorb probable and
estimable losses, future additions or deductions may be necessary if economic
or other conditions in the future differ from the current environment.
Total Noninterest Income. Noninterest income increased $97,000, or 62.6%,
to $252,000 for the six months ended June 30, 2008 from $155,000 for the six
months ended June 30, 2007. The increase was attributable to net gains on sales
of available-for-sale securities of $96,000 for the six months ended June 30,
2008 compared with $16,000 of such sales for the six months ended June 30,
2007, an increase in income related to debit, credit and ATM transactions as
well as a decrease in amortization expense on servicing rights for the six
months ended June 30, 2008 compared with the six months ended June 30, 2007.
Total Noninterest Expense. Noninterest expense increased $226,000, or
18.1% to $1.5 million for the six months ended June 30, 2008 compared with $1.2
million for the six months ended June 30, 2007. Salaries and employee benefits
expense increased $85,000 from $651,000, or 52.2%, of total noninterest expense
for the six months ended June 30, 2007 to $736,000, or 50.0%, of total
noninterest expense for the six months ended June 30, 2008. The increase in
salaries and employee benefits expense related to an increase in staffing for
the commercial lending area, salary increases for executives and employees,
increases related to stock benefit plans for executives and employees,
partially offset by an increase in the deferrals of loan origination costs.
Other increases in noninterest expense related to an increase of $45,000 in
marketing expenses, $50,000 in other expenses as well as a $31,000 increase in
data processing costs. The increase in marketing expense related to costs
associated with our Rewards Checking 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. The increase in other expenses 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. The increase in data processing
costs related to increased service bureau costs as well as computer related
costs due to internal controls compliance under Sarbanes-Oxley and other
technical support costs.
17
Income Tax Expense. Income tax expense decreased $1,000, or 2.3%, to
$43,000 for the six months ended June 30, 2008 from $44,000 for the six months
ended June 30, 2007. The effective tax rate was 49.9% for the six months ended
June 30, 2008 compared to 44.5% for the six months ended June 30, 2007.
Risk Elements
Total nonperforming loans increased $19,000 to $289,000 or 0.43% of total
loans at June 30, 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 $180,000 and $165,000 of the
balance outstanding, respectively, at June 30, 2008 and December 31, 2007.
Total nonperforming assets increased from $270,000, or 0.26%, of total assets
at December 31, 2007 to $763,000, or 0.68%, of total assets at June 30, 2008.
At the end of the second quarter of 2008, the Bank transferred a commercial
property secured by an inn in the amount of $474,000 to other real estate
owned.
June 30, December 31,
2008 2007
-------- ------------
($ in Thousands)
Loans 90 days or more past due and still accruing $ 40 $ 0
==== ====
Total nonperforming loans and nonperforming assets $763 $270
==== ====
Nonperforming loans as a percent of total loans 0.43% 0.42%
Nonperforming assets as a percent of total assets 0.68% 0.26%
The following table is a break down of nonperforming loans by loan type
that have a government guaranty for the periods noted below:
June 30, December 31,
2008 2007
-------- ------------
($ in Thousands)
Commercial business loans with a SBA guarantee $212 $184
---- ----
Total nonperforming loans with a SBA guarantee $212 $184
==== ====
Guaranteed portion of nonperforming loans $180 $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 excess funds in
short-term interest-earning assets, which provide liquidity to meet lending
requirements. We also generate cash through borrowings. We utilize FHLB
advances to leverage our capital base and provide funds for our lending and
investment activities, and enhance our interest rate risk management.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, we maintain a strategy of
investing in various lending products such as residential, commercial and
consumer loans. We use our sources of funds primarily to meet ongoing
commitments, to pay maturing time deposits and savings withdrawals, to fund
loan commitments and to maintain our portfolio of mortgage-backed and related
securities. At June 30, 2008, the total approved loan commitments unfunded
amounted to $9.8 million, which includes the unadvanced portion of loans of
$7.7 million. Certificates of deposit and advances from the FHLB of Boston
scheduled to mature in one year or less at June 30, 2008, totaled $23.5 million
and $5.75
18
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 repurchase line of
credit with a brokerage firm for $5.0 million, in the event additional
liquidity were needed.
At June 30, 2008, we had total collateral available to support an
additional $9.9 million in additional advances from the FHLB of Boston.
Stockholders' Equity
Our stockholders' equity decreased $467,000 to $8.97 million at June 30,
2008 from $9.44 million at December 31, 2007. The decrease in stockholders'
equity was primarily attributable to the repurchase of 65,000 shares of common
stock for treasury for approximately $411,000, the decrease in accumulated
other comprehensive income of $140,000, partially offset by net income of
$43,000 for the six months ended June 30, 2008 and a $41,000 increase related
to the recognition of stock option expense as well as restricted stock award
amortization. Our equity to assets ratio was 7.96% at June 30, 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 June 30, 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 June 30, 2008 were as follows: total
risk-based capital 15.00%, Tier I risk based 14.37% and Tier I leverage (core
capital) 7.69%. 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.
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
19
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.
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.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved, from time to time, as plaintiff or defendant in various
legal actions arising in the normal course of business. At June 30, 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 May 2008 relate to the stock
repurchase plan that was approved by the Company's Board of Directors on
February 14, 2008. Repurchased shares are held as treasury stock and will be
available for general corporate purposes. As of June 30, 2008, the Company
completed the stock repurchase program noted above having purchased 65,000
shares of common stock at a weighted average share price of $6.32.
Total Number of Maximum Number
Shares Purchased of Shares that May
Total Number as Part of Publicly Yet Be Purchased
of Shares Average Price Announced Plans Under the Plans or
Period Purchased Paid per Share or Programs Programs
- -------------------------------------- ------------ -------------- ------------------- ------------------
April 1, 2008 through April 30, 2008 - - - 55,000
May 1, 2008 through May 31, 2008 55,000 6.30 55,000 -
June 1, 2008 through June 30, 2008 - - - -
------- ----- ------ ------
Total 55,000 $6.30 55,000 -
======= ===== ====== ======
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
On May 8, 2008, the Company held its Annual Meeting of Stockholders. The
matters which were submitted to a vote of the security holders and the results
of the voting at such meeting were as follows:
Results of Stockholder Vote
-----------------------------------------------
Abstentions
and Broker
Matter Submitted For Against Withheld Non-Votes
- ---------------- --- ------- -------- -----------
1) Election of the following directors for three years
or until their successors are elected and qualified:
A) Nancy L. Carlson 997,729 N/A 8,654 N/A
B) William M. Pierce, Jr. 966,035 N/A 40,348 N/A
C) Kenneth R. Simonetta 997,729 N/A 8,654 N/A
2) Ratification of Shatswell, MacLeod & Company, P.C.
as the Company's independent registered public
accounting firm for the fiscal year ending
December 31, 2008 1,002,304 4,079 N/A N/A
21
Directors Nancy L. Carlson, William M. Pierce, Jr. and Kenneth R.
Simonetta continued in office in their current terms.
Item 5. Other Information
Not applicable
Item 6. Exhibits
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Monadnock Bancorp, Inc.
Date: August 8, 2008 /s/ William M. Pierce, Jr.
--------------------------
William M. Pierce, Jr.
President and Chief Executive Officer
Date: August 8, 2008 /s/ Karl F. Betz
----------------
Karl F. Betz
Senior Vice President and Chief
Financial Officer
23