AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 19, 2004
REGISTRATION NO. 333-
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MONADNOCK COMMUNITY BANCORP, INC.
(Name of Small Business Issuer in Its Charter)
FEDERAL 6712 (TO BE APPLIED FOR)
(State or Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Code Identification No.)
Organization) Number)
ONE JAFFREY ROAD
PETERBOROUGH, NEW HAMPSHIRE 03458
(603) 924-9654
(Address and Telephone Number of Principal Executive Offices)
ONE JAFFREY ROAD
PETERBOROUGH, NEW HAMPSHIRE 03458
(Address of Principal Place of Business or Intended
Principal Place of Business)
WILLIAM M. PIERCE, JR.
ONE JAFFREY ROAD
PETERBOROUGH, NEW HAMPSHIRE 03458
(603) 924-9654
(Name, Address and Telephone Number of Agent for Service)
COPIES TO:
RICHARD GARABEDIAN, ESQ.
ROBERT LIPSHER, ESQ.
LUSE GORMAN POMERENK & SCHICK, P.C.
5335 WISCONSIN AVENUE, N.W.
SUITE 400
WASHINGTON, D.C. 20015
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933,
check the following box: :
If this Form is filed to register additional shares for an offering pursuant to
Rule 462(b) under the Securities Act please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: 9
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: 9
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: 9
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
CALCULATION OF REGISTRATION FEE
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Proposed maximum
Proposed maximum aggregate
Title of each class of Amount to be offering price offering price Amount of
securities to be registered registered per share (1) registration fee
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Common Stock, $0.01 par value per
share 557,930 shares $8.00 $4,463,440 $600
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(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
PROSPECTUS
UP TO 485,156 SHARES OF COMMON STOCK
MONADNOCK COMMUNITY BANCORP, INC.
(Proposed Holding Company for Monadnock Community Bank)
Monadnock Community Bancorp, Inc. is a federally-chartered stock corporation that is offering for sale up to 485,156 shares
of its common stock to the public at $8.00 per share in connection with the reorganization of Monadnock Community Bank into a mutual
holding company structure. Monadnock Community Bancorp, Inc. will be the holding company for Monadnock Community Bank. The shares
being offered will represent 45.0% of the outstanding common stock of Monadnock Community Bancorp, Inc. after the completion of this
stock offering. We must sell a minimum of 358,594 shares in order to complete the offering and we will terminate the offering if we
do not sell the minimum number of shares. We may sell up to 557,930 shares because of regulatory considerations or changes in market
or economic conditions without resoliciting subscribers. Monadnock Mutual Holding Company, a federally-chartered mutual holding
company, will own the remainder of the outstanding common stock of Monadnock Community Bancorp, Inc.
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TERMS OF THE OFFERING
MAXIMUM,
MINIMUM MAXIMUM AS ADJUSTED(1)
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Per Share Price.............................................. $ 8.00 $ 8.00 $ 8.00
Number of Shares............................................. 358,594 485,156 557,930
Estimated Offering Expenses.................................. $ 500,000 $ 500,000 $ 500,000
Net Proceeds to Monadnock Community Bancorp, Inc............. $ 2,368,752 $ 3,381,248 $ 3,963,440
Net Proceeds Per Share....................................... $ 6.61 $ 6.97 $ 7.10
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(1) Represents an amount that is 15% more than the maximum of the offering range as a result of changes in financial or market
conditions. The sale of stock up to this amount does not require the resolicitation of subscribers.
THIS INVESTMENT INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 1 OF THIS DOCUMENT.
Ryan Beck & Co. will use its best efforts to assist Monadnock Community Bancorp, Inc. in selling at least the minimum number
of shares shown above but does not guarantee that this number will be sold. Ryan Beck & Co., Inc. is not obligated to purchase any
shares of common stock in the offering. The minimum number of shares an individual investor may purchase is 25 shares or $200.
The stock offering to the eligible depositors of Monadnock Community Bank will end at 10:00 a.m., Eastern Daylight Time, on
_________, 2004. We may also commence a community offering and a syndicated community offering concurrently with, during or promptly
after the subscription offering. We may extend the stock offerings without notice to you until August __, 2004, but they must be
completed or terminated by ________, 2006. Monadnock Community Bancorp, Inc. will hold all funds of subscribers in an
interest-bearing account at Monadnock Community Bank or a trust account at an FDIC insured institution until the stock offering is
completed or terminated. Funds will be returned promptly with interest if the stock offering is terminated. Monadnock Community
Bancorp, Inc. anticipates that the common stock will be quoted on the OTC Bulletin Board.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, NOR ANY OTHER FEDERAL AGENCY OR STATE
SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK INFORMATION CENTER AT (___)____-____
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RYAN BECK & CO.
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___________________, 2004
[MAP of Registrant's market area to be produced here.]
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SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY
NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO FULLY UNDERSTAND
THE REORGANIZATION AND STOCK OFFERING, YOU SHOULD READ THIS ENTIRE DOCUMENT
CAREFULLY, INCLUDING THE FINANCIAL STATEMENTS AND THE NOTES TO THE FINANCIAL
STATEMENTS OF MONADNOCK COMMUNITY BANK.
THE COMPANIES:
MONADNOCK COMMUNITY BANCORP, INC.
Monadnock Community Bancorp, Inc. ("Monadnock Community Bancorp") is a
federally-chartered stock corporation that will be formed for the purpose of
acquiring all of the capital stock that Monadnock Community Bank will issue upon
its reorganization into a mutual holding company structure. Following the
reorganization, a majority of the outstanding common stock of Monadnock
Community Bancorp will be held by Monadnock Mutual Holding Company, a
federally-chartered mutual holding company. Monadnock Community Bancorp's
offices will be located at the same address as Monadnock Community Bank and with
the same telephone number.
As part of the reorganization, Monadnock Community Bancorp is offering
up to 485,156 shares of common stock, subject to adjustment. These shares will
represent 45.0% of the outstanding common stock of Monadnock Community Bancorp
after the completion of the reorganization and stock offering. Monadnock Mutual
Holding Company will own the remainder of the outstanding common stock of
Monadnock Community Bancorp. The following chart shows the corporate structure
after completion of the reorganization and stock offering.
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Monadnock Mutual Holding Public Stockholders of
Company Monadnock Community Bancorp, Inc.
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55% 45%
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Monadnock Community Bancorp, Inc.
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100%
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Monadnock Community Bank
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Monadnock Community Bancorp is not expected in the near future to engage
in any significant business following completion of the reorganization and stock
offering. Its primary activity will be to hold all of the stock of Monadnock
Community Bank. Monadnock Community Bancorp will invest the proceeds of the
offering as discussed under "How We Intend to Use the Proceeds." In the future,
it may pursue other business activities, including mergers and acquisitions,
investment alternatives and diversification of operations. There are, however,
no current understandings or agreements regarding these activities.
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MONADNOCK MUTUAL HOLDING COMPANY
Monadnock Mutual Holding Company is a federally-chartered mutual holding
company that will be formed in connection with the mutual holding company
reorganization of Monadnock Community Bank.
Following completion of the reorganization, Monadnock Mutual Holding
Company will own 55% of the outstanding common stock of Monadnock Community
Bancorp. So long as Monadnock Mutual Holding Company is in existence, it will at
all times own at least a majority of the outstanding common stock of Monadnock
Community Bancorp. It is anticipated that the only business activity of
Monadnock Mutual Holding Company going forward will be to own a majority of
Monadnock Community Bancorp's common stock.
Monadnock Mutual Holding Company's offices will be located at the same
address as Monadnock Community Bancorp and with the same telephone number.
MONADNOCK COMMUNITY BANK
ONE JAFFREY ROAD
PETERBOROUGH, NEW HAMPSHIRE 03458
(603) 924-9654
Monadnock Community Bank is a federally-chartered mutual savings bank
that was organized in 1971 as a Vermont chartered credit union to serve the
companies that were members of the Automobile Wholesalers Association of New
England and the employees of such businesses. In May 1996 the credit union
converted its charter to a federal mutual savings bank and, as a result, also
serves the general public.
We serve the Counties of Hillsborough and Cheshire in New Hampshire
through our one office. Our principal business consists of attracting retail
deposits from the general public and investing those funds primarily in
permanent one-to four-family residential mortgage loans. We also originate
commercial real estate loans and commercial business loans and to a lesser
extent we originate home equity loans, multi-family loans and automobile and
other consumer loans. At December 31, 2003, we had total assets of $43.7
million, total deposits of $34.4 million and total equity of $2.5 million. See
"Business of Monadnock Community Bank- General."
BUSINESS STRATEGIES
Our business strategy is to grow and enhance our profitability by:
o Continuing asset growth and expanding market presence;
o Continuing to be a diversified lender;
o Continuing our strong asset quality;
o Maintaining a strong capital position; and
o Building core deposits.
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See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Management Strategy."
THE REORGANIZATION AND STOCK OFFERING
In connection with our reorganization into the mutual holding company
form of organization, we are offering common stock to the public primarily to
allow us to grow through expanded lending and other operations, including
additional branches. See "The Stock Offering - Purposes of the Stock Offering."
We are offering between 358,594 and 485,156 shares of Monadnock
Community Bancorp common stock at $8.00 per share. Because of possible changes
in financial market conditions or that of Monadnock Community Bank, among other
factors, before we complete the stock offering, the number of shares we sell may
increase to 557,930 shares with the approval of the Office of Thrift
Supervision, without any notice or resolicitation opportunity provided to you.
If so, you will not have the chance to change or cancel your stock order.
Ryan Beck & Co., Inc. ("Ryan Beck") will assist us in selling the stock.
For further information about Ryan Beck's role in the offering, see "The Stock
Offering - Marketing Arrangements."
HOW WE DETERMINED THE OFFERING RANGE AND THE $8.00 PRICE PER SHARE
The independent appraisal by RP Financial, LC. ("RP Financial"), dated
as of March 5, 2004, established the offering range. This appraisal was based on
our financial condition and operations and the effect of the additional capital
raised in the stock offering.
The appraisal incorporated an analysis of a peer group of
publicly-traded mid-tier thrift holding companies and mutual holding companies
that RP Financial considered to be comparable to Monadnock Community Bancorp.
This analysis included an evaluation of the average and median price-to-earnings
and price-to-book value ratios indicated by the market prices of the peer
companies. RP Financial applied the peer group's fully converted pricing ratios,
as adjusted for certain qualitative valuation factors, to account for
differences between Monadnock Community Bancorp and the peer group, to Monadnock
Community Bancorp's pro forma earnings and book value to derive the estimated
pro forma market value of Monadnock Community Bancorp.
RP Financial has estimated that as of March 5, 2004, the pro forma
market value of Monadnock Community Bancorp on a fully converted basis ranged
from a minimum of $6.4 million to a maximum of $8.6 million. Based on this
valuation and the $8.00 per share price, the number of shares of common stock to
be issued by Monadnock Community Bancorp will range from 796,875 shares to
1,078,125 shares. The $8.00 price per share was selected primarily to allow more
shares to be issued within the offering range and provide greater liquidity for
the stock. Due to the small size of the stock offering, however, there can be no
assurance that a liquid trading market will develop. Monadnock Community Bancorp
is offering 45.0% of these shares, or between 358,594 and 485,156 shares or $2.9
million to $3.9 million, for sale to eligible depositors of Monadnock Community
Bank, the Monadnock Community Bancorp Employee Stock Ownership Plan and possibly
to the general public in a community offering if all the shares offered in the
subscription offering are not subscribed for in that
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offering. Monadnock Mutual Holding Company will own between 438,281 and 592,969 shares, or 55.0%, of Monadnock
Community Bancorp at the completion of the stock offering.
The following table presents a summary of selected pricing ratios for the peer group companies and the
resulting pricing ratios for Monadnock Community Bancorp, with such ratios adjusted to their fully converted
equivalent basis. Compared to the average pricing of the peer group, Monadnock Community Bancorp's pro forma
pricing ratios at the maximum of the offering range indicated a premium of 1,273.0% on a price-to-earnings basis
and a discount of 15.0% on a price-to-book basis. The estimated appraised value and the resulting
premium/discount took into consideration the potential financial impact of the stock offering on Monadnock
Community Bancorp.
Fully Converted Equivalent Pro Forma
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Price-to-Earnings Price-to-Book
Multiple Value Ratio
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MONADNOCK COMMUNITY BANCORP
Maximum (485,156 shares sold)............................... 408.60x 86.96%
Minimum (358,594 shares sold)............................... 294.33 81.23
VALUATION OF PEER GROUP COMPANIES AS OF MARCH 5, 2004(1)
Averages.................................................... 29.76 102.33
Medians..................................................... 29.32 102.64
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(1) Reflects earnings for the most recent trailing twelve month period for which data is publicly available.
THE INDEPENDENT APPRAISAL IS NOT NECESSARILY INDICATIVE OF THE POST-STOCK ISSUANCE MARKET VALUE. DO NOT ASSUME
OR EXPECT THAT THE VALUATION OF MONADNOCK COMMUNITY BANCORP AS INDICATED ABOVE MEANS THAT THE COMMON STOCK WILL
TRADE AT OR ABOVE THE $8.00 PURCHASE PRICE AFTER THE STOCK OFFERING.
The independent valuation must be updated before we complete the stock offering. The amount of common
stock being offered may be increased by up to 15% without notice to persons who have subscribed for stock, so
that a total of up to 557,930 shares would be sold in the offering. We received authorization from the Office of
Thrift Supervision to conduct the stock offering on ________, 2004. The updated independent valuation will be
subject to the further approval of the Office of Thrift Supervision before we can complete the stock offering.
If the updated independent valuation would result in more than 557,930 shares being sold or less than 358,594
shares being sold, we would notify persons who have subscribed and they would have the opportunity to confirm,
change or cancel their subscription orders. See "Pro Forma Data."
TERMS OF THE OFFERING
We are offering the shares of common stock to those with subscription rights in the following order of
priority:
(1) Depositors who held at least $50.00 with us on December 31, 2002.
(2) The Monadnock Community Bancorp Employee Stock Ownership Plan.
(3) Depositors who held at least $50.00 with us on March 31, 2004.
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(4) Other members of Monadnock Community Bank as of ________, 2004.
Shares of common stock not subscribed for in the subscription offering may be offered to the general
public in a direct community offering with a preference to natural persons residing in Hillsborough and
Cheshire Counties in New Hampshire and, if necessary to complete the offering, a syndicated community offering
of any remaining shares may be held. We reserve the right, in our sole discretion, to accept or reject any
orders to purchase shares of common stock received in the direct community offering and the syndicated
community offering. If we receive orders for more shares than we are offering, we may not be able to fully or
partially fill your order. Shares will be allocated first to categories in the subscription offering. A
detailed description of share allocation procedures can be found in the section entitled "The Stock Offering."
TERMINATION OF THE OFFERING
The subscription offering will end at 10:00 a.m., Eastern Daylight Time on ________, 2004, unless
extended. If fewer than the minimum number of shares are subscribed for in the subscription offering and we do
not receive orders for the minimum number of shares by ________, 2004, we will either:
(1) promptly return any payment you made to us, with interest, or cancel any deposit account
withdrawal authorization you gave us;
(2) increase the maximum purchase limitations; and/or
(3) further extend the offering, if allowed, and give you notice of the extension and of your
rights to confirm, cancel or change your order. If we extend the offering and you do not
respond to the notice, then we will cancel your order and return your payment, with interest,
or cancel any withdrawal authorization you gave us.
We must complete or terminate the stock offering by ________, 2006.
HOW WE WILL USE THE PROCEEDS RAISED FROM THE SALE OF COMMON STOCK
We intend to use the net proceeds received from the stock offering as follows:
Maximum, as
Minimum Maximum adjusted
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Gross proceeds.......................................... $ 2,868,752 $ 3,881,248 $ 4,463,440
Less: Estimated offering expenses...................... 500,000 500,000 500,000
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Net Proceeds............................................ 2,368,752 3,381,248 3,963,440
Less:
Investment in Monadnock Community Bank............... 1,704,002 2,675,998 3,234,902
Capitalization of Monadnock Mutual Holding Company... 50,000 50,000 50,000
Loan to our employee stock ownership plan............ 114,750 155,250 178,538
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Net cash proceeds retained by
Monadnock Community Bancorp............................ $ 500,000 $ 500,000 $ 500,000
============== ================ ===============
The net proceeds retained by Monadnock Community Bancorp and Monadnock Community Bank may ultimately be
used to support lending activities and possible future expansion of Monadnock Community Bank through adding new
offices. We intend to use the
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proceeds at Monadnock Community Bancorp for general corporate purposes which may
include investments in securities, repurchasing stock and paying dividends. See
"How We Intend to Use the Proceeds."
MARKET FOR COMMON STOCK
Due to the relatively small size of our initial public stock offering,
our stock will be quoted on the OTC Bulletin Board. The OTC Bulletin Board is a
market with generally less liquidity and fewer buyers and sellers than the
Nasdaq Stock Market. Even if a liquid market develops for our stock, there is no
assurance that it can be maintained. An active, orderly trading market depends
on the presence and participation of willing buyers and sellers which neither
Monadnock Community Bancorp nor the market makers can control. This may affect
your ability to sell your shares on short notice, and the sale of a large number
of shares at one time could temporarily depress the market price. For these
reasons, our stock should not be viewed as a short term investment.
Additionally, the aggregate purchase price of stock sold in the offering
is based on an independent appraisal. After our shares begin trading, the
marketplace will determine the price per share, which may be influenced by
factors, such as prevailing interest rates, investor perceptions of Monadnock
Community Bancorp, economic conditions and the outlook for financial
institutions. Price fluctuations may be unrelated to the operating performance
of particular companies. In several cases, due to market volatility, shares of
common stock of newly converted savings banks traded below the price at which
the shares were sold in their initial public offerings. We cannot assure you
that, after the reorganization, the trading price of our common stock will be at
or above $8.00
LIMITATIONS ON THE PURCHASE OF COMMON STOCK IN THE STOCK OFFERING
The minimum purchase is 25 shares.
The maximum purchase in the subscription offering by any person or group
of persons through a single deposit account is $70,000 which equals 8,750 shares
of common stock.
The maximum purchase by any person in the direct or syndicated community
offering is $70,000 of common stock, which equals 8,750 shares of common stock.
The maximum purchase in the subscription offering and the direct or
syndicated community offering combined with any person, related persons or
persons acting together is $70,000 or 8,750 shares of the common stock sold in
the stock offering.
If any of the following persons purchase common stock, their purchases
when combined with your purchases cannot exceed $70,000, which equals 8,750
shares of the common stock sold in the stock offering:
o your parents, spouse, sisters, brothers, children or anyone
married to any of these persons, who live in the same house as
you;
o your parents, spouse, sisters, brothers, children or anyone
married to any of these persons, who is one of our officers or
directors;
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o persons exercising subscription rights through qualifying
deposit accounts registered to the same address;
o companies, trusts or other entities in which you have a
financial interest or hold a management position; or
o other persons who may be acting together with you as associates
or persons acting in concert.
Subject to regulatory approval, we may increase or decrease the purchase
limitations at any time. For additional information on purchase limitations,
including the detailed definitions of "associates" and "acting in concert," see
"The Reorganization and Stock Offering--Limitations On Common Stock Purchases."
We have the right to determine whether prospective purchasers are associates or
acting in concert.
HOW TO PURCHASE COMMON STOCK
NOTE: ONCE WE RECEIVE YOUR ORDER, YOU CANNOT CANCEL OR CHANGE IT WITHOUT
OUR CONSENT. IF MONADNOCK COMMUNITY BANCORP INTENDS TO SELL FEWER THAN 358,594
SHARES OR MORE THAN 557,930 SHARES, ALL SUBSCRIBERS WILL BE NOTIFIED AND GIVEN
THE OPPORTUNITY TO CONFIRM, CHANGE OR CANCEL THEIR ORDERS. IF YOU DO NOT RESPOND
TO THIS NOTICE, WE WILL RETURN YOUR FUNDS PROMPTLY WITH INTEREST.
If you want to subscribe for shares, you must complete an original stock
order form and drop it off at our office or send it, together with full payment
or withdrawal authorization, to Monadnock Community Bank in the postage-paid
envelope provided. You must sign the certification that is part of the stock
order form. We must receive your stock order form and payment before the end of
the offering period.
You may pay for shares in any of the following ways:
o BY CHECK OR MONEY ORDER made payable to Monadnock Community
Bancorp.
o AUTHORIZED ACCOUNT WITHDRAWAL. The stock order form outlines the
types of Monadnock Community Bank deposit accounts you may
authorize for direct withdrawal. The funds you authorize must be
in your account at the time your stock order is received. Funds
will not be withdrawn from your accounts until the completion or
termination of the stock offering and will earn interest at the
applicable deposit account rate until then. A hold will be
placed on these funds when your stock order form is received,
however, making the designated funds unavailable to you. You may
authorize withdrawal of funds from your certificate of deposit
accounts without incurring an early withdrawal penalty, with the
agreement that the withdrawal is being made for the purchase of
shares in the offering. You may not authorize direct withdrawals
from Monadnock Community Bank IRA deposit accounts.
We will pay interest on your subscription funds at the rate Monadnock
Community Bank pays on regular savings accounts, currently 0.5%, from the date
we receive your funds until the stock offering is completed or terminated.
Please do not send cash or wire transfers. Checks will be cashed upon receipt.
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WE CURRENTLY DO NOT INTEND TO PAY CASH DIVIDENDS
We do not currently intend to pay cash dividends. We intend to retain
our earnings and the net proceeds of the stock offering to support our future
growth. We may, however, determine to pay cash dividends in the future. The
amount and timing of any dividends, however, have not yet been determined.
Monadnock Community Bancorp currently has no intention to initiate any
action which leads to a return of capital (as distinguished from a dividend) to
stockholders of Monadnock Community Bancorp. Regulations of the Office of Thrift
Supervision prohibit a return of capital during the term of the three year
business plan submitted by Monadnock Community Bank to the Office of Thrift
Supervision in connection with the stock offering.
If we pay dividends to stockholders of Monadnock Community Bancorp, it
is anticipated that Monadnock Mutual Holding Company would waive any dividends
payable to it, subject to Office of Thrift Supervision approval. Under Office of
Thrift Supervision regulations, such dividends would not result in dilution to
public stockholders in the event Monadnock Mutual Holding Company converts to
stock form in the future. See "How We Are Regulated."
MANAGEMENT PURCHASES
Directors and executive officers of Monadnock Community Bancorp,
together with their associates, and the employee stock ownership plan intend to
purchase $608,350 and $648,850 of common stock in the offering, or 21.2% and
16.7% of the offering based on the minimum and maximum, respectively, of the
total shares sold in the offering. The employee stock ownership plan intends to
purchase 4.0% of the stock sold in the offering. These purchases will count
towards the minimum purchases needed to complete the offering, and will be made
for investment purposes only and not for resale.
BENEFITS TO MANAGEMENT FROM THE OFFERING
We intend to establish the Monadnock Community Bancorp Employee Stock
Ownership Plan which will purchase 4.0% of the shares sold in this offering. A
loan from Monadnock Community Bancorp to the plan, funded by a portion of the
proceeds from this offering, will be used to purchase these shares. The loan
will accrue interest at the prime rate in effect at the time the loan is made.
The Monadnock Community Bancorp Employee Stock Ownership Plan will provide a
retirement benefit to all employees eligible to participate in the plan.
Moreover, in addition to the employee stock ownership plan under the
plan of mutual holding company reorganization and stock issuance, we may grant
awards under one or more stock benefit plans, including stock option plans and
recognition and retention plans, in an amount up to 25% of the number of shares
of common stock held by persons other than Monadnock Community Bancorp. The
recognition and retention plan and stock option plan cannot be established
sooner than six months after the reorganization and stock offering and would
require the approval of our stockholders. The number of options granted or
shares awarded under any initial stock option plan or recognition and retention
plan may not exceed 10% and 4%, respectively of the shares sold in the offering,
if such plans are adopted within one year from the date of completion of the
offering. If adopted within one year, the recognition and retention plan would
be subject to such other limitations as may be imposed by the Office of Thrift
Supervision. If the stock option plan or recognition and retention plan is
adopted after one
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year from the date of the completion of the reorganization and stock offering,
such plan would be permitted to grant or award a greater number of options and
shares of common stock, subject to stockholder approval and the overall
limitations provided for in the plan of mutual holding company reorganization
and stock issuance.
The following table presents the total value of the shares of common
stock, at the maximum of the offering range, which would be acquired by the
employee stock ownership plan and the total value of all shares to be available
for award and issuance under the restricted stock plan. The table assumes that
the value of the shares is $8.00 per share and the amount of the shares in the
plan is equal to 4.0% of the shares sold at the maximum of the offering range.
The table does not include a value for the options because the price paid for
the option shares will be equal to the fair market value of the common stock on
the day that the options are granted. As a result, financial gains can be
realized under an option only if the market price of common stock increases.
Number Estimated Percentage of
of Value of Shares Sold
Shares Shares in the Offering
------------ ------------ ---------------
Employee stock ownership plan....... 19,406 $ 155,248 4.0%
Restricted stock awards............. 19,406 155,248 4.0
Stock options....................... 48,516 -- 10.0
------------ ------------ ---------------
Total........................... 87,328 $ 310,496 18.0%
============ ============ ===============
For a further discussion of benefits to management, see "Management."
STOCK INFORMATION CENTER
If you have any questions regarding the stock offering or the stock
order form, please call the stock information center at (___) ___-____ Monday
through Friday between the hours of 9:00 a.m. and 4:00 p.m., Eastern Daylight
Time.
SUBSCRIPTION RIGHTS
Subscription rights are not allowed to be transferred and we will act to
ensure that you do not do so. We will not accept any stock orders that we
believe involve the transfer of subscription rights.
DELIVERY OF STOCK CERTIFICATES
Certificates representing shares of common stock sold in the offering
will be mailed to the certificate registration address noted on the order form,
as soon as practicable following completion of the offering and receipt of all
necessary regulatory approvals. IT IS POSSIBLE THAT, UNTIL CERTIFICATES FOR THE
COMMON STOCK ARE AVAILABLE AND DELIVERED TO PURCHASERS, PURCHASERS MIGHT NOT BE
ABLE TO SELL THE SHARES OF COMMON STOCK WHICH THEY ORDERED, EVEN THOUGH THE
COMMON STOCK WILL HAVE BEGUN TRADING.
DELIVERY OF PROSPECTUS
To ensure that you receive a prospectus at least 48 hours before the
offering deadline, we may not mail prospectuses any later than five days prior
to such date or hand-deliver any
ix
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- --------------------------------------------------------------------------------
prospectuses later than two days prior to that date. Stock order forms may only
be distributed with a prospectus.
IMPORTANT RISKS IN OWNING MONADNOCK COMMUNITY BANCORP'S COMMON STOCK
Before you decide to purchase stock, you should read the "Risk Factors"
section on pages 1 to 5 of this document for information regarding certain risks
of the stock offering.
POSSIBLE CONVERSION OF MONADNOCK MUTUAL HOLDING COMPANY TO STOCK FORM
In the future, Monadnock Mutual Holding Company may convert from the
mutual to capital stock form, in a transaction commonly known as a "second-step
conversion." This second-step conversion may be undertaken in order to, among
other things, raise additional capital for Monadnock Community Bank or
facilitate an acquisition transaction. Monadnock Mutual Holding Company is not
fully converting to stock form at this time because the expected net proceeds
from the stock offering are sufficient in our opinion to support the growth of
Monadnock Mutual Holding Company and Monadnock Community Bank anticipated at
this time.
In a second-step conversion, members of Monadnock Mutual Holding Company
would have subscription rights to purchase common stock in an offering of new
shares to be conducted by Monadnock Community Bancorp or its successor, the
shares of Monadnock Community Bancorp would be cancelled and the public
stockholders of Monadnock Community Bancorp would be entitled to exchange their
shares of common stock for an equal percentage of new shares of the converted
Monadnock Mutual Holding Company. This percentage may be adjusted to reflect any
assets owned by Monadnock Community Mutual Holding Company. Monadnock Community
Bancorp's public stockholders, therefore, would own approximately the same
percentage of the resulting entity as they owned prior to the second-step
conversion. The Board of Directors has no current plans to undertake a
"second-step conversion" transaction.
RESTRICTIONS ON ACQUISITION OF MONADNOCK COMMUNITY BANCORP AND MONADNOCK
COMMUNITY BANK
Federal law restricts the ability of any person, firm or entity to
acquire Monadnock Community Bancorp, Monadnock Community Bank or their
respective capital stock. No such person, firm or entity may acquire more than
25% of any class of voting stock of Monadnock Community Bancorp or Monadnock
Community Bank without prior written approval by the Office of Thrift
Supervision. In addition, for a period of three years following completion of
the stock offering, Office of Thrift Supervision regulations generally prohibit
any person from acquiring or making an offer to acquire beneficial ownership of
more than 10% of the stock of Monadnock Community Bancorp without prior written
approval from the Office of Thrift Supervision. Certain provisions of the
charter and bylaws of Monadnock Community Bancorp and Monadnock Community Bank
affect the ability of any person, firm or entity to acquire control of Monadnock
Community Bancorp and Monadnock Community Bank. These provisions include
limitations on voting rights of persons owning more than 10% of any class of
outstanding voting stock of Monadnock Community Bancorp or Monadnock Community
Bank.
x
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RISK FACTORS
YOU SHOULD CONSIDER THESE RISK FACTORS, IN ADDITION TO THE OTHER
INFORMATION IN THIS PROSPECTUS, BEFORE DECIDING WHETHER TO MAKE AN INVESTMENT IN
MONADNOCK COMMUNITY BANCORP'S COMMON STOCK.
OUR LOAN PORTFOLIO POSSESSES INCREASED RISK DUE TO OUR SUBSTANTIAL NUMBER OF
COMMERCIAL BUSINESS LOANS AND COMMERCIAL REAL ESTATE LOANS, WHICH COULD INCREASE
THE LEVEL OF OUR PROVISION FOR LOAN LOSSES.
Our outstanding commercial business and commercial real estate loans
accounted for approximately 37.1% of our total loan portfolio as of December 31,
2003. Generally, we consider these types of loans to involve a higher degree of
credit risk compared to first mortgage loans on one- to four-family, owner
occupied residential properties. These loans have higher risks than loans
secured by residential real estate because loan repayments are dependent on the
borrower's business generating income in amounts sufficient to cover operating
expenses and debt service.
Because of our planned continued emphasis on commercial business and
commercial real estate loans, we may determine it necessary to increase the
level of our provision for loan losses. Increased provisions for loan losses
would increase our expenses and reduce our profits. We recorded no provision in
fiscal 2002 and recorded a benefit of $50,000 in fiscal 2003. For further
information concerning the risks associated with commercial real estate, and
commercial business loans, see "Business of Monadnock Community Bank- Lending
Activities" and "- Asset Quality."
OUR LOAN PORTFOLIO POSSESSES INCREASED RISK DUE TO ITS RECENT RAPID EXPANSION
AND THE UNSEASONED NATURE OF THE PORTFOLIO.
Our total loan portfolio increased from $18.9 million at December 31,
2002 to $30.9 million at December 31, 2003 as part of our plan to increase
interest earning assets and take advantage of the residential mortgage financing
boom. As a result of our rapid expansion, a significant portion of our portfolio
is unseasoned, with the risk that these loans may not have had sufficient time
to perform to properly indicate the potential magnitude of losses. During this
time frame, we have also experienced a historically low interest rate
environment. Our unseasoned adjustable rate loans have not, therefore, been
subject to a rising interest rate environment which causes them to adjust to the
maximum level and thus an increase could cause collection risks resulting from
potentially increasing payment obligations by the borrower. Approximately 63.0%
of our total loan portfolio consists of loans with adjustable rates.
WE USE A THIRD PARTY TO ORIGINATE ONE- TO FOUR- FAMILY RESIDENTIAL LOANS.
We have used a third party to underwrite, process and close our
residential mortgage loans since 2001. We use this company in order to offer our
customers this loan product without the expense of an in-house residential
mortgage loan department. We intend to continue this relationship for the
forseeable future. Should we discontinue this relationship or otherwise be
unable to use this company in the future, our ability to originate residential
mortgage loans may be disrupted unless we are able to find a suitable
replacement or have the capability to perform
1
the function through our lending staff. In such a case our income may be
negatively affected if our lending program is disrupted. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
OUR PROFITABILITY HAS BEEN MARGINAL OVER THE PAST FEW YEARS AND THERE CAN BE NO
ASSURANCE THAT OUR EARNINGS WILL INCREASE.
Our net income for the fiscal years ended December 31, 2003 and 2002 was
approximately $27,000 and $63,000, respectively. We would not have been
profitable if we had not benefited from certain types of earnings, such as gains
on sales of loans and investments, which may not recur or, if recurring, will
likely be modest. In addition, should our fee income decline as a result of a
slowdown of the residential mortgage refinancing boom, our income will be
negatively impacted.
Our efficiency ratio (non-interest expense divided by net interest
income plus non-interest income) was 101.34% for 2003, reflecting the high fixed
costs of operating a single branch. Our efforts to grow in order to increase our
net interest and non-interest income relative to our non-interest expenses has
been constrained by our relatively limited capital base. We believe that our
existing systems will be better utilized as we use the capital raised in the
stock offering to support efforts to make more loans, attract new customers and
increase business with existing customers. Additionally, our business plan
anticipates the opening of a branch in early 2005, which will be supported, in
part, by existing systems. However, the new branch will incur some additional
fixed operating costs. The expenses of the branch will therefore more than
offset its earnings for some period of time until it has attracted a
sufficiently large base of deposits and loans. Additionally, our costs will
increase in the future due to stock-based incentive plans that we will adopt.
There can be no assurance that our expansion plans will be successful and result
in increased profitability.
OUR SUCCESSFUL OPERATION DEPENDS UPON ON OUR RELIANCE OF OUR CHIEF EXECUTIVE
OFFICER.
Like many small institutions, Monadnock Community Bank depends heavily
upon its President and Chief Executive Officer, William M. Pierce, Jr., 50, who
has served in such position since October 1999. In the event that Mr. Pierce
reduces his involvement in Monadnock Community Bank's operations, which is not
currently contemplated, Monadnock Community Bank's operations could be
significantly and adversely affected.
CHANGES IN INTEREST RATES MAY HURT OUR PROFITS.
To be profitable, we have to earn more money in interest that we receive
on loans and our investments than we pay in interest to our depositors and
lenders. Interest rates are at historically low levels. If interest rates rise,
our net interest income could be reduced because interest rates paid on
interest-bearing liabilities, including deposits and borrowings, increase more
quickly than interest received on interest-earning assets, including loans and
mortgage-backed and investment securities. In addition, rising interest rates
may hurt our income because they may reduce the demand for loans and the value
of our mortgage-related and investment securities. In the alternative, if
interest rates decrease, our net interest income could increase. However, in a
declining rate environment, we may also be susceptible to the payoff or
refinance of high rate
2
mortgage loans that could reduce our net interest income. For a further
discussion of how changes in interest rates could impact us, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Asset
and Liability Management and Market Risk."
IF ECONOMIC CONDITIONS DETERIORATE, OUR EARNINGS AND FINANCIAL CONDITION COULD
BE ADVERSELY IMPACTED AS BORROWERS' ABILITY TO REPAY LOANS DECLINES AND THE
VALUE OF THE COLLATERAL SECURING OUR LOANS DECREASES.
A substantial majority of our loans are made to borrowers located in New
Hampshire. Our financial results may be adversely affected by changes in
prevailing local and national economic conditions, including decreases in real
estate values, adverse employment conditions, the monetary and fiscal policies
of the federal and New Hampshire state governments and other significant
external events. Because we have a significant amount of real estate loans,
decreases in real estate values could adversely affect the value of property
used as collateral. Adverse changes in the economy may also have a negative
effect on the ability of our borrowers to make timely repayments of their loans,
which would have an adverse impact on our earnings.
AFTER THIS OFFERING, OUR RETURN ON EQUITY WILL BE LOW COMPARED TO OTHER
COMPANIES AND OUR COMPENSATION EXPENSES WILL INCREASE. THIS COULD NEGATIVELY
IMPACT THE PRICE OF OUR STOCK.
The proceeds we will receive from the sale of our common stock will
significantly increase our capital and it will take us time to fully use this
capital in our business operations to increase our net income. Our compensation
expenses will also increase because of the costs associated with stock-based
incentive plans. Therefore, we expect our initial return on equity to be below
our historical level and less than our regional and national peers. For the year
ended December 31, 2003, our return on equity was 1.06%. On a pro forma basis,
at the maximum of the offering range, our return on equity would have been 0.44%
for the year ended December 31, 2003, compared to an industry average of 8.95%
and a peer group average of 4.95%. This low return on equity could hurt our
stock price. We cannot guarantee when or if we will achieve returns on equity
that are comparable to industry peers. For further information regarding pro
forma income and expenses, see "Pro Forma Data."
WE INTEND TO GRANT STOCK OPTIONS AND RESTRICTED STOCK TO THE BOARD AND
MANAGEMENT FOLLOWING THE STOCK OFFERING WHICH COULD REDUCE YOUR OWNERSHIP
INTEREST.
If approved by a vote of the stockholders other than Monadnock Mutual
Holding Company, we intend to establish a stock option plan with a number of
shares equal to 10.0% of the shares sold in the stock offering and a restricted
stock plan with a number of shares equal to 4.0% of the shares sold in the stock
offering, worth approximately $543,376 at the $8.00 purchase price in the
offering and assuming the maximum of the offering range. These plans will be for
the benefit of directors, officers and employees of Monadnock Community Bancorp
and Monadnock Community Bank. Stock options are paid for by the recipient in an
amount equal to the fair market value of the stock on the date of the grant. The
payments are not made until the option is actually exercised by the recipient.
Restricted stock is a bonus paid in the form of stock rather than cash, and is
not paid for by the recipient. Under the plan of mutual holding company
reorganization and stock issuance, we are authorized to grant awards under one
3
or more stock benefits plans, including the recognition and retention plan and
stock option plan, in an amount up to 25% of the number of shares of common
stock held by persons other than Monadnock Mutual Holding Company. The
recognition and retention plan and stock option plan cannot be implemented until
at least six months after the reorganization and offering, and if they are
adopted within twelve months after the reorganization, they will be subject to
certain Office of Thrift Supervision regulations regarding vesting and
allocation of awards. In the event that a portion of the shares used to (i) fund
the recognition and retention plan or (ii) satisfy the exercise of options from
our stock option plan, is obtained from authorized but unissued shares, rather
than from open market purchases, the issuance of additional shares will decrease
our net income per share and stockholders' equity per share. Awards under these
plans will reduce the ownership interest of all stockholders. For further
discussion regarding these plans, see "Pro Forma Data" and "Management -
Benefits - Stock Benefit Plans."
PERSONS WHO PURCHASE STOCK IN THE OFFERING WILL OWN A MINORITY OF MONADNOCK
COMMUNITY BANCORP'S COMMON STOCK AND WILL NOT BE ABLE TO EXERCISE VOTING CONTROL
OVER MOST MATTERS PUT TO A VOTE OF STOCKHOLDERS.
Public stockholders will own a minority or 45.0% of the outstanding
shares of Monadnock Community Bancorp's common stock after the stock offering.
The same directors and executive officers who manage Monadnock Community Bancorp
also manage Monadnock Mutual Holding Community which will own 55.0% of the
outstanding common stock of Monadnock Community Bancorp. The Board of Directors
of Monadnock Mutual Holding Company will be able to exercise voting control over
most matters put to a vote of stockholders because Monadnock Mutual Holding
Company will own a majority of Monadnock Community Bancorp's common stock. For
example, Monadnock Mutual Holding Company may exercise its voting control to
prevent a sale of Monadnock Community Bancorp in which the public stockholders
could receive a premium for their shares.
In addition, Monadnock Community Bancorp's directors, executive officers
and their associates are expected to purchase approximately 61,700 shares sold
in the offering, which represent 12.7% of the shares sold at the maximum of the
offering range. These purchases, together with the purchase of 4.0% of the
shares sold in the offering by the Monadnock Community Bancorp Employee Stock
Ownership Plan will result in the inside ownership of Monadnock Community
Bancorp common stock of 16.7% at the maximum of the offering range. Furthermore,
if stockholders of Monadnock Community Bancorp approve the restricted stock plan
and the stock option plan, and provided that all shares under the restricted
stock plan are awarded and all options under the stock option plan are awarded
and exercised, directors and executive officers may own up to an additional
14.0% of the shares of the stock sold in the offering. See "Management -
Benefits" and "Proposed Stock Purchases by Management."
HOLDERS OF MONADNOCK COMMUNITY BANCORP COMMON STOCK MAY NOT BE ABLE TO SELL
THEIR SHARES WHEN DESIRED IF A LIQUID TRADING MARKET DOES NOT DEVELOP, OR FOR
$8.00 OR MORE PER SHARE EVEN IF A LIQUID TRADING MARKET DEVELOPS.
Due to the relatively small size of our initial public stock offering,
our stock will be quoted on the OTC Bulletin Board. The OTC Bulletin Board is a
market with generally less liquidity and fewer buyers and sellers than the
Nasdaq Stock Market. Even if a liquid market
4
develops for our stock, there is no assurance that it can be maintained. An
active, orderly trading market depends on the presence and participation of
willing buyers and sellers which neither Monadnock Community Bancorp nor the
stock's market makers can control. This may affect your ability to sell your
shares on short notice, and the sale of a large number of shares at one time
could temporarily depress the market price. For these reasons, our stock should
not be viewed as a short-term investment.
Additionally, the aggregate purchase price of stock sold in the offering
is based on an independent appraisal. After our shares begin trading, the
marketplace will determine the price per share, which may be influenced by
various factors, such as prevailing interest rates, investor perceptions of
Monadnock Community Bancorp, economic conditions and the outlook for financial
institutions. Price fluctuations may be unrelated to the operating performance
of particular companies. In several cases, due to market volatility, shares of
common stock of newly converted savings banks traded below the price at which
the shares were sold in the companies' initial public offerings. We cannot
assure you that, after the reorganization, the trading price of our common stock
will be at or above $8.00.
MANAGEMENT WILL HAVE SUBSTANTIAL DISCRETION OVER INVESTMENT OF THE OFFERING
PROCEEDS AND MAY MAKE INVESTMENTS WITH WHICH YOU DISAGREE.
The net offering proceeds to Monadnock Community Bancorp are estimated
to range from $2.4 million to $3.4 million at the minimum and the maximum of the
offering range, respectively, and management intends to use these funds for
general business purposes, involving a loan to the Monadnock Community Bancorp
Employee Stock Ownership Plan, giving management substantial discretion over
their investment. You may disagree with investments that management makes. See
"How We Intend to Use the Proceeds."
STRONG COMPETITION IN OUR PRIMARY MARKET AREA MAY REDUCE OUR ABILITY TO ATTRACT
AND RETAIN DEPOSITS AND OBTAIN LOANS.
We operate in a competitive market for both attracting deposits, which
is our primary source of funds, and originating loans. Historically, our most
direct competition for savings deposits has come from credit unions, community
banks, large commercial banks and thrift institutions in our primary market
area. Particularly in times of extremely low or extremely high interest rates,
we have faced additional significant competition for investors' funds from
brokerage firms and other firms short-term money market securities and corporate
and government securities. Our competition for loans comes principally from
mortgage bankers, commercial banks, other thrift institutions and insurance
companies. Such competition for the origination of loans may limit our future
growth and earnings prospects. Competition for loan originations and deposits
may limit our future growth and earnings prospects.
5
SELECTED FINANCIAL AND OTHER DATA
The summary information presented below under "Selected Financial
Condition Data" and "Selected Operations Data" for, and as of the end of, each
of the years ended December 31, 2003 and 2002 is derived from our audited
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation have been
included. The following information is only a summary and you should read it in
conjunction with our financial statements and notes beginning on page F-2.
At December 31,
---------------------------
2003 2002
----------- ----------
(In Thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets.......................... $ 43,740 $ 41,289
Cash and cash equivalents............. 1,823 1,269
Loans, net............................ 30,728 18,602
Securities available-for-sale......... 10,073 20,439
Other investments (interest-bearing...
term deposit)....................... 100 100
FHLB stock............................ 485 430
Deposits.............................. 34,432 31,621
FHLB advances......................... 6,747 7,000
Total equity.......................... 2,483 2,597
Year Ended December 31,
---------------------------
2003 2002
----------- ----------
(In Thousands)
SELECTED OPERATIONS DATA:
Total interest income................. $ 1,961 $ 2,265
Total interest expense................ 825 1,097
----------- -----------
Net interest income................. 1,136 1,168
Provision (benefit) for loan
losses.............................. (50) 0
----------- -----------
Net interest income after
provision (benefit) for loan losses. 1,186 1,168
Customer service charges.............. 58 42
Other non-interest income............. 164 177
----------- -----------
Total non-interest income............. 222 219
Total non-interest expense............ 1,376 1,326
----------- -----------
Income before income taxes............ 32 61
Income tax provision (benefit)........ 5 (2)
----------- -----------
Net income............................ $ 27 $ 63
=========== ===========
6
SELECTED FINANCIAL RATIO AND At or For the Year Ended
OTHER DATA: December 31,
-------------------------
2003 2002
----------- ----------
PERFORMANCE RATIOS:
Return on assets (ratio of net
income to average total assets)........ 0.06% 0.15%
Return on equity (ratio of net
income to average equity).............. 1.06% 2.49%
Ratio of non-interest expense to
average total assets................... 3.24% 3.22%
Efficiency ratio(1)..................... 101.34% 95.63%
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................... 109.29% 108.20%
INTEREST RATE SPREAD INFORMATION(2):
Average during period................... 2.53% 2.66%
End of period........................... 3.56% 3.06%
Net interest margin(3).................. 2.72% 2.88%
ASSET QUALITY RATIOS:
Non-performing assets to total assets... 0.39% 0.29%
Allowance for loan losses to
non-performing loans(4)................ 203.82% 349.06%
Allowance for loan losses to total
loans (4)(5)........................... 1.04% 1.95%
Net charge-offs (recoveries) to
average outstanding loans(4)(5)........ --% (0.01)%
Non-performing loans to total
loans(4)(5)............................ 0.51% 0.56%
CAPITAL RATIOS:
Equity to total assets at end of
period................................. 5.68% 6.29%
Average equity to average assets........ 5.95% 6.10%
Tier 1 leverage......................... 5.82% 6.13%
Tier 1 risk-based....................... 10.93% 15.64%
Total risk based........................ 12.19% 16.91%
OTHER DATA:
Number of full-service offices.......... 1 1
Number of loans......................... 475 336
Number of deposit accounts.............. 3,271 2,999
- ------------------
(1) Efficiency ratio represents non-interest expense as a percentage of net
interest income plus non-interest income.
(2) Spread represents the difference between the weighted average yield on
interest-earning assets and weighted average cost on interest-earning
liabilities.
(3) Net interest income divided by average interest-earning assets.
(4) The allowance for loan losses at December 31, 2003 and 2002 was $320,000
and $370,000, respectively.
(5) Total loans are net of deferred fees and costs.
7
HOW WE INTEND TO USE THE PROCEEDS
Although the actual net proceeds from the sale of the shares of common
stock cannot be determined until the stock offering is completed, we presently
anticipate that the net proceeds from the sale of the shares of common stock
will be between $2.4 million at the minimum of the offering range and $3.4
million at the maximum of the offering range and may be up to $4.0 million
assuming an increase in the estimated value of the common stock sold in the
estimated offering range by 15%. See "Pro Forma Data" and "The Stock Offering -
How We Determined Our Price and the Number of Shares to be Sold in the Stock
Offering" as to the assumptions used to arrive at such amounts.
We intend to use the net proceeds received from the stock offering as
follows:
Maximum, as
Minimum Maximum adjusted
--------------------------------------------
Gross Proceeds.......................................... $2,868,752 $3,881,248 $4,463,440
Less: Estimated offering expenses...................... 500,000 500,000 500,000
------------- -------------- -------------
Net Proceeds............................................ 2,368,752 3,381,248 3,963,440
Less:
Investment in Monadnock Community Bank............... 1,704,002 2,675,998 3,234,902
Capitalization of Monadnock Mutual Holding Company... 50,000 50,000 50,000
Loan to our employee stock ownership plan............ 114,750 155,250 178,538
------------- -------------- -------------
Net cash proceeds retained by
Monadnock Community Bancorp............................ $ 500,000 $ 500,000 $ 500,000
============= ============== =============
Monadnock Community Bancorp will retain up to $500,000 of the net stock
offering proceeds from which the loan will be made to the employee stock
ownership plan, and will invest the remaining proceeds in Monadnock Community
Bank. The portion of the net proceeds used by Monadnock Community Bancorp to
make a loan to the employee stock ownership plan will enable the employee stock
ownership plan to purchase up to 4.0% of the shares of common stock sold in the
stock offering. Based upon the sale of 358,594 shares of common stock and
485,156 shares of common stock at the minimum and maximum of the estimated
offering range, respectively, the loan to the employee stock ownership plan
would be $114,750 and $155,250, respectively. See "Management - Benefits -
Employee Stock Ownership Plan." The remaining net proceeds initially retained by
Monadnock Community Bancorp may be used to invest in U.S. Government and federal
agency securities of various maturities, mortgaged-backed or other securities,
deposits in either Monadnock Community Bank or other financial institutions, or
a combination thereof. The net proceeds will be used to support Monadnock
Community Bancorp's operations and may ultimately be used to support Monadnock
Community Bank's lending activities and any future expansion of operations.
The net proceeds retained by Monadnock Community Bank from the stock
offering may also be used for other business and investment purposes, including
the payment of regular or special cash dividends, possible repurchases of the
common stock for treasury or for the restricted stock plan. Monadnock Community
Bancorp and Monadnock Community Bank have no current plans, however, to declare
dividends or pay any return of capital on the common stock. Management of
Monadnock Community Bancorp may consider expanding or diversifying its
activities, as opportunities become available.
In the future, the board of directors of Monadnock Community Bancorp may
determine, based on the existing facts and circumstances, to repurchase shares
of common stock, subject to
8
any applicable regulatory requirements. Repurchases of stock by Monadnock
Community Bancorp, which may be at prices above or below the initial offering
price, will generally be conducted through an open market repurchase program
subject to applicable regulations. Any stock repurchases will be subject to the
determination of Monadnock Community Bancorp's board of directors that Monadnock
Community Bank will be capitalized in excess of all applicable regulatory
requirements after any such repurchases. Such facts and circumstances may
include, but will not be limited to:
o market and economic factors such as the price at which the stock
is trading in the market, the volume of trading, the
attractiveness of other investment alternatives in terms of the
rate of return and risk involved in the investment, the ability
to increase the book value and/or earnings per share of the
remaining outstanding shares, and an improvement in Monadnock
Community Bancorp's return on equity;
o the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to
fund employee stock benefit plans; and
o any other circumstances in which repurchases would be in the
best interests of Monadnock Community Bancorp and its
stockholders.
The portion of the net proceeds used by Monadnock Community Bancorp to
invest in Monadnock Community Bank will be added to Monadnock Community Bank's
general funds to be used for general corporate purposes, including increased
lending activities. While the amount of net proceeds received by Monadnock
Community Bank will further strengthen its capital position, which already
exceeds all regulatory requirements, the stock offering is not planned solely to
increase Monadnock Community Bank's regulatory capital. The net proceeds may be
used as described above to support lending activities as well as future
expansion of operations, including a new branch that may be established in early
2005. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Management Strategy."
The net proceeds may vary because total expenses of the stock offering
may be more or less than those estimated. The net proceeds will also vary if the
number of shares to be sold in the stock offering is adjusted to reflect a
change in the estimated pro forma market value of Monadnock Community Bank.
Payments for shares made through withdrawals from existing deposit accounts at
Monadnock Community Bank will not result in the receipt of new funds for
investment by Monadnock Community Bank but will result in a reduction of
Monadnock Community Bank's interest expense and liabilities as funds are
transferred from interest-bearing certificates or other deposit accounts.
OUR POLICY REGARDING DIVIDENDS
In order to retain capital to support the increase of earning assets of
Monadnock Community Bank, the board of directors of Monadnock Community Bancorp
does not currently intend to pay cash dividends on the common stock of Monadnock
Community BANCORP. Any payment of dividends in the future will depend upon a
number of factors, including capital requirements, Monadnock Community Bancorp's
and Monadnock Community Bank's financial condition and results of operations,
tax considerations, statutory and regulatory limitations and general economic
conditions. No assurances can be given that any dividends will be paid or that,
if paid, will not be reduced or eliminated in future periods. Special cash
dividends, stock dividends or returns of capital may, to the extent permitted by
regulations, be paid in addition to,
9
or in lieu of, regular cash dividends. Monadnock Community Bancorp intends to
file consolidated tax returns with Monadnock Community Bank. Accordingly, it is
anticipated that any cash distributions made by Monadnock Community Bancorp to
its stockholders would be treated as cash dividends and not as a non-taxable
return of capital for federal and state tax purposes. See "Taxation."
Dividends from Monadnock Community Bancorp will depend, in large part,
upon receipt of dividends from Monadnock Community Bank, because Monadnock
Community Bancorp initially will have no source of income other than dividends
from Monadnock Community Bank, earnings from the investment of proceeds from the
sale of shares of common stock retained by Monadnock Community Bancorp and
interest payments with respect to Monadnock Community Bancorp's loan to the
Monadnock Community Bancorp Employee Stock Ownership Plan. A regulation of the
Office of Thrift Supervision imposes limitations on "capital distributions" by
savings institutions. See "How We are Regulated - Limitations on Dividends and
Other Capital Distributions."
If we pay dividends to stockholders of Monadnock Community Bancorp, it
is anticipated that any dividends payable to Monadnock Mutual Holding Company
would be waived by the company, subject to Office of Thrift Supervision
approval. Under Office of Thrift Supervision regulations, such dividends would
not result in dilution to public stockholders if Monadnock Mutual Holding
Company converts to stock form in the future. See "How We are Regulated -
Limitations on Dividends and Other Capital Distributions."
Monadnock Community Bancorp currently has no intention to initiate any
action which leads to a return of capital (as distinguished from a dividend) to
stockholders of Monadnock Community Bancorp. Regulations of the Office of Thrift
Supervision prohibit a return of capital during the three-year term of the
business plan submitted by Monadnock Community Bank to the Office of Thrift
Supervision in connection with the stock offering.
MARKET FOR THE COMMON STOCK
Monadnock Community Bancorp and Monadnock Community Bank have never
issued any capital stock, and consequently, there is no established market for
the common stock at this time. We expect that Monadnock Community Bancorp's
common stock will be quoted in the over the counter market on the OTC Bulletin
Board upon completion of the stock offering. However, given the limited amount
of shares of Monadnock Community Bancorp being offered, it is unlikely that a
liquid trading market will develop. The development of a liquid public market
depends on the existence of willing buyers and sellers, the presence of which is
not within the control of Monadnock Community Bancorp, Monadnock Community Bank
or any market maker. Accordingly, the number of active buyers and sellers of the
common stock at any particular time may be limited. Under such circumstances,
you may have difficulty selling shares on short notice. Therefore, you should
not consider the stock as a short-term investment. Trying to sell a large number
of shares at one time may also temporarily depress the market price of the
stock.
A requirement for inclusion on the OTC Bulletin Board is that there be
at least one market maker. Making a market involves maintaining bid and asked
quotations, being able as principal to effect transactions in reasonable
quantities at these quoted prices, subject to various securities laws, and other
regulatory requirements. Although it is under no obligation to do so, Ryan Beck
& Co. has stated that it intends to use its best efforts to make a market in our
10
common stock, so long as the volume of trading and other market-making
conditions justify such activity. We also intend to encourage other brokerage
firms to make a market in the common stock.
PRO FORMA REGULATORY CAPITAL ANALYSIS
At December 31, 2003, Monadnock Community Bank exceeded all of its
applicable regulatory capital requirements. The table sets forth the historical
regulatory capital of Monadnock Community Bank at December 31, 2003 and the pro
forma regulatory capital of Monadnock Community Bank after giving effect to the
stock offering, based upon the sale of the number of shares shown in the table.
The pro forma regulatory capital amounts reflect the receipt by Monadnock
Community Bank of the net proceeds less $500,000 retained by Monadnock Community
Bancorp, $50,000 of net proceeds contributed to Monadnock Mutual Holding
Company, and the net proceeds utilized to fund the employee stock ownership plan
and restricted stock plan. The pro forma risk-based capital amounts assume the
investment of the net proceeds received by Monadnock Community Bank in assets
which have a risk-weight equal to the average risk-weight of Monadnock Community
Bank's assets, under applicable regulations, as if such net proceeds had been
received and so applied at December 31, 2003. See "How We Are Regulated."
11
Pro Forma at December 31, 2003
--------------------------------------------------
Historical at 358,594 Shares 421,875 Shares
December 31, 2003 Sold At $8.00 Per Share Sold At $8.00 Per Share
----------------- ----------------------- -----------------------
Percent of Percent of Percent of
Amount Assets(1) Amount Assets(1) Amount Assets(1)
------ --------- ------ --------- ------ ---------
(Dollars in Thousands)
Equity capital under GAAP........ $ 2,483 5.68% $ 4,072 8.99% $ 4,538 9.92%
Tangible capital:
Actual....................... $ 2,551 5.82% $ 4,140 9.12% $ 4,606 10.04%
Requirement.................. 657 1.50 681 1.50 688 1.50
-------- ------- -------- ------- -------- --------
Excess....................... $ 1,894 4.32% $ 3,459 7.62% $ 3,918 8.54%
======== ======= ======== ======= ======== ========
Core capital
Actual....................... $ 2,551 5.82% $ 4,140 9.12% $ 4,606 10.04%
Requirement.................. 1,752 4.00 1,816 4.00 1,835 4.00
-------- -------- ------- -------- --------
Excess....................... $ 799 1.82% $ 2,324 5.12% $ 2,771 6.04%
======== ======== ======== ======== ======== =========
Risk-based capital
Actual....................... $ 2,843 12.19% $ 4,432 18.74% $ 4,898 20.63%
Requirement.................. 1,867 8.00 1,892 8.00 1,899 8.00
-------- ------- -------- ------- -------- --------
Excess....................... $ 976 4.19% $ 2,540 10.74% $ 2,999 12.63%
======== ======== ======== ======== ======== =========
Tier I to risk weighted assets
Actual....................... $ 2,551 10.93% $ 4,140 17.51% $ 4,606 19.40%
Requirement.................. 933 4.00 946 4.00 950 4.00
-------- ------- -------- -------- -------- -------
Excess....................... $ 1,618 6.93% $ 3,194 13.51% $ 3,656 15.40%
======== ======= ======= ===== ======== =======
(CONTINUED)
Pro Forma at December 31, 2003
------------------------------------------------
485,156 Shares 557,930 Shares
Sold At $8.00 Per Share Sold At $8.00 Per Share
----------------------- -----------------------
Percent of Percent of
Amount Assets(1) Amount Assets(1)
------ --------- ------ ---------
Equity capital under GAAP........ $ 5,004 10.83% $ 5,539 11.85%
Tangible capital:
Actual....................... $ 5,072 10.95% $ 5,607 11.96%
Requirement.................. 695 1.50 703 1.50
-------- -------- -------- --------
Excess....................... $ 4,377 9.45% $ 4,904 10.46%
======== ======== ======== ========
Core capital
Actual....................... $ 5,072 10.95% 5,607 11.96%
Requirement.................. 1,853 4.00 1,875 4.00
-------- -------- -------- --------
Excess....................... $ 3,219 6.95% $ 3,732 7.96%
======== ========= ======== =========
Risk-based capital
Actual....................... $ 5,364 22.50% $ 5,899 24.64%
Requirement.................. 1,907 8.00 1,915 8.00
-------- -------- -------- --------
Excess....................... $ 3,457 14.50% $ 3,984 16.64%
======== ========= ======== =========
Tier I to risk weighted assets
Actual....................... 5,072 21.28% $ 5,607 23.42%
Requirement.................. 953 4.00% 958 4.00
-------- -------- -------- --------
Excess....................... $ 4,119 17.28% $ 4,650 19.42%
======== ======= ======== ========
- ------------------
(1) Adjusted total or adjusted risk-weighted assets, as appropriate.
12
CAPITALIZATION
The following table presents the historical consolidated capitalization of Monadnock Community Bancorp at December 31, 2003,
and the pro forma consolidated capitalization of Monadnock Community Bancorp after giving effect to the stock offering, based upon
the sale of the number of shares shown below and the other assumptions set forth under "Pro Forma Data."
Monadnock Community Bancorp - Pro Forma
------------------------------------------------------------
Monadnock 557,930
Monadnock Shares(1)
Community 358,594 421,875 485,156 (Maximum
Bancorp Shares Shares Shares of Range,
Historical (Minimum (Midpoint (Maximum as
Capitalization of Range) of Range) of Range) Adjusted)
---------------- ------------ ------------ ------------ ------------
(In Thousands)
Deposits(2)........................................ $ 34,432 $ 34,432 $ 34,432 $ 34,432 $ 34,432
Borrowings......................................... 6,747 6,747 6,747 6,747 6,747
---------------- ------------ ------------ ------------ ------------
Total deposits and borrowings...................... $ 41,179 $ 41,179 $ 41,179 $ 41,179 $ 41,179
================ ============ ============ ============ ============
Stockholders' equity
Preferred stock, $0.01 par value, 2,000,000
shares authorized, none issued.................. -- -- -- -- --
Common stock, $0.01 par value, 18,000,000
shares authorized; shares to be issued as
reflected(3).................................... $ -- $ 8 $ 9 $ 11 $ 12
Additional paid-in capital................... -- 2,361 2,866 3,370 3,951
Retained earnings............................ 2,483 2,433(4) 2,433(4) 2,433(4) 2,433(4)
Less:
Common stock to be acquired by the employee
stock ownership plan(5)......................... -- (115) (135) (155) (179)
Common stock to be acquired by the restricted
stock plan(6)................................... -- (115) (135) (155) (179)
---------------- ------------ ------------ ------------ ------------
Total stockholders' equity......................... $ 2,483 $ 4,572 $ 5,038 $ 5,504 $ 6,038
================ ============ ============ ============ ============
- ------------------
(1) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the estimated
offering range of up to 15% to reflect changes in market and financial conditions following the commencement of the
offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of common stock in the stock offering. Any withdrawals
would reduce pro forma deposits by the amount of the withdrawals.
(3) Reflects the issuance of the shares of common stock to be sold in the stock offering. No effect has been given to the
issuance of additional shares of common stock pursuant to the proposed stock option plan. The plan of mutual holding company
reorganization and stock issuance permits Monadnock Community Bancorp to adopt one or more benefit plans, in an amount up to
25% of the number of shares of common stock held by persons other than Monadnock Mutual Holding Company. The Restricted
Stock Plan will not be implemented for at least six months after the Reorganization and until approved by stockholders. See
"Pro Forma Data" and "Management - Benefits - Stock Benefit Plans."
(4) Amount reflects $50,000 contributed by Monadnock Community Bancorp to Monadnock Mutual Holding Company.
(5) Assumes that 4.0% of the common stock sold in the stock offering will be purchased by the employee stock ownership plan,
which is reflected as a reduction from stockholders' equity. The employee stock ownership plan shares will be purchased with
funds loaned to the employee stock ownership plan by Monadnock Community Bancorp. See "Pro Forma Data" and "Management -
Benefits - Employee Stock Ownership Plan."
(6) Monadnock Community Bancorp intends to adopt a restricted stock plan and to submit such plan to stockholders at an annual or
special meeting of stockholders held at least six months following the completion of the stock offering. If the plan is
approved by stockholders, Monadnock Community Bancorp intends to contribute sufficient funds to the restricted stock plan to
enable the plan to purchase a number of shares of common stock equal to 4.0% of the common stock sold in the stock offering.
Assumes that stockholder approval has been obtained and that the shares have been purchased in the open market at the
purchase price. However, in the event Monadnock Community Bancorp issues authorized but unissued shares of common stock to
the restricted stock plan in the amount of 4.0% of the common stock sold in the stock offering, the voting interests of
existing stockholders would be diluted by approximately 1.77%. The shares are reflected as a compensation expense resulting
in a reduction of stockholders' equity. See "Pro Forma Data" and "Management - Benefits - Stock Benefit Plans."
13
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the stock offering is completed. However, net proceeds are
currently estimated to be between $2.4 million and $3.4 million, or $4.0 million
in the event the estimated offering range is increased by 15%, based upon the
following assumptions:
o all shares of common stock will be sold in the subscription
offering;
o Ryan Beck will receive a marketing fee of $125,000 upon
completion of the stock offering;
o total expenses, including the marketing fees paid to Ryan Beck,
are estimated to be approximately $500,000. Actual expenses may
vary from those estimated.
Pro forma consolidated net income and stockholders' equity of Monadnock
Community Bancorp have been calculated for the year ended December 31, 2003, as
if the common stock to be sold in the stock offering had been sold at the
beginning of the periods and the net proceeds had been invested at 1.26%, which
represents the yield on one-year U.S. Government securities at December 31,
2003. The effect of withdrawals from deposit accounts for the purchase of common
stock has not been reflected. A tax rate of 40.0% has been assumed for the
periods, resulting in an after-tax yield of 0.76%. Historical and pro forma per
share amounts have been calculated by dividing historical and pro forma amounts
by the indicated number of shares of common stock, as adjusted to give effect to
the employee stock ownership plan. See Note 3 to the tables below. No effect has
been given in the pro forma stockholders' equity calculations for the assumed
earnings on the net proceeds. Monadnock Community Bancorp intends to retain up
to $500,000 of the net proceeds from the stock offering and to make a loan to
fund the purchase of 4.0% of the common stock by the employee stock ownership
plan. See "How We Intend to Use the Proceeds."
No effect has been given in the tables to the issuance of additional
shares of common stock pursuant to the proposed stock option plan. The table
below gives effect to the restricted stock plan, which is expected to be adopted
by Monadnock Community Bancorp following the stock offering and presented along
with the stock option plan to stockholders for approval at an annual or special
meeting of stockholders to be held at least six months following the completion
of the stock offering. If the restricted stock plan is approved by stockholders,
the restricted stock plan intends to acquire an amount of common stock equal to
4.0% of the shares of common stock sold in the stock offering, either through
open market purchases or from authorized but unissued shares of common stock, if
permissible. The table below assumes that stockholder approval has been
obtained, as to which there can be no assurance, and that the shares acquired by
the restricted stock plan are purchased in the open market at $8.00 per share.
We assume that shares of common stock are granted under the plan in awards that
vest over a five year period. The plan of mutual holding company reorganization
and stock issuance provides that we may grant awards under one or more stock
benefit plans in an amount up to 25% of the number of shares of common stock
held by persons other than Monadnock Mutual Holding Company. We may decide to
establish a recognition and retention plan providing for the award of greater
than 4% of the shares of common stock sold. No effect has been given to
Monadnock Community
14
Bancorp's results of operations after the stock offering, the market price of
the common stock after the stock offering or a less than 4.0% purchase by the
restricted stock plan. See "Management - Benefits - Stock Benefit Plans."
The pro forma stockholders' equity is not intended to represent the fair
market value of the common stock and may be different than amounts that would be
available for distribution to stockholders in the event of liquidation.
THE FOLLOWING PRO FORMA INFORMATION MAY NOT BE REPRESENTATIVE OF THE
FINANCIAL EFFECTS OF THE FOREGOING TRANSACTIONS AT THE DATES ON WHICH SUCH
TRANSACTIONS ACTUALLY OCCUR AND SHOULD NOT BE TAKEN AS INDICATIVE OF FUTURE
RESULTS OF OPERATIONS. PRO FORMA STOCKHOLDERS' EQUITY REPRESENTS THE DIFFERENCE
BETWEEN THE STATED AMOUNT OF ASSETS AND LIABILITIES OF MONADNOCK COMMUNITY
BANCORP COMPUTED IN ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
THE UNITED STATES OF AMERICA ("GAAP").
15
At or For the Year Ended
December 31, 2003
--------------------------------------------------------------------
557,930
358,594 421,875 485,156 Shares Sold
Shares Sold Shares Sold Shares Sold at $8.00 Per
at $8.00 Per at $8.00 at $8.00 Per Share
Share Per Share Share (Maximum
(Minimum of (Midpoint (Maximum of of Range, as
Range) of Range) Range) Adjusted)(1)
---------------- ------------- -------------- -------------
(In Thousands, Except for Per Share Data)
Gross proceeds................................................ $ 2,869 $ 3,375 $ 3,881 $ 4,463
Less offering expenses and commissions........................ 500 500 500 500
---------------- ------------- -------------- -------------
Estimated net proceeds.................................... 2,369 2,875 3,381 3,963
Less:
Shares purchased by the employee stock ownership plan(3). (115) (135) (155) (179)
Shares purchased by the restricted stock plan(4)......... (115) (135) (155) (179)
---------------- ------------- -------------- -------------
Estimated proceeds available for investment(2)................ $ 2,139 $ 2,605 $ 3,071 $ 3,605
================ ============= ============== =============
Net income:
Historical.................................................. $ 27 $ 27 $ 27 $ 27
Pro forma income on net proceeds............................ 16 19 23 27
Pro forma employee stock ownership plan adjustment(3)....... (7) (8) (9) (11)
Pro forma restricted stock plan adjustment(4)................. (14) (16) (19) (21)
---------------- ------------- -------------- -------------
Pro forma net income.......................................... $ 22 $ 22 $ 22 $ 22
================ ============= ============== =============
Net income per share:
Historical.................................................. $ 0.03 $ 0.03 $ 0.03 $ 0.02
Pro forma income on net proceeds, as adjusted............... 0.02 0.02 0.02 0.02
Pro forma employee stock ownership plan adjustment(3)....... (0.01) (0.01) (0.01) (0.01)
Pro forma restricted stock plan adjustment(4)............... (0.02) (0.02) (0.02) (0.02)
---------------- ------------- -------------- -------------
Pro forma net income per share(4)(5)(6)....................... $ 0.03 $ 0.02 $ 0.02 $ 0.01
---------------- ------------- -------------- -------------
Number of shares outstanding for pro forma net
income per share calculations(5)............................ 783,966 922,312 1,060,659 1,219,759
Offering price to pro forma net income per share.............. 266.7x 400.0x 400.0x 800.0x
================ ============= ============== =============
16
At or For the Year Ended
December 31, 2003
----------------------------------------------------------------------
358,594 421,875 485,156 557,930
Shares Sold Shares Sold Shares Sold Shares Sold
at $8.00 Per at $8.00 at $8.00 Per at $8.00 Per
Share Per Share Share Share
(Minimum of (Midpoint (Maximum of (Maximum of
Range) of Range) Range) Range, as
Adjusted)(1)
---------------- ------------- -------------- ---------------
(In Thousands, Except for Per Share Data)
Stockholders' equity:
Historical......................................... $ 2,483 $ 2,483 $ 2,483 $ 2,483
Estimated net proceeds............................. 2,369 2,875 3,381 3,963
Less:
Capitalization of Monadnock Mutual Holding
Company...................................... (50) (50) (50) (50)
Common stock purchased by the employee
stock ownership plan(3)...................... (115) (135) (155) (179)
Common stock purchased by the restricted
stock plan(4)................................ (115) (135) (155) (179)
---------------- ------------- -------------- ---------------
Pro forma stockholders' equity(3)(4)................. $ 4,572 $ 5,038 $ 5,504 $ 6,038
================ ============= ============== ===============
Stockholders' equity per share:
Historical......................................... $ 3.11 $ 2.64 $ 2.30 $ 2.00
Estimated net proceeds............................. 2.97 3.06 3.14 3.19
Less:
Capitalization of Monadnock Mutual Holding
Company...................................... (0.06) (0.05) (0.05) (0.04)
Common stock purchased by the employee
stock ownership plan(3)...................... (0.14) (0.14) (0.14) (0.14)
Common stock purchased by the restricted
stock plan(4)................................ (0.14) (0.14) (0.14) (0.14)
---------------- ------------- -------------- ---------------
Pro forma stockholders' equity(4)(5)(6).............. $ 5.74 $ 5.37 $ 5.11 $ 4.87
================ ============= ============== ===============
Offering price as a percentage of pro forma
stockholders' equity(5)............................ 139.37% 148.98% 156.56% 164.27%
Number of shares outstanding for pro forma
stockholders' equity per share calculations(5)..... 796,875 937,500 1,078,125 1,239,844
- ------------------
(1) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the estimated
offering range of up to 15% to reflect changes in market and financial conditions following the commencement of the stock
offering.
(2) Estimated net proceeds, available for investment, consist of the estimated net proceeds from the stock offering minus (i)
the proceeds attributable to the purchase by the employee stock ownership plan and (ii) the value of the shares to be
purchased by the restricted stock plan, subject to stockholder approval, after the stock offering at an assumed purchase
price of $8.00 per share.
(3) It is assumed that 4.0% of the shares of common stock sold in the stock offering will be purchased by the employee stock
ownership plan with funds loaned by Monadnock Community Bancorp. Monadnock Community Bancorp and Monadnock Community Bank
intend to make annual contributions to the employee stock ownership plan in an amount at least equal to the principal and
interest requirement of the debt. The pro forma net earnings assumes (i) that the loan to the employee stock ownership plan
is payable over 10 years, with the employee stock ownership plan shares having an average fair value of $8.00 per share in
accordance with Statement of Position ("SOP") 93-6 of the American Institute of Certified Public Accountants, entitled
"Employers' Accounting for Employee Stock Ownership Plans," and (ii) the effective tax rate was 40.0% for the period. See
"Management - Benefits - Employee Stock Ownership Plan."
(4) It is assumed that the restricted stock plan will purchase, following stockholder approval of such plan, a number of shares
of common stock equal to 4.0% of the shares of common stock sold in the stock offering for issuance to directors, officers
and
17
employees. Funds used by the restricted stock plan to purchase the
shares initially will be contributed to the restricted stock plan by
Monadnock Community Bancorp. It is further assumed that the shares were
acquired by the restricted stock plan at the beginning of the period
presented in open market purchases at the purchase price and that 20% of
the amount contributed, net of taxes at 40.00%, was an amortized expense
during the year ended December 31, 2003. The issuance of authorized but
unissued shares of common stock pursuant to the restricted stock plan in
the amount of 4.0% of the common stock sold in the offering would dilute
the voting interests of existing stockholders by approximately 1.77%.
See "Management - Benefits - Stock Benefit Plans."
(5) The per share calculations are determined by adding the number of shares
sold in the stock offering and for purposes of calculating net income
per share, in accordance with SOP 93-6 subtracting 12,909 shares, 15,188
shares, 17,466 shares, and 20,085 shares, at the minimum, midpoint,
maximum and 15% above the maximum of the offering range, respectively,
representing the employee stock ownership plan shares which have not
been committed for release during the year ended December 31, 2003. See
Note 3 above. For purposes of calculating pro forma stockholders' equity
per share, it is assumed that shares outstanding total 796,875 shares at
the minimum of the estimated pro forma market value of Monadnock
Community Bank on a fully converted basis, or the estimated valuation
range, 937,500 shares at the midpoint of the range, 1,078,125 shares at
the maximum of the range and 1,239,844 shares at 15% above the maximum
of the range, respectively.
(6) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plan, which will be adopted by
Monadnock Community Bancorp following the stock offering and presented
for approval by stockholders at an annual or special meeting of
stockholders of Monadnock Community Bancorp held at least six months
following the completion of the stock offering. If the stock option plan
is approved by stockholders, it is assumed that an amount equal to 10.0%
of the common stock sold in the stock offering, or 35,859 shares at the
minimum of the estimated offering range, 42,187 shares at the midpoint
of the range, 48,515 shares at the maximum of the range and 55,793
shares at 15% above the maximum of the range, respectively, will be
reserved for future issuance upon the exercise of options to be granted
under the stock option plan. The issuance of common stock pursuant to
the exercise of options under the stock option plan will result in the
dilution of existing stockholders' voting interests by approximately
4.31%. This assumes stockholder approval of the stock option plan, that
all these options were exercised at the beginning of the period at an
exercise price of $8.00 per share and that the shares to fund the
restricted stock plan are acquired through open market purchases at the
purchase price. See "Management - Benefits - Stock Benefit Plans."
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which are based on
assumptions and describe future plans, strategies and expectations of Monadnock
Community Bancorp and Monadnock Community Bank. These forward-looking statements
are generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar words. Our ability to predict
results or the actual effect of future plans or strategies is uncertain. Factors
which could have a material adverse effect on our operations include, but are
not limited to, changes in interest rates, general economic conditions, economic
conditions in the state of New Hampshire, 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 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.
These risks and uncertainties should be considered in evaluating forward-looking
statements and you should not rely too much on these statements.
GENERAL
The following discussion is intended to assist in understanding the
financial condition and results of operations of Monadnock Community Bank. The
discussion and analysis does not include any comments relating to Monadnock
Community Bancorp since Monadnock Community Bancorp is a company in
organization. The information contained in this section should be read in
conjunction with other sections of this prospectus, including the financial
statements, beginning on page F-1 and the accompanying notes to the financial
statements, beginning on page F-1.
Our results of operations depend primarily on 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 commissions we receive on loans we
refer to a mortgage banking company, service charges on deposit accounts, ATM
fees and charges 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 costs. Our results of operations may also be
affected significantly by general and local economic and competitive conditions,
changes in market interest rates, governmental policies and actions of
regulatory authorities.
Following the completion of the stock offering we intend to adopt,
subject to stockholder approval, a restricted stock plan and a stock option
plan. The implementation of the restricted stock plan will affect our results of
operations as a component of employee compensation expense. The effect the
restricted stock plan will have on employee compensation expense will be equal
to the current market price of the shares being awarded to the employees
receiving the shares recognized as compensation expense over the vesting period
of the shares. Monadnock Community Bank may currently elect to account for stock
option awards issued to employees
19
under Accounting Principles Board Opinion ("APB") No. 25 which requires
recognition of compensation expense based on the intrinsic value of the award at
the measurement date, which is generally the date of grant. The intrinsic value
is equal to the difference between the current market price of the stock and the
exercise price of the stock option award. Since the options to be issued are
intended to have an exercise price equal to the current market price of the
stock there will be no compensation expense recognized on these awards. See "Pro
Forma Data."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In reviewing and understanding financial information for Monadnock
Community Bank, you are encouraged to read and understand the significant
accounting policies used in preparing our consolidated financial statements.
These policies are described in Note 2 to the financial statements. The
accounting and financial reporting policies of Monadnock Community Bank conform
to accounting principles generally accepted in the United States of America and
to general practices within the banking industry. Accordingly, the financial
statements require certain estimates, judgments, and assumptions, which are
believed to be reasonable, based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of income and expenses
during the periods presented. The following accounting policies comprise those
that management believes are the most critical to aid in fully understanding and
evaluating our reported financial results.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is established
through a provision for loan losses charged to expense. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. Subsequent recoveries are added to
the allowance. The allowance is an amount that management believes will cover
known and inherent losses in the loan portfolio, based on evaluations of the
collectibility of loans. The evaluations take into consideration such factors as
changes in the types and amount of loans in the loan portfolio, historical loss
experience, peer group information, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral,
estimated losses relating to specifically identified loans, and current economic
conditions.
Our methodology for analyzing the allowance for loan losses consists of
specific and general components. The specific component relates to loans that
are classified as doubtful, substandard or special mention. For such loans that
are also classified as impaired, an allowance is established when the discounted
cash flows (or collateral value or observable market price) of the impaired loan
is lower than the carrying value of that loan. The general component covers
non-classified loans and is based on historical loss experience for consumer
loans and peer group loss experience for real estate loans, adjusted for
qualitative factors.
While management uses the best information available to make loan loss
allowance evaluations, adjustments to the allowance may be necessary based on
changes in economic and other conditions or changes in accounting guidance. In
addition, the Office of Thrift Supervision, as an integral part of its
examination process, periodically reviews our allowance for loan losses. The
Office of Thrift Supervision may require the recognition of adjustments to the
allowance for loan losses based on its judgment of information available to it
at the time of its examination.
20
LOANS: Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses and deferred net loan origination fees, and increased
by premiums on purchased loans. Loan fees and certain direct loan origination
costs are deferred, and the net fee or cost is recognized as an adjustment to
interest income using the effective interest method over the remaining lives of
the associated loans. Loan premiums on purchased loans are amortized into
interest income as a yield adjustment over the estimated lives of the loan pools
using the effective interest method.
INVESTMENTS: Investments and mortgage-backed securities that Monadnock
Community Bank has both the positive intent and ability to hold to maturity are
classified as held-to-maturity and carried at cost. All mortgage-backed
securities are currently held for sale and carried at fair value. Purchase
premiums and discounts on mortgage-backed securities and collateralized mortgage
obligations are amortized and accreted to interest income using the effective
interest method, taking into consideration assumed prepayment patterns.
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 Hillsborough and Cheshire counties. We intend to continue to attract retail
deposits, with the goal of expanding the deposit base and to rely on organic
growth. This growth is anticipated to include the establishment of new branches,
although we have only one new branch under consideration in our market area.
This new branch will allow us to more effectively serve our customers located in
that area. We have signed a purchase contract for the land at a cost of
$160,000. Completion of the sale is subject to satisfaction of certain
conditions, including a satisfactory environmental analysis. If we proceed, we
anticipate the branch will open in early 2005 and we estimate that the
construction and furnishing costs will be $340,000. See "How We Intend To Use
The Proceeds." We expect that the majority of the deposits will be used to
originate residential real estate, home equity, commercial business or
commercial real estate loans. 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 Community Bank while providing cost effective services to our market
area and leveraging our infrastructure.
Financial highlights of our strategy include:
CONTINUING ASSET GROWTH AND EXPANDING MARKET PRESENCE. As a credit
union, by law, we served a specific group of customers. As a result of our 1996
conversion to a federal savings bank, our base of possible customers expanded
such that we could, for the first time, broadly target individuals and
businesses in our market area. Total assets have grown $32.8 million, or 300.9%,
from $10.9 million at April 30, 1996 to $43.7 million at December 31, 2003, as a
result of our efforts to expand and market our product lines to appeal to a wide
base of prospective customers. However, our growth has been constrained by our
relatively limited capital base. The additional capital provided through the
stock offering will support the anticipated new branch and our ongoing efforts
to attract new customers and increase business with existing customers.
CONTINUING TO BE A DIVERSIFIED LENDER. On a measured pace, since our
1996 conversion from credit union to savings bank, we have diversified our loan
products beyond offering commercial real estate loans. We are now able to better
serve the needs of our community. As a result of expanding our product lines,
one-to-four family residential loans comprised 53.27% of
21
our loan portfolio at December 31, 2003. We intend to continue to concentrate on
home and business lending, offering one-to-four family residential, commercial
business, commercial real estate, home equity, and to a lesser extent,
multi-family residential and consumer loans.
CONTINUING OUR STRONG ASSET QUALITY. The new loan product lines
mentioned above were introduced 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 conservative lending practices, we invest in high
grade securities. Our high asset quality is reflected in our ratio of
non-performing assets to total assets, which was 0.39% and 0.29% at December 31,
2003 and 2002, respectively.
MAINTAINING A STRONG CAPITAL POSITION. As a result of our conservative
risk management, we have consistently maintained capital in excess of regulatory
requirements. Our equity to total assets ratio was 6.29% at December 31, 2002.
Primarily through asset growth, it was reduced during 2003 to 5.68% at December
31, 2003. Additional capital will allow us to improve our capital ratios while
continuing our asset growth.
BUILDING CORE DEPOSITS. As a credit union, our deposits were
concentrated in regular savings accounts. Since 1997, we have been offering a
wide range of deposit accounts. We have tried to increase our core deposits,
including checking accounts, NOW accounts and savings accounts, which generally
are lower cost sources of funds than certificates of deposits and are less
sensitive to withdrawal when interest rates fluctuate. We intend to continue to
offer a broad range of deposits and to try to increase our core deposits through
the additional branch that we anticipate opening.
All of these initiatives are designed to improve our profitability.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2003 AND DECEMBER 31, 2002.
GENERAL. Our total assets increased by $2.4 million, or 5.8%, to $43.7
million at December 31, 2003 compared to $41.3 million at December 31, 2002. The
increase primarily reflected growth in our net loan portfolio of $12.1 million
to $30.7 million from $18.6 million partially offset by a decrease in investment
securities of $10.3 million to $10.1 million from $20.4 million. To fund the
increase in assets, deposits and Federal Home Loan Bank advances increased by
$2.6 million to $41.2 million from $38.6 million.
ASSETS. Our net loan portfolio increased $12.1 million, or 65.1%, from
$18.6 million at December 31, 2002 to $30.7 million at December 31, 2003. The
largest increase was in one-to-four-family residential loans, due to the
refinancing demand as borrowers sought to take advantage of lower market
interest rates. These loans increased $9.7 million, or 143.2%, to $16.5 million
from $6.8 million. In addition, the commercial real estate loan portfolio
increased $1.6 million to $8.4 million from $6.8 million. The commercial
business loan portfolio increased $1.1 million to $3.1 million from $2.0
million.
Cash and cash equivalents increased $.5 million, or 38.5%, to $1.8
million at December 31, 2003 from $1.3 million at December 31, 2002 due to
reductions in available for sale securities, growth in deposits, partially
offset by increases in total loans. Our interest-bearing deposits in other
financial institutions increased $700,000 to $1.4 million at December 31, 2003
from $700,000 at December 31, 2002. The increase was primarily due to the
investment of such deposits from the proceeds of sales of securities.
22
Our investment portfolio decreased $10.3 million to $10.1 million at
December 31, 2003 from $20.4 million at December 31, 2002. The decrease was due
to the repayment of principal on mortgage-backed securities in the amount of
$6.3 million and the sale of mortgage-backed securities in the amount of $12.1
million, partially offset by the purchasing of slightly more than $8.0 million
of new mortgage backed securities.
DEPOSITS. Our total deposits increased $2.8 million, or 8.9%, to $34.4
million at December 31, 2003 from $31.6 million at December 31, 2002 as a result
of our marketing initiatives and paying competitive interest rates.
Interest-bearing deposits increased $2.3 million, to $32.3 million from $30.0
million, and non-interest-bearing deposits increased $500,000, to $2.1 million
from $1.6 million. The additional funding was used to support loan growth.
BORROWINGS. Although Federal Home Loan Bank advances decreased $300,000
to $6.7 million at December 31, 2003 from $7.0 million at December 31, 2002, the
average balance outstanding increased $1.0 million to $8.1 for the year ended
December 31, 2003 from $7.1 million for the year ended December 31, 2002. We
used the increased borrowings for the funding of loans and as part of our
capital and interest rate risk management strategies. By paying off high rate
advances, we were able to replace them with longer term lower rate borrowings.
EQUITY. Total equity decreased by $114,000, or 4.4%, to $2.5 million at
December 31, 2003 from $2.6 million at December 31, 2002. Our equity to assets
ratio was 5.68% at December 31, 2003 compared to 6.29% at December 31, 2002. The
decrease in our equity to assets ratio was primarily a result of our asset
growth. Despite net income of $27,000 for 2003, equity decreased as a result of
unrealized decrease in the market value of available-for-sale securities of
$141,000. This adjustment to equity is net of deferred taxes.
23
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following tables sets forth certain information at December 31, 2003 and for the years ended December 31, 2003
and 2002. The average yields and costs are derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are derived primarily from month-end balances.
Management does not believe that the use of month-end balances rather than daily average balances has caused any material
differences in the information presented.
For the Year ended December 31,
-------------------------------------------
At December 31, 2003 2003
------------------------------- -------------------------------------------
Average Average Average
Ending Balance Yield/Cost Balance Interest Yield/Cost
---------------- ------------ ------------- ------------ -------------
INTEREST-EARNING ASSETS (Dollars in Thousands)
- -----------------------
Loans, net (1)(4)........................ $ 30,728 5.74% $ 24,167 $ 1,470 6.08%
Mortgage-backed Securities(2)............ 10,073 3.22% 15,909 464 2.92%
Agency Securities........................ -- 108 3 2.78%
Federal Home Loan Bank stock............. 485 2.75% 451 14 3.10%
Other interest-earning assets............ 1,481 0.71% 1,208 10 0.83%
---------------- ------------- ------------ -------------
Total interest-earning assets............ 42,767 4.94% 41,843 1,961 4.69%
Non-interest earning assets.............. 973 670
--------------- --------------
Total assets............................. $ 43,740 $ 42,513
=============== ==============
INTEREST-BEARING LIABILITIES
- ----------------------------
NOW and Money market..................... $ 15,842 0.75% $ 12,931 $ 114 0.88%
Savings deposits......................... 1,830 0.50% 1,818 10 0.55%
Certificates of deposit.................. 14,656 2.66% 15,389 442 2.87%
FHLB advances............................ 6,747 2.85% 8,148 259 3.18%
---------------- ------------- ------------ -------------
Total interest-bearing liabilities....... 39,075 1.82% 38,286 825 2.15%
------------
Non-interest bearing liabilities......... 2,182 1,697
-------------
Total liabilities........................ 41,257 39,983
Equity................................... 2,483 2,530
-------------
Total liabilities and equity............ $ 43,740 $ 42,513
=============== =============
Net interest/spread...................... 3.12% $ 1,136 2.54%
========== ==========
Margin(3)................................ 2.71%
==========
Ratio of interest-earning assets to
interest-bearing liabilities............. 109.45% 109.29%
=============== ==============
(CONTINUED)
For the Year ended December 31,
-------------------------------------------
2002
-------------------------------------------
Average Average
Balance Interest Yield/Cos
------------- ------------ -------------
INTEREST-EARNING ASSETS
- -----------------------
Loans, net (1)(4)........................ $ 17,769 $ 1,308 7.37%
Mortgage-backed Securities(2)............ 20,784 906 4.36%
Agency Securities........................ 382 17 4.45%
Federal Home Loan Bank stock............. 393 15 3.82%
Other interest-earning assets............ 1,166 18 1.54%
------------- ------------ -------------
Total interest-earning assets............ 40,494 2,264 5.59%
Non-interest earning assets.............. 683
-----------
Total assets............................. $ 41,117
===========
INTEREST-BEARING LIABILITIES
- ----------------------------
NOW and Money market..................... $ 12,025 $ 196 1.63%
Savings deposits......................... 1,592 15 0.94%
Certificates of deposit.................. 16,676 594 3.56%
FHLB advances............................ 7,132 292 4.09%
------------- ------------ -------------
Total interest-bearing liabilities....... 37,425 1,097 2.93%
------------
Non-interest bearing liabilities......... 1,241
-------------
Total liabilities........................ 38,666
Equity................................... 2,511
-------------
Total liabilities and equity............ $ 41,177
=============
Net interest/spread...................... $1,167 2.66%
============ =============
Margin(3)................................ 2.88%
=============
Ratio of interest-earning assets to
interest-bearing liabilities............. 108.20%
=============
- -------------------------------------
(1) Calculated net of deferred fees and loss reserves and includes non-performing loans.
(2) Calculated based on amortized cost.
(3) Net interest income divided by interest-earning assets
24
RATE/VOLUME ANALYSIS
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and interest-bearing
liabilities. For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in volume, which are changes
in volume multiplied by the old rate; (2) changes in rate, which are changes in rate
multiplied by the old volume; and (3) changes in rate/volume, which are the changes in rate
times the changes in volume.
For the Year Ended
December 31, 2003 vs. 2002
Increase (Decrease)
Due to
---------------------------------------------
Rate/
Volume Rate Volume Net
---------------------------------------------
(In Thousands)
INTEREST-EARNING ASSETS
-----------------------
Loans, net(1)....................... $ 472 $(299) $ (82) $ 161
Mortgage-backed Securities.......... (213) (300) 70 (442)
Agency Securities................... (12) (5) 4 (13)
Federal Home Loan Bank stock........ 2 (3) 0 (1)
Other interest-earning assets....... 0 (8) 0 (8)
-------- --------- --------- -----------
Total interest-earning assets....... $ 249 $(544) $ (8) $(303)
======== ========= ========= ===========
INTEREST-BEARING LIABILITIES
----------------------------
NOW and Money market accounts....... $ 15 $ (90) $ (7) $ (82)
Savings deposits.................... 2 (6) (1) (5)
Certificates of deposit............. (46) (115) 9 (152)
FHLB advances....................... 42 (66) (9) (33)
-------- --------- --------- -----------
Total interest-bearing liabilities.. $ 13 $(278) $ (8) $(272)
======== ========= ========= ===========
Net interest/spread................. $236 $(267) $ -- $ (31)
======== ========= ========= ===========
- -------------------------------------
(1) Total loans are not net of deferred fees and costs.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND
2002.
GENERAL. We recorded net income of $27,000 for the year ended December 31, 2003 and
$63,000 for the year ended December 31, 2002. We would not have been profitable in these
periods without certain types of earnings, such as gains on sale of loans and investments
and a benefit (instead of a provision) for loan losses. These types of earnings may not
recur or, if recurring, will likely be modest.
NET INTEREST INCOME. Net interest income decreased $31,000, or 2.67%, to $1.14
million for the year ended December 31, 2003 compared to $1.17 million for the year ended
December 31, 2002, reflecting a $300,000, or 13.4%, decrease in interest income, offset by
a $272,000, or 24.8%, decrease in interest expense. Our interest rate spread decreased to
2.5% for the year ended December 31, 2003 compared to 2.7% for the year ended December 31,
2002, reflecting a significant change in asset mix due to increased funding of fixed-rate
residential real estate loans and reduced yields on adjustable rate mortgage-backed
securities, partially offset by lower levels of rates paid on deposits. In addition, the
ratio of average interest-earning assets to average interest-bearing liabilities increased
to 109.3% for year ended December 31, 2003 compared to 108.2% for year ended December 31,
2002.
25
INTEREST INCOME. Total interest income decreased by $300,000, or 13.4%,
to $2.0 million for the year ended December 31, 2003 from $2.3 million for the
year ended December 31, 2002. The decrease was primarily the result of lower
market rates that allowed the refinancing of loans to lower fixed rates and the
adjusting down of rates on adjustable rate loans and mortgage-backed securities
during the year. Our average loan portfolio balance grew by $6.4 million to
$24.2 million for the year ended December 31, 2003 from $17.8 million for the
year ended December 31, 2002. Interest earned on total loans for the year ended
December 31, 2003 was $1.5 million compared to $1.3 million for the year ended
December 31, 2002. The average yield on total loans decreased to 6.1% for the
year ended December 31, 2003 as compared to 7.4% for the year ended December 31,
2002, primarily due to a general decrease in the market rates of interest.
Interest income on investment securities, Federal Home Loan Bank stock
and interest-bearing deposits with other financial institutions decreased
$464,000, or 48.6%, for the year ended December 31, 2003 to $491,000 from
$955,000 for the year ended December 31, 2002. The change was a result of a
decrease in the average balance of the portfolio of $5.1 million to $17.7
million for the year ended December 31, 2003 from $22.7 million for the year
ended December 31, 2002, combined with a decrease in the overall average yield
on total investments from 2.8% for the year ended December 31, 2003 as compared
to 4.2% for the year ended December 31, 2002. During 2003, we sold high yielding
mortgage-backed securities at gains, to fund loans and to avoid expected
prepayments on the securities resulting from the lower interest rate
environment.
INTEREST EXPENSE. The decrease in interest expense of $272,000 for the
year ended December 31, 2003 was primarily due to the lower interest rates.
Average Federal Home Loan Bank advances increased by $1.0 million to $8.1
million for the year ended December 31, 2003 from $7.1 million for the year
ended December 31, 2002. Although average Federal Home Loan Bank advances
increased, the lower rates resulted in reduced interest costs of $33,000 as
interest expense on Federal Home Loan Bank advances was $259,000 for the year
ended December 31, 2003 compared to $292,000 the previous year. Overall, the
average outstanding balance of deposits remained relatively constant, however,
average certificate of deposit balances decreased by $1.3 million to $15.4
million for the year ended December 31, 2003 from $16.7 million for the year
ended December 31, 2002. The average yield on interest bearing liabilities
decreased from 2.9% at December 31, 2002 to 2.2% at December 31, 2003, due
primarily to the lower market rates of interest on the new fundings. Additional
borrowings and increases in interest bearing liabilities were used to fund the
growth in loans in order to implement our leverage strategy to increase
interest-earning assets.
BENEFIT FOR LOAN LOSSES. There was a benefit for loan losses (rather
than a provision) of $50,000 for the year ended December 31, 2003. In part, this
was a result of the payoff of some loans for which reserves had been
established. There was no benefit or provision for loan losses in 2002. The
allowance for loan losses as a percent of total loans was 1.03% at December 31,
2003 as compared to 1.95% at December 31, 2002. We believe that our allowance
for loan losses is adequate to cover specifically identifiable loan losses as
well as estimated losses inherent in the portfolio for which the losses are
probable but not specifically identifiable. See "Business of Monadnock Community
Bank - Asset Quality-Allowance for Loan Losses."
OTHER INCOME. Other income amounted to $222,000 for the year ended
December 31, 2003, compared to $219,000 for the year ended December 31, 2002.
During 2003, gain on the sale of loans was $27,300, while there was no gain or
loss in 2002. Service charges on deposits increased by $15,300 in 2003 compared
to 2002. Fees paid to us by a mortgage banking company to whom we referred loans
for closing, but did not accept for our portfolio were
26
recorded as loan commission; and totaled $56,160 in 2002 and $74,165 in fiscal
2002. Net gain on the sale of available-for-sale securities decreased by $16,600
in fiscal 2003 to $51,292 compared to $67,875 in fiscal 2002. These securities
were sold partly to fund originations of new loans and to avoid increased
pre-payments due to the declining interest rate environment. Fees received and
paid on loans that are closed by the mortgage banking company and placed in our
portfolio are deferred and amortized as an adjustment of yield.
OTHER EXPENSES. Other expenses increased $50,000, or 3.77%, to $1.38
million for the year ended December 31, 2003 compared to $1.33 million for the
year ended December 31, 2002. The increase during 2003 was primarily due to
prepayment penalties on Federal Home Loan Bank advances totaling $33,000,
increased equipment expense of $23,000 as upgrades were made to the our local
area network and increases in salaries and benefits of $12,000. These increases
were partly offset by a decrease in professional fees of $20,000.
Salaries and employee benefits represented 52.74% and 53.90% of total
non-interest expense for the years ended December 31, 2003 and 2002,
respectively. Total salaries and employee benefits increased $12,000, or 1.7%,
to $726,000 for the year ended December 31, 2003 from $714,000 for the same
period in 2002. The increase is primarily due to normal salary increases,
bonuses, and vacation accruals.
Federal income tax expense for 2003 was $5,000. In 2002, we recognized a
tax benefit of $2,500 reflecting a loss carryover benefit. The loss carryover
benefit is applicable only on earned income, and, since the benefit for loan
losses of $50,000 in 2003 is not earned income, the loss carryover could not be
used in 2003.
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
OUR RISK WHEN INTEREST RATES CHANGE. The rates of interest we earn on
assets and pay on liabilities generally are established contractually for a
period of time. Market interest rates change over time. Our loans generally have
longer maturities than our deposits. Accordingly, our results of operations,
like those of other financial institutions, are impacted by changes in interest
rates and the interest rate sensitivity of our assets and liabilities. The risk
associated with changes in interest rates and our ability to adapt to these
changes is known as interest rate risk and is our most significant market risk.
HOW WE MEASURE OUR RISK OF INTEREST RATE CHANGES. As part of our attempt
to manage our exposure to changes in interest rates and comply with applicable
regulations, we monitor our interest rate risk. In monitoring interest rate risk
we continually analyze and manage assets and liabilities based on their payment
streams and interest rates, the timing of their maturities, and their
sensitivity to actual or potential changes in market interest rates.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on our results of operations, we have
adopted investment/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 Monadnock Community 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
27
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 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 pursuant to net present value of portfolio equity
analysis and income simulations. The asset/liability 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 Originating and purchasing adjustable rate loans,
o Originating a reasonable volume of fixed rate mortgages,
o Managing our deposits to establish stable deposit relationships,
o Using Federal Home Loan Bank advances and pricing on fixed-term
non-core deposits to align maturities and repricing terms, and
o Limiting the percentage of fixed-rate loans in our portfolio by
only holding shorter term fixed rate assets such as residential
mortgage loans with a 20 year maturity.
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. In the future, we intend to continue our existing strategy of
originating fixed rate mortgage loans with a term of less than 15 years.
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 Monadnock Community Bank.
The Office of Thrift Supervision provides us with the information
presented in the following table, which is based on information provided to the
Office of Thrift Supervision by Monadnock Community Bank. It presents the change
in Monadnock Community Bank's net portfolio value at December 31, 2003 (the
latest data available), that would occur upon an immediate change in interest
rates based on Office of Thrift Supervision assumptions, but without giving
effect to any steps that management might take to counteract that change.
The following table illustrates the change in net interest income at
December 31, 2003 that would occur in the event of an immediate change in
interest rates, with no effect given to any steps that management might take to
counter the effect of that interest movement.
28
December 31, 2003
- -----------------------------------------------------------------------------------------------------------------
Change in
Interest Rates in
Basis Points ("bp") Net Portfolio Value as % of PV of Assets
(Rate Shock -------------------------------------------------- ------------------------------
in Rates) $ Amount $ Change % Change NPV Ratio $ Change
- ------------------------ -------------------------------------------------------------------------------------
(Dollars in Thousands)
+300 bp 2,448 -719 -23% 5.69% -139bp
+200 bp 2,797 -369 -12% 6.40% -68bp
+100 bp 3,043 -124 -4% 6.88% -21bp
0 bp 3,167 -- -- 7.08% --
-100 bp 3,216 49 +2% 7.13% +5bp
The Office of Thrift Supervision uses certain assumptions in assessing
the interest rate risk of savings associations. These assumptions relate to
interest rates, loan prepayment rates, deposit decay rates, and the market
values of certain assets under differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, shortcomings are
inherent in the method of analysis presented in the foregoing tables. For
example, although assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in the market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgage loans, have
features that restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, if interest rates change, expected rates of
prepayments on loans and early withdrawals from certificates of deposit could
deviate significantly from those assumed in calculating the table.
LIQUIDITY AND COMMITMENTS
Prior to the passage of the Financial Regulatory Relief and Economic
Efficiency Act of 2000 in December 2000, we were required to maintain minimum
levels of investments that qualify as liquid assets under Office of Thrift
Supervision regulations. Liquidity may increase or decrease depending upon the
availability of funds and comparative yields on investments in relation to the
return on loans. Historically, we have maintained liquid assets at levels above
the minimum requirements imposed by Office of Thrift Supervision regulations and
above levels believed to be adequate to meet the requirements of normal
operations, including potential deposit outflows. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is maintained.
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 Federal Home
Loan Bank advances to
29
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 as described in greater detail under
"Business of Monadnock Community Bank - Lending Activities." 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 December 31, 2003, the total
approved loan commitments unfunded amounted to $3.2 million, which includes the
unadvanced portion of loans of $2.6 million. Certificates of deposits and
advances from the Federal Home Loan Bank of Boston scheduled to mature in one
year or less at December 31, 2003, totaled $9.4 million and $500,000,
respectively. Based on historical experience, we believe that a significant
portion of maturing deposits will remain with Monadnock Community Bank. We
anticipate that we will continue to have sufficient funds, through deposits and
borrowings, to meet our current commitments.
At December 31, 2003, we had available additional advances from the
Federal Home Loan Bank of Boston in the amount of $6.2 million.
CAPITAL
Consistent with our goal to operate a sound and profitable financial
organization, we actively seek to maintain a "well capitalized" institution in
accordance with regulatory standards. Total stockholders' equity was $2.5
million at December 31, 2003, or 5.68%, of total assets on that date. As of
December 31, 2003, we exceeded all regulatory capital requirements. Our
regulatory capital ratios at December 31, 2003 were as follows: core capital
5.82%; Tier I risk-based capital 10.93%; and total risk-based capital 12.19%.
The regulatory capital requirements to be considered well capitalized are 5%, 6%
and 10%, respectively. See "How We Are Regulated - Regulatory Capital
Requirements."
IMPACT OF INFLATION
The financial statements presented herein have been prepared in
accordance with GAAP. These principles require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services, since such prices are affected by inflation. In a period
of rapidly rising interest rates, the liquidity and maturity structure of our
assets and liabilities are critical to the maintenance of acceptable performance
levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of non-interest expense. Such expense items as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that we have made. We are unable to determine the extent, if any,
to which properties securing our loans have appreciated in dollar value due to
inflation.
30
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. SFAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. This Statement did not have a
material impact on our financial statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain
Financial Institutions" ("SFAS No. 147"), an Amendment of SFAS Nos. 72 and 144
and FASB Interpretation No. 9. SFAS No. 72 "Accounting for Certain Acquisitions
of Banking or Thrift Institutions" and FASB Interpretation No. 9 "Applying APB
Opinions No. 16 and 17 When a Savings and Loan Association or a Similar
Institution Is Acquired in a Business Combination Accounted for by the Purchase
Method" provided interpretive guidance on the application of the purchase method
to acquisitions of financial institutions. Except for transactions between two
or more mutual enterprises, SFAS No. 147 removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with SFAS No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." Thus, the requirement in paragraph 5 of Statement 72 to recognize (and
subsequently amortize) any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset no longer applies to acquisitions within the
scope of SFAS No. 147. In addition, SFAS No. 147 amends SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" to include in its scope
long-term customer-relationship intangible assets of financial institutions such
as depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS No. 144 requires for other long-lived assets
that are held and used.
Paragraph 5 of SFAS No. 147, which relates to the application of the
purchase method of accounting, was effective for acquisitions for which the date
of acquisition is on or after October 1, 2002. The provisions in paragraph 6
related to accounting for the impairment or disposal of certain long-term
customer-relationship intangible assets were effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
in paragraphs 8-14 were effective on October 1, 2002, with earlier application
permitted. There was no impact on our financial statements on adoption of this
Statement.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on
the disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. FIN 45 clarifies that a guarantor is required to disclose
(a) the nature of the guarantee; (b) the maximum potential amount of future
payments under the guarantee; (c) the carrying amount of the liability; (d) the
nature and extent of any recourse provisions or available collateral that would
enable the guarantor to recover the amounts paid under the guarantee.
The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in FIN 45 are effective for
financial statements of interim or annual periods ending
31
after December 15, 2002. We adopted the initial recognition and initial
measurement provisions of FIN 45 effective as of January 1, 2003 and adopted the
disclosure requirements effective as of December 31, 2002. The adoption of this
interpretation did not have a material effect on our financial position or
results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement (a) clarifies
under what circumstances a contract with an initial net investment meets the
characteristic of a derivative, (b) clarifies when a derivative contains a
financing component, (c) amends the definition of an underlying derivative to
conform to language used in FASB Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," and (d) amends certain other existing pronouncements.
The provisions of SFAS No. 149 are effective for contracts entered into or
modified after June 30, 2003. There was no substantial impact on our financial
statements on adoption of this Statement.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). This Statement establishes standards for the classification
and measurement of certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that certain financial instruments
that were previously classified as equity must be classified as a liability.
Most of the guidance in SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. This
Statement did not have any material effect on our financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), in an effort to expand upon and
strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. In December 2003, the FASB revised Interpretation No. 46, also
referred to as Interpretation 46 (R) ("FIN 46(R)"). The objective of this
interpretation is not to restrict the use of variable interest entities but to
improve financial reporting by companies involved with variable interest
entities. Until now, one company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. This interpretation changes that, by requiring a variable
interest entity to be consolidated by a company only if that company is subject
to a majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both. We
are required to apply FIN 46, as revised, to all entities subject to it no later
than the beginning of the first fiscal year or interim period beginning after
December 15, 2004. The adoption of this interpretation is not expected to have a
material effect on our financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits - an
amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132 (revised
2003)"). This Statement revises employers' disclosures about pension plans and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans required by SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No.
32
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
This Statement retains the disclosure requirements contained in SFAS No. 132,
"Employers' Disclosures About Pensions and Other Postretirement Benefits," which
it replaces. It requires additional disclosures to those in the original
Statement 132 about assets, obligations, cash flows and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. This Statement is effective for financial statements with fiscal years
ending after December 15, 2003 and interim periods beginning after December 15,
2003. Adoption of this Statement did not have a material impact on our financial
statements.
BUSINESS OF MONADNOCK MUTUAL HOLDING COMPANY
Monadnock Mutual Holding Company will be a federally-chartered mutual
holding company formed in connection with the mutual holding company
reorganization of Monadnock Community Bank. Following completion of the
reorganization, it will be a mutual holding company registered with the Office
of Thrift Supervision. Monadnock Mutual Holding Company's executive offices will
be located at One Jaffrey Road, Peterborough, New Hampshire and its telephone
number will be 603-924-9654.
Following completion of the reorganization, Monadnock Mutual Holding
Company's principal assets will be a majority of the outstanding common stock of
Monadnock Community Bancorp and $50,000 in cash it received from Monadnock
Community Bancorp as its initial capitalization. At the present time, we expect
that Monadnock Mutual Holding Company will not engage in any business activity
other than its investment in a majority of the common stock of Monadnock
Community Bancorp. Federal law and regulations require that as long as Monadnock
Mutual Holding Company is in existence, it must own a majority of Monadnock
Community Bancorp's common stock. Following completion of the reorganization and
the stock offering, Monadnock Mutual Holding Company will own 55.0% of Monadnock
Community Bancorp's outstanding common stock. Federal law, regulation, and the
plan of mutual holding company reorganization and stock issuance permit
Monadnock Mutual Holding Company to convert to the stock form of organization.
For additional information regarding a stock conversion of Monadnock Mutual
Holding Company, see "How We are Regulated - Monadnock Community Bancorp -
Conversion of Monadnock Mutual Holding Company to Stock Form."
BUSINESS OF MONADNOCK COMMUNITY BANCORP
Monadnock Community Bancorp will be a federally-chartered stock
corporation formed as part of the mutual holding company reorganization of
Monadnock Community Bank. Following completion of the reorganization it will be
a savings bank holding company registered with the Office of Thrift Supervision.
Monadnock Community Bancorp's executive offices will be located at One Jaffrey
Road, Peterborough, New Hampshire and its telephone number is 603-924-9654.
Initially following the completion of the stock offering, Monadnock
Community Bancorp will not be an operating company and will have no significant
assets other than 100% of the outstanding common stock of Monadnock Community
Bank, $500,000 of the net proceeds it retains from the stock offering, part of
which will be used to make a loan to the Monadnock Community Bancorp Employee
Stock Ownership Plan and will have no significant liabilities. See "How We
Intend to Use the Proceeds." Monadnock Community Bancorp intends to utilize the
support staff and offices of Monadnock Community Bank and will pay Monadnock
Community Bank for these services. If Monadnock Community Bancorp expands or
changes its business in the future, it may hire its own employees.
33
Monadnock Community Bancorp will invest the proceeds of the offering as
discussed under "How We Intend to Use the Proceeds." In the future, it may
pursue other business activities, including mergers and acquisitions, investment
alternatives and diversification of operations. There are, however, no current
understandings or agreements for these activities.
BUSINESS OF MONADNOCK COMMUNITY BANK
GENERAL
Monadnock Community Bank was originally established in 1971 as the Awane
Credit Union to serve the automobile after market parts dealers of the
Automobile Wholesalers Association of New England and the employees of such
businesses. At the time of its conversion from a New Hampshire credit union to a
federal mutual savings bank our field of membership consisted of this group.
However, as a credit union, we were legally restricted to serve only individuals
who shared a "common bond" such as a common employer.
After receiving the necessary regulatory and membership approvals in May
1996, the credit union converted to a federal mutual savings bank which serves
the general public.
Our principal business consists of attracting retail deposits from the
general public and investing those funds primarily in permanent one- to
four-family residential mortgage loans We also originate commercial real estate
loans and commercial business loans and to a lesser extent we originate home
equity loans, multi-family loans and automobile and other consumer loans. We
obtain loans through our staff, as well as through advertising in various
publications and our relationship with a mortgage banking company.
Our revenues are derived principally from interest on loans and
mortgage-backed and other securities. We also generate revenue from service
charges, sales of loans and investments and other income.
We offer a variety of deposit accounts having a wide range of interest
rates and terms, which generally include savings accounts, money market
accounts, demand deposit accounts and certificate of deposit accounts with
varied terms ranging from 90 days to seven years. We solicit deposits in our
primary market area of western Hillsborough and eastern Cheshire Counties.
MARKET AREA
We intend to continue to be a community oriented financial institution
offering a variety of financial services to primarily meet the needs of the
western Hillsborough and eastern Cheshire Counties we serve. We currently hold
less than a 1.0% deposit share in these counties. We also have less than a 1.0%
share of the loan market in these counties. Our market area is predominately
rural in nature. The employer base is varied with manufacturing, educational and
service companies. Population growth has been slightly positive over the past
few years.
LENDING ACTIVITIES
GENERAL. We originate one- to four-family residential loans. We also
originate commercial real estate loans and commercial business loans and to a
lesser extent home equity loans, multi-family residential loans and consumer
loans, primarily automobile loans. At December 31, 2003, our net loan portfolio
totaled $30.7 million, which constituted 70.3% of our total assets.
34
At December 31, 2003, the maximum amount which we could have loaned to
any one borrower and the borrower's related entities under applicable
regulations was generally $500,000. The Bank also utilizes credit enhancements
provided by the U.S. Small Business Administration, the U.S.D.A. and others
which guarantee a major portion of specific loans. Our five largest lending
relationships at December 31, 2003 were as follows: (1) a $ 991,000 loan to
finance the operations and expansion of a golf course of which $590,000 is
guaranteed by the Small Business Administration, (2) a $478,000 loan to finance
the purchase of land and construction of a church, (3) a $474,000 loan secured
by cash for working capital for a recreational automobile dealer (4) a $445,000
loan to finance the purchase and renovation of a restaurant and inn, and (5) a
$444,000 loan to a private school to refinance existing debt and to provide
working capital.
The following table presents information concerning the composition of
Monadnock Community Bank's loan portfolio in dollar amounts and in percentages
as of the dates indicated.
AT DECEMBER 31,
----------------------------------------------------------------
2003 2002
------------------------------ ------------------------------
AMOUNT PERCENT AMOUNT PERCENT
-------------- -------------- -------------- --------------
(Dollars in Thousands)
Real Estate
- -----------
One- to four-family............... $ 16,458 53.27% $ 6,766 35.71%
Home equity....................... 2,025 6.55% 2,166 11.43%
Commercial........................ 8,352 27.04% 7,112 37.53%
Multi-family...................... 543 1.76% 447 2.36%
-------------- -------------- -------------- --------------
Total real estate loans...... 27,378 88.62% 16,491 87.03%
Other Loans
- -----------
Commercial business............... 3,116 10.09% 1,997 10.54%
Consumer.......................... 399 1.29% 461 2.43%
-------------- -------------- -------------- --------------
Total other loans............ 3,515 11.38% 2,458 12.97%
-------------- -------------- -------------- --------------
Total loans.................. 30,893 100.00% 18,949 100.00%
============== ==============
Less:
Net deferred loan origination
costs........................ 155 23
Premiums on purchased loans.... -- --
Allowance for loan losses...... (320) (370)
-------------- --------------
Total loans, net............. $ 30,728 $ 18,602
============== ==============
35
The following table shows the composition of Monadnock Community Bank's
loan portfolio by fixed- and adjustable-rate at the dates indicated.
AT DECEMBER 31,
----------------------------------------------------------------
2003 2002
------------------------------ ------------------------------
AMOUNT PERCENT AMOUNT PERCENT
-------------- -------------- -------------- --------------
(Dollars in Thousands)
FIXED-RATE LOANS
Real Estate
- -----------
One- to four-family............... $ 9,777 31.65% $ 2,000 10.55%
Commercial........................ 242 0.78% 240 1.27%
-------------- -------------- -------------- --------------
Total real estate loans...... 10,019 32.43% 2,240 11.82%
OTHER LOANS
Commercial non-mortgage........... 1,009 3.27% 749 3.95%
Consumer 399 1.29% 461 2.44%
-------------- -------------- -------------- --------------
Total other loans............ 1,408 4.56% 1,210 6.39%
-------------- -------------- -------------- --------------
Total fixed-rate loans....... 11,427 36.99% 3,450 18.21%
-------------- -------------- -------------- --------------
ADJUSTABLE-RATE LOANS
Real Estate
- -----------
One- to four-family............... 6,681 21.63% 4,766 25.15%
Home equity....................... 2,025 6.55% 2,166 11.43%
Commercial........................ 8,110 26.25% 6,872 36.26%
Multi-family...................... 543 1.76% 447 2.36%
-------------- -------------- -------------- --------------
Total real estate loans...... 17,359 56.19% 14,251 75.20%
Other Loans
- -----------
Commercial business............... 2,107 6.82% 1,248 6.59%
Consumer.......................... -- -- -- --
-------------- -------------- -------------- --------------
Total other loans............ 2,107 6.82% 1,248 6.59%
-------------- -------------- -------------- --------------
Total adjustable loans....... 19,466 63.01 15,499 81.79%
-------------- -------------- -------------- --------------
Total loans.................. 30,893 100.00% 18,949 100.00%
-------------- ============== -------------- ==============
Less:
Net deferred loan origination
costs......................... 155 23
Premiums on purchased loans.... -- --
Allowance for loan losses...... (320) (370)
-------------- --------------
Total loans, net............. $ 30,728 $ 18,602
============== ==============
36
LOAN MATURITY AND YIELDS. The following table sets forth certain
information at December 31, 2003 regarding the dollar amount of loans maturing
in Monadnock Community Bank's portfolio based on their contractual terms to
maturity, but does not include scheduled payments or potential prepayments.
Demand loans, loans having no stated schedule of repayments and no stated
maturity are reported as due in one year or less. Loan balances do not include
undisbursed loan proceeds, unearned discounts, unearned income and allowance for
loan losses.
Real Estate
---------------------------------------------------------------------------------
One- to Four-Family Commercial Multi-Family Home Equity
------------------- ------------------ ------------------ ------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
- ---------------------------
Due
- ---------------------------
Within 1 year ............. $ 161 6.07% $ 36 8.10% $ -- --% $ -- --%
After 1 Year Through 3
Years.................... 36 7.57 220 5.36 -- -- -- --
After 3 Years through 5
Years.................... 136 6.99 105 6.10 -- -- -- --
After 5 Years through 10
Years.................... 3,247 5.28 1,030 6.72 -- -- 2,025 5.80
After 10 Years through 15
Years.................... 6,662 5.06 1,639 6.26 146 8.25 -- --
Over 15 Years.............. 6,216 5.28 5,322 6.52 397 5.64 -- --
-------- ------- -------- ------- -------- ------- -------- -------
Total...................... $ 16,458 5.22% $ 8,352 6.46% $ 543 6.34% $ 2,025 5.80%
======== ======= ======== ======= ======== ======= ======== =======
(CONTINUED)
Consumer Commercial Business Total
------------------ -------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- -------- -------- ---------- -------- --------
(Dollars in Thousands)
- ---------------------------
Due
- ---------------------------
Within 1 year ............. $ 45 7.20% $ 666 5.68% $ 908 5.92%
After 1 Year Through 3
Years.................... 228 6.37 516 6.43 1,000 6.19
After 3 Years through 5
Years.................... 126 6.54 1,006 6.06 1,373 6.20
After 5 Years through 10
Years.................... -- -- 928 6.57 7,230 5.80
After 10 Years through 15
Years.................... -- -- -- -- 8,447 5.35
Over 15 Years.............. -- -- -- -- 11,935 5.84
-------- ------- ------- ------- -------- -------
Total...................... $ 399 6.52% $ 3,116 6.19% $ 30,893 5.73%
======== ======= ======= ======= ======== =======
37
LOAN REPRICING. The following schedule illustrates the interest rate
sensitivity of Monadnock Community Bank's loan portfolio at December 31, 2003.
Loans which have adjustable or renegotiable interest rates are shown as maturing
in the period during which the loan reprices. The schedule does not include
scheduled payments or potential prepayments.
Real Estate
-------------------------------------------------------------------------
One- to Four- Multi- Home
Due Family Commercial Family Equity
- -------------------------------------------- -------------------------------------------------------------------------
(In Thousands)
Within 1 year(1)........................ $ 2,412 $3,691 $288 $2,025
After 1 Year through 3 Years............ 1,156 2,732 -- --
After 3 Years through 5 Years........... 2,822 1,687 255 --
After 5 Years through 10 Years.......... 2,946 242 -- --
After 10 Years through 15 Years......... 6,780 -- -- --
Over 15 years........................... 342 -- -- --
---------------- ------------------ -------------- ------------
Total................................... $16,458 $8,352 $543 $2,025
================ ================== ============== ============
(Continued)
Commer-cial
Due Business Consumer Total
- -------------------------------------------- ---------------------------------------------------
Within 1 year(1)........................ $1,890 $46 $10,352
After 1 Year through 3 Years............ 368 227 4,483
After 3 Years through 5 Years........... 858 126 5,748
After 5 Years through 10 Years.......... -- -- 3,188
After 10 Years through 15 Years......... -- -- 6,780
Over 15 years........................... -- -- 342
-------------- ---------------
Total................................... $3,116 $399 $30,893
============ ============== ===============
----------------------------
(1) Includes demand loans and loans having no stated maturity.
38
Of the $30.9 million in total loans at December 31, 2003, approximately
$11.4 million have fixed rates of interest and approximately $19.5 million have
adjustable rates of interest.
ONE- TO FOUR-FAMILY RESIDENTIAL LENDING. Rather than process this type
of loan in-house, we use the services of a mortgage banking company to originate
all of one- to four-family loans on our behalf in order to provide this service
to our customers in a cost-effective manner. These loans are generally
underwritten in accordance secondary market standards that we have approved. Our
lending staff take the loan applications and prepare the material for submission
to the mortgage banking company for underwriting, final processing and closing.
These loans are funded by the mortgage banking company with an option for
Monadnock Community Bank to purchase the loan upon funding. For the year ended
December 31, 2003 we accepted for our portfolio $10.9 million of the $19.9
million loans originated through this program. We generally do not hold in our
portfolio any fixed rate loan with a maturity of more than 15 years. We
generally service all loans held in our portfolio.
Through our relationship with the mortgage banking company, we can
assist applicants to obtain financing, but we are not required to commit to
portfolio any loans. We receive a fee from the mortgage company for each loan we
refer to it. Before deciding whether to accept a loan for our portfolio we
review the terms and underwriting. If we wish to accept a loan, we pay the
mortgage company after the loan closes. If, as is typical, we choose to maintain
the borrower relationship by also servicing the loan, we pay an additional fee.
The fees received and paid on a portfolio loan are deferred and amortized as
adjustment of the loan's yield. Fees received on loans not accepted for
portfolio are recorded in income as loan commissions. At December 31, 2003, one-
to four-family residential mortgage loans totaled $16.5 million, or 53.3%, of
our gross loan portfolio.
These loans are underwritten based on the applicant's employment and
credit history and the appraised value of the subject property. Loans are
generally made up to 80% of the lesser of the appraised value or purchase price
for one- to four-family residential loans. Should a loan be granted with a
loan-to-value ratio in excess of 80%, private mortgage insurance is required in
order to reduce the debt exposure below 80%. Properties securing our one- to
four-family loans are generally appraised by independent fee appraisers approved
by the board of directors. Borrowers obtain title and hazard insurance, and
flood insurance, if necessary, in an amount not less than the value of the
property improvements. We generally retain in our portfolios all adjustable rate
single-family loans that we acquire through this relationship.
One- to four-family mortgage loans are originated on a fixed-rate and
adjustable-rate basis. The pricing strategy for mortgage loans includes setting
interest rates that are competitive with other local financial institutions and
consistent with our internal needs. Adjustable-rate loans are tied to a variety
of indices including a rate based on U. S. Treasury securities adjusted to a
constant maturity of one year. A majority of the adjustable rate loans carry an
initial fixed rate of interest for either three or five years which then convert
to an interest rate that is adjusted annually based upon the applicable index.
Home mortgages are structured with up to a 30 year maturity. All of our one-
to-four family loans originated or purchased are secured by properties primarily
located in Hillsborough and Cheshire Counties. All our real estate loans contain
a "due on sale" clause allowing us to declare the unpaid principal balance due
and payable upon the sale
39
of the security property. See "- Originations, Purchases, Sales and Repayments."
See "- Asset Quality - Non-Performing Assets" and "- Classified Assets."
COMMERCIAL REAL ESTATE LENDING. We offer commercial real estate loans.
These loans are secured primarily by small retail establishments and small
office buildings located in our primary market area. At December 31, 2003,
commercial real estate loans totaled $8.4 million, or 27.0%, of our gross loan
portfolio. Our largest commercial real estate loan relationship at December 31,
2003, was a $991,000 loan secured by a golf course and other assets. This loan
carries a guarantee by the Small Business Administration covering 65.4% or
$648,114 of the principal and up to 120 days of interest.
We originate only adjustable-rate commercial real estate loans. The
interest rate on these loans is tied to a variety of indices, including a rate
based on the constant maturity of one year U.S. Treasury securities. A majority
of our adjustable-rate loans carry an initial fixed rate of interest for either
three or five years which then converts to an interest rate that is adjusted
annually based upon the index. Loan-to-value ratios on our commercial real
estate loans do not exceed 75% of the appraised value of the property securing
the loan. These loans require monthly payments, amortize up to 20 years and may
carry pre-payment penalties.
Loans secured by commercial real estate are underwritten based on the
income producing potential of the property, the financial strength of the
borrower and any guarantors. The net operating income, which is the income
derived from the operation of the property less all operating expenses, must be
sufficient to cover the payments related to the outstanding debt. We may require
an assignment of rents or leases in order to be assured that the cash flow from
the project will be used to repay the debt. Appraisals on properties securing
commercial real estate loans are generally performed by independent state
licensed fee appraisers approved by the board of directors. The properties
securing our commercial real estate loans are primarily located in New
Hampshire. See "- Loan Originations, Purchases, Sales and Repayments."
Loans secured by commercial real estate properties are generally larger
and involve a greater degree of credit risk than one- to four-family residential
mortgage loans. Because payments on loans secured by commercial real estate
properties are often dependent on the successful operation or management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or the economy. If the cash flow from the project is reduced,
or if leases are not obtained or renewed, the borrower's ability to repay the
loan may be impaired. See "- Asset Quality - Non-Performing Loans." See "- Loan
Originations, Purchases, Sales and Repayments and see "Risk Factors - Our loan
portfolio possesses increased risk due to our substantial number of commercial
real estate and commercial business loans, which could increase the level of our
provision for loan losses."
COMMERCIAL BUSINESS LENDING. We offer commercial business loans. These
loans are secured primarily by the assets of the business such as equipment,
receivables and inventory. At December 31, 2003, commercial business loans
totaled $3.1 million, or 10.1%, of our gross loan portfolio. Our largest
commercial business loan at December 31, 2003, was a $305,593 loan to a
advertising specialty business secured by accounts receivable, inventory and all
assets.
40
We also originate commercial business loans guaranteed by the Small
Business Administration. Repayment of the principal of such loans is partially
guaranteed by the Small Business Administration in a range from 50% to 90% of
the principle depending upon the type of loan, the amount of the loan and the
business of the borrower. At December 31, 2003, we had $911,000 in loans
originated with guarantees by the Small Business Administration, commercial
business loans, $642,000 of which is guaranteed by the Small Business
Administration.
We originate fixed and adjustable-rate commercial business loans. The
interest rate on these loans is tied to a variety of indices, including the
prime rate as published in the Wall Street Journal. A majority of our
adjustable-rate loans carry an initial fixed rate of interest for either three
or five years which then converts an interest rate that is adjusted annually
based upon the index.
Commercial loans are generally larger and 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 business, repayment of such loans may be subject to adverse
conditions in the economy. If the cash flow from the business is reduced, the
borrower's ability to repay the loan may be impaired. See "- Asset Quality -
Non-Performing Loans" and "Risk Factors - Our loan portfolio possesses increased
risk due to our substantial number of commercial real estate and commercial
business loans, which could increase the level of our provision for loan
losses." See "- Loan Originations, Purchases, Sales and Repayments."
HOME-EQUITY RESIDENTIAL LENDING. We currently originate loans both fixed
amount home equity loans and home equity lines of credit. At December 31, 2003,
such loans totaled $2.0 million or less than 6.6% of our gross loan portfolio.
We generally underwrite these loans based on the applicant's employment and
credit history. Presently, we lend up to 80% of the real estate tax assessment
value less any first liens. We require our borrowers to obtain hazard insurance
and flood insurance, if necessary, in an amount not less than the value of the
property improvements. Our home equity lines of credit carry adjustable interest
rates based upon the prime rate of interest. All home equity loans have a
maximum maturity of 15 years and home equity lines have a maturity of 20 years
with a ten year draw period. We currently retain and service these loans. See "-
Originations, Purchases, Sales and Repayments." See "- Asset Quality -
Non-Performing Assets" and "- Classified Assets."
MULTI-FAMILY RESIDENTIAL LENDING. We also offer multi-family residential
loans. These loans are secured by real estate located in our primary market
area. At December 31, 2003, multi-family residential loans totaled $543,000, or
1.8%, of our gross loan portfolio.
Our multi-family residential loans are originated with adjustable
interest rates only. We use a number of indices to set the interest rate,
including a rate based on the constant maturity of one year U.S. Treasury
securities. A majority of our adjustable rate loans carry an initial fixed rate
of interest for either three or five years which then converts to an interest
rate that is adjusted annually based upon the applicable index. Loan-to-value
ratios on our multi-family residential loans do not exceed 75% of the appraised
value of the property securing the loan. These loans require monthly payments
and amortize over a period of up to 20 years. We originate these
41
loans through our staff. We retain all of the multi-family loans we originate,
while selling participations to manage our exposure to any one borrower.
Loans secured by multi-family residential real estate are underwritten
based on the income producing potential of the property and the financial
strength of the borrower. The net operating income, which is the income derived
from the operation of the property less all operating expenses, must be
sufficient to cover the payments related to the outstanding debt. We may require
an assignment of rents or leases in order to be assured that the cash flow from
the project will be used to repay the debt. Appraisals on properties securing
multi-family residential loans are performed by independent state licensed fee
appraisers approved by the board of directors. See "- Loan Originations,
Purchases, Sales and Repayments."
Loans secured by multi-family residential properties are generally
larger and involve a greater degree of credit risk than one- to four-family
residential mortgage loans and home equity loans. Because payments on loans
secured by multi-family residential properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the economy.
If the cash flow from the project is reduced, or if leases are not obtained or
renewed, the borrower's ability to repay the loan may be impaired. See "- Asset
Quality - Non-Performing Assets."
CONSUMER LOANS. Currently we offer loans secured by new and used
automobiles and by deposit accounts, and we make a limited number of unsecured
loans. Consumer loans generally have shorter terms to maturity, which reduces
our exposure to changes in interest rates, and carry higher rates of interest
than do one- to four-family residential mortgage loans. At December 31, 2003,
our consumer loan portfolio totaled $399,000, or 1.3%, of our gross loan
portfolio.
Consumer loans may entail greater risk than do one- to four-family
residential mortgage loans, particularly in the case of consumer loans which are
unsecured or secured by rapidly depreciable assets, such as automobiles.
Repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance. As a result, consumer loan
collections are dependent on the borrower's continuing financial stability and,
thus, are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy.
LOAN ORIGINATIONS, PURCHASES, SALES AND REPAYMENTS
All loan applications are taken through employees located at our office.
Walk-in customers and referrals from our current customer base, advertisements
and real estate brokers are also important sources of loan originations. While
we originate both adjustable-rate and fixed-rate loans, our ability to originate
loans is dependent upon customer demand for loans in our market area. Demand is
affected by local competition and the interest rate environment. We generally do
not purchase loans secured by one- to four-family residential real estate. The
loans we acquire through our mortgage banking company relationship are not
considered purchases for financial reporting purposes. We generally do not
purchase other types of loans. We have sold participation interests in
commercial real estate and commercial business loans and multi-family loans to
manage our limitation on loans to one borrower.
42
The following table shows the loan origination, purchase, sale and
repayment activities of Monadnock Community Bank for the periods indicated.
Year Ended December 31,
---------------------------
2003 2002
------------ -----------
(In Thousands)
Originations by type:
- ---------------------
Adjustable rate:
Real estate - one-to four-family........ $ 3,503 $ 959
- home equity............... 1,627 1,622
- commercial................ 3,136 3,481
- multi-family.............. 109 455
Non-real estate - commercial business... 2,502 1,707
- consumer........... -- --
------------ -----------
Total adjustable-rate.............. 10,877 8,224
Fixed rate:
Real estate - one-to four-family........ 8,356 404
- commercial................ 101 --
Non-real estate - consumer.............. 445 510
------------ -----------
Total fixed-rate................... 8,902 914
------------ -----------
Total loans originated............. 19,779 9,138
Purchases:
- ----------
Real estate - one-to four-family........ 768 933
- commercial................ -- --
- multi-family.............. -- --
------------ -----------
Total loans purchased.............. 768 933
Sales and Repayments:
- ---------------------
Sales and loan participations sold...... 413 465
Principal repayments.................... 8,188 5,629
------------ -----------
Total reductions................... 8,601 6,094
Increase in other items, net............ 181 14
------------ -----------
Net increase....................... $12,127 $3,991
============ ===========
ASSET QUALITY
COLLECTION PROCEDURES. We have established a loan collection policy for
delinquent loans. For one- to four-family residential, multi-family, commercial
real estate loans and commercial business loans serviced by us, a delinquency
notice is sent to the borrower when the loan is eight days past due. When the
loan is 20 days past due, we contact the borrower requesting payment of the
delinquent amount in full, or the establishment of an acceptable repayment plan
to bring the loan current. If an acceptable repayment plan has not been agreed
upon, loan personnel will generally take action to foreclose on the real estate
collateral or other security for the loan. The notice of intent to foreclose
allows the borrower up to 30 days to bring the account current in the case of a
residential mortgage loan and 10 days in the case of a commercial mortgage loan.
Once the loan becomes 60 days delinquent, and an acceptable repayment plan has
not been agreed upon, the servicing officer will initiate foreclosure or
repossession of the collateral in the case of a non-real estate loan.
When a borrower fails to make a timely payment on a consumer loan, a
delinquency notice is sent when the loan is over 10 or 15 days past due,
depending on the type of loan.
43
Following such time, and generally within 20 days of the delinquency, our staff
contacts the borrower by telephone to determine the reason for delinquency and
to request payment of the delinquent amount in full or the establishment of an
acceptable repayment plan to bring the loan current. If the borrower is unable
to make or keep payment arrangements, additional collection action is taken in
the form of repossession of collateral for secured loans and small claims or
legal action for unsecured loans.
DELINQUENT LOANS. The following table sets forth our loans delinquent 60
to 89 days and over 90 days or more past due by type, number, amount and
percentage of type at December 31, 2003.
Loans Delinquent For:
--------------------------------------------------------- Total
60-89 Days 90 Days or More Delinquent Loans
------------------------- ---------------------------- -------------------------
(Dollars in Thousands)
Principal Principal Principal
Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
One- to four-family........... -- $ -- 1 $ 62 1 $ 62
Home equity................... -- -- -- -- -- --
Commercial real estate........ -- -- -- -- -- --
Multi-family.................. -- -- -- -- -- --
Commercial business........... 1 80 -- -- 1 --
Consumer...................... -- -- -- -- -- 80
---------- ----------- ------------ ------------ ----------- ----------
Total................... 1 $ 80 1 $ 62 2 $ 142
========== =========== ============ ============ =========== ==========
Delinquent loans to
total gross loans........... 0.26% 0.20% 0.46%
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of non-performing assets in our loan portfolio. Non-performing assets
consist of non-accrual loans, accruing loans past due 90 days and more and
foreclosed assets. Loans to a customer whose financial condition has
deteriorated are considered for non-accrual status whether or not the loan is 90
days and over past due. Generally, all loans past due 90 days and over are
classified as non-accrual. On non-accrual loans, interest income is not
recognized until actually collected. At the time the loan is placed on
non-accrual status, interest previously accrued but not collected is reversed
and charged against current income.
Foreclosed assets consist of real estate and other assets which have
been acquired through foreclosure on loans. At the time of foreclosure, assets
are recorded at the lower of their estimated fair value less selling costs or
the loan balance, with any write-down charged against the allowance for loan
losses. At both dates presented, we had no troubled debt restructurings which
involve forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates.
44
At December 31,
2003 2002
-------------- --------------
(Dollars in Thousands)
NONACCRUAL LOANS:
One- to four-family....................... $ 62 $ --
Home equity............................... -- --
Commercial real estate.................... 95 106
Multi-family.............................. -- --
Commercial business....................... -- --
Consumer.................................. -- --
Total..................................... 157 106
-------------- --------------
Repossessed assets........................ 13 13
-------------- --------------
Total non-performing assets............... $ 170 $ 119
============== ==============
Non-performing loans to total loans(1).... 0.51% 0.56%
Non-performing assets to total assets..... 0.39% 0.29%
- ---------------
(1) Loan for $95,000 is impaired, as defined in SFAS No. 114, but paying
current.
CLASSIFIED ASSETS. Regulations provide for the classification of loans
and other assets, such as debt and equity securities considered by regulators to
be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management and approved by the board of directors.
General allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. When an insured institution classifies problem assets as "loss," it is
required either to establish a specific allowance for losses equal to 100% of
that portion of the asset so classified or to charge off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the Office of Thrift
Supervision and the FDIC, which may order the establishment of additional
general or specific loss allowances.
In connection with the filing of our periodic reports with the Office of
Thrift Supervision and in accordance with our classification of assets policy,
we regularly review the problem assets in our portfolio to determine whether any
assets require classification in accordance with
45
applicable regulations. The total amount of classified assets represented 50.6%
of our equity capital and 2.9% of our total assets at December 31, 2003.
The aggregate amount of our classified assets at the dates indicated
were as follows:
At December 31,
------------------------------------
2003 2002
----------------- ---------------
(In Thousands)
Loss.................... $ -- $ --
Doubtful................ -- --
Substandard............. 735 836
Special Mention......... 522 47
----------------- ---------------
Total................... $1,257 $ 883
================= ===============
Our classified assets are primarily comprised of commercial real estate
loans originated prior to 1997 by the previous management. Monadnock Community
Bank's current management has focused on improving credit monitoring of these
loans. All of the loans were current at December 31, 2003. The largest
classified asset at that date is a portion of a substandard loan to finance the
operation and expansion of a golf course that is not guaranteed by the Small
Business Administration in an amount of $311,418.
ALLOWANCE FOR LOAN LOSSES. We maintain an allowance for loan losses to
absorb losses inherent in the loan portfolio. The allowance is based on ongoing,
quarterly assessments of the estimated losses inherent in the loan portfolio.
Our methodology for assessing the appropriateness of the allowance consists of
several key elements, which include loss ratio analysis by type of loan and
specific allowances for identified problem loans. In addition, the allowance
incorporates the results of measuring impaired loans as provided in Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures." These accounting standards
prescribe the measurement methods, income recognition and disclosures related to
impaired loans.
The formula allowance is calculated by applying loss factors to
outstanding loans based on the internal risk evaluation of the loans or pools of
loans. Changes in risk evaluations of both performing and nonperforming loans
affect the amount of the formula allowance. Loss factors are based both on our
historical loss experience as well as on significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date.
The appropriateness of the allowance is reviewed and established by
management quarterly based on then-existing economic and business conditions
affecting our key lending areas and other conditions, such as credit quality
trends (including trends in nonperforming loans expected to result from existing
conditions), collateral values, loan volumes and concentrations, specific
industry conditions within portfolio segments and recent loss experience in
particular segments of the portfolio that existed as of the balance sheet date
and the impact that such conditions were believed to have had on the
collectibility of the loan. Senior management reviews these conditions quarterly
in discussions with our senior credit officers. To the extent that any of these
conditions is evidenced by a specifically identifiable problem credit or
portfolio segment as of the evaluation date, management's estimate of the effect
of such condition may be
46
reflected as a specific allowance applicable to such credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the loss related to this condition is reflected in
the general allowance. The evaluation of the inherent loss with respect to these
conditions is subject to a higher degree of uncertainty because they are not
identified with specific problem credits or portfolio segments.
Management also evaluates the adequacy of the allowance for loan losses
based on a review of individual loans, historical loan loss experience, the
value and adequacy of collateral, and economic conditions in our market area.
This evaluation is inherently subjective as it requires material estimates,
including the amounts and timing of future cash flows expected to be received on
impaired loans that may be susceptible to significant change. For all
specifically reviewed loans for which it is probable that Monadnock Community
Bank will be unable to collect all amounts due according to the terms of the
loan agreement, Monadnock Community Bank determines impairment by computing a
fair value either based on discounted cash flows using the loan's initial
interest rate or the fair value of the collateral if the loan is collateral
dependent. Large groups of smaller balance homogenous loans that are
collectively evaluated for impairment and are excluded from specific impairment
evaluation, and their allowance for loan losses is calculated in accordance with
the allowance for loan losses policy described above.
Because the allowance for loan losses is based on estimates of losses
inherent in the loan portfolio, actual losses can vary significantly from the
estimated amounts. Our methodology as described permits adjustments to any loss
factor used in the computation of the formula allowance in the event that, in
management's judgment, significant factors which affect the collectibility of
the portfolio as of the evaluation date are not reflected in the loss factors.
By assessing the estimated losses inherent in the loan portfolio on a quarterly
basis, we are able to adjust specific and inherent loss estimates based upon any
more recent information that has become available. In addition, management's
determination as to the amount of our allowance for loan losses is subject to
review by the Office of Thrift Supervision and the FDIC, which may require the
establishment of additional general or specific allowances based upon their
judgment of the information available to them at the time of their examination
of Monadnock Community Bank.
At December 31, 2003, our allowance for loan losses was $320,000 or
1.04% of the total loan portfolio and 203.82% of total non-performing loans.
Assessing the adequacy of the allowance for loan losses is inherently subjective
as it requires making material estimates, including the amount and timing of
future cash flows expected to be received on impaired loans, that may be
susceptible to significant change. In the opinion of management, the allowance,
when taken as a whole, is adequate to absorb reasonable estimated loan losses
inherent in our loan portfolios.
47
The following table sets forth an analysis of our allowance for loan
losses.
Year Ended December 31,
----------------------------------
2003 2002
-------------- --------------
(Dollars in Thousands)
Balance at beginning of period............ $ 370 $ 369
CHARGE-OFFS:
One-to four-family.................... -- --
Home equity........................... -- --
Commercial............................ -- --
Multi-family.......................... -- --
Commercial business................... -- --
Consumer.............................. (1) --
RECOVERIES:
One-to four-family.................... -- --
Home equity........................... -- --
Commercial............................ -- --
Multi-family.......................... -- --
Commercial business................... -- 1
Consumer.............................. 1 --
Net charge-offs........................... -- 1
Provision (benefit) for loan losses....... (50) --
-------------- --------------
Balance at end of period.................. $ 320 $ 370
============== ==============
Net charge-offs (recoveries) to average
loans during this period (1).............. -- (0.01)%
Net charge-offs to average non-
performing loans during this period..... -- 0.13%
Allowance for loan losses to non-
performing loans........................ 203.82% 349.06%
Allowance as a % of total loans
(end of period)(1)...................... 1.04% 1.95%
- ------------------
(1) Total loans are net of deferred fees and costs
Monadnock Community Bank recorded a benefit (instead of a provision) for
loan losses for the year ended December 31, 2003, primarily as a result of the
payoff of some commercial real estate loans originated by prior management that
had been reserved for through the allowance for loan losses. We believe that our
allowance for loan losses is adequate to cover specifically identifiable loan
losses as well as estimated losses inherent in the portfolio for which the
losses are probable but not specifically identifiable.
48
The distribution of the allowance for losses on loans at the dates
indicated is summarized as follows.
At December 31,
----------------------------------------------------------------------------
2003 2002
----------------------------------- -----------------------------------
Percent Percent
of Gross of Gross
Loans in Loans in
Each Each
Percent of Category Percent of Category
Allowance to Total Allowance to Total
to Total Gross to Total Gross
Amount Allowance Loans Amount Allowance Loans
-------- ----------- -------- -------- ----------- --------
(Dollars in Thousands)
Secured by real estate............ $ 248 77.50% 88.60% $ 295 79.73% 87.00%
Commercial business............... 64 20.00% 10.10% 66 17.83% 10.60%
Consumer.......................... 8 2.50% 1.30% 9 2.44% 2.40%
Unallocated....................... -- --% --% -- --% --%
------- ------ ------ ------- ------ -------
Total Allowance for Loan Losses... $ 320 100.00% 100.00% $ 370 100.00% 100.00%
======= ====== ====== ======= ====== ======
INVESTMENT ACTIVITIES
GENERAL. Under the direction and guidance of the Asset and Liability
Committee and board policy, our president has the basic responsibility for the
management of our investment portfolio. Various factors are considered when
making decisions, including the marketability, maturity and tax consequences of
the proposed investment. The maturity structure of investments will be affected
by various market conditions, including the current and anticipated short and
long term interest rates, the level of interest rates, the trend of new deposit
inflows, and the anticipated demand for funds via deposit withdrawals and loan
originations and purchases.
LIQUIDITY. We are required by federal regulations to maintain liquid
assets in an amount necessary to support our operations and are also permitted
to make certain other securities investments. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Commitments." Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is provided.
We are authorized to invest in various types of liquid assets, including
U.S. Treasury obligations, securities of various federal agencies, certain
certificates of deposit of insured banks and savings institutions, certain
bankers' acceptances, repurchase agreements and federal funds. Subject to
various restrictions, federal savings associations may also invest their assets
in investment grade commercial paper and corporate debt securities and mutual
funds whose assets conform to the investments that a federally chartered savings
association is otherwise authorized to make directly. See "How We Are Regulated
- - Monadnock Community Bank" for a discussion of additional restrictions on our
investment activities.
49
MORTGAGE-BACKED SECURITIES. We invest in mortgage-backed securities as
part of our asset liability management strategy. Management believes that
mortgage-backed securities represent attractive investment opportunities
relative to other investments due to the wide variety of maturity and repayment
options available through such investments. Our mortgage-backed securities are
purchased as an alternative to mortgage loans. At December 31, 2003, we held
$10.1 million of mortgage backed securities. All of our mortgage-backed
securities are guaranteed by Ginnie Mae, a United States Government sponsored
enterprise.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Our current strategy is to hold all
securities as available for sale, recorded at fair value.
The following table sets forth the composition of our investment
portfolio at the dates indicated.
At December 31,
------------------------- -- -------------------------
2003 2002
------------------------- -------------------------
Carrying % of Total Carrying % of Total
Value Total Value Total
----------- ---------- ---------- ------------
(Dollars in Thousands)
Securities Available for Sale:
U.S. government and federal agencies
$ -- --% $ -- --%
Mortgage-backed securities:
Fannie Mae....................... -- -- 2,546 12.46
Ginnie Mae....................... 10,073 100.00 16,181 79.17
Freddie Mac...................... -- -- 1,712 8.37
----------- ---------- ---------- ------------
$10,073 100.00% $20,439 100.00%
----------- ---------- ---------- ------------
Other earnings assets:
Interest-bearing deposits in other
financial institutions........ $ 1,381 70.24% $691 56.59%
Federal Home Loan Bank stock..... 485 24.67 430 35.22
Other investments................ 100 5.09 100 8.19
----------- ---------- ------------
Total.............................. 1,966 100.00% 1,221 100.00%
----------- ========== ---------- ------------
Total.............................. $12,039 $21,660
=========== ==========
While our mortgage backed securities carry a reduced credit risk as
compared to whole loans due to their issuance under government agency sponsored
programs, they remain subject to the risk that a fluctuating interest rate
environment, along with other factors like the geographic distribution of the
underlying mortgage loans, may alter the prepayment rate of the mortgage loans
and so affect both the prepayment speed, and value, of the investment
securities. As a result of these factors, the estimated average lives of these
securities will be shorter than the contractual maturities as shown on the
following table. The maturities of the investment securities portfolio and the
amortized cost and fair value, excluding Federal Home Loan Bank stock, as of
December 31, 2003, are as follows:
50
At December 31, 2003
----------------------------------------------------------------------------------
One to Five to
One Year Five 10 Over 10
or Less Years Years Years Total Securities
----------- --------- --------- ----------- ------------ ----------
Amortized Amortized Amortized Amortized Amortized Fair
Cost Cost Cost Cost Cost Value
----------- --------- --------- ----------- ------------ ----------
(Dollars in Thousands)
Mortgage-backed securities .. $ -- $ -- $ -- $ 10,186 $ 10,186 $ 10,073
Total investment securities.. $ -- $ -- $ -- $ 10,186 $ 10,186 $ 10,073
=========== ========= ========= =========== ============ ===========
Weighted average yield....... 3.04% 3.04% 3.22%
SOURCES OF FUNDS
GENERAL. Our sources of funds are deposits, payment of principal and
interest on loans, interest earned on or maturation of other investment
securities, borrowings, and funds provided from operations.
DEPOSITS. We offer a variety of deposit accounts to consumers with a
wide range of interest rates and terms. Our deposits consist of certificates of
deposit, savings, money market and demand deposit accounts. We have historically
paid market rates on our deposit accounts. We primarily rely on competitive
pricing policies, marketing and customer service to attract and retain these
deposits. We do not solicit brokered deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates. The variety
of deposit accounts we offer has allowed us to be competitive in obtaining funds
and to respond with flexibility to changes in consumer demand. We have become
more susceptible to short-term fluctuations in deposit flows, as customers have
become more interest rate conscious. We try to manage the pricing of our
deposits in keeping with our asset/liability management, liquidity and
profitability objectives, subject to competitive factors. Based on our
experience, we believe that our deposits are relatively stable sources of funds.
Despite this stability, our ability to attract and maintain these deposits and
the rates paid on them has been and will continue to be significantly affected
by market conditions.
51
The following table sets forth our deposit flows during the periods
indicated.
Year Ended December 31,
----------------------------------
2003 2002
--------------- ---------------
(Dollars in Thousands)
Opening balance............... $ 31,621 $ 29,854
Deposits net of withdrawals... 2,245 962
Interest credited............. 566 805
--------------- ---------------
Ending balance................ $ 34,432 $ 31,621
=============== ===============
Net increase.................. $ 2,811 $ 1,767
Percent increase.............. 8.89% 5.92%
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs we offered at the dates indicated.
At
December 31,
--------------------------------------------------------
2003 2002
---------------------------- --------------------------
Percent of Percent of
Amount Total Amount Total
------------ -------------- ------------ ------------
(Dollars in Thousands)
Non-interest-bearing demand....... $ 2,103 6.10% $ 1,643 5.20%
Savings .......................... 1,831 5.32 1,576 4.98
NOW and Money market.............. 15,842 46.01 11,421 36.12
Certificates of deposit
1.00% - 1.99%................. 8,017 23.28 3,243 10.26
2.00% - 2.99%................. 1,156 3.36 6,007 19.00
3.00% - 3.99%................. 1,244 3.62 2,844 8.99
4.00% - 4.99%................. 1,703 4.95 2,127 6.72
5.00% - 5.99%................. 2,025 5.88 2,096 6.63
6.00% - 6.99%................. 511 1.48 664 2.10
7.00% - 7.99%................. -- -- -- --
------------ -------------- ------------ ------------
Total certificates of deposit..... 14,656 42.57 16,981 53.70
------------ -------------- ------------ ------------
Total deposits.................... $ 34,432 100.00% $ 31,621 100.00%
============ ============== ============ ============
52
The following table indicates the amount of Monadnock Community Bank's
certificates of deposit by time remaining until maturity as of December 31,
2003.
-------------------------------------------------------------------------------------------------
December 31 December 31 December 31 December 31 December 31 December 31
2004 2005 2006 2007 2008 2009 Total
--------------- -------------- -------------- -------------- -------------- -------------- -----------
(Dollars in Thousands)
1.00%-1.99%.......... $ 7,551 $ 310 $ 156 $ -- $ -- $ -- $8,017
2.00%-2.99%.......... 308 687 158 -- 3 -- 1,156
3.00%-3.99%.......... 647 10 183 191 207 6 1,244
4.00%-4.99%.......... 402 379 474 432 1 15 1,703
5.00%-5.99%.......... 147 473 730 583 92 -- 2,025
6.00%-6.99%.......... 306 37 141 27 -- -- 511
7.00%-7.99%.......... -- -- -- -- -- -- --
$9,361 $ 1,896 $ 1,842 $ 1,233 $ 303 $21 $14,656
--------------- -------------- -------------- -------------- -------------- -------------- -----------
$100,000 and over $1,407 $ 317 $ 129 $ 103 $ -- $ -- $1,956
Below $100,000....... 7,954 1,579 1,713 1,130 303 21 12,700
--------------- -------------- -------------- -------------- -------------- -------------- -----------
Total............ $9,361 $ 1,896 $ 1,842 $ 1,233 $ 303 $21 $14,656
=============== ============== ============== ============== ============== ============== ===========
BORROWINGS. Although deposits are our primary source of funds, we may
utilize borrowings primarily as part of our asset liability management strategy,
when we desire additional capacity to purchase loans or to fund loan demand. Our
borrowings historically have consisted of advances from the Federal Home Loan
Bank of Boston. See Note 7 of the Notes to Financial Statements.
We may obtain advances from the Federal Home Loan Bank of Boston upon
the security of our mortgage loans and mortgage-backed securities. These
advances may be made pursuant to several different credit programs, each of
which has its own interest rate, range of maturities and call features. At
December 31, 2003, we had $6.7 million in Federal Home Loan Bank advances
outstanding.
The following table sets forth information as to our Federal Home Loan
Bank advances for the periods indicated.
At or For the Year
Ended December 31,
-------------------------
2003 2002
------------ -----------
(Dollars in Thousands)
Average balance outstanding............................ $8,148 $7,132
Maximum month-end balance.............................. 9,054 8,525
Balance at end of period............................... 6,747 7,000
Weighted average interest rate during the period....... 3.18% 4.09%
Weighted average interest rate at end of period........ 2.85% 3.38%
SUBSIDIARY AND OTHER ACTIVITIES
At December 31, 2003 Monadnock Community Bank did not have any
subsidiaries.
53
COMPETITION
We face strong competition in originating real estate and other loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from mortgage bankers. We also face competition from other commercial
banks with respect to commercial business loans.
We attract all of our deposits through our home office. Competition for
those deposits is principally from savings institutions, commercial banks,
brokerage firms, credit unions and mutual funds. We compete for these deposits
by offering superior service and a variety of deposit accounts at competitive
rates. As of December 31, 2003, we believe that we hold less than 1.0% of the
deposits in Hillsborough and Cheshire Counties.
EMPLOYEES
At December 31, 2003, we had a total of 18 employees, including 2
part-time employees. Our employees are not represented by any collective
bargaining group.
PROPERTIES
At December 31, 2003, we had one full service office which we lease. We
also plan to open an additional office in 2005. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Management
Strategy." The net book value of our investment in premises, equipment and
fixtures was approximately $189,000 at December 31, 2003. See
Our office facility information is as follows:
Owned or Lease Expiration Net Book Value
Location Leased Date December 31, 2003
- --------------- ---------- ---------------- -----------------
(In Thousands)
HOME AND EXECUTIVE OFFICE Leased July 2008 --
One Jaffrey Road
Peterborough, New Hampshire 03458
We do not use an in-house computer system. We use a third-party vendor
to maintain our data base of depositor and borrower customer information.
LEGAL PROCEEDINGS
From time to time, we are involved as plaintiff or defendant in various
legal actions arising in the normal course of business. We do not anticipate
incurring any material liability as a result of this litigation.
54
PROPOSED STOCK PURCHASES BY MANAGEMENT
The following table sets forth, for each of Monadnock Community Bank's
directors and executive officers both individually and as a group, the proposed
purchases of common stock, assuming sufficient shares are available to satisfy
their subscriptions. The amounts include shares that may be purchased through
IRAs and by associates. These purchases are intended for investment purposes
only, and not for resale. Directors, officers, their associates and employees
will pay the same price as all other purchasers in the stock offering.
At the Minimum of the At the Maximum of the
Estimated Offering Range Estimated Offering Range
-------------------------- ----------------------------
As a Percent As a Percent
Number of of Shares Number of of Shares
Name Amount Shares Offered Shares Offered
- ----------------------------------- --------- ------------ ------------- ------------ ---------------
DIRECTORS:
Richard J. Wargo $70,000 8,750 2.44% 8,750 1.80%
Samuel J. Hackler 70,000 8,750 2.44% 8,750 1.80%
Kenneth A. Christian 70,000 8,750 2.44% 8,750 1.80%
Kenneth R. Simonetta 70,000 8,750 2.44% 8,750 1.80%
William M. Pierce, Jr. 70,000 8,750 2.44% 8,750 1.80%
Jack Goldstein 70,000 8,750 2.44% 8,750 1.80%
Thomas C. LaFortune 25,600 3,200 0.89% 3,200 0.66%
EXECUTIVE OFFICERS:
Donald R. Blanchette 16,000 2,000 0.56% 2,000 0.41%
David A. Reilly 32,000 4,000 1.12% 4,000 0.82%
All directors and executive $493,600 61,700 17.21% 61,700 12.72%
officers as a group (9 persons) ======== ====== ====== ====== ======
55
THE REORGANIZATION AND STOCK OFFERING
THE BOARD OF DIRECTORS OF MONADNOCK COMMUNITY BANK HAS ADOPTED AND THE
OFFICE OF THRIFT SUPERVISION HAS APPROVED THE PLAN OF MUTUAL HOLDING COMPANY
REORGANIZATION AND STOCK ISSUANCE, SUBJECT TO APPROVAL BY THE MEMBERS OF
MONADNOCK COMMUNITY BANK ENTITLED TO VOTE ON THE MATTER. THE OFFICE OF THRIFT
SUPERVISION APPROVAL IS SUBJECT TO SATISFACTION OF CERTAIN CONDITIONS IMPOSED BY
THE OFFICE OF THRIFT SUPERVISION. THE OFFICE OF THRIFT SUPERVISION APPROVAL DOES
NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF MUTUAL HOLDING
COMPANY REORGANIZATION AND STOCK ISSUANCE.
GENERAL
On March 11, 2004, we adopted a Plan of Mutual Holding Company
Reorganization and Stock Issuance pursuant to which Monadnock Community Bank
will reorganize into a mutual holding company and Monadnock Community Bancorp
will offer shares of its common stock to the eligible depositors of Monadnock
Community Bank and possibly the general public.
Under this plan, Monadnock Community Bank will reorganize into the
federal mutual holding company structure as a wholly owned subsidiary of
Monadnock Community Bancorp, which in turn will be a majority-owned subsidiary
of Monadnock Mutual Holding Company. Following receipt of all required
regulatory approvals, the approval of the members (depositors) of Monadnock
Community Bank entitled to vote on the plan and the satisfaction of all other
conditions precedent to the reorganization, Monadnock Community Bank will
complete the reorganization. Monadnock Community Bank in its stock form will
continue to conduct its business and operations from the same office with the
same personnel as Monadnock Community Bank conducted prior to the
reorganization. The reorganization will not affect the balances, interest rates
or other terms of Monadnock Community Bank's loans or deposit accounts, and the
deposit accounts will continue to be insured by the FDIC. Monadnock Mutual
Holding Company initially will be capitalized with $50,000. When the
reorganization is completed, this capital will be used for general corporate
purposes.
Pursuant to the plan, we will accomplish our corporate change as
following or in any other manner that is consistent with applicable federal law
and regulations and the intent of the plan:
(1) Monadnock Community Bank will organize an interim stock savings
bank as a wholly-owned subsidiary ("Interim One");
(2) Interim One will organize an interim stock savings bank as a
wholly-owned subsidiary ("Interim Two");
(3) Interim One will organize Monadnock Community Bancorp as a
wholly-owned subsidiary;
(4) Monadnock Community Bank will exchange its charter for a federal
stock savings bank charter to become Monadnock Community Bank
and Interim One will exchange its charter for a federal mutual
holding company charter to become Monadnock Mutual Holding
Company;
56
(5) simultaneously with step (4), Interim Two will merge with and
into Monadnock Community Bank with Monadnock Community Bank as
the resulting institution;
(6) all of the initially issued stock of Monadnock Community Bank
will be transferred to Monadnock Mutual Holding Company in
exchange for membership interests in Monadnock Mutual Holding
Company.
(7) Monadnock Mutual Holding Company will contribute the capital
stock of Monadnock Community Bank to Monadnock Community Bancorp
and Monadnock Community Bank will become a wholly-owned
subsidiary of Monadnock Community Bancorp; and
(8) contemporaneously with the reorganization, Monadnock Community
Bancorp will offer for sale in the stock offering shares of
common stock based on the pro forma market value of Monadnock
Community Bancorp and Monadnock Community Bank.
Monadnock Community Bancorp expects to receive the approval of the
Office of Thrift Supervision to become a savings bank holding company and to own
all of the common stock of Monadnock Community Bank. The reorganization will be
effected only upon completion of the sale of the minimum number of the shares of
common stock to be issued pursuant to the plan of mutual holding company
reorganization and stock issuance.
The following is a summary of material aspects of the reorganization and
stock issuance. The summary is qualified in its entirety by reference to the
provisions of the plan of mutual holding company reorganization and stock
issuance. Copies of the plan of mutual holding company reorganization and stock
issuance are available for inspection at the office of Monadnock Community Bank
and at the Office of Thrift Supervision. The plan of mutual holding company
reorganization and stock issuance is also filed as an exhibit to the
Registration Statement of which this prospectus is a part, copies of which may
be obtained from the SEC. See "Additional Information."
OUR REASONS FOR THE CORPORATE CHANGE
As a mutual institution, Monadnock Community Bank has no authority to
issue shares of capital stock and consequently has no access to market sources
of equity capital. Only by generating and retaining earnings from year to year
is Monadnock Community Bank able to increase its capital position.
As a stock corporation upon completion of the reorganization, Monadnock
Community Bank will be organized in the form used by commercial banks, most
major corporations and a majority of savings institutions. The ability to raise
new equity capital through the issuance and sale of Monadnock Community Bank's
or Monadnock Community Bancorp's capital stock will allow Monadnock Community
Bank the flexibility to increase it capital position more rapidly than by
accumulating earnings and at times deemed advantageous by the board of directors
of Monadnock Community Bank. It will also support future growth and expanded
operations, including increased lending and investment activities, as business
and regulatory needs require. The ability to attract new capital also will help
Monadnock Community Bank address the needs
57
of the communities it serves and enhance its ability to make acquisitions or
expand into new businesses.
The acquisition alternatives available to Monadnock Community Bank are
quite limited as a mutual institution, because of a requirement in Office of
Thrift Supervision regulations that the surviving institution in a merger
involving a mutual institution generally must be in mutual form. After the
reorganization, Monadnock Community Bank will have increased ability to merge
with other mutual and stock institutions and Monadnock Community Bancorp may
acquire control of other mutual or stock savings associations and retain the
acquired institution as a separate subsidiary of Monadnock Community Bancorp.
There are no current plans to do so.
Finally, the ability to issue capital stock will enable Monadnock
Community Bank to establish stock compensation plans for directors, officers and
employees, giving them equity interests in Monadnock Community Bank and greater
incentive to improve its performance. For a description of the stock
compensation plans which will be adopted by Monadnock Community Bank in
connection with the reorganization, see "Management." Although Monadnock
Community Bank's ability to raise capital and general business flexibility will
be improved by this reorganization and stock offering, these advantages will be
limited by the requirement in applicable laws and regulations that a mutual
holding company maintain a majority ownership interest in its savings bank
holding company subsidiary.
The advantages of the reorganization also could be achieved if Monadnock
Community Bank were to reorganize into a wholly-owned subsidiary of a stock
holding company, known as a standard conversion, rather than as a second-tier
subsidiary of a mutual holding company. A standard conversion also would free
Monadnock Community Bank from the restrictions on its ability to raise capital
which result from the requirement that its mutual holding company maintain a
majority ownership interest in Monadnock Community Bancorp.
Office of Thrift Supervision regulations require that savings
institutions converting to stock form in a standard conversion sell all of their
to-be-outstanding capital stock rather than a minority interest. The amount of
equity capital that would be raised in a standard conversion would therefore be
substantially more than the amount raised in a minority stock offering by a
subsidiary of a mutual holding company and would make it more difficult for
Monadnock Community Bancorp to maximize the return on its equity. A standard
conversion also would eliminate all aspects of the mutual form or organization,
whereas some are retained with the mutual holding company structure. Completion
of the reorganization does not eliminate the possibility of Monadnock Mutual
Holding Company converting from mutual to stock form in the future; however, a
full conversion is not contemplated at this time. See "Monadnock Mutual Holding
Company May Consider Converting to Stock Form in the Future."
After considering the advantages and disadvantages of the
reorganization, as well as applicable fiduciary duties and alternative
transactions, including a reorganization into a wholly-owned subsidiary of a
stock holding company rather than as a second-tier subsidiary of a mutual
holding company, the board of directors of Monadnock Community Bank unanimously
approved the reorganization as being in the best interests of Monadnock
Community Bank and equitable to its depositors.
58
EFFECTS OF THE REORGANIZATION AND STOCK OFFERING
GENERAL. The reorganization and stock offering will have no effect on
Monadnock Community Bank's present business of accepting deposits and investing
its funds in loans and other investments permitted by law. The reorganization
and stock offering will not result in any change in the existing services
provided to depositors and borrowers, or in our existing office, management and
staff. Monadnock Community Bank will continue to be subject to regulation,
supervision and examination by the Office of Thrift Supervision and the FDIC.
DEPOSITS AND LOANS. Each holder of a deposit account in Monadnock
Community Bank at the time of the reorganization and stock offering will
continue as an account holder in Monadnock Community Bank after the
reorganization and stock offering, and the reorganization and stock offering
will not affect the deposit balance, interest rate or other terms of such
accounts. Each account will be insured by the FDIC to the same extent as before
the reorganization and stock offering. Depositors in Monadnock Community Bank
will continue to hold their existing certificates and other evidence of their
accounts. The reorganization and stock offering will not affect the loan terms
of any borrower from Monadnock Community Bank. The amount, interest rate,
maturity, security for and obligations under each loan will remain as they
existed prior to the reorganization and stock offering.
CONTINUITY. During the process, the normal business of Monadnock
Community Bank of accepting deposits and making loans will continue without
interruption. Following completion of the reorganization and stock offering,
Monadnock Community Bank will continue to be subject to regulation by the Office
of Thrift Supervision, and FDIC insurance of accounts will continue without
interruption. After the reorganization and stock offering, Monadnock Community
Bank will continue to provide services for depositors and borrowers under
current policies and by its present management and staff.
The board of directors presently serving Monadnock Community Bank will
continue to serve as the board of directors of Monadnock Community Bank after
the reorganization and stock offering. The members of the board of directors of
Monadnock Community Bancorp will consist of the individuals currently serving on
the board of directors of Monadnock Community Bancorp, which are the same
directors serving for Monadnock Community Bank. After the reorganization and
stock offering, the voting stockholders of Monadnock Community Bancorp will
elect approximately one-third of Monadnock Community Bancorp's directors
annually. All current officers of Monadnock Community Bancorp and Monadnock
Community Bank will retain their positions with Monadnock Community Bancorp and
Monadnock Community Bank, respectively, after the reorganization and stock
offering.
VOTING RIGHTS. After completion of the reorganization and stock
offering, the members will have no voting rights in Monadnock Community Bank or
Monadnock Community Bancorp and, therefore, will not be able to elect directors
of Monadnock Community Bank or Monadnock Community Bancorp or to control their
affairs. Currently these rights are held by depositors of Monadnock Community
Bank. After the reorganization and stock issuance, voting rights will be vested
exclusively in the stockholders of Monadnock Community Bancorp, which will own
all of the stock of Monadnock Community Bank. Each holder of common stock will
be entitled to
59
vote on any matter to be considered by the stockholders of Monadnock Community
Bancorp, subject to the provisions of Monadnock Community Bancorp's charter.
As a federally-chartered mutual holding company, Monadnock Mutual
Holding Company will have no authorized capital stock and no stockholders.
Monadnock Mutual Holding Company will be controlled by members of Monadnock
Community Bank, which consists of its depositors. These members have generally
signed proxies giving their voting rights to Monadnock Community Bank's
management. The revocable proxies that members of Monadnock Community Bank give
the board of directors of Monadnock Community Bank general authority to cast a
member's vote on any and all matters presented to the members. These proxies are
deemed to cover the member's votes as members of Monadnock Mutual Holding
Company, and this authority is given to the board of directors of Monadnock
Mutual Holding Company.
The plan of mutual holding company reorganization and stock issuance
also provides for the transfer of proxy rights to the board of directors of
Monadnock Mutual Holding Company. As a result, the board of directors of
Monadnock Community Bank will be able to govern the operations of Monadnock
Mutual Holding Company, and Monadnock Community Bancorp, notwithstanding
objections raised by members of Monadnock Mutual Holding Company or stockholders
of Monadnock Community Bancorp, respectively, so long as the board of directors
has been appointed proxy for a majority of the outstanding votes of members of
Monadnock Mutual Holding Company and these proxies have not been revoked. In
addition, all persons who become depositors of Monadnock Community Bank
following the reorganization will have membership rights with respect to
Monadnock Mutual Holding Company.
DEPOSITORS' RIGHTS IF WE LIQUIDATE. In the event of a voluntary
liquidation of Monadnock Community Bank prior to the reorganization, holders of
deposit accounts in Monadnock Community Bank would be entitled to distribution
of any assets of Monadnock Community Bank remaining after all claims of
depositors and creditors are satisfied. Following the reorganization, the holder
of Monadnock Community Bank's common stock, which will be Monadnock Community
Bancorp, would be entitled to any assets remaining upon a liquidation,
dissolution or winding up of Monadnock Community Bank and, except through their
liquidation interests in Monadnock Community Bank, as discussed below, holders
of deposit accounts in Monadnock Community Bank would not have any interest in
these assets.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of Monadnock Mutual Holding Company following completion of the
reorganization, holders of deposit accounts in Monadnock Community Bank would be
entitled, pro rata to the value of their accounts and to distribution of any
assets of Monadnock Mutual Holding Company remaining after the claims of all
creditors of Monadnock Mutual Holding Company are satisfied. Stockholders of
Monadnock Community Bancorp will have no liquidation or other rights with
respect to Monadnock Community Bank solely as stockholders.
In the event of a liquidation, dissolution or winding up of Monadnock
Community Bancorp, each holder of shares of the common stock would be entitled
to receive, after payment of all debts and liabilities of Monadnock Community
Bancorp, a pro rata portion of all assets of Monadnock Community Bancorp
available for distribution to holders of the common stock.
60
There currently are no plans to liquidate Monadnock Community Bank,
Monadnock Community Bancorp or Monadnock Community Bank, MHC.
TAX EFFECTS OF THE REORGANIZATION. We intend to proceed with the
reorganization on the basis of an opinion from our special counsel, Luse Gorman
Pomerenk & Schick, P.C., Washington, D.C., as to tax matters that are material
to the reorganization. The opinion is based, among other things, on factual
representations made by us, including the representation that the exercise price
of the subscription rights to purchase the common stock will be approximately
equal to the fair market value of the stock at the time of the completion of the
reorganization. Luse Gorman Pomerenk & Schick, P.C.'s opinion provides as
follows:
1. The conversion of Monadnock Community Bank's charter from a
mutual savings bank charter to a stock bank charter will qualify
as a reorganization under section 368(a)(1)(F) of the Internal
Revenue Code of 1986 (the "Code"), and no gain or loss will be
recognized by Monadnock Community Bank in either its mutual form
("Mutual Bank") or stock form (as the "Stock Bank") as a result.
2 No gain or loss will be recognized by Monadnock Community Bank
upon the transfer of its assets to Stock Bank solely in exchange
for shares of Stock Bank common stock and the assumption by
Stock Bank of the liabilities of Mutual Bank.
3. No gain or loss will be recognized by Stock Bank upon the
receipt of Monadnock Community Bank's assets in exchange for
shares of Stock Bank common stock.
4. Stock Bank's holding period in the assets received from
Monadnock Community Bank will include the period during which
such assets were held by Mutual Bank.
5. The Stock Bank's basis in the assets of Monadnock Community Bank
will be the same as the basis of such assets in the hands of
Monadnock Community Bank immediately prior to the
reorganization.
6. Mutual Bank members will recognize no gain or loss upon the
constructive receipt of solely Stock Bank common stock in
exchange for their membership interests.
7. The Stock Bank will succeed to and take into account Monadnock
Community Bank's earnings and profits or deficit in earnings and
profits, as of the date of the reorganization.
8. For purposes of Section 381, Stock Bank will be treated the same
as Mutual Bank, and therefore, Mutual Bank's tax year will not
end merely as a result of the conversion of Monadnock Community
Bank to stock form and Stock Bank will not be required to obtain
a new employee identification number.
9. No gain or loss will be recognized by eligible account holders
and supplemental eligible account holders of Mutual Bank on the
issuance to them of withdrawable deposit accounts in Stock Bank
plus liquidation rights with respect to Monadnock
61
Mutual Holding Company, in exchange for their deposit accounts
in Mutual Bank or to the other depositors on the issuance to
them of withdrawable deposit accounts.
10. It is more likely than not that the fair market value of the
subscription rights to purchase common stock is zero.
Accordingly, no gain or loss will be recognized by eligible
account holders and supplemental eligible account holders upon
the distribution to them of the nontransferable subscription
rights to purchase shares of stock in Monadnock Community
Bancorp. Gain realized, if any, by the eligible account holders
and supplemental eligible account holders on the distribution to
them of the nontransferable subscription rights to purchase
shares of common stock will be recognized but only in an amount
not in excess of the fair market value of such subscription
rights. Eligible account holders and supplemental eligible
account holders will not realize any taxable income as a result
of the exercise by them of the nontransferable subscription
rights.
11. The basis of the deposit accounts in Stock Bank to be received
by the eligible account holders, supplemental eligible account
holders and other members of Mutual Bank will be the same as the
basis of their deposit accounts in Mutual Bank surrendered in
exchange therefor. The basis of the interests in the liquidation
rights in the Monadnock Mutual Holding Company to be received by
the eligible account holders and supplemental eligible account
holders of Mutual Bank will be zero.
12. The exchange of Stock Bank common stock constructively received
by eligible account holders, supplemental eligible account
holders and other members in exchange for membership interests
in Monadnock Mutual Holding Company will constitute a tax-free
exchange of property solely for "stock."
13. Eligible account holders, supplemental eligible account holders
and other members will recognize no gain or loss upon the
transfer of Stock Bank common stock they constructively received
in the conversion of Monadnock Community Bank to stock form to
Monadnock Mutual Holding Company solely in exchange for
membership interests in Monadnock Mutual Holding Company.
14. Eligible account holders, supplemental eligible account holders
and other members' basis in the Monadnock Mutual Holding Company
membership interests received in the transaction (which basis is
-0-) will be the same as the basis of the property transferred
in exchange for such interests.
15. Monadnock Mutual Holding Company will recognize no gain or loss
upon receipt of property from eligible account holders,
supplemental eligible account holders and other members in
exchange for membership interests in Monadnock Mutual Holding
Company.
16. Monadnock Mutual Holding Company's basis in the property
received from eligible account holders, supplemental eligible
account holders and other
62
members (which basis is -0-) will be the same as the basis of
such property in the hands of eligible account holders,
supplemental eligible account holders and other members.
17. Monadnock Mutual Holding Company's holding period for the
property received from eligible account holders, supplemental
account holders and other members will include the period during
which such property was held by such persons.
18. Monadnock Mutual Holding Company and the persons who purchased
common stock of Monadnock Community Bancorp in the subscription
and community offering ("minority stockholders") will recognize
no gain or loss upon the transfer of Stock Bank common stock and
cash, respectively, to Monadnock Community Bancorp in exchange
for common stock in Monadnock Community Bancorp
19. Monadnock Community Bancorp will recognize no gain or loss on
its receipt of Stock Bank common stock and cash in exchange for
Monadnock Community Bancorp common stock.
20. Monadnock Mutual Holding Company's basis in the Monadnock
Community Bancorp common stock will be the same as its basis in
the Monadnock Community Bank stock exchanged for such stock.
21. Monadnock Mutual Holding Company's holding period in the
Monadnock Community Bancorp common stock received will include
the period during which it held the Stock Bank common stock,
provided that such property was a capital asset on the date of
the exchange.
22. Monadnock Community Bancorp's basis in the Stock Bank stock
received from Monadnock Mutual Holding Company will be the same
as the basis of such property in the hands of Monadnock Mutual
Holding Company.
23. Monadnock Community Bancorp's holding period for the Stock Bank
stock received from Monadnock Mutual Holding Company will
include the period during which such property was held by
Monadnock Mutual Holding Company.
24. It is more likely than not that the basis of the Monadnock
Community Bancorp common stock to its minority stockholders will
be the purchase price thereof. The holding period of the
Monadnock Community Bancorp common stock purchased pursuant to
the exercise of subscription rights will commence on the date on
which the right to acquire such stock was exercised.
The opinion addresses all material federal income tax consequences of
the reorganization. The tax opinion as to items 10 and 24 above is based on the
position that subscription rights to be received by eligible account holders and
supplemental eligible account holders do not have any economic value at the time
of distribution or the time the subscription rights are exercised. In this
regard, Luse Gorman Pomerenk & Schick, P.C. noted that the subscription rights
will be granted at no cost to the recipients, are legally non-transferable and
of short duration, and will provide the recipient with the right only to
purchase shares of common stock at the same price to
63
be paid by members of the general public in any community offering. The firm
also noted that the Internal Revenue Service has not in the past concluded that
subscription rights have value. Based on the foregoing, Luse Gorman Pomerenk &
Schick, P.C. believes that it is more likely than not that the nontransferable
subscription rights to purchase shares of common stock have no value. However,
the issue of whether or not the nontransferable subscription rights have value
is based on all the facts and circumstances. If the nontransferable subscription
rights granted to eligible subscribers are subsequently found to have an
ascertainable value greater than zero, income may be recognized by various
recipients of the nontransferable subscription rights (in certain cases, whether
or not the rights are exercised) and we could recognize gain on the distribution
of the nontransferable subscription rights.
The opinions of Luse Gorman Pomerenk & Schick, P.C., unlike a letter
ruling issued by the Internal Revenue Service, are not binding on the Internal
Revenue Service and the conclusions expressed therein may be challenged at a
future date. The Internal Revenue Service has issued favorable rulings for
transactions substantially similar to the proposed reorganization, but any such
ruling may not be cited as precedent by any taxpayer other than the taxpayer to
whom the ruling is addressed. We do not plan to apply for a letter ruling
concerning the transactions described herein.
Monadnock Community Bank has also obtained an opinion from Shatswell,
MacLeod & Company, P.C. that the tax effects of the stock offering under New
Hampshire tax laws will be substantially the same as described above with
respect to federal income tax laws.
Monadnock Community Bank has received a letter from RP Financial,
stating its belief that the subscription rights do not have any value, based on
the fact that these rights are acquired by the recipients without cost, are
nontransferable and of short duration, and give the recipients the right only to
purchase the common stock at a price equal to its estimated fair market value,
which will be the same price as the purchase price for the unsubscribed shares
of common stock. If the subscription rights granted to eligible depositors are
deemed to have an ascertainable value, receipt of these rights would be taxable
probably only to those eligible depositors who exercise the subscription rights,
either as a capital gain or ordinary income, in an amount equal to such value,
and Monadnock Community Bancorp and Monadnock Community Bank could recognize
gain on any distribution. Eligible subscribers are encouraged to consult with
their own tax advisor as to the tax consequences in the event that subscription
rights are deemed to have an ascertainable value. Unlike private rulings, the
letter of RP Financial is not binding on the IRS, and the IRS could disagree
with conclusions reached in the letter. In the event of any disagreement, there
can be no assurance that the IRS would not prevail in a judicial or
administrative proceeding.
HOW WE DETERMINED OUR PRICE AND THE NUMBER OF SHARES TO BE SOLD IN THE STOCK
OFFERING
The plan of mutual holding company reorganization and stock issuance
requires that the purchase price of the common stock must be based on the
appraised pro forma market value of Monadnock Community Bancorp and Monadnock
Community Bank, as determined on the basis of an independent valuation.
Monadnock Community Bank has retained RP Financial to make this valuation. RP
Financial is a firm with extensive experience in the valuation of companies
undertaking a stock offering such as the proposed offering of Monadnock
Community Bancorp.
64
Monadnock Community Bank selected RP Financial based upon its experience and
reputation in valuing stock offerings by issuers such as Monadnock Community
Bancorp. For its services in making this appraisal, RP Financial's fees and
out-of-pocket expenses are estimated to be $35,000. Monadnock Community Bank has
agreed to indemnify RP Financial and any employees of RP Financial who act for
or on behalf of RP Financial in connection with the appraisal against any and
all loss, cost, damage, claim, liability or expense of any kind, including
claims under federal and state securities laws, arising out of any misstatement
or untrue statement of a material fact or an omission to state a material fact
in the information supplied by Monadnock Community Bank to RP Financial, unless
RP Financial is determined to be negligent or otherwise at fault.
RP Financial issued its appraisal in reliance upon the information
contained in this prospectus, including the financial statements. RP Financial
also considered the following factors, among others:
o the present and projected operating results and financial condition of
Monadnock Community Bancorp and Monadnock Community Bank, which were
prepared by Monadnock Community Bank then adjusted by RP Financial to
reflect the net proceedings of the offering and the economic and
demographic conditions in Monadnock Community Bank's existing
marketing areas;
o certain historical, financial and other information relating to
Monadnock Community Bank, which were prepared by Monadnock Community
Bank;
o a comparative evaluation of the operating and financial statistics of
Monadnock Community Bank with those of other similarly situated
publicly-traded mutual holding companies;
o the aggregate size of the offering of the common stock;
o the impact of the stock offering on Monadnock Community Bank's net
worth and earnings potential as calculated by RP Financial;
o the proposed dividend policy of Monadnock Community Bancorp and
Monadnock Community Bank; and
o the trading market for securities of comparable institutions and
general conditions in the market for such securities.
The appraisal also incorporated an analysis of a peer group of publicly-traded
mutual holding companies that RP Financial considered to be comparable to
Monadnock Community Bancorp. The peer group analysis conducted by RP Financial
included a total of 10 publicly-traded mutual holding companies, all of whom had
less than $825 million in assets. The analysis of comparable publicly-traded
institutions included an evaluation of the average and median price-to-earnings,
price-to-book value ratios and price-to-assets indicated by the market prices of
the peer companies, among other factors. RP Financial applied the peer group's
pricing ratios as adjusted for certain qualitative valuation factors to account
for differences between Monadnock
65
Community Bancorp's and the peer group, to Monadnock Community Bancorp's pro
forma earnings, book value and assets to derive the estimated pro forma market
value of Monadnock Community Bancorp.
In its review of the appraisal provided by RP Financial, the board of
directors reviewed the methodologies and the appropriateness of the assumptions
used by RP Financial in addition to the factors listed above, and the board of
directors believes that these assumptions were reasonable.
On the basis of the foregoing, RP Financial has advised Monadnock
Community Bancorp and Monadnock Community Bank that in its opinion, dated March
5, 2004, the estimated pro forma market value of Monadnock Community Bancorp on
a fully converted basis ranged from a minimum of $6.4 million to a maximum of
$8.6 million with a midpoint of $7.5 million. The board of directors of
Monadnock Community Bank determined that the common stock should be sold at
$8.00 per share. Based on the estimated valuation range and the purchase price,
the number of shares of common stock that Monadnock Community Bancorp will issue
will range from between 796,875 shares at the minimum and 1,078,125 shares at
the maximum of the range, with a midpoint of 937,500 shares. The Board
determined to offer for sale 45.0% of these shares, or between 358,594 shares
and 485,156 shares, with a midpoint of 421,875 shares, the offering range, to
depositors and the public pursuant to this prospectus. The 55.0% of the shares
of Monadnock Community Bancorp stock that are not offered for sale in the
offering will be issued to Monadnock Mutual Holding Company.
The following table presents a summary of selected pricing ratios for
the peer group companies and the resulting pricing ratios for Monadnock
Community Bancorp, reflecting the pro forma impact of the stock offering.
Compared to the average pricing ratios of the peer group, Monadnock Community
Bancorp's pro forma pricing ratios at the midpoint of the offering range
indicated a premium of 1,078% on a price-to-earnings basis, a discount of 17.5%
on a price-to-book basis and a discount of 20.2% on a price-to-tangible book
value basis. The estimated appraised value and the resulting discounts took into
consideration the potential financial impact of the stock offering.
66
Pro Forma Pro Forma
Price to Price to Pro Forma Price
Earnings Book to Tangible Book
Multiple(1) Value Ratio Value
--------------- --------------- -----------------
Monadnock Community Bancorp (fully converted basis) as of
March 5, 2004
15% above maximum........................................... 477.05 89.29% 89.29%
Maximum..................................................... 408.66 86.96 86.96
Midpoint.................................................... 350.73 84.43 84.43
Minimum..................................................... 294.33 81.23 81.23
All Full-Converted Thrifts Publicly Traded on the NYSE, NASDAQ &
AMEX as of March 5, 2004
Averages.................................................... 18.08x 167.69% 180.29%
Medians..................................................... 17.05 156.46 167.01
Valuation of Peer Group Institutions (fully converted basis)
as of March 5, 2004
Averages.................................................... 29.76x 102.33% 105.86%
Medians..................................................... 29.32 102.64 107.22
- --------------
(1) Reflects earnings for the most recent trailing twelve month period for which
data is publicly available.
RP FINANCIAL'S VALUATION IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING THESE SHARES.
RP FINANCIAL DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION PROVIDED BY MONADNOCK COMMUNITY BANCORP OR MONADNOCK
COMMUNITY BANK, NOR DID RP FINANCIAL VALUE INDEPENDENTLY THE ASSETS OR
LIABILITIES OF MONADNOCK COMMUNITY BANCORP OR MONADNOCK COMMUNITY BANK. THE
VALUATION CONSIDERS MONADNOCK COMMUNITY BANK AS A GOING CONCERN AND SHOULD NOT
BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF MONADNOCK COMMUNITY
BANK. MOREOVER, BECAUSE THIS VALUATION IS NECESSARILY BASED UPON ESTIMATES AND
PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME
TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING COMMON STOCK IN THE
OFFERINGS WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES AT OR ABOVE THE
PURCHASE PRICE OR IN THE RANGE OF THE VALUATION DESCRIBED ABOVE.
Prior to completion of the stock offering, the maximum of the estimated
valuation range may be increased up to 15% and the number of shares of common
stock offered for sale may be increased to 557,930 shares to reflect changes in
market and financial conditions or to fill the orders of the employee stock
ownership plan without the resolicitation of subscribers. See "- Limitations on
Stock Purchases" as to the method of distribution and allocation of additional
shares that may be issued in the event of an increase in the estimated offering
range to fill unfilled orders in the subscription offering.
No sale of shares of common stock in the stock offering may be completed
unless prior to such completion RP Financial confirms that nothing of a material
nature has occurred which, taking into account all relevant factors, would cause
it to conclude that the aggregate value of the common stock to be issued is
materially incompatible with the estimate of the aggregate
67
consolidated pro forma market value of Monadnock Community Bancorp and Monadnock
Community Bank. If this confirmation is not received, Monadnock Community
Bancorp may cancel the stock offering, extend the offering period and establish
a new estimated valuation and offering range and/or estimated price range,
extend, reopen or hold a new offering or take any other action the Office of
Thrift Supervision may permit.
The estimated valuation range may be amended with the approval of the
Office of Thrift Supervision, if required, or if necessitated by subsequent
developments in the financial condition of Monadnock Community Bancorp and
Monadnock Community Bank or market conditions generally. In the event the
estimated market value is updated to amend the value of Monadnock Community
Bancorp on a fully converted basis below $6.4 million or above $9.9 million,
which is the maximum of the estimated fully converted valuation range, as
adjusted by 15%, a new appraisal will be filed with the Office of Thrift
Supervision. Purchasers will be resolicited and be permitted to continue their
orders, in which case they will need to reconfirm their subscriptions prior to
the expiration of the resolicitation offering or their subscription funds will
be promptly refunded with interest at Monadnock Community Bank's current rate of
interest on savings accounts and deposit account withdrawals will be cancelled,
or be permitted to modify or rescind their subscriptions. Any change in the
estimated offering range must be approved by the Office of Thrift Supervision.
An increase in the number of shares of common stock as a result of an
increase in the estimated pro forma market value would decrease both a
subscriber's ownership interest and Monadnock Community Bancorp's pro forma net
income and stockholders' equity on a per share basis while increasing pro forma
net income and stockholders' equity on an aggregate basis. A decrease in the
number of shares of common stock would increase both a subscriber's ownership
interest and Monadnock Community Bancorp's pro forma net income and
stockholders' equity on a per share basis while decreasing pro forma net income
and stockholders' equity on an aggregate basis. See "Risk Factors - We intend to
grant stock options and restricted stock to the board and management following
the stock offering which could reduce your ownership interest" and "Pro Forma
Data."
Copies of the appraisal report of RP Financial, including any
amendments, and the detailed report of the appraiser setting forth the method
and assumptions for the appraisal are available for inspection at the main
office of Monadnock Community Bank and the other locations specified under
"Additional Information."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
Under the plan of stock issuance, rights to subscribe for the purchase
of common stock in the subscription offering have been granted to the following
persons in the following order of descending priority:
o depositors of Monadnock Community Bank with account balances of at
least $50.00 as of the close of business on December 31, 2002
("Eligible Account Holders"),
o tax-qualified employee plans, including the employee stock ownership
plan ("Tax-Qualified Employee Plans"),
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o depositors of Monadnock Community Bank with account balances of at
least $50.00 as of the close of business on March 31, 2004
("Supplemental Eligible Account Holders"), and
o other depositors of Monadnock Community Bank, who do not qualify in
the preceding categories ("Other Members").
All subscriptions received will be subject to the availability of common stock
after satisfaction of all subscriptions of all persons having prior rights in
the subscription offering and to the maximum and minimum purchase limitations
set forth in the plan of stock issuance and as described below under "-
Limitations on Stock Purchases."
PREFERENCE CATEGORY NO. 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible
Account Holder shall receive, without payment, first priority, nontransferable
subscription rights to subscribe for shares of common stock in an amount equal
to the greater of:
(1) $70,000 or 8,750 shares of common stock;
(2) one-tenth of one percent of the total offering of shares of
common stock; or
(3) 15 times the product, rounded down to the next whole number,
obtained by multiplying the total number of shares of common
stock to be sold by a fraction, of which the numerator is the
amount of the qualifying deposit of the Eligible Account Holder
and the denominator is the total amount of qualifying deposits
of all Eligible Account Holders in Monadnock Community Bank in
each case as of the close of business on December 31, 2002, the
"Eligibility Record Date,"
subject to the overall purchase limitations. See "- Limitations on Stock
Purchases."
If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated among subscribing Eligible Account
Holders so as to permit each such Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his or her total
allocation equal to the lesser of the number of shares subscribed for or 100
shares. Thereafter, any shares remaining will be allocated among the subscribing
Eligible Account Holders whose subscriptions remain unfilled pro rata in the
proportion that the amounts of their respective qualifying deposits bear to the
total amount of qualifying deposits of all subscribing Eligible Account Holders
whose subscriptions remain unfilled. For example, if an Eligible Account Holder
with an unfilled subscription has qualifying deposits totaling $100, and the
total amount of qualifying deposits for Eligible Account Holders with unfilled
subscriptions was $1,000, then the number of shares that may be allocated to
fill this Eligible Account Holder's subscription would be 10% of the shares
remaining available, up to the amount subscribed for. Subscription rights of
Eligible Account Holders will be subordinated to the priority rights of
Tax-Qualified Employee Plans to purchase shares in excess of the maximum of the
estimated offering range.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest as of December 31, 2002. Failure to list an account could result in
fewer shares being allocated than if all accounts
69
had been disclosed. The subscription rights of Eligible Account Holders who are
also directors or officers of Monadnock Community Bank or their associates will
be subordinated to the subscription rights of other Eligible Account Holders to
the extent attributable to increased deposits in the year preceding December 31,
2002.
PREFERENCE CATEGORY NO. 2: TAX-QUALIFIED EMPLOYEE PLANS. Each
Tax-Qualified Employee Plan, including the employee stock ownership plan, shall
be entitled to receive, without payment therefore, second priority,
nontransferable subscription rights to purchase up to 10.0% of the common stock,
provided that individually or in the aggregate such plans (other than that
portion of such plans which is self-directed) shall not purchase more than 10.0%
of the shares of common stock, including any increase in the number of shares of
common stock after the date hereof as a result of an increase of up to 15% in
the maximum of the estimated offering range. The proposed Monadnock Community
Bancorp Employee Stock Ownership Plan intends to purchase 4.0% of the shares of
common stock sold in the stock offering, or 14,343 shares and 19,406 shares
based on the minimum and maximum of the estimated offering range, respectively.
Subscriptions by the Tax-Qualified Employee Plan will not be aggregated with
shares of common stock purchased directly by or which are otherwise attributable
to any other participants in the subscription and direct community offerings,
including subscriptions of any of Monadnock Community Bank's directors,
officers, employees or associates thereof. Subscription rights received pursuant
to this category shall be subordinated to all rights received by Eligible
Account Holders to purchase shares pursuant to Preference Category No. 1;
provided, however, that notwithstanding any other provisions of the plan of
stock issuance to the contrary, in the event that the total number of shares
offered in the stock offering is increased to an amount greater than the number
of shares representing the maximum of the estimated offering range, each
Tax-Qualified Employee Plan will have a priority right to purchase any such
shares exceeding the maximum of the estimated offering range up to an aggregate
of 10.0% of the common stock sold in the stock offering. See "Management -
Benefits - Employee Stock Ownership Plan."
PREFERENCE CATEGORY NO. 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the
extent that there are sufficient shares remaining after satisfaction of
subscriptions by Eligible Account Holders and Tax Qualified Employee Plans, each
Supplemental Eligible Account Holder shall be entitled to receive, without
payment therefor, third priority, nontransferable subscription rights to
subscribe for shares of common stock in an amount equal to the greater of:
(1) $70,000 or 8,750 shares of common stock;
(2) one-tenth of one percent of the total offering of shares of
common stock; or
(3) 15 times the product, rounded down to the next whole number,
obtained by multiplying the total number of shares of common
stock to be issued by a fraction, of which the numerator is the
amount of the qualifying deposit of the Supplemental Eligible
Account Holder and the denominator of which is the total amount
of qualifying deposits of all Supplemental Eligible Account
Holders in Monadnock Community Bank in each case on the close of
business on March 31, 2004, the "Supplemental Eligibility Record
Date,"
70
subject to the overall purchase limitations. See "Limitations on Stock
Purchases."
If there are not sufficient shares available to satisfy all
subscriptions of all Supplemental Eligible Account Holders, available shares
first will be allocated among subscribing Supplemental Eligible Account Holders
so as to permit each Supplemental Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his total
allocation, including the number of shares, if any, allocated in accordance with
Preference Category No. 1, equal to the lesser of the number of shares
subscribed for or 100 shares. Thereafter, any shares remaining available will be
allocated among the Supplemental Eligible Account Holders whose subscriptions
remain unfilled pro rata in the proportion that the amounts of their respective
qualifying deposits bear to the total amount of qualifying deposits of all
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unfilled.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest as of March 31, 2004. Failure to list an account could result in fewer
shares being allocated than if all accounts had been disclosed. The subscription
rights of Eligible Account Holders who are also directors or officers of
Monadnock Community Bank or their associates will be subordinated to the
subscription rights of other Eligible Account Holders to the extent attributable
to increased deposits in the year preceding March 31, 2004.
PREFERENCE CATEGORY NO. 4: OTHER MEMBERS. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by Eligible
Account Holders, the Tax-Qualified Employee Plans and Supplemental Eligible
Account Holders, each Other Member shall receive without payment therefor,
fourth priority, non-transferable subscription rights to subscribe for shares of
Monadnock Community Bancorp common stock, up to $70,000 or 8,750 shares of
common stock or one-tenth of one percent of the total offering of shares of
common stock, subject to the overall purchase limitations.
In the event the Other Members subscribe for a number of shares which,
when added to shares subscribed for by Eligible Account Holders, the
Tax-Qualified Employees Plans and Supplemental Eligible Accounts Holders, is in
excess of the total number of shares of common stock offered in the stock
offering, available shares will be allocated among the subscribing other members
pro rata in the same proportion that his or her number of votes on the close of
business on __________, 2004, the date for determining voting members entitled
to vote at the special meting, which we call the voting record dates, bears to
the total number of votes on the voting record date to all subscribing other
members on such date. Such number of votes shall be determined based on
Monadnock Community Banks' mutual charter and bylaws in effect on the date of
approval by the members of the plan of mutual holding reorganization and stock
issuance.
See "- Limitations on Stock Purchases."
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The subscription offering
will expire at 10:00 a.m., Eastern Daylight Time, on __________, 2004 (the
"Expiration Date"), unless extended for up to 45 days or for such additional
periods by Monadnock Community Bancorp and Monadnock Community Bank as may be
approved by the Office of Thrift Supervision. The
71
stock offering may not be extended beyond _________, 2006. Subscription rights
which have not been exercised prior to the expiration date, unless extended,
will become void.
Monadnock Community Bancorp and Monadnock Community Bank will not
execute orders until at least the minimum number of shares of common stock,
358,594 shares, have been subscribed for or otherwise sold. If the minimum
number of shares have not been subscribed for or sold within 45 days after the
Expiration Date, unless this period is extended with the consent of the Office
of Thrift Supervision, all funds delivered to Monadnock Community Bank pursuant
to the subscription offering will be returned promptly to the subscribers with
interest and all withdrawal authorizations will be canceled. If an extension
beyond the 45-day period following the Subscription Expiration Date is granted,
Monadnock Community Bancorp and Monadnock Community Bank will notify subscribers
of the extension of time and of any rights of subscribers allowing them to
confirm, modify or rescind their subscriptions. Orders of those who do not reply
during the resolicitation period will be cancelled as described above.
DIRECT COMMUNITY OFFERING
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of Eligible Account Holders, Tax-Qualified
Employee Plans and Supplemental Eligible Account Holders, we may choose to offer
shares pursuant to the plan of stock issuance to members of the general public
who receive a prospectus, with a preference given to natural persons residing in
Hillsborough and Cheshire Counties, New Hampshire. These natural persons are
referred to as preferred subscribers. No person may subscribe for or purchase
more than $70,000 of common stock in the direct community offering, if any,
subject to the maximum purchase limitations. See "- Limitations on Stock
Purchases." Monadnock Community Bancorp and Monadnock Community Bank may limit
total subscriptions in the direct community offering so as to assure that the
number of shares available for the syndicated community offering may be up to a
specified percentage of the number of shares of common stock. Orders for stock
received in any community offering must first be filled to a maximum of two
percent of the shares offered in the stock offering and any remaining shares
must be allocated on an equal number of shares per order until all orders have
been filled. The term "residing" as used in this prospectus means any person who
occupies a dwelling within Hillsborough or Cheshire counties, has a present
intent to remain for a period of time, and manifests the genuineness of that
intent by establishing ongoing physical presence, together with an indication
that such presence is something other than merely transitory in such counties.
We may utilize deposit or loan records or other evidence provided to us to
decide whether a person is a resident. In all, however, the determination shall
be in our sole discretion.
Finally, Monadnock Community Bancorp and Monadnock Community Bank may
reserve shares offered in the direct community offering for sales to
institutional investors. The opportunity to subscribe for shares of common stock
in any direct community offering will be subject to the right of Monadnock
Community Bancorp and Monadnock Community Bank, in their sole discretion, to
accept or reject any orders in whole or in part from any person either at the
time of receipt of an order or as soon as practicable following the Subscription
Expiration Date. The direct community offering, if any, shall be for a period of
not more than 45 days unless extended by Monadnock Community Bancorp and
Monadnock Community Bank, and shall commence concurrently with, during or
promptly after the subscription offering.
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SYNDICATED COMMUNITY OFFERING
As a final step in the stock offering, the plan of stock issuance
provides that, if feasible, all shares of common stock not purchased in the
subscription offering and direct community offering may be offered for sale to
selected members of the general public in a syndicated community offering
through a syndicate of registered broker-dealers managed by Ryan Beck, Inc. as
agent for Monadnock Community Bancorp. We call this the syndicated community
offering. We expect that the syndicated community offering will commence as soon
as practicable after termination of the subscription offering and the direct
community offering, if any. We, in our sole discretion, have the right to reject
orders in whole or in part received in the syndicated community offering.
Neither Ryan Beck nor any registered broker-dealer shall have any obligation to
take or purchase any shares of common stock in the syndicated community
offering; however, Ryan Beck has agreed to use its best efforts in the sale of
shares in the syndicated community offering. Orders for stock received in any
syndicated community offering must first be filled to a maximum of two percent
of the shares offered in the stock offering and any remaining shares must be
allocated on an equal number of shares per order until all orders have been
filled.
The price at which common stock is sold in the syndicated community
offering will be the same price at which shares are offered and sold in the
subscription offering and direct community offering. No person may purchase more
than $70,000 of common stock in the syndicated community offering, subject to
the maximum purchase limitations. See "- Limitations on Stock Purchases."
Ryan Beck may enter into agreements with broker-dealers to assist in the
sale of the shares in the syndicated community offering, although no agreements
of this kind exist as of the date of this prospectus. No orders may be placed or
filled by or for a selected dealer during the subscription offering.
The syndicated community offering will be conducted in accordance with
certain SEC rules applicable to best efforts offerings. Generally under those
rules, Ryan Beck, a broker-dealer, will deposit funds it receives prior to the
closing date from interested investors into a separate non-interest bearing bank
account. If and when all conditions for the closing are met, funds for common
stock sold by Ryan Beck in the syndicated community offering will be promptly
delivered to us. If the offering closes, but some or all of an interested
investor's funds are not accepted by us, those funds in the account will be
promptly returned, without interest, to the potential investor. Normal customer
ticketing will be used. In the syndicated community offering, subscription
agreements will not be used.
The syndicated community offering will be completed within 90 days after
the termination of the subscription offering, unless extended by Monadnock
Community Bancorp with the approval of the Office of Thrift Supervision, but in
no event later than _______, 2004. The syndicated community offering may not be
extended past ________, 2006. See "- How We Determined Our Price and the Number
of Shares to be Sold in the Stock Offering" above for a discussion of rights of
subscribers, if any, in the event an extension is granted.
73
PERSONS WHO ARE NOT PERMITTED TO PARTICIPATE IN THE STOCK OFFERING
Monadnock Community Bancorp will make reasonable efforts to comply with
the securities laws of all states in the United States in which persons entitled
to subscribe for stock pursuant to the plan of stock issuance reside. However,
Monadnock Community Bancorp is not required to offer stock in the subscription
offering to any person who resides in a foreign country or resides in a state of
the United States with respect to which:
o the number of persons otherwise eligible to subscribe for shares
under the plan of stock issuance who reside in such jurisdiction is
small;
o the granting of subscription rights or the offer or sale of shares
of common stock to these persons would require any of Monadnock
Community Bancorp and Monadnock Community Bank or their officers,
directors or employees, under the laws of that jurisdiction, to
register as a broker, dealer, salesman or selling agent or to
register or otherwise qualify its securities for sale in that
jurisdiction or to qualify as a foreign corporation or file a consent
to service of process in that jurisdiction; or
o the registration, qualification or filing in the judgment of
Monadnock Community Bancorp would be impracticable or unduly
burdensome for reasons of cost or otherwise.
Where the number of persons eligible to subscribe for shares in one state is
small, Monadnock Community Bancorp will base its decision as to whether or not
to offer the common stock in that state on a number of factors, including but
not limited to the size of accounts held by account holders in the state, the
cost of registering or qualifying the shares or the need to register Monadnock
Community Bancorp or Monadnock Community Bank, its officers, directors or
employees as brokers, dealers or salesmen.
LIMITATIONS ON STOCK PURCHASES
The plan of stock issuance includes the following limitations on the
number of shares of Monadnock Community Bancorp common stock which may be
purchased in the stock offering:
(1) No fewer than 25 shares or $200 of common stock may be
purchased, to the extent shares are available;
(2) Each Eligible Account Holder may subscribe for and purchase in
the subscription offering up to the greater of:
(a) $70,000 or 8,750 shares of common stock;
(b) one-tenth of one percent of the total offering of shares
of common stock; or
(c) 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of
shares of common stock to be sold by a fraction, of
which the numerator is the amount of the qualifying
deposit
74
of the Eligible Account Holder and the denominator is
the total amount of qualifying deposits of all Eligible
Account Holders in Monadnock Community Bank in each case
as of the close of business on the Eligibility Record
Date, subject to the overall limitation in clause (7)
below;
(3) The Tax-Qualified Employee Plans, including an employee stock
ownership plan, may purchase in the aggregate up to 10.0% of the
shares of common stock issued in the stock offering, and
including any additional shares sold in the event of an increase
in the estimated offering range; although at this time the
employee stock ownership plan intends to purchase only 4.0% of
the shares sold in the stock offering;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the subscription offering up to the greater of:
(a) $70,000 or 8,750 shares of common stock;
(b) one-tenth of one percent of the total offering of shares
of common stock; or
(c) 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of
shares of common stock to be sold by a fraction, of
which the numerator is the amount of the qualifying
deposit of the Supplemental Eligible Account Holder and
the denominator is the total amount of qualifying
deposits of all Supplemental Eligible Account Holders in
Monadnock Community Bank in each case as of the close of
business on the Supplemental Eligibility Record Date,
subject to the overall limitation in clause (7) below;
(5) Each Other Member may subscribe for and purchase in the
subscription offering up to $70,000 or one-tenth of one percent
of the total offering of shares of common stock, subject to the
overall limitations in clause (7) below.
(6) Persons purchasing shares of common stock in the direct
community or syndicated public offering may purchase in the
direct community or syndicated community offering respectively,
up to $70,000 or 8,750 shares of common stock, subject to the
overall limitation in clause (7) below;
(7) Except for the Tax-Qualified Employee Plans, irrespective of the
purchase limitations set forth in clauses 2(c) and 4(c) above,
the maximum number of shares of Monadnock Community Bancorp
common stock subscribed for or purchased in all categories of
the offerings by any person, together with associates of and
groups of persons acting in concert with such persons, shall not
exceed 2.5% of the common stock sold in the stock offering; and
(8) No more than 35% of the total number of shares offered for sale
in the stock offering may be purchased by directors and officers
of Monadnock Community Bank
75
and their associates in the aggregate, excluding purchases by
Tax-Qualified Employee Plans.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, the boards of directors of Monadnock Community
Bancorp and Monadnock Community Bank may, in their sole discretion, increase the
individual amount permitted to be subscribed for to a maximum of 9.99% of the
number of shares sold in the stock offering, provided that orders for shares
exceeding 5% of the shares being offered in the stock offering shall not exceed,
in the aggregate, 10% of the shares being offered in the stock offering.
Requests to purchase additional shares of common stock will be allocated by the
boards of directors on a pro rata basis giving priority in accordance with the
preference categories set forth in this prospectus.
The term "associate" when used to indicate a relationship with any
person means:
o any corporation or organization (other than Monadnock Community Bank,
Monadnock Community Bancorp, or a majority-owned subsidiary of either
of them) of which such person is a director, officer or partner or is
directly or indirectly the beneficial owner of 10% or more of any
class of equity securities;
o any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity;
o any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a director or
officer of Monadnock Community Bank, Monadnock Community Bancorp or
any subsidiary of Monadnock Community Bank, or Monadnock Community
Bancorp or any affiliate thereof; and
o any person acting in concert with any of the persons or entities
specified above;
provided, however, that Tax-Qualified or Non-Tax Qualified Employee Plans will
not be deemed to be an associate of any director or officer of Monadnock
Community Bancorp or Monadnock Community Bank, to the extent provided in the
plan of stock issuance. When used to refer to a person other than an officer or
director of Monadnock Community Bank, the board of directors of Monadnock
Community Bank or officers delegated by the board of directors in their sole
discretion may determine the persons that are associates of other persons.
The term "acting in concert" is defined to mean knowing participation in
a joint activity or interdependent conscious parallel action towards a common
goal whether or not pursuant to an express agreement, or a combination or
pooling of voting or other interests in the securities of an issuer for a common
purpose pursuant to any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. A person or company which acts
in concert with another person or company shall also be deemed to be acting in
concert with any person or company who is also acting in concert with that other
party, except that the Tax Qualified Employee Plans will not be deemed to be
acting in concert with their trustees or a person who serves in a similar
capacity solely for the purpose of determining whether stock held by the trustee
and stock held by each plan will each be delegated. The determination of whether
76
a group is acting in concert shall be made solely by the board of directors of
Monadnock Community Bank or officers delegated by such board of directors and
may be based on any evidence upon which such board or delegatee chooses to rely.
MARKETING ARRANGEMENTS
We have retained Ryan Beck as our financial and marketing advisor to
consult with and to advise Monadnock Community Bank, and to assist Monadnock
Community Bancorp, on a best efforts basis, in the distribution of the shares of
common stock in the offering. The services that Ryan Beck will provide include,
but are not limited to:
o training the employees of Monadnock Community Bank who will perform
ministerial functions in the subscription offering and direct
community offering regarding the mechanics of the stock offering
process;
o managing the stock information center by assisting interested stock
subscribers and by keeping records of all stock orders; and
o targeting our sales effort and preparing marketing materials.
For its services, Ryan Beck will receive a management fee of $25,000 and
a success fee of $100,000. In the event that selected dealers are used to assist
in the sale of shares of Monadnock Community Bancorp common stock in the direct
community offering, these dealers will be paid a fee of up to 6.0% of the total
purchase price of the shares they sell. Monadnock Community Bancorp and
Monadnock Community Bank have agreed to indemnify Ryan Beck against claims or
liabilities, including liabilities under the Securities Act of 1933, as amended,
and will contribute to payments Ryan Beck may be required to make in connection
with any such claims or liabilities.
Sales of shares of Monadnock Community Bancorp common stock will be made
by registered representatives affiliated with Ryan Beck or by the broker-dealers
managed by Ryan Beck. Ryan Beck has undertaken that the shares of Monadnock
Community Bancorp common stock will be sold in a manner which will ensure that
the distribution standards of the National Association of Securities Dealers
will be met. A stock information center will be established at Monadnock
Community Bank's office located at One Jaffrey Road, Peterborough, New Hampshire
03458. Monadnock Community Bancorp will rely on Rule 3a4-1 of the Securities
Exchange Act of 1934 and sales of Monadnock Community Bancorp common stock will
be conducted within the requirements of this rule, so as to permit officers,
directors and employees to participate in the sale of Monadnock Community
Bancorp common stock in those states where the law permits. No officer, director
or employee of Monadnock Community Bancorp or Monadnock Community Bank will be
compensated directly or indirectly by the payment of commissions or other
remuneration in connection with his or her participation in the sale of common
stock. Ryan Beck has not prepared a report or opinion constituting
recommendations or advice to Monadnock Community Bank or Monadnock Community
Bancorp in connection with the stock offering. In addition, Ryan Beck has
expressed no opinion as to the prices at which Monadnock Community Bancorp
common stock to be offered in the stock offering may trade.
77
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION OFFERING
To ensure that each purchaser receives a prospectus at least 48 hours
before the Subscription Expiration Date, unless extended, in accordance with
Rule 15c2-8 of the Securities Exchange Act of 1934, no prospectus will be mailed
any later than five days prior to that date or hand delivered any later than two
days prior to that date. Execution of the order form will confirm receipt or
delivery in accordance with Rule 15c2-8. Order forms will only be distributed
with a prospectus.
To purchase shares in the subscription offering, an executed order form
with the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at Monadnock Community Bank,
which may be given by completing the appropriate blanks in the order form, must
be received by Monadnock Community Bank by 12:00 Noon, Eastern Daylight Time, on
the Subscription Expiration Date, unless extended. In addition, Monadnock
Community Bancorp and Monadnock Community Bank will require a prospective
purchaser to execute a certification in the form required by applicable Office
of Thrift Supervision regulations in connection with any sale of common stock.
Order forms which are not received by this time or are executed defectively or
are received without full payment, or appropriate withdrawal instructions, are
not required to be accepted. In addition, Monadnock Community Bank will not
accept orders submitted on photocopied or facsimiled order forms nor order forms
unaccompanied by an executed certification form. Monadnock Community Bank has
the right to waive or permit the correction of incomplete or improperly executed
forms, but does not represent that it will do so. Once received, an executed
order form may not be modified, amended or rescinded without the consent of
Monadnock Community Bank, unless the stock offering has not been completed
within 45 days after the end of the subscription offering, or this period has
been extended.
In order to ensure that Eligible Account Holders, Tax-Qualified Employee
Plans, Supplemental Eligible Account Holders and Other Members are properly
identified as to their stock purchase priority, depositors as of the close of
business on the Eligibility Record Date, December 31, 2002, the Supplemental
Eligibility Record Date, March 31, 2004, or for Other Members, on the voting
record date, must list all accounts on the stock order form giving all names in
each account and the account numbers.
Payment for subscriptions may be made:
o by check or money order;
o by authorization of withdrawal from deposit accounts maintained with
Monadnock Community Bank(including a certificate of deposit); or
o in cash, if delivered in person at the office of Monadnock Community
Bank, although we request that you exchange cash for a check with any
of our tellers.
No wire transfers will be accepted. Payments for shares subscribed for,
other than withdrawals from a deposit account at Monadnock Community Bank, will
be deposited in a segregated deposit account at Monadnock Community Bank or in a
trust account at
78
___________________, an FDIC insured financial institution. Interest will be
paid on payments made by cash, check or money order at our then-current savings
account rate from the date payment is received until completion of the stock
offering. If payment is made by authorization of withdrawal from deposit
accounts, the funds authorized to be withdrawn from a deposit account will
continue to accrue interest at the contractual rate, but may not be used by the
subscriber until all of Monadnock Community Bancorp common stock has been sold
or the plan of stock offering is terminated, whichever is earlier.
If a subscriber authorizes Monadnock Community Bank to withdraw the
amount of the purchase price from his deposit account, Monadnock Community Bank
will do so as of the effective date of the completion of the stock offering.
Monadnock Community Bank will waive any applicable penalties for early
withdrawal from certificate accounts.
In the event of an unfilled amount of any subscription order, Monadnock
Community Bank will make an appropriate refund or cancel an appropriate portion
of the related withdrawal authorization, after completion of the stock offering.
If for any reason the stock offering is not consummated, purchasers will have
refunded to them all payments made, with interest, and all withdrawal
authorizations will be canceled in the case of subscription payments authorized
from accounts at Monadnock Community Bank.
If any Tax-Qualified Employee Plans or Non-Tax Qualified Employee Plans
subscribe for shares during the subscription offering, these plans will not be
required to pay for the shares subscribed for at the time they subscribe, but
rather, may pay for shares of common stock subscribed for at the purchase price
upon completion of the subscription offering and direct community offering, if
all shares are sold, or upon completion of the syndicated community offering if
shares remain to be sold in that offering. In the event that, after the
completion of the subscription offering, the amount of shares to be issued is
increased above the maximum of the estimated valuation range included in this
prospectus, the Tax-Qualified and Non-Tax Qualified Employee Plans will be
entitled to increase their subscription by a percentage equal to the percentage
increase in the amount of shares to be issued above the maximum of the estimated
valuation range, provided that such subscription will continue to be subject to
applicable purchase limits and stock allocation procedures.
Owners of self-directed IRA may use the assets of their IRAs to purchase
shares of Monadnock Community Bancorp common stock in the subscription offering
and direct community offering. Federal law requires that officers, directors and
10% stockholders who use self-directed IRA funds to purchase shares of common
stock in the offerings make the purchases for the exclusive benefit of the IRAs.
IRAs maintained at Monadnock Community Bank are not self-directed IRAs and any
interested parties wishing to use IRA funds for stock purchases may do so, but
are advised to contact the stock information center at (___) ___-____ for
additional information as soon as possible.
The records of Monadnock Community Bank will be deemed to control with
respect to all matters related to the existence of subscription rights and one's
ability to purchase shares of common stock in the subscription offering.
79
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Pursuant to rules and regulations of the Office of Thrift Supervision,
no person with subscription rights may transfer or enter into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the plan of stock issuance or the shares of common stock to
be issued upon their exercise. These rights may be exercised only by the person
to whom they are granted and only for that person's account. Each person
exercising subscription rights will be required to certify that the person is
purchasing shares solely for the person's own account and that the person has no
agreement or understanding regarding the sale or transfer of the shares.
Regulations also prohibit any person from offering or making an announcement of
an offer or intent to make an offer to purchase such subscription rights or
shares of common stock prior to the completion of the stock offering.
We will refer to the Office of Thrift Supervision any situations that we
believe may involve a transfer of subscription rights and will not honor orders
believed by us to involve the transfer of these rights.
DELIVERY OF CERTIFICATES
Certificates representing common stock issued in the stock offering will
be mailed by Monadnock Community Bancorp's transfer agent to the persons
entitled thereto at the addresses of the persons appearing on the stock order
form as soon as practicable following completion of the stock offering. Any
certificates returned as undeliverable will be held by Monadnock Community
Bancorp until claimed by persons legally entitled to them or otherwise disposed
of in accordance with applicable law. Until certificates for common stock are
available and delivered to subscribers, they may not be able to sell the shares
of common stock for which they have subscribed, even though trading of the
common stock may have commenced.
REQUIRED APPROVALS
Various approvals of the Office of Thrift Supervision are required in
order to consummate the stock offering. The Office of Thrift Supervision has
approved the plan of mutual holding company reorganization and stock issuance
subject to standard conditions.
Monadnock Community Bancorp is required to make certain filings with
state securities regulatory authorities in connection with the issuance of
Monadnock Community Bancorp common stock in the offerings.
RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER THE STOCK OFFERING
All shares of common stock purchased in connection with the stock
offering by a director or an executive officer of Monadnock Community Bancorp
and Monadnock Community Bank will be subject to a restriction that the shares
not be sold for a period of one year following the stock offering except in the
event of the death of the director or officer or pursuant to a merger or similar
transaction approved by the Office of Thrift Supervision. Each certificate for
restricted shares will bear a legend giving notice of this restriction on
transfer, and instructions will be issued to the effect that any transfer within
this time period of any certificate or record ownership of the shares other than
as provided above is a violation of the restriction. Any shares of
80
common stock issued at a later date within this one year period as a stock
dividend, stock split or otherwise with respect to the restricted stock will be
subject to the same restrictions.
Purchases of common stock of Monadnock Community Bancorp by directors,
executive officers and their associates during the three-year period following
completion of the stock offering may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the Office of
Thrift Supervision. This restriction does not apply, however, to negotiated
transactions involving more than 1% of Monadnock Community Bancorp's outstanding
common stock or to purchases of stock pursuant to an employee stock benefit
plan.
Pursuant to Office of Thrift Supervision regulations, in general
Monadnock Community Bancorp may not repurchase any shares of the common stock,
for a period of one year following the stock offering, other than pursuant to
(a) an offer to all stockholders on a pro rata basis which is approved by the
Office of Thrift Supervision or (b) through open market purchases of up to 5% of
the outstanding stock where extraordinary circumstances exist.
MANAGEMENT
MANAGEMENT OF MONADNOCK COMMUNITY BANCORP
The board of directors of Monadnock Community Bancorp will consist of
the seven individuals who currently serve as directors of Monadnock Community
Bank. The board of directors of Monadnock Community Bancorp will be divided into
three classes, as nearly equal as possible, with approximately one third of the
directors elected each year. The directors will be elected by the stockholders
of Monadnock Community Bancorp for three year terms, or until their successors
are elected and have qualified. The terms of the directors of each of Monadnock
Community Bancorp and Monadnock Community Bank are identical. Following
completion of the reorganization and the stock offering, the directors will be
elected by Monadnock Mutual Holding Company and the holders of the common stock
of Monadnock Community Bancorp not held by Monadnock Mutual Holding Company.
The following individuals will serve as the executive officers of
Monadnock Community Bancorp and hold the office set forth below opposite their
name.
Executive Position Held
--------- -------------
William M. Pierce, Jr. President and Chief Executive Officer
Donald R. Blanchette Vice President and Chief Financial Officer
Executive officers of Monadnock Community Bancorp are elected annually
and hold office until their respective successors have been elected or until
death, resignation or removal by the board of directors.
Information concerning the principal occupations, employment and
compensation of the directors and executive officers of Monadnock Community
Bancorp is set forth under "- Management of Monadnock Community Bank." Directors
of Monadnock Community Bancorp initially will not be compensated by Monadnock
Community Bancorp but will serve and be compensated by Monadnock Community Bank.
It is not anticipated that separate compensation
81
will be paid to directors of Monadnock Community Bancorp until such time as
these persons devote significant time to the separate management of Monadnock
Community Bancorp affairs, which is not expected to occur until Monadnock
Community Bancorp becomes actively engaged in additional businesses other than
holding the stock of Monadnock Community Bank. Monadnock Community Bancorp may
determine that such compensation is appropriate in the future.
MANAGEMENT OF MONADNOCK COMMUNITY BANK
Upon completion of the stock offering, the directors of Monadnock
Community Bank immediately prior to the stock offering will continue to serve as
directors of Monadnock Community Bank. The board of directors of Monadnock
Community Bank consists of seven directors divided into three classes, with
approximately one-third of the directors elected at each annual stockholder
meeting. Because Monadnock Community Bancorp will own all the issued and
outstanding capital stock of Monadnock Community Bank following the stock
offering, the board of directors of Monadnock Community Bancorp will elect the
directors of Monadnock Community Bank.
The following table sets forth information regarding the board of
directors of Monadnock Community Bank as of December 31, 2003.
Term of
Positions Held With Director Office
Name Age Monadnock Community Bank Since Expires
--------------------------- --------- ------------------------------------- ---------- ----------
Kenneth A. Christian 59 Director 2001 2004
Jack Goldstein 81 Director 1997 2004
Thomas C. LaFortune 65 Director 1997 2004
William M. Pierce, Jr. 50 Director, President and CEO 1999 2005
Kenneth R. Simonetta 62 Director 1999 2005
Samuel J. Hackler 59 Director and Vice Chairman 1996 2006
Richard J. Wargo 49 Director and Chairman of the Board 1996 2006
The business experience of each director for at least the past five
years is set forth below.
KENNETH A. CHRISTIAN. Mr. Christian is an owner and principal in the
firm of Bellows, Nichols Agency, an insurance agency, located in Peterborough,
New Hampshire. He has been associated with the firm since 1970.
JACK GOLDSTEIN. Mr. Goldstein is currently retired. He served as the
trustee for the Automobile Wholesalers Association of New England Insurance
Trust and as a management consultant for over 20 years.
THOMAS C. LAFORTUNE . Mr. LaFortune has been a self-employed tax
preparer in Peterborough, New Hampshire since 1982.
82
WILLIAM M. PIERCE, JR. Mr. Pierce has served as president and chief
executive officer of Monadnock Community Bank since October 1999. He served as
Vice President and Chief Operating Officer from August 1997 until his
appointment to such positions.
KENNETH R. SIMONETTA. Mr. Simonetta is the president of the Sims Press,
a commercial printing company located in Peterborough, New Hampshire. He has
been employed by the Sims Press since 1967.
SAMUEL J. HACKLER. Mr. Hackler is the president of New Hampshire
Antiques, Milford, New Hampshire, an antiques retail establishment that he has
operated since 1983.
RICHARD J. WARGO. Mr. Wargo is the President of Exact Auto, an
automobile parts distributor located in Conway, New Hampshire. He has been
employed by the company since 1977.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The business experience for at least the past five years for each of
three executive officers of Monadnock Community Bank, who do not serve as
directors, is set forth below.
DONALD R. BLANCHETTE. Mr. Blanchette, age 50, serves as vice president
and treasurer, a position he has held since May 2000. From July 1998 until such
time he served as treasurer.
DAVID A. REILLY. Mr. Reilly, age 62, has served as senior vice president
and senior loan officer since April 1999. He previously served as a commercial
lending officer for Granite Bank from 1991 until December 1998.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors meets monthly. During the fiscal year ended
December 31, 2003, the board of directors held 22 meetings. No director attended
fewer than 75% of the total meetings of the board of directors and committees on
which the board member served during this period.
We currently have standing Executive, Audit, Asset/Liability Management,
Loan, Compensation, Nominating, Investment and Compliance Committees. With the
exception of the Compensation and Audit Committees as to which Mr. Pierce does
not serve, all board members serve on the committees.
The Audit Committee is chaired by Mr. LaFortune. The Audit Committee
meets quarterly or more frequently as needed. The committee recommends the
independent auditors and reviews the audit report prepared by the independent
auditors. This committee met four times in fiscal 2003 and oversees the audit
activities of Monadnock Community Bank.
The Asset/Liability Committee is chaired by Mr. Pierce. The committee
meets quarterly or more frequently as needed. The Committee oversees Monadnock
Community Bank's asset liability management. The Committee reviews and monitors
Monadnock Community Bank's
83
investment portfolio, liquidity position and interest rate risk. This Committee
met six times in fiscal 2003.
The Loan Committee oversees all loan activities. The committee approves
all loans that exceed management's loan authority, periodically reviews loans
within the loan officer's loan authority and reviews all past due loans on a
monthly basis. This committee meets monthly or more frequently as needed. The
committee is chaired by Mr. Wargo. This committee met nine times in fiscal 2003.
The Compensation Committee is chaired by Mr. Wargo. The committee meets
as needed to establish compensation policies and employee compensation. The
committee met twice in fiscal 2003.
The Investment Committee is chaired by Mr. Wargo. The committee meets
quarterly and establishes the investment policy, oversees investments held by
Monadnock Community Bank and makes investment decisions that are not otherwise
delegated to management. This committee met three times in fiscal 2003.
The Nominating Committee is chaired by Mr. Wargo. This committee meets
once a year to nominate individuals for election to the board of directors.
The Compliance Committee is chaired by Mr. Wargo and oversees Monadnock
Community Bank's compliance with federal and state laws, as well as internal
policies. The committee meets as needed. The committee met six times in fiscal
2003.
DIRECTORS' COMPENSATION
Members of Monadnock Community Bank's board of directors receive a fee
of $150 per meeting attended and the board typically meets twice a month. The
Chairman of the Board receives a minimum of $500 per month. The Committee
members are not separately compensated for their service.
EXECUTIVE COMPENSATION
The following table sets forth a summary of information concerning the
compensation paid by Monadnock Community Bank, including amounts deferred to
future periods, for services rendered in all capacities during the year ended
December 31, 2003 to the president and chief executive officer of Monadnock
Community Bank. No other officer's earned compensation exceeding $100,000.
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Long Term
---------
Annual Compensation Compensation Awards
------------------- -------------------
Other Restricted
----- ----------
Annual Stock All Other
------ ----- ---------
Fiscal Compensation Award Compen-
------ ------------ ----- -------
Name and Principal Position Year Salary Bonus ($)(1) ($)(2) Options(#)(2) Sation(3)
--------------------------- ---- ------ ----- ------ ------ ------------- -------
William M. Pierce, Jr. 2003 $103,947 $ -- -- -- -- $3,100
President and Chief Executive
Officer
- -------------
(1) This amount does not include personal benefits or perquisites which did
not exceed the lesser of $50,000 or 10% of the named individual's salary
and bonus.
(2) Monadnock Community Bank does not have any stock option or restricted
stock plans. Monadnock Community Bancorp does, however, intend to adopt
such plans no earlier than six months following the stock offering. See
"- Benefits - Stock Benefit Plan."
(3) Amount represents contribution under Monadnock Community Bank's Simple
IRA.
BENEFITS
GENERAL. We currently provide health and welfare benefits to our
employees, including hospitalization and comprehensive medical insurance, life
insurance, subject to deductibles and copayments by employees.
SIMPLE IRA. Monadnock Community Bank maintains a qualified, tax-exempt
savings plan known as a Savings Incentive Match Plan for Employees of Small
Employers ("Simple IRA") with a cash or deferred feature qualifying under
Section 408(p) of the Internal Revenue Code. Employees of Monadnock Community
Bank who earned at least $1.00 in the preceding calendar year may participate in
this plan.
Participants are permitted to make salary reduction contributions to the
Plan of up to $9,000 of the participant's annual salary. In addition, Monadnock
Community Bank may match the participant's contribution on a dollar for dollar
basis up to 100% of the participant's before-tax contribution up to a maximum
contribution by Monadnock Community Bank of 3.0% of the participant's annual
salary for the year. All contributions by Monadnock Community Bank and the
participants, as well as earnings, are fully and immediately vested.
Participants may invest amounts contributed to their IRA accounts in any
number of investment options available under the Plan. Each participant receives
an annual statement which provides information regarding, among other things,
the market value of his investments and contributions made to the Plan on the
participant's behalf. For the year ended December 31, 2003, Monadnock Community
Bank's contribution to the Plan on behalf of Mr. Pierce was $3,100.
EMPLOYEE STOCK OWNERSHIP PLAN. Monadnock Community Bancorp intends to
adopt a new benefit plan which consists of an employee stock ownership plan for
the employees of Monadnock Community Bancorp and any subsidiary, including
Monadnock Community Bank, to become effective upon the completion of the stock
offering. This plan is hereafter referred to
85
as the "ESOP." Employees of Monadnock Community Bancorp and Monadnock Community
Bank who have been credited with at least 1,000 hours of service during a twelve
month period are eligible to participate in the ESOP.
As part of the stock offering, it is anticipated that the ESOP will
borrow funds from Monadnock Community Bancorp. The ESOP will use these funds to
purchase up to 4.0% of the common stock sold in the stock offering. It is
anticipated that this loan will equal 100% of the aggregate purchase price of
the common stock acquired by the ESOP. The loan to the ESOP will be repaid
principally from Monadnock Community Bank's contributions to the ESOP over a
period of 10 years and the collateral for the loan will be the common stock
purchased by the ESOP. The interest rate for the loan is expected to be the
prime rate of interest. Monadnock Community Bancorp may, in any plan year, make
additional discretionary contributions for the benefit of plan participants in
either cash or shares of common stock, which may be acquired through the
purchase of outstanding shares in the market or from individual stockholders,
upon the original issuance of additional shares by Monadnock Community Bancorp
or upon the sale of treasury shares by Monadnock Community Bancorp. These
purchases, if made, would be funded through additional borrowings by the ESOP or
additional contributions from Monadnock Community Bancorp. The timing and manner
of future contributions to the ESOP will be subject to laws and regulations and
market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held
in a suspense account and released to participants' accounts as debt service
payments are made. Shares released from the ESOP will be allocated to each
eligible participant's ESOP account based on the ratio of each such
participant's compensation to the total compensation of all eligible
participants. Forfeitures will be reallocated among remaining participating
employees and may reduce any amount Monadnock Community Bancorp might otherwise
have contributed to the ESOP. The account balances of participants within the
ESOP will become 100% vested after seven years of service. In the case of a
"change in control," as defined in the ESOP, which triggers a termination of the
ESOP, participants will become immediately fully vested in their account
balances. Benefits are payable upon retirement or other separation from service.
Monadnock Community Bancorp's contributions to the ESOP are not fixed, so
benefits payable under the ESOP cannot be estimated.
_______________, will serve as trustee of the ESOP. Under the ESOP, the
trustee must vote all allocated shares held in the ESOP in accordance with the
instructions of the participating employees. Unallocated shares and allocated
shares for which the employee does not provide voting instructions, will be
voted by the trustee as directed by the board of directors of Monadnock
Community Bancorp.
Generally accepted accounting principles requires that any third party
borrowing by the ESOP be reflected as a liability on Monadnock Community
Bancorp's statement of financial condition. Since the ESOP is borrowing from
Monadnock Community Bancorp, such obligations are not treated as a liability,
but will be excluded from stockholders' equity. If the ESOP purchases newly
issued shares from Monadnock Community Bancorp, total stockholders' equity would
neither increase nor decrease, but per share stockholders' equity and per share
net earnings would decrease as the newly issued shares are allocated to the ESOP
participants.
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The ESOP will be subject to the requirements of Employee Retirement and
Income Security Act, and the regulations of the IRS and the Department of Labor
thereunder.
STOCK BENEFIT PLANS. In the future, we intend to adopt a stock option
plan and a restricted stock plan for the benefit of selected directors, officers
and employees. We anticipate that the stock option plan will have reserved a
number of shares equal to not more than 10.0% of the Monadnock Community Bancorp
common stock sold in the stock offering, and the restricted stock plan will have
reserved a number of shares equal to not more than 4.0% of the Monadnock
Community Bancorp common stock sold in the stock offering subject, if
applicable, to regulatory limitations. Grants of stock options will be made at a
price equal to 100% of the market value on the date of grant. Grants of common
stock pursuant to the restricted stock plan will be issued without cost to the
recipient. Once a determination is made to implement a stock option plan or
restricted stock plan, it is anticipated that any such plans will be submitted
to stockholders for their consideration at which time stockholders would be
provided with detailed information regarding such plans. The plans must be
approved by a majority of the votes eligible to be cast other than votes
eligible to be cast by Monadnock Mutual Holding Company. If such plans are
approved, and effected, they may have a dilutive effect on Monadnock Community
Bancorp stockholders as well as affect Monadnock Community Bancorp's net income
and stockholders' equity, although the actual results cannot be determined until
such plans are implemented.
Any such stock option plan or restricted stock plan will not be
submitted to stockholders for approval or implemented less than six months after
the date of the completion of the stock offering, subject to continuing Office
of Thrift Supervision jurisdiction. If either the stock option plan or the
restricted stock plan are implemented within one year of the consummation of the
stock offering, the granting of options and restricted stock will be subject to
regulatory restrictions, including a requirement that the awards vest equally
over a five year period. Pursuant to our plan of mutual holding company
reorganization and stock issuance and Office of Thrift Supervision regulations,
we may grant awards under one or more stock benefit plans, including the
recognition and retention plan, in an amount up to 25% of the common stock held
by persons other than Monadnock Mutual Holding Company. It is expected that, if
adopted within one year from the date of completion of the reorganization, the
initial recognition and retention plan would authorize awards of our common
stock in an aggregate amount up to 4% of the shares sold in the offering, and
would be subject to such other limitations as may be imposed by the Office of
Thrift Supervision. The recognition and retention plan may authorize awards of
more than 4% of the shares sold in the offering, if it is adopted after one year
from the date of the completion of the reorganization.
LOANS AND OTHER TRANSACTIONS WITH OFFICERS AND DIRECTORS
We have a policy of granting loans to officers and directors, which
fully complies with all applicable federal regulations. Loans to directors and
executive officers are made in the ordinary course of business and on the same
terms and conditions as those of comparable transactions with unaffiliated third
parties prevailing at the time, in accordance with our underwriting guidelines,
and do not involve more than the normal risk of collectibility or present other
unfavorable features. In addition, all loans to directors and executive officers
are approved by at least a majority of the independent, disinterested members of
the board.
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All loans that we are permitted to make to our directors and executive
officers are subject to regulations restricting loans and other transactions
with affiliated persons of Monadnock Community Bank. We had no loans to our
directors and executive officers at December 31, 2003.
HOW WE ARE REGULATED
Set forth below is a brief description of certain laws and regulations
which are applicable to Monadnock Community Bancorp and Monadnock Community
Bank. The description of these laws and regulations, as well as descriptions of
laws and regulations contained elsewhere herein, does not purport to be complete
and is qualified in its entirety by reference to the applicable laws and
regulations.
Legislation is introduced from time to time in the United States
Congress that may affect the operations of Monadnock Community Bancorp and
Monadnock Community Bank. In addition, the regulations governing Monadnock
Community Bancorp and Monadnock Community Bank may be amended from time to time
by the Office of Thrift Supervision. Any such legislation or regulatory changes
in the future could adversely affect Monadnock Community Bancorp or Monadnock
Community Bank. No assurance can be given as to whether or in what form any such
changes may occur.
GENERAL
Monadnock Community Bank, as a federally-chartered savings institution,
is subject to federal regulation and oversight by the Office of Thrift
Supervision extending to all aspects of its operations. Monadnock Community Bank
also is subject to regulation by the FDIC, which insures the deposits of
Monadnock Community Bank to the maximum extent permitted by law, and
requirements established by the Federal Reserve Board. Federally chartered
savings institutions are required to file periodic reports with the Office of
Thrift Supervision and are subject to periodic examinations by the Office of
Thrift Supervision and the FDIC. The investment and lending authority of savings
institutions are prescribed by federal laws and regulations, and such
institutions are prohibited from engaging in any activities not permitted by
such laws and regulations. Such regulation and supervision primarily is intended
for the protection of depositors and not for the purpose of protecting
stockholders. This regulatory oversight will continue to apply to Monadnock
Community Bank following the completion of the stock offering.
The Office of Thrift Supervision regularly examines Monadnock Community
Bank and prepares reports for the consideration of Monadnock Community Bank's
board of directors on any deficiencies that it may find in Monadnock Community
Bank's operations. Monadnock Community Bank's relationship with its depositors
and borrowers also is regulated to a great extent by both federal and state
laws, especially in such matters as the ownership of savings accounts and the
form and content of Monadnock Community Bank's mortgage requirements. Any change
in such regulations, whether by the FDIC, the Office of Thrift Supervision or
Congress, could have a material adverse impact on Monadnock Community Bancorp
and Monadnock Community Bank and their operations.
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MONADNOCK COMMUNITY BANCORP
GENERAL. Monadnock Community Bancorp is a federal mutual holding company
subsidiary within the meaning of Section 10(o) of the Home Owners' Loan Act. It
is required to file reports with the Office of Thrift Supervision and is subject
to regulation and examination by the Office of Thrift Supervision. In addition,
the Office of Thrift Supervision has enforcement authority over Monadnock
Community Bancorp and any non-savings institution subsidiaries. This permits the
Office of Thrift Supervision to restrict or prohibit activities that it
determines to be a serious risk to Monadnock Community Bank. This regulation is
intended primarily for the protection of the depositors and not for the benefit
of stockholders of Monadnock Community Bancorp.
ACTIVITIES RESTRICTIONS. Monadnock Community Bancorp and its non-savings
institution subsidiaries are subject to statutory and regulatory restrictions on
their business activities specified by federal regulations, which include
performing services and holding properties used by a savings institution
subsidiary, activities authorized for savings and loan holding companies as of
March 5, 1987, and non-banking activities permissible for bank holding companies
pursuant to the Bank Holding Company Act of 1956 or authorized for financial
holding companies pursuant to the Gramm-Leach-Bliley Act.
If Monadnock Community Bank fails the qualified thrift lender test,
Monadnock Community Bancorp must, within one year of that failure, register as,
and will become subject to, the restrictions applicable to bank holding
companies. See "- Qualified Thrift Lender Test."
MERGERS AND ACQUISITIONS. Monadnock Community Bancorp must obtain
approval from the Office of Thrift Supervision before acquiring more than 5% of
the voting stock of another savings institution or savings and loan holding
company or acquiring such an institution or holding company by merger,
consolidation or purchase of its assets. In evaluating an application for
Monadnock Community Bancorp to acquire control of a savings institution, the
Office of Thrift Supervision would consider the financial and managerial
resources and future prospects of Monadnock Community Bancorp and the target
institution, the effect of the acquisition on the risk to the insurance funds,
the convenience and the needs of the community and competitive factors.
WAIVERS OF DIVIDENDS BY MONADNOCK COMMUNITY BANCORP. Office of Thrift
Supervision regulations require Monadnock Mutual Holding Company to notify the
Office of Thrift Supervision of any proposed waiver of its receipt of dividends
from Monadnock Community Bancorp. The Office of Thrift Supervision reviews
dividend waiver notices on a case-by-case basis, and, in general, does not
object to any such waiver if: (i) the mutual holding company's board of
directors determines that such waiver is consistent with such directors'
fiduciary duties to the mutual holding company's members; (ii) for as long as
the savings association subsidiary is controlled by the mutual holding company,
the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association and its stock holding company; (iii) the amount of
any dividend waived by the mutual holding company is available for declaration
as a dividend solely to the mutual holding company, in accordance with SFAS No.
5, where the savings
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association determines that the payment of such dividend to the mutual holding
company is probable, an appropriate dollar amount is recorded as a liability;
and (iv) the amount of any waived dividend is considered as having been paid by
the savings association in evaluating any proposed dividend under Office of
Thrift Supervision capital distribution regulations.
We anticipate that Monadnock Mutual Holding Company will waive dividends
paid by Monadnock Community Bancorp, if any. Under Office of Thrift Supervision
regulations, our public stockholders would not be diluted because of any
dividends waived by Monadnock Mutual Holding Company(and waived dividends would
not be considered in determining an appropriate exchange ratio) in the event
Monadnock Mutual Holding Company converts to stock form.
CONVERSION OF MONADNOCK MUTUAL HOLDING COMPANY TO STOCK FORM. The Office
of Thrift Supervision regulations permit Monadnock Mutual Holding Company to
convert from the mutual form of organization to the capital stock form of
organization (a "Conversion Transaction"). There can be no assurance when, if
ever, a Conversion Transaction will occur, and the board of directors has no
current intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction a new holding company would be formed as the successor to Monadnock
Community Bancorp (the "New Holding Company"), Monadnock Community Bank, MHC's
corporate existence would end, and certain depositors of Monadnock Community
Bank would receive the right to subscribe for additional shares of the New
Holding Company. In a Conversion Transaction, each share of common stock held by
stockholders other than Monadnock Mutual Holding Company ("Minority
Stockholders") would be automatically converted into a number of shares of
common stock in the New Holding Company determined pursuant to an exchange ratio
that ensures that the Minority Stockholders own the same percentage of common
stock in the New Holding Company as they owned in Monadnock Community Bancorp
immediately prior to the Conversation Transaction. Under Office of Thrift
Supervision regulations, Minority Stockholders would not be diluted because of
any dividends waived by Monadnock Mutual Holding Company (and waived dividends
would not be considered in determining an appropriate exchange ratio), if
Monadnock Mutual Holding Company converts to stock form. The total number of
shares held by Minority Stockholders after a Conversion Transaction also would
be increased by any purchases by Minority Stockholders in the stock offering
conducted as part of the Conversion Transaction.
A Conversion Transaction requires the approval of the Office of Thrift
Supervision as well as a majority of the votes eligible to be cast by the
members of Monadnock Community Bancorp and a majority of the votes eligible to
be cast by the stockholders of Monadnock Community Bancorp other than Monadnock
Community Bancorp.
MONADNOCK COMMUNITY BANK
The Office of Thrift Supervision has extensive authority over the
operations of savings institutions. As part of this authority, Monadnock
Community Bank is required to file periodic reports with the Office of Thrift
Supervision and is subject to periodic examinations by the Office of Thrift
Supervision and the FDIC. When these examinations are conducted by the Office of
Thrift Supervision and the FDIC, the examiners may require Monadnock Community
Bank to provide for higher general or specific loan loss reserves. All savings
institutions are
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subject to a semi-annual assessment, based upon the savings institution's total
assets, to fund the operations of the Office of Thrift Supervision.
The Office of Thrift Supervision also has extensive enforcement
authority over all savings institutions and their holding companies, including
Monadnock Community Bank and Monadnock Community Bancorp. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the Office of Thrift Supervision.
Except under certain circumstances, public disclosure of final enforcement
actions by the Office of Thrift Supervision is required.
In addition, the investment, lending and branching authority of
Monadnock Community Bank is prescribed by federal laws and it is prohibited from
engaging in any activities not permitted by such laws. For instance, no savings
institution may invest in non-investment grade corporate debt securities. In
addition, the permissible level of investment by federal institutions in loans
secured by non-residential real property may not exceed 400% of total capital,
except with approval of the Office of Thrift Supervision. Federal savings
institutions are also generally authorized to branch nationwide. Monadnock
Community Bank is in compliance with the noted restrictions.
Monadnock Community Bank's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At December 31, 2003, Monadnock Community
Bank's general lending limit under this restriction was $500,000. Monadnock
Community Bank is in compliance with the loans-to-one-borrower limitation.
The Office of Thrift Supervision, as well as the other federal banking
agencies, has adopted guidelines establishing safety and soundness standards on
such matters as loan underwriting and documentation, asset quality, earnings
standards, internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits. Any institution which fails to comply
with these standards must submit a compliance plan.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
Monadnock Community Bank is a member of the Savings Association
Insurance Fund, which is administered by the FDIC. Deposits are insured up to
the applicable limits by the FDIC and such insurance is backed by the full faith
and credit of the United States government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the Savings Association Insurance Fund. The FDIC
also has the authority to initiate enforcement actions against savings
institutions, after giving the Office of Thrift Supervision an opportunity to
take such action, and may terminate the deposit insurance if
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it determines that the institution has engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the Savings Association
Insurance Fund will be less than the designated reserve ratio of 1.25% of
Savings Association Insurance Fund insured deposits. In setting these increased
assessments, the FDIC must seek to restore the reserve ratio to that designated
reserve level, or such higher reserve ratio as established by the FDIC. The FDIC
may also impose special assessments on Savings Association Insurance Fund
members to repay amounts borrowed from the United States Treasury or for any
other reason deemed necessary by the FDIC.
Since January 1, 1997, the premium schedule for Bank Insurance Fund and
Savings Association Insurance Fund insured institutions has ranged from 0 to 27
basis points. However, Savings Association Insurance Fund and Bank Insurance
Fund insured institutions are required to pay a Financing Corporation
assessment, in order to fund the interest on bonds issued to resolve thrift
failures in the 1980s, equal to approximately 1.5 basis points for each $100 in
domestic deposits annually. These assessments, which may be revised based upon
the level of Bank Insurance Fund and Savings Association Insurance Fund
deposits, will continue until the bonds mature in the year 2017.
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings institutions, such as Monadnock Community
Bank, are required to maintain a minimum level of regulatory capital. The Office
of Thrift Supervision has established capital standards, including a tangible
capital requirement, a leverage ratio or core capital requirement and a
risk-based capital requirement applicable to such savings institutions. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The Office of Thrift Supervision is also
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets, as defined by regulation. Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
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rights, must be deducted from tangible capital for calculating compliance with
the requirement. At December 31, 2003, Monadnock Community Bank had no
intangible assets.
At December 31, 2003, Monadnock Community Bank had tangible capital of
$2.6 million, or 5.82% of adjusted total assets, which is approximately $1.9
million above the minimum requirement of 1.5% of adjusted total assets in effect
on that date.
The capital standards also require core capital equal to at least 4.0%
of adjusted total assets unless its supervisory condition is such to allow it to
maintain a 3.0% ratio. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. At December 31, 2003, Monadnock Community Bank had no intangibles
which were subject to these tests. At December 31, 2003, Monadnock Community
Bank had core capital equal to $2.6 million, or 5.82% of adjusted total assets,
which is $800,000 above the minimum requirement of 4.0% in effect on that date.
The Office of Thrift Supervision also requires savings institutions to
have core capital equal to 4% of risk-weighted assets ("Tier 1 Risk-Based"). At
December 31, 2003, Monadnock Community Bank had Tier 1 risk-based capital of
$2.6 million or 10.93% of risk-weighted assets, which is approximately $700,000
above the minimum on such date. The Office of Thrift Supervision also requires
savings institutions to have total capital of at least 8.0% of risk-weighted
assets. Total capital consists of core capital, as defined above, and
supplementary capital. Supplementary capital consists of certain permanent and
maturing capital instruments that do not qualify as core capital and general
valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets. Supplementary capital may be used to satisfy the
risk-based requirement only to the extent of core capital. The Office of Thrift
Supervision is also authorized to require a savings institution to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the Office of Thrift Supervision has assigned a risk weight of 50% for prudently
underwritten permanent one- to four-family first lien mortgage loans not more
than 90 days delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by Fannie Mae or
Freddie Mac.
On December 31, 2003, Monadnock Community Bank had total risk-based
capital of $2.8 million and risk-weighted assets of $23.3 million; or total
capital of 12.19% of risk-weighted assets. This amount was $1.0 million above
the 8.0% requirement in effect on that date.
The Office of Thrift Supervision and the FDIC are authorized and, under
certain circumstances, required to take certain actions against savings
institutions that fail to meet their capital requirements. The Office of Thrift
Supervision is generally required to take action to restrict the activities of
an "undercapitalized institution," which is an institution with less than either
a 4.0% core capital ratio, a 4.0% Tier 1 risked-based capital ratio or an 8.0%
risk-based capital ratio. Any such institution must submit a capital restoration
plan and until the plan is approved by the Office of Thrift Supervision, may not
increase its assets, acquire another
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institution, establish a branch or engage in any new activities, and generally
may not make capital distributions. The Office of Thrift Supervision is
authorized to impose the additional restrictions that are applicable to
significantly undercapitalized institutions.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized institution must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings institution that fails to comply with its capital plan or
has Tier 1 risk-based or core capital ratios of less than 3.0% or a risk-based
capital ratio of less than 6.0% and is considered "significantly
undercapitalized" will be made subject to one or more additional specified
actions and operating restrictions which may cover all aspects of its operations
and may include a forced merger or acquisition of the institution. An
institution that becomes "critically undercapitalized" because it has a tangible
capital ratio of 2.0% or less is subject to further mandatory restrictions on
its activities in addition to those applicable to significantly undercapitalized
institutions. In addition, the Office of Thrift Supervision must appoint a
receiver, or conservator with the concurrence of the FDIC, for a savings
institution, with certain limited exceptions, within 90 days after it becomes
critically undercapitalized. Any undercapitalized institution is also subject to
the general enforcement authority of the Office of Thrift Supervision and the
FDIC, including the appointment of a conservator or a receiver.
The Office of Thrift Supervision is also generally authorized to
reclassify an institution into a lower capital category and impose the
restrictions applicable to such category if the institution is engaged in unsafe
or unsound practices or is in an unsafe or unsound condition.
The imposition by the Office of Thrift Supervision or the FDIC of any of
these measures on Monadnock Community Bank may have a substantial adverse effect
on its operations and profitability.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
Office of Thrift Supervision regulations impose various restrictions on
savings institutions with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital account.
Generally, savings institutions that before and after the proposed
distribution are well-capitalized and have an examination rating in one of the
top two categories, may make capital distributions during any calendar year
equal to the greater of 100% of net income for the year-to-date plus retained
net income for the two preceding years. However, an institution deemed to be in
need of more than normal supervision by the Office of Thrift Supervision may
have its dividend authority restricted by the Office of Thrift Supervision.
Monadnock Community Bank may pay dividends to Monadnock Community Bancorp in
accordance with this general authority.
Savings institutions proposing to make any capital distribution need not
submit written notice to the Office of Thrift Supervision prior to such
distribution unless, like Monadnock Community Bank, they are a subsidiary of a
holding company or would not remain well-
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capitalized following the distribution. Savings institutions that do not, or
would not meet their current minimum capital requirements following a proposed
capital distribution or propose to exceed these net income limitations, must
obtain Office of Thrift Supervision approval prior to making such distribution.
The Office of Thrift Supervision may object to the distribution during that
30-day period based on safety and soundness concerns. See "- Regulatory Capital
Requirements."
LIQUIDITY
All savings institutions, including Monadnock Community Bank, are
required to maintain sufficient liquidity to ensure a safe and sound operation.
QUALIFIED THRIFT LENDER TEST
All savings institutions, including Monadnock Community Bank, are
required to meet a qualified thrift lender test to avoid certain restrictions on
their operations. This test requires a savings institution to have at least 65%
of its portfolio assets, as defined by regulation, in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. As an alternative, the savings institution may maintain 60% of its assets
in those assets specified in Section 7701(a)(19) of the Internal Revenue Code.
Under either test, such assets primarily consist of residential housing related
loans and investments. At December 31, 2003, Monadnock Community Bank met the
test with a 99.2%, ratio and has always met the test since its effectiveness.
Any savings institution that fails to meet the qualified thrift lender
test must convert to a national bank charter, unless it requalifies as a
qualified thrift lender within one year of failure and thereafter remains a
qualified thrift lender. If such an institution has not yet requalified or
converted to a national bank, its new investments and activities are limited to
those permissible for both a savings institution and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
institution is immediately ineligible to receive any new Federal Home Loan Bank
borrowings and is subject to national bank limits for payment of dividends. If
such an institution has not requalified or converted to a national bank within
three years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. If any institution that fails
the qualified thrift lender test is controlled by a holding company, then within
one year after the failure, the holding company must register as a bank holding
company and become subject to all restrictions on bank holding companies.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act, every FDIC-insured institution has
a continuing and affirmative obligation consistent with safe and sound banking
practices to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The Community Reinvestment Act does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the Community Reinvestment Act. The Community Reinvestment Act
requires the Office of Thrift Supervision, in connection with the examination of
Monadnock
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Community Bank, to assess the institution's record of meeting the credit needs
of its community and to take such record into account in its evaluation of
certain applications, such as a merger or the establishment of a branch, by
Monadnock Community Bank. An unsatisfactory rating may be used as the basis for
the denial of an application by the Office of Thrift Supervision. Due to the
heightened attention being given to the Community Reinvestment Act in the past
few years, Monadnock Community Bank may be required to devote additional funds
for investment and lending in its local community. Monadnock Community Bank was
examined for Community Reinvestment Act compliance and received a rating of
satisfactory in its latest examination.
TRANSACTIONS WITH AFFILIATES
Generally, transactions between a savings institution or its
subsidiaries and its affiliates are required to be on terms as favorable to the
institution as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the institution's capital. Affiliates of Monadnock Community Bank include
Monadnock Community Bancorp and any company which is under common control with
Monadnock Community Bank. In addition, a savings institution may not lend to any
affiliate engaged in activities not permissible for a bank holding company or
acquire the securities of most affiliates. The Office of Thrift Supervision has
the discretion to treat subsidiaries of savings institutions as affiliates on a
case by case basis.
On April 1, 2003, the Federal Reserve's Regulation W, which
comprehensively interprets sections 23A and 23B, became effective. The Federal
Reserve Act and Regulation W are applicable to savings associations such as
Monadnock Community Bank. The regulation unifies and updates staff
interpretations issued over the years, incorporates several new interpretative
proposals (such as to clarify when transactions with an unrelated third party
will be attributed to an affiliate), and addresses new issues arising as a
result of the expanded scope of nonbanking activities engaged in by banks and
bank holding companies in recent years and authorized for financial holding
companies under the Gramm-Leach-Bliley Act.
In addition, the Office of Thrift Supervision regulations prohibit a
savings institution from lending to any of its affiliates that is engaged in
activities that are not permissible for bank holding companies and from
purchasing the securities of any affiliate, other than a subsidiary.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the Office of
Thrift Supervision. These conflict of interest regulations and other statutes
also impose restrictions on loans to such persons and their related interests.
Among other things, such loans must generally be made on terms substantially the
same as for loans to unaffiliated individuals.
FEDERAL SECURITIES LAW
The stock of Monadnock Community Bancorp is registered with the SEC
under the Securities Exchange Act of 1934, as amended. Monadnock Community
Bancorp will be subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Securities Exchange Act
of 1934.
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Monadnock Community Bancorp stock held by persons who are affiliates of
Monadnock Community Bancorp may not be resold without registration unless sold
in accordance with certain resale restrictions. Affiliates are generally
considered to be officers, directors and principal stockholders. If Monadnock
Community Bancorp meets specified current public information requirements, each
affiliate of Monadnock Community Bancorp will be able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
SARBANES-OXLEY ACT OF 2002
The Sarbanes-Oxley Act of 2002 was signed into law by President Bush on
July 30, 2002 in response to public concerns regarding corporate accountability
in connection with recent accounting scandals. The stated goals of the
Sarbanes-Oxley Act are to increase corporate responsibility, to provide for
enhanced penalties for accounting and auditing improprieties at publicly traded
companies and to protect investors by improving the accuracy and reliability of
corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act
generally applies to all companies that file or are required to file periodic
reports with the SEC, under the Securities Exchange Act of 1934, including
Monadnock Community Bancorp.
The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules, requires the SEC and securities
exchanges to adopt extensive additional disclosure, corporate governance and
other related rules and mandates further studies of certain issues by the SEC
and the Comptroller General. The Sarbanes-Oxley Act represents significant
federal involvement in matters traditionally left to state regulatory systems,
such as the regulation of the accounting profession, and to state corporate law,
such as the relationship between a board of directors and management and between
a board of directors and its committees.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts, primarily checking, NOW and Super NOW checking accounts.
At December 31, 2003, Monadnock Community Bank was in compliance with these
reserve requirements. Savings institutions are authorized to borrow from the
Federal Reserve Bank "discount window," but Federal Reserve Board regulations
require institutions to exhaust other reasonable alternative sources of funds,
including Federal Home Loan Bank borrowings, before borrowing from the Federal
Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM
Monadnock Community Bank is a member of the Federal Home Loan Bank of
Boston, which is one of 12 regional Federal Home Loan Banks that administers the
home financing credit function of savings institutions. Each Federal Home Loan
Bank serves as a reserve or central bank for its members within its assigned
region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the Federal Home Loan Bank System. It makes loans or
advances to members in accordance with policies and procedures, established by
the board of directors of the Federal Home Loan Bank, which are subject to the
oversight of the Federal Housing Finance Board. All advances from the Federal
Home Loan Bank are required
97
to be fully secured by sufficient collateral as determined by the Federal Home
Loan Bank. In addition, all long-term advances are required to provide funds for
residential home financing.
As a member, Monadnock Community Bank is required to purchase and
maintain stock in the Federal Home Loan Bank of Boston. At December 31, 2003,
Monadnock Community Bank had $485,300 million in Federal Home Loan Bank stock,
which was in compliance with this requirement. In past years, Monadnock
Community Bank has received substantial dividends on its Federal Home Loan Bank
stock. Over the past two fiscal years such dividends have averaged 3.34% and
were 3.04% for the fiscal year ended December 31, 2003. Monadnock Community Bank
recorded dividends of $13,725 for the fiscal year ended December 31, 2003.
Under federal law, the Federal Home Loan Banks are required to provide
funds for the resolution of troubled savings institutions and to contribute to
low- and moderately-priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have affected adversely
the level of Federal Home Loan Bank dividends paid and could continue to do so
in the future. These contributions could also have an adverse effect on the
value of Federal Home Loan Bank stock in the future. A reduction in value of
Monadnock Community Bank's Federal Home Loan Bank stock may result in a
corresponding reduction in Monadnock Community Bank's capital.
TAXATION
FEDERAL TAXATION
GENERAL. Monadnock Community Bancorp and Monadnock Community Bank are
subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of
federal taxation is intended only to summarize pertinent federal income tax
matters and is not a comprehensive description of the tax rules applicable to
Monadnock Community Bancorp or Monadnock Community Bank. Monadnock Community
Bancorp has not yet filed a federal income tax return due to its recent
organization. Monadnock Community Bank's federal income tax returns have never
been audited by the IRS.
It is anticipated that Monadnock Community Bancorp will elect to file a
consolidated federal income tax return with Monadnock Community Bank commencing
with the first taxable year after completion of the stock offering. Accordingly,
it is anticipated that any cash distributions made by Monadnock Community
Bancorp to its stockholders would be considered to be taxable dividends and not
as a non-taxable return of capital to stockholders for federal and state tax
purposes.
METHOD OF ACCOUNTING. For federal income tax purposes, Monadnock
Community Bank currently reports its income and expenses on the accrual method
of accounting and uses a fiscal year ending on December 31st, for filing its
federal income tax return.
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Monadnock Community Bancorp may
eliminate from its income dividends received from Monadnock Community Bank as a
wholly
98
owned subsidiary of Monadnock Community Bancorp if it elects to file a
consolidated return with Monadnock Community Bank. The corporate
dividends-received deduction is 100% or 80%, in the case of dividends received
from corporations with which a corporate recipient does not file a consolidated
tax return, depending on the level of stock ownership of the payor of the
dividend. Corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct 70% of dividends received or accrued on their
behalf.
STATE TAXATION
Monadnock Community Bancorp and Monadnock Community Bank are subject to
the New Hampshire Business Profits tax which is assessed at the rate of 8.5%.
For this purpose, gross business profits generally means federal taxable income
subject to certain modifications provided for in New Hampshire law.
RESTRICTIONS ON ACQUISITION OF MONADNOCK COMMUNITY BANCORP
AND MONADNOCK COMMUNITY BANK
The principal federal regulatory restrictions which affect the ability
of any person, firm or entity to acquire Monadnock Community Bancorp, Monadnock
Community Bank or their respective capital stock are described below. Also
discussed are certain provisions in Monadnock Community Bancorp's stock charter
and bylaws which may be deemed to affect the ability of a person, firm or entity
to acquire Monadnock Community Bancorp.
FEDERAL LAW
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a savings institution unless the Office of Thrift Supervision
has been given 60 days prior written notice. The Home Owners' Loan Act provides
that no company may acquire "control" of a savings institution without the prior
written approval of the Office of Thrift Supervision. Any company that acquires
such control becomes a savings and loan holding company subject to registration,
examination and regulation by the Office of Thrift Supervision. Pursuant to
federal regulations, control of a savings institution (including its holding
company) is conclusively deemed to have been acquired by, among other things,
the acquisition of more than 25% of any class of voting stock of the institution
or the ability to control the election of a majority of the directors of an
institution. Moreover, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of voting stock, or
of more than 25% of any class of stock of a savings institution, where certain
enumerated "control factors" are also present in the acquisition. The Office of
Thrift Supervision may prohibit an acquisition of control if:
o it would result in a monopoly or substantially lessen competition;
o the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
99
o the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or
of the public to permit the acquisition of control by such person.
These restrictions do not apply to the acquisition of a savings institution's
capital stock by one or more tax-qualified employee stock benefit plans,
provided that the plans do not have beneficial ownership of more than 25% of any
class of equity security of the savings institution.
For a period of three years following completion of the stock offering,
Office of Thrift Supervision regulations generally prohibit any person from
acquiring or making an offer to acquire beneficial ownership of more than 10% of
the stock of Monadnock Community Bancorp or Monadnock Community Bank without
Office of Thrift Supervision approval.
CHARTER AND BYLAWS OF MONADNOCK COMMUNITY BANCORP
The following discussion is a summary of certain provisions of the
charter and bylaws of Monadnock Community Bancorp that relate to restrictions of
acquisitions. The description is necessarily general and qualified by reference
to the articles of charter and bylaws.
DIRECTORS. Certain provisions of Monadnock Community Bancorp's bylaws
will impede changes in majority control of the board of directors. Monadnock
Community Bancorp's bylaws provide that the board of directors will be divided
into three classes, with directors in each class elected for three-year
staggered terms. Thus, assuming a board of three directors or more, it would
take two annual elections to replace a majority of Monadnock Community Bancorp's
board. The bylaws also provide that any vacancy occurring in the board of
directors, including a vacancy created by an increase in the number of
directors, shall be filled by a majority vote of the directors then in office.
Finally, the bylaws impose certain notice and information requirements in
connection with the nomination by stockholders of candidates for election to the
board of directors or the proposal by stockholders of business to be acted upon
at an annual meeting of stockholders.
RESTRICTIONS ON CALL OF SPECIAL MEETINGS. The federal stock charter of
Monadnock Community Bancorp provides that for a period of five years from the
date of the completion of the stock offering a special meeting of stockholders
may be called only through a resolution of the board of directors for matters
relating to a change in control of Monadnock Community Bancorp or amendments to
its charter.
ABSENCE OF CUMULATIVE VOTING. Monadnock Community Bancorp's federal
stock charter does not provide for cumulative voting rights in the election of
directors. This means that Monadnock Mutual Holding Company, as the holder of a
majority of the shares eligible to be voted at a meeting of stockholders may
elect all of the directors of Monadnock Community Bancorp and thus prevent a
minority stockholder from obtaining representation on the Board of Directors.
AUTHORIZED BUT UNISSUED SHARES OF CAPITAL STOCK. After the stock
offering, Monadnock Community Bancorp will have authorized but unissued shares
of common and preferred stock. See "Description of Capital Stock." The board of
directors could use these shares of common
100
and preferred stock to render more difficult or to discourage an attempt to
obtain control of Monadnock Community Bancorp by means of a merger, tender offer
or proxy statement. We anticipate, however, that it is unlikely that we will use
the shares for this purpose, since Monadnock Mutual Holding Company must always
own at least a majority of our common stock.
Our federal stock charter also authorizes 2,000,000 shares of serial
preferred stock, no par value per share. Monadnock Community Bancorp is
authorized to issue preferred stock from time to time in one or more series
subject to applicable provisions of law, and the board of directors is
authorized to fix the designations, and relative preferences, limitations,
voting rights, if any, including without limitation, offering rights of such
shares (which could be multiple or as a separate class). In the event of a
proposed merger, tender offer or other attempt to gain control of Monadnock
Community Bancorp that the board of directors does not approve, it might be
possible for the board of directors to authorize the issuance of a series of
preferred stock with rights and preferences that would impede that completion of
the transaction. If Monadnock Community Bancorp issues any preferred stock which
disparately reduced the voting rights of the common stock, the common stock
could be required to be delisted from the Nasdaq system. An effect of the
possible issuance of preferred stock, therefore may be to deter a future attempt
to gain control of Monadnock Community Bancorp. The board of directors has no
present plan or understanding to issue any preferred stock.
LIMITATION ON VOTING RIGHTS. The federal stock charter of Monadnock
Community Bancorp provides that for a period of five years from the completion
of the stock offering by Monadnock Community Bancorp, no person other than
Monadnock Mutual Holding Company may offer to acquire or acquire the beneficial
ownership of more than 10% of any class of equity security of Monadnock
Community Bancorp. This provision does not apply to any tax-qualified employee
benefit plan or Monadnock Community Bancorp or to an underwriter or member of an
underwriting or selling group involving the public sale or resale of securities
of Monadnock Community Bancorp or any of its subsidiaries so long as after the
sale or resale, no underwriter or member of the selling group is a beneficial
owner of more than 10% of any class of equity securities of Monadnock Community
Bancorp. In addition, during this five-year period, all shares owned over the
l0% limit may not be voted in any matter submitted to stockholders for a vote.
OWNERSHIP OF COMMON STOCK BY MANAGEMENT. We expect our directors and
officers to purchase up to 61,700 shares of common stock in the offering.
Directors and officers are expected to control the voting of 12.72% of the
shares of common stock sold in the offering (at the maximum of the offering
range), and may control the voting of approximately 4.0% of the shares of common
stock sold in the offering through the ESOP. Under the terms of the ESOP,
unallocated shares and shares for which the employee did not provide voting
instructions will be voted by the independent trustees as directed by the Board
of Directors of Monadnock Community Bancorp. In addition, the officers and
directors of Monadnock Community Bancorp are also officers and directors of
Monadnock Mutual Holding Company which, after the stock offering, will own at
least a majority of Monadnock Community Bancorp's common stock.
Certain provisions of Monadnock Community Bancorp's stock option plan
and other benefit plans provide for benefits and cash payments in the event of a
change in control of
101
Monadnock Community Bancorp. The plans provide for accelerated vesting in the
event of a change in control. These provisions may have the effect of increasing
the cost of, and thereby discouraging, a future attempt to take over Monadnock
Community Bancorp and thus generally may serve to perpetuate current management.
DESCRIPTION OF CAPITAL STOCK OF
MONADNOCK COMMUNITY BANCORP
GENERAL
Monadnock Community Bancorp is authorized to issue 18,000,000 shares of
common stock having a par value of $0.01 per share and 2,000,000 shares of
preferred stock having a par value of $0.1 per share. Monadnock Community
Bancorp currently expects to issue up to a maximum of 458,156 shares of common
stock, or 557,930 shares in the event that the maximum of the estimated offering
range is increased by 15%, and no shares of preferred stock in the stock
offering. Each share of Monadnock Community Bancorp's common stock will have the
same relative rights as, and will be identical in all respects with, each other
share of common stock. Upon payment of the purchase price for the common stock
in accordance with the plan of stock issuance, all of the stock will be duly
authorized, fully paid and nonassessable. Presented below is a description of
all aspects of Monadnock Community Bancorp's capital stock which are deemed
material to an investment decision with respect to the stock offering.
The common stock of Monadnock Community Bancorp will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC, or any other governmental agency. The Board of
Directors can, without stockholders approval, issue additional shares of common
stock although Monadnock Mutual Holding Company so long as it is in existence,
must own a majority of the outstanding common stock of Monadnock Community
Bancorp.
COMMON STOCK
DISTRIBUTIONS. Monadnock Community Bancorp can pay dividends if, as and
when declared by its board of directors, subject to compliance with limitations
which are imposed by law. The holders of common stock of Monadnock Community
Bancorp will be entitled to receive and share equally in these dividends as they
may be declared by the board of directors of Monadnock Community Bancorp out of
funds legally available for such purpose. If Monadnock Community Bancorp issues
preferred stock, the holders of such preferred stock may have a priority over
the holders of the common stock with respect to dividends. See "Our Policy
Regarding Dividends."
VOTING RIGHTS. Holders of common stock of Monadnock Community Bancorp
will possess exclusive voting rights in Monadnock Community Bancorp. Each holder
of common stock will be entitled to one vote per share and will not have any
right to cumulate votes in the election of directors, therefore, directors will
be elected by a plurality of the shares actually voting on the matter. Under
certain circumstances, shares in excess of 10% of the issued and outstanding
shares of common stock may be considered "excess shares" and, accordingly, not
be entitled to vote. See "Restrictions on Acquisition of Monadnock Community
Bancorp and
102
Monadnock Community Bank." If Monadnock Community Bancorp issues preferred
stock, holders of the preferred stock may also possess voting rights.
LIQUIDATION. In the event of any liquidation, dissolution or winding up
of Monadnock Community Bank, Monadnock Community Bancorp, as holder of Monadnock
Community Bank's capital stock, would be entitled to receive, after payment or
provision for payment of all debts and liabilities of Monadnock Community Bank,
including all deposit accounts and accrued interest thereon, all assets of
Monadnock Community Bank available for distribution. In the event of
liquidation, dissolution or winding up of Monadnock Community Bancorp, the
holders of its common stock would be entitled to receive, after payment or
provision for payment of all its debts and liabilities, all of the assets of
Monadnock Community Bancorp available for distribution. If preferred stock is
issued, the holders thereof may have a priority over the holders of the common
stock in the event of liquidation or dissolution.
RIGHTS TO BUY ADDITIONAL SHARES. Holders of the common stock of
Monadnock Community Bancorp will not be entitled to preemptive rights with
respect to any shares which may be issued. Preemptive rights are the priority
right to buy additional shares if Monadnock Community Bancorp issues more shares
in the future. Therefore, if additional shares are issued by Monadnock Community
Bancorp without the opportunity for existing stockholders to purchase more
shares, a stockholder's ownership interest in the Company may be subject to
dilution. The common stock is not subject to redemption.
PREFERRED STOCK
None of the shares of Monadnock Community Bancorp's authorized preferred
stock will be issued in the stock offering. This stock may be issued with
preferences and designations as the board of directors may from time to time
determine. The board of directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. Monadnock Community Bancorp has no present plans to issue preferred
stock. If preferred stock is issued in the future, Monadnock Community Bancorp
will not offer preferred stock to promoters except on the same terms as it is
offered to all other existing stockholders or to new stockholders; or the
issuance will be approved by a majority of Monadnock Community Bancorp's
independent directors who do not have an interest in the transaction and have
access, at Monadnock Community Bancorp's expense, to its or independent legal
counsel.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Monadnock Community Bancorp common
stock is Registrar and Transfer Company.
EXPERTS
Our balance sheets as of December 31, 2003 and 2002 and the related
statements of income, changes in equity and cash flows for each of the two years
in the period ending December 31, 2003 included in this prospectus have been
audited by Shatswell, MacLeod & Company, P.C., independent auditors, as set
forth in their report appearing elsewhere herein and
103
in the registration statement, and are included in reliance upon the reports of
this firm given upon the authority as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of
its report to Monadnock Community Bancorp setting forth its opinion as to the
estimated pro forma market value of the common stock upon its issuance and its
letter with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the common stock and the federal income tax consequences
of the stock offering has been passed upon for Monadnock Community Bancorp by
Luse Gorman Pomerenk & Schick, P.C., Washington, D.C., special counsel to
Monadnock Community Bank. The New Hampshire income tax consequences of the stock
issuance will be passed upon for Monadnock Community Bank and Monadnock
Community Bancorp by Shatswell, MacLeod & Company, P.C., West Peabody,
Massachusetts. Certain legal matters will be passed upon for Ryan Beck by
Muldoon Murphy Faucette & Aggugia, LLP Washington, D.C.
ADDITIONAL INFORMATION
Monadnock Community Bancorp has filed with the SEC a registration
statement under the Securities Act of 1933 with respect to the common stock
offered hereby. As permitted by the rules and regulations of the SEC, this
prospectus does not contain all the information set forth in the registration
statement. This information, including the appraisal report which is an exhibit
to the registration statement, can be examined without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of this material can be obtained from the SEC at
prescribed rates. In addition, the SEC maintains a web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC, including Monadnock
Community Bancorp. The statements contained in this prospectus as to the
contents of any contract or other document filed as an exhibit to the
registration statement are, of necessity, brief descriptions thereof and are not
necessarily complete; each statement is qualified by reference to the contract
or document.
Monadnock Community Bancorp has filed an Application for Minority Stock
Issuance with the Office of Thrift Supervision with respect to the stock
offering. This prospectus omits certain information contained in this
application. The application may be examined at the principal office of the
Office of Thrift Supervision, 1700 G Street, N.W., Washington, D.C. 20552, and
at the Northeast Regional Office of the Office of Thrift Supervision located at
10 Exchange Place, 18th Floor, Jersey City, New Jersey 07302.
In connection with the stock offering, Monadnock Community Bancorp has
registered its common stock with the SEC under Section 12 of the Securities
Exchange Act of 1934, and, upon such registration, Monadnock Community Bancorp
and the holders of its stock will become subject to the proxy solicitation
rules, reporting requirements and restrictions on stock purchases and sales by
directors, officers and greater than 10% stockholders, the annual and periodic
reporting and other requirements of the Securities Exchange Act of 1934. Under
the plan of mutual holding company reorganization and stock issuance, Monadnock
Community Bancorp
104
has undertaken that it will not terminate this registration
for a period of at least three years following the completion of the stock
issuance.
A copy of the plan of mutual holding company reorganization and stock
issuance and the charter and bylaws of Monadnock Community Bancorp, Monadnock
Community Bank and Monadnock Mutual Holding Company and the appraisal report of
RP Financial are available without charge from Monadnock Community Bank.
Requests for such information should be directed to: Stockholder Relations,
Monadnock Community Bancorp, One Jaffrey Road, Peterborough, New Hampshire 03458
(603) 924-9654.
105
MONADNOCK COMMUNITY BANCORP
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report.................................................F-2
Balance Sheets at December 31, 2003 and 2002.................................F-3
Statements of Income for the Years Ended
December 31, 2003 and 2002.................................................F-4
Statements of Changes in Equity for the Years Ended
December 31, 2003 and 2002.................................................F-5
Statements of Cash Flows for the Years Ended December 31, 2003 and 2002......F-6
Notes to Financial Statements................................................F-7
All schedules are omitted because the required information is not
applicable or is included in the Financial Statements and related Notes.
F-1
[LOGO] SHATSWELL, MacLEOD & COMPANY, P.C.
---------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Monadnock Community Bank
Peterborough, New Hampshire
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying balance sheets of Monadnock Community Bank as
of December 31, 2003 and 2002 and the related statements of income, changes in
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Monadnock Community Bank as of
December 31, 2003 and 2002, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Shatswell, MacLeod & Company, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
February 17, 2004
83 PINE STREET o WEST PEABODY, MASSACHUSETTS 01960-3635 o
TELEPHONE (978) 535-0206 o FACSILMILE (978) 535-9908
samc@shatswell.com www.shatswell.com
F-2
MONADNOCK COMMUNITY BANK
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS 2003 2002
- ------ ----------- -----------
Cash and due from banks $ 441,782 $ 577,837
Federal Home Loan Bank overnight deposit 1,315,455 648,887
Interest-bearing demand deposits with other banks 65,386 41,891
----------- -----------
Total cash and cash equivalents 1,822,623 1,268,615
Interest-bearing time deposit in other bank 100,000 100,000
Investments in available-for-sale securities (at fair value) 10,073,066 20,439,363
Federal Home Loan Bank stock, at cost 485,300 430,400
Loans, net of allowance for loan losses of $319,592 as of
December 31, 2003 and $369,972 as of December 31, 2002 30,728,184 18,601,614
Premises and equipment 188,622 194,476
Other real estate owned 12,500 12,500
Accrued interest receivable 124,299 166,419
Other assets 205,740 75,248
----------- -----------
Total assets $43,740,334 $41,288,635
=========== ===========
LIABILITIES AND EQUITY
- ----------------------
Deposits:
Noninterest-bearing $ 2,103,332 $ 1,643,123
Interest-bearing 32,328,201 29,977,393
----------- -----------
Total deposits 34,431,533 31,620,516
Federal Home Loan Bank advances 6,746,550 7,000,000
Other liabilities 79,259 70,770
----------- -----------
Total liabilities 41,257,342 38,691,286
----------- -----------
Equity:
Retained earnings 2,551,055 2,524,266
Accumulated other comprehensive (loss) income (68,063) 73,083
----------- -----------
Total equity 2,482,992 2,597,349
----------- -----------
Total liabilities and equity $43,740,334 $41,288,635
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
MONADNOCK COMMUNITY BANK
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
------------ ------------
Interest and dividend income:
Interest and fees on loans $1,469,892 $1,309,443
Interest on investments-taxable 466,999 922,793
Other interest income 23,930 32,458
------------ ------------
Total interest and dividend income 1,960,821 2,264,694
------------ ------------
Interest expense:
Interest on deposits 565,503 804,986
Interest on Federal Home Loan Bank advances 258,997 292,179
------------ ------------
Total interest expense 824,500 1,097,165
------------ ------------
Net interest and dividend income 1,136,321 1,167,529
(Benefit) provision for loan losses (50,000) 0
------------ ------------
Net interest and dividend income after (benefit) provision
for loan losses 1,186,321 1,167,529
------------ ------------
Other income:
Net gain on sales of available-for-sale securities 51,292 67,875
Service charges on deposits 57,701 42,400
Income from operations of investment real estate 5,165
Gain on sale of loans, net 27,320
Loss on sale of investment real estate, net (298)
Loan commissions 56,160 74,165
Other income 29,472 29,364
------------ ------------
Total other income 221,945 218,671
------------ ------------
Other expense:
Salaries and employee benefits 725,909 714,454
Occupancy expense 95,018 96,682
Equipment expense 147,609 125,163
Blanket bond insurance 25,651 30,112
Professional fees 42,127 61,996
Supplies and printing 30,699 25,496
Telephone expense 30,294 31,610
Prepayment penalty on borrowings 33,325
Marketing expense 39,696 28,448
Postage expense 22,522 22,103
Other expense 183,627 189,519
------------ ------------
Total other expense 1,376,477 1,325,583
------------ ------------
Income before income tax expense (benefit) 31,789 60,617
Income tax expense (benefit) 5,000 (2,537)
------------ ------------
Net income $ 26,789 $ 63,154
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
MONADNOCK COMMUNITY BANK
STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 2003 AND 2002
Accumulated
Other
Retained Comprehensive
Earnings Income (Loss) Total
---------- --------------- ----------
Balance, December 31, 2001 $2,461,112 $91,866 $2,552,978
Comprehensive income:
Net income 63,154
Net change in unrealized holding gain on
available-for-sale securities, net of tax effect (18,783)
Comprehensive income 44,371
---------- --------- ----------
Balance, December 31, 2002 2,524,266 73,083 2,597,349
Comprehensive income:
Net income 26,789
Net change in unrealized holding gain on
available-for-sale securities, net of tax effect (141,146)
Comprehensive income (114,357)
---------- --------- ----------
Balance, December 31, 2003 $2,551,055 $(68,063) $2,482,992
========== ======== ==========
Reclassification disclosure for the years ended December 31:
2003 2002
--------- ---------
Net unrealized (losses) gains on available-for-sale securities $(182,433) $ 36,773
Reclassification adjustment for net realized gains in net income (51,292) (67,875)
--------- ---------
Other comprehensive loss before income tax effect (233,725) (31,102)
Income tax benefit 92,579 12,319
--------- ---------
Other comprehensive loss, net of tax $(141,146) $(18,783)
========= ========
Accumulated other comprehensive income (loss) as of December 31, 2003 and 2002
consists of net unrealized holding gains (losses) on available-for-sale
securities, net of taxes.
The accompanying notes are an integral part of these financial statements.
F-5
MONADNOCK COMMUNITY BANK
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
------------ ----------
Cash flows from operating activities:
Net income $ 26,789 $ 63,154
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Net gain on sales of available-for-sale securities (51,292) (67,875)
Net amortization of securities 101,123 107,967
Change in deferred loan origination costs, net (131,702) (15,485)
(Benefit) provision for loan losses (50,000)
Loss on disposal of asset 298
Gain on sale loans, net (27,320)
Depreciation and amortization 58,905 55,834
Gain on sale of other real estate owned (1,309)
Decrease in accrued interest receivable 42,120 44,948
Decrease (increase) in other assets 9,559 (11,578)
(Increase) decrease in loan servicing rights and interest-only strips (323) 20,544
Increase in prepaid expenses (39,383) (9,790)
Deferred tax expense (benefit) 5,000 (21,075)
(Increase) decrease in taxes receivable (27,436) 9,930
Increase in accrued expenses 1,917 7,970
Increase (decrease) in accrued interest payable 2,114 (266)
Increase in other liabilities 19,128 3,494
------------ ----------
Net cash (used in) provided by operating activities (60,801) 186,761
------------ ----------
Cash flows from investing activities:
Purchases of available-for-sale securities (8,326,509) (13,338,496)
Proceeds from sales of available-for-sale securities 12,100,286 7,041,083
Proceeds from maturities of available-for-sale securities 6,308,964 8,116,995
Purchases of Federal Home Loan Bank stock (54,900) (55,400)
Loan originations and principal collections, net (11,590,824) (3,043,316)
Loans purchased (768,358) (933,000)
Recoveries of previously charged off loans 620 1,244
Proceeds from sales of loans 441,014
Capital expenditures - premises and equipment (53,051) (56,607)
Proceeds from sales of other real estate owned 36,661
------------ ----------
Net cash used in investing activities (1,942,758) (2,230,836)
------------ ----------
Cash flows from financing activities:
Net increase in demand deposits, savings and NOW deposits 5,136,199 1,497,910
Net (decrease) increase in time deposits (2,325,182) 269,081
Long-term advances from Federal Home Loan Bank 5,746,550 5,000,000
Payments on long-term advances from Federal Home Loan Bank (6,000,000) (4,000,000)
------------ ----------
Net cash provided by financing activities 2,557,567 2,766,991
------------ ----------
Net increase in cash and cash equivalents 554,008 722,916
Cash and cash equivalents at beginning of period 1,268,615 545,699
------------ ----------
Cash and cash equivalents at end of period $ 1,822,623 $1,268,615
============ ==========
F-6
MONADNOCK COMMUNITY BANK
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(continued)
2003 2002
-------------- --------------
Supplemental disclosures:
Interest paid $822,386 $1,097,431
Income taxes paid 27,436 8,608
The accompanying notes are an integral part of these financial statements.
F-7
MONADNOCK COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 1 - NATURE OF OPERATIONS
Monadnock Community Bank is a federally chartered mutual savings bank. The Bank
provides a variety of financial services to corporations and individuals
primarily in portions of Hillsborough and Cheshire County, New Hampshire and
throughout New England through its office located in Peterborough, New
Hampshire. 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.
NOTE 2 - ACCOUNTING POLICIES
The accounting and reporting policies of the Bank conform to accounting
principles generally accepted in the United States of America and predominant
practices within the savings institution industry. The financial statements were
prepared using the accrual method of accounting. The significant accounting
policies are summarized below to assist the reader in better understanding the
financial statements and other data contained herein.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash items, due from banks, interest bearing demand
deposit accounts with other banks and Federal Home Loan Bank overnight
deposit.
Cash and due from banks as of December 31, 2003 and 2002 includes
$75,000 and $150,000, respectively which is subject to withdrawals and
usage restrictions to satisfy the reserve requirements of the Federal
Reserve Bank.
SECURITIES:
Investments in debt securities are adjusted for amortization of premiums
and accretion of discounts computed so as to approximate the interest
method. Gains or losses on sales of investment securities are computed
on a specific identification basis.
The Bank classifies debt and equity securities into one of three
categories: held-to-maturity, available-for-sale, or trading. This
security classification may be modified after acquisition only under
certain specified conditions. In general, securities may be classified
as held-to-maturity only if the Bank has the positive intent and ability
to hold them to maturity. Trading securities are defined as those bought
and held principally for the purpose of selling them in the near term.
All other securities must be classified as available-for-sale.
-- Held-to-maturity securities are measured at amortized cost in
the balance sheets. Unrealized holding gains and losses are not
included in earnings or in a separate component of equity. They
are merely disclosed in the notes to the financial statements.
F-8
-- Available-for-sale securities are carried at fair value on the
balance sheets. Unrealized holding gains and losses are not
included in earnings, but are reported as a net amount (less
expected tax) in a separate component of equity until realized.
-- Trading securities are carried at fair value on the balance
sheets. Unrealized holding gains and losses for trading
securities are included in earnings.
Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary
are reflected in earnings as realized losses.
LOANS:
Loans receivable that management has the intent and ability to hold
until maturity or payoff, are reported at their outstanding principal
balances adjusted for amounts due to borrowers on unadvanced loans, any
charge-offs, the allowance for loan losses and any deferred fees, costs
on originated loans or unamortized premiums or discounts on purchased
loans.
Interest on loans is recognized on a simple interest basis.
Loan origination, commitment fees and certain direct origination costs
are deferred and the net amount amortized as an adjustment of the
related loan's yield. The Bank is amortizing these amounts over the
contractual life of the related loans.
Residential real estate loans are generally placed on nonaccrual when
reaching 90 days past due or in process of foreclosure. All closed-end
consumer loans 90 days or more past due and any equity line in the
process of foreclosure are placed on nonaccrual status. Secured consumer
loans are written down to realizable value and unsecured consumer loans
are charged-off upon reaching 120 or 180 days past due depending on the
type of loan. Commercial real estate loans and commercial business loans
and leases which are 90 days or more past due are generally placed on
nonaccrual status, unless secured by sufficient cash or other assets
immediately convertible to cash. When a loan has been placed on
nonaccrual status, previously accrued and uncollected interest is
reversed against interest on loans. A loan can be returned to accrual
status when collectibility of principal is reasonably assured and the
loan has performed for a period of time, generally six months.
Cash receipts of interest income on impaired loans is credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of
the cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is
deemed to be fully collectible. When recognition of interest income on
an impaired loan on a cash basis is appropriate, the amount of income
that is recognized is limited to that which would have been accrued on
the net carrying amount of the loan at the contractual interest rate.
Any cash interest payments received in excess of the limit and not
applied to reduce the net carrying amount of the loan are recorded as
recoveries of charge-offs until the charge-offs are fully recovered.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes
the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
F-9
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan
basis for commercial and construction loans by either the present value
of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price, or the fair value of
the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer and residential loans for impairment
disclosures.
Servicing assets are recognized as separate assets when rights are
acquired through purchase or through sale of financial assets.
Capitalized servicing rights are reported in other assets and are
amortized into noninterest income in proportion to, and over the period
of, the estimated future net servicing income of the underlying
financial assets. Servicing assets are evaluated for impairment based
upon the fair value of the rights as compared to amortized cost.
Impairment is determined by stratifying rights by predominant
characteristics, such as interest rates and terms. Fair value is
determined using prices for similar assets with similar characteristics,
when available, or based upon discounted cash flows using market-based
assumptions. Impairment is recognized through a valuation allowance for
an individual stratum, to the extent that fair value is less than the
capitalized amount for the stratum.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Cost and related allowances for depreciation and
amortization of premises and equipment retired or otherwise disposed of
are removed from the respective accounts with any gain or loss included
in income or expense. Depreciation and amortization are calculated
principally on the straight-line method over the estimated useful lives
of the assets.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through foreclosure
and properties classified as in-substance foreclosures in accordance
with Statement of Financial Accounting Standards (SFAS) No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructuring."
These properties are carried at the lower of cost or estimated fair
value less estimated costs to sell. Any write-down from cost to
estimated fair value, required at the time of foreclosure or
classification as in-substance foreclosure, is charged to the allowance
for loan losses. Expenses incurred in connection with maintaining these
assets, subsequent write-downs and gains or losses recognized upon sale
are included in other expense.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," the Bank classifies loans as in-substance repossessed or
foreclosed if the Bank receives physical possession of the debtor's
assets regardless of whether formal foreclosure proceedings take place.
ADVERTISING:
The Bank directly expenses costs associated with advertising as they are
incurred.
F-10
INCOME TAXES:
The Bank recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established
for the temporary differences between the accounting basis and the tax
basis of the Bank's assets and liabilities at enacted tax rates expected
to be in effect when the amounts related to such temporary differences
are realized or settled.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires that the Bank disclose estimated fair value for its financial
instruments. Fair value methods and assumptions used by the Bank in
estimating its fair value disclosures are as follows:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair
values.
Interest-bearing time deposits in other banks: Fair values of
interest-bearing time deposits in other banks are estimated using
discounted cash flow analyses based on current rates for similar types
of time deposits.
Securities (including mortgage-backed securities): Fair values for
securities are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans held-for-sale: Fair values of mortgage loans held-for-sale are
based on commitments on hand from investors or prevailing market prices.
Loans receivable: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for other loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for interest and
non-interest checking, passbook savings and money market accounts are,
by definition, equal to the amount payable on demand at the reporting
date (i.e., their carrying amounts). Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Federal Home Loan Bank advances: Fair values for Federal Home Loan Bank
advances are estimated using a discounted cash flow technique that
applies interest rates currently being offered on advances to a schedule
of aggregated expected monthly maturities on Federal Home Loan Bank
advances.
Off-balance sheet instruments: The fair value of commitments to
originate loans is estimated using the fees currently charged to enter
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments and the unadvanced portion of loans, fair
value also considers the difference between current levels of interest
rates and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation with
the counterparties at the reporting date.
F-11
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). This
Statement requires that a liability for a cost associated with an exit
or disposal activity be recognized and measured initially at fair value
only when the liability is incurred. SFAS No. 146 is effective for exit
or disposal activities that are initiated after December 31, 2002. This
Statement did not have a material impact on the Bank's financial
statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain
Financial Institutions" ("SFAS No. 147"), an Amendment of SFAS Nos. 72
and 144 and FASB Interpretation No. 9. SFAS No. 72 "Accounting for
Certain Acquisitions of Banking or Thrift Institutions" and FASB
Interpretation No. 9 "Applying APB Opinions No. 16 and 17 When a Savings
and Loan Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method" provided interpretive
guidance on the application of the purchase method to acquisitions of
financial institutions. Except for transactions between two or more
mutual enterprises, SFAS No. 147 removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9
and requires that those transactions be accounted for in accordance with
SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and
Other Intangible Assets." Thus, the requirement in paragraph 5 of
Statement 72 to recognize (and subsequently amortize) any excess of the
fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible
asset no longer applies to acquisitions within the scope of SFAS No.
147. In addition, SFAS No. 147 amends SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" to include in its scope
long-term customer-relationship intangible assets of financial
institutions such as depositor- and borrower-relationship intangible
assets and credit cardholder intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow
recoverability test and impairment loss recognition and measurement
provisions that SFAS No. 144 requires for other long-lived assets that
are held and used.
Paragraph 5 of SFAS No. 147, which relates to the application of the
purchase method of accounting, was effective for acquisitions for which
the date of acquisition is on or after October 1, 2002. The provisions
in paragraph 6 related to accounting for the impairment or disposal of
certain long-term customer-relationship intangible assets were effective
on October 1, 2002. Transition provisions for previously recognized
unidentifiable intangible assets in paragraphs 8-14 were effective on
October 1, 2002, with earlier application permitted. There was no impact
on the Bank's financial statements on adoption of this Statement.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN
45 elaborates on the disclosure to be made by a guarantor in its interim
and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee.
FIN 45 clarifies that a guarantor is required to disclose (a) the nature
of the guarantee; (b) the maximum potential amount of future payments
under the guarantee; (c) the carrying amount of the liability; (d) the
nature and extent of any recourse provisions or available collateral
that would enable the guarantor to recover the amounts paid under the
guarantee.
The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in FIN 45 are effective
for financial statements of interim or annual periods ending after
December 15, 2002. The Bank adopted the initial recognition and initial
measurement provisions of FIN 45 effective as of January 1, 2003 and
adopted the disclosure requirements effective as of December 31, 2002.
The adoption of this interpretation did not have a material effect on
the Bank's financial position or results of operations.
F-12
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"),
which amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
This Statement (a) clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, (b)
clarifies when a derivative contains a financing component, (c) amends
the definition of an underlying to conform to language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," and (d) amends certain other existing
pronouncements. The provisions of SFAS No. 149 are effective for
contracts entered into or modified after June 30, 2003. There was no
substantial impact on the Bank's financial statements on adoption of
this Statement.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS No. 150"). This Statement establishes standards for the
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 requires
that certain financial instruments that were previously classified as
equity must be classified as a liability. Most of the guidance in SFAS
No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. This Statement did
not have any material effect on the Bank's financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), in an effort to expand upon
and strengthen existing accounting guidance that addresses when a
company should include in its financial statements the assets,
liabilities and activities of another entity. In December 2003, the FASB
revised Interpretation No. 46, also referred to as Interpretation 46 (R)
("FIN 46(R)"). The objective of this interpretation is not to restrict
the use of variable interest entities but to improve financial reporting
by companies involved with variable interest entities. Until now, one
company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting
interests. This interpretation changes that, by requiring a variable
interest entity to be consolidated by a company only if that company is
subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's
residual returns or both. The Bank is required to apply FIN 46, as
revised, to all entities subject to it no later than the beginning of
the first fiscal year or interim period beginning after December 15,
2004. The adoption of this interpretation is not expected to have a
material effect on the Bank's financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits
- an amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No.
132 (revised 2003)"). This Statement revises employers' disclosures
about pension plans and other postretirement benefit plans. It does not
change the measurement or recognition of those plans required by SFAS
No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." This
Statement retains the disclosure requirements contained in SFAS No. 132,
"Employers' Disclosures About Pensions and Other Postretirement
Benefits," which it replaces. It requires additional disclosures to
those in the original Statement 132 about assets, obligations, cash
flows and net periodic benefit cost of defined benefit pension plans and
other defined benefit postretirement plans. This Statement is effective
for financial statements with fiscal years ending after December 15,
2003 and interim periods beginning after December 15, 2003. Adoption of
this Statement did not have a material impact on the Bank's financial
statements.
F-13
NOTE 3 - INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES
Debt securities have been classified in the balance sheets according to
management's intent. The amortized cost of securities and their approximate fair
values are as follows:
Gains In Losses In
Accumulated Accumulated
Amortized Other Other
Cost Comprehensive Comprehensive Fair
Basis Income Income Value
------------- --------------- --------------- ---------------
December 31, 2003:
Mortgage-backed securities $10,185,772 $ 19 $(112,725) $10,073,066
=========== ======== ========= ===========
December 31, 2002:
Mortgage-backed securities $20,318,344 $150,573 $ (29,554) $20,439,363
=========== ======== ========= ===========
There were no securities of issuers whose aggregate carrying amount exceeded 10%
of equity as of December 31, 2003.
As of December 31, 2003 and 2002, securities with carrying amounts totaling
$4,042,623 and $4,189,746, respectively were pledged to secure Federal Home Loan
Bank advances.
Proceeds from sales of available-for-sale securities were $12,100,286 during the
year ended December 31, 2003. Gross realized gains and gross realized losses on
those sales were $68,931 and $17,639, respectively. Proceeds from sales of
available-for-sale securities were $7,041,083 during the year ended December 31,
2002. Gross realized gains and gross realized losses on those sales were $74,983
and $7,108, respectively.
The aggregate fair value and unrealized losses of securities that have been in a
continuous unrealized-loss position for less than twelve months and for twelve
months or more, and are not other than temporarily impaired, are as follows as
of December 31, 2003:
Less Than 12 Months 12 Months or Longer Total
--------------------- ------------------------ --------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
---------- ---------- ----------- ------------ ------------- ------------
Description of securities:
Mortgage-backed securities $9,581,295 $98,896 $490,932 $13,829 $10,072,227 $112,725
---------- ------- -------- ------- ----------- --------
Total temporarily impaired securities $9,581,295 $98,896 $490,932 $13,829 $10,072,227 $112,725
========== ======= ======== ======= =========== ========
The investments in the Bank's investment portfolio that are temporarily impaired
as of December 31, 2003 consist of debt securities issued by U.S. government
corporations and agencies with strong credit ratings. The unrealized losses in
the above table are attributable to changes in market interest rates. Bank
management does not intend to sell these securities in the near term future, and
due to the securities relative short duration, anticipates that the unrealized
losses that currently exist will be dramatically reduced going forward.
NOTE 4 - LOANS
Loans consisted of the following as of December 31:
2003 2002
----------- -----------
Commercial real estate $ 8,352,092 $ 6,827,869
Consumer real estate 18,953,235 9,067,774
Construction loans 72,605 594,800
Commercial loans 3,115,594 1,997,126
Consumer loans 399,475 460,944
----------- -----------
30,893,001 18,948,513
Allowance for loan losses (319,592) (369,972)
Deferred costs, net 154,775 23,073
----------- -----------
Net loans $30,728,184 $18,601,614
=========== ===========
F-14
Certain directors and executive officers of the Bank were customers of the Bank
during 2003. There were no loans to such persons and their companies as of
December 31, 2003. During the year ended December 31, 2003, total principal
payments amounted to $93,819 and principal advances were $0.
Changes in the allowance for loan losses were as follows for the years ended
December 31:
2003 2002
-------- --------
Balance at beginning of period $369,972 $368,728
Recoveries of loans previously charged off 620 1,244
Provision (benefit) for loan losses (50,000)
Charge offs (1,000)
-------- --------
Balance at end of period $319,592 $369,972
======== ========
The following table sets forth information regarding nonaccrual loans and
accruing loans 90 days or more overdue as of December 31:
2003 2002
-------- --------
Nonaccrual loans $157,287 $106,177
======== ========
Accruing loans which are 90 days or more overdue $ 0 $ 0
======== ========
Information about loans that meet the definition of an impaired loan in
Statement of Financial Accounting Standards No. 114 is as follows as of December
31:
2003 2002
-------------------------- --------------------------
Recorded Related Recorded Related
Investment Allowance Investment Allowance
In Impaired For Credit In Impaired For Credit
LOANS LOSSES LOANS LOSSES
------------ ----------- ------------ -----------
Loans for which there is a related allowance for credit losses $ 94,987 $14,248 $106,177 $15,927
Loans for which there is no related allowance for credit losses 0 0
--------- ------- -------- -------
Totals $ 94,987 $14,248 $106,177 $15,927
========= ======= ======== =======
Average recorded investment in impaired loans during the
year ended December 31 $ 100,639 $111,980
======== ========
Related amount of interest income recognized during the
time, in the year ended December 31, that the loans
were impaired
Total recognized $ 0 $ 0
======== ========
Amount recognized using a cash-basis method of
accounting $ 0 $ 0
======== ========
Loan servicing rights of $4,553 were capitalized in 2003 and amortization was
$227. The balance of capitalized loan servicing rights included in other assets
as of December 31, 2003 was $4,326. The fair value of these rights approximated
their carrying amount.
F-15
NOTE 5 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31:
2003 2002
-------- --------
Leasehold improvements $133,621 $117,299
Furniture and equipment 286,939 291,755
-------- --------
420,560 409,054
Accumulated depreciation and amortization (231,938) (214,578)
-------- --------
$188,622 $194,476
======== ========
NOTE 6 - DEPOSITS
The aggregate amount of time deposit accounts in denominations of $100,000 or
more as of December 31, 2003 and 2002 was $1,955,570 and $3,897,675,
respectively.
For time deposits as of December 31, 2003, the scheduled maturities for each of
the following five years ended December 31, and thereafter are:
2004 $ 9,360,824
2005 1,895,644
2006 1,841,916
2007 1,232,997
2008 303,394
Thereafter 20,848
-----------
$14,655,623
===========
Deposits from related parties held by the Bank as of December 31, 2003 and 2002
amounted to $225,978 and $394,151, respectively.
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB).
Maturities of advances from the FHLB for the years ending after December 31,
2003 are summarized as follows:
AMOUNT
----------
2004 $ 500,000
2005 2,275,000
2006 2,779,550
2007 1,192,000
----------
$6,746,550
==========
Borrowings from the FHLB are secured by a blanket lien on qualified collateral,
consisting primarily of loans with first mortgages secured by one to four family
properties, certain unencumbered investment securities and other qualified
assets.
At December 31, 2003, the interest rates on FHLB advances ranged from 1.81% to
4.69%. At December 31, 2003, the weighted average interest rate on FHLB advances
was 2.85%.
F-16
NOTE 8 - INCOME TAX EXPENSE (BENEFIT)
The components of income tax expense (benefit) are as follows for the years
ended December 31:
2003 2002
--------- ---------
Current:
Federal $ $22,063
State 4,063
Benefit of net operating loss carry forward (7,588)
--------- ---------
18,538
--------- ---------
Deferred:
Federal 10,923 2,437
State 3,432 2,885
Change in the valuation allowance (9,355) (26,397)
--------- ---------
5,000 (21,075)
--------- ---------
Total income tax expense (benefit) $ 5,000 $ (2,537)
========= =========
The reasons for the difference between the tax at the statutory federal income
tax rate and the effective tax rate are summarized as follows for the years
ended December 31:
2003 2002
--------- ---------
% of % of
Income Income
--------- ---------
Federal income tax at statutory rate 34.0% 34.0%
Increase (decrease) in tax resulting from:
Unallowable expenses 4.0 2.2
State tax, net of federal tax benefit 7.1 3.1
Change in valuation allowance (29.4) (43.5)
---- ----
Effective tax rates 15.7% (4.2)%
==== =====
The Bank had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
2003 2002
--------- ---------
Deferred tax assets:
Allowance for loan losses $108,482 $132,672
Other temporary differences 14,794 10,983
Operating loss carryover 48,850 4,254
Net unrealized holding loss on available-for-sale securities 44,643
--------- ---------
Gross deferred tax assets 216,769 147,909
Valuation allowance (8,270) (17,625)
--------- ---------
208,499 130,284
--------- ---------
Deferred tax liabilities:
Depreciation(1,357) (8,729)
Loan origination cost net of fees (67,978) (16,286)
Accrual to cash adjustment (61,253) (67,129)
Loan income (5,002) (4,874)
Net unrealized holding gain on available-for-sale securities (47,936)
--------- ---------
Gross deferred tax liabilities (135,590) (144,954)
--------- ---------
Net deferred tax assets (liabilities) $ 72,909 $ (14,670)
========= =========
As of December 31, 2003 for federal income tax purposes, the Bank has operating
loss carryovers of approximately $113,000 which will expire in 2023.
As of December 31, 2003, for state income tax purposes, the Bank has operating
loss carryovers of approximately $188,000 which will expire in the years 2007
through 2013.
F-17
NOTE 9 - PENSION PLAN
The Bank has a Savings Incentive Match Plan for Employees of Small Employers
that covers all employees. The Bank matches 3% of employee's compensation. The
Bank contributed $15,965 and $14,950 to the plan during the years ended December
31, 2003 and 2002, respectively.
NOTE 10 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), Tier 1 (core) capital (as defined) to
adjusted total assets (as defined), and tangible capital to tangible assets (as
defined). Management believes, as of December 31, 2003, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 2003, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 and
Tangible capital ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Bank's actual capital amounts and ratios are also presented in the table as
of December 31:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollar amounts in thousands)
December 31, 2003:
Total Capital (to Risk Weighted Assets) $2,843 12.19% $1,867 >8.0% $2,333 >10.0%
- -
Core Capital (to Adjusted Total Assets) 2,551 5.82 1,752 >4.0 2,190 >5.0
- -
Tangible Capital (to Tangible Assets) 2,551 5.82 657 >1.5 N/A N/A
-
Tier 1 Capital (to Risk Weighted Assets) 2,551 10.93 N/A N/A 1,400 >6.0
-
December 31, 2002:
Total Capital (to Risk Weighted Assets) 2,728 16.91 1,291 >8.0 1,291 >10.0
- -
Core Capital (to Adjusted Total Assets) 2,524 6.13 1,646 >4.0 2,058 >5.0
- -
Tangible Capital (to Tangible Assets) 2,524 6.13 617 >1.5 N/A N/A
-
Tier 1 Capital (to Risk Weighted Assets) 2,524 15.64 N/A N/A 968 >6.0
-
F-18
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 2003, the Bank was obligated under an operating lease for the
Bank's main office expiring
July 31, 2008. The Bank has the option to extend the lease for two additional
five year periods. The total minimum rental due in future periods under this
existing agreement is as follows as of December 31, 2003:
2004 $46,627
2005 46,627
2006 46,627
2007 46,627
2008 27,199
--------
Total $213,707
========
The total rental expense amounted to $41,415 for 2003 and $41,968 for 2002.
NOTE 12 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located within the state.
The majority of the Bank's loan portfolio is comprised of loans collateralized
by real estate located in the state of New Hampshire.
NOTE 13 - FINANCIAL INSTRUMENTS
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to originate loans, standby letters of
credit and unadvanced funds on loans. The instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheets. The contract amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for loan commitments and standby letters of
credit is represented by the contractual amounts of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the borrower. Collateral held varies, but may include
secured interests in mortgages, accounts receivable, inventory, property, plant
and equipment and income-producing properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. As of December 31, 2003 and 2002, the
maximum potential amount of the Bank's obligation was $250,000 and $104,713,
respectively, for financial and standby letters of credit. The Bank's
outstanding letters of credit generally have a term of less than one year. If a
letter of credit is drawn upon, the Bank may seek recourse through the
customer's underlying line of credit. If the customer's line of credit is also
in default, the Bank may take possession of the collateral, if any, securing the
line of credit.
F-19
The estimated fair values of the Bank's financial instruments, all of which are
held or issued for purposes other than trading, are as follows as of December
31, 2003:
Carrying Fair
Amount Value
------------- -------------
Financial assets:
Cash and cash equivalents $ 1,822,623 $ 1,822,623
Interest bearing time deposit in other bank 100,000 100,000
Available-for-sale securities 10,073,066 10,073,066
Federal Home Loan Bank stock 485,300 485,300
Loans, net 30,728,184 30,773,000
Accrued interest receivable 124,299 124,299
Financial liabilities:
Deposits 34,431,533 34,711,000
Federal Home Loan Bank advances 6,746,550 6,770,000
The carrying amounts of financial instruments shown in the above table are
included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
The notional amounts of financial instrument liabilities with off-balance sheet
credit risk are as follows as of December 31:
2003 2002
------------- -------------
Commitments to originate loans $ 573,000 $ 151,500
Unadvanced portions of loans:
Commercial lines of credit 814,380 686,247
Consumer lines of credit 1,553,124 1,678,111
Standby letters of credit 250,000 104,713
Construction loans 250 129,670
------------- -------------
$ 3,190,754 $ 2,750,241
============= =============
There is no material difference between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.
NOTE 14 - RECLASSIFICATION
Certain amounts in the prior year have been reclassified to be consistent with
the current year's statement presentation.
F-20
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS IN CONNECTION
WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY MONADNOCK COMMUNITY BANCORP, INC., MONADNOCK COMMUNITY
BANK OR RYAN BECK. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER UP TO
OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO 485,156 SHARES
CHANGE IN THE AFFAIRS OF MONADNOCK COMMUNITY BANCORP, INC. OR MONADNOCK
COMMUNITY BANK SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS
FURNISHED HEREIN OR SINCE THE DATE HEREOF.
-------------- MONADNOCK COMMUNITY BANCORP, INC.
TABLE OF CONTENTS (Proposed Holding Company for
Monadnock Community Bank)
PAGE
Summary.......................................................... COMMON STOCK
Risk Factors.....................................................
Selected Financial and Other Data................................
How We Intend to Use the Proceeds................................
Our Policy Regarding Dividends...................................
Market for the Common Stock...................................... --------------
Pro Forma Regulatory Capital Analysis............................
Capitalization................................................... PROSPECTUS
Pro Forma Data...................................................
Management's Discussion and Analysis of --------------
Financial Condition and Results of Operations.................
Business of Monadnock Community Bank, MHC........................ RYAN BECK & CO.
Business of Monadnock Community Bancorp, Inc.....................
Business of Monadnock Community Bank............................. __________, 2004
Proposed Stock Purchases by Management...........................
The Reorganization and Stock Offering............................
Management ......................................................
How We Are Regulated.............................................
Taxation.........................................................
Restrictions on Acquisitions of Monadnock Community Bancorp, Inc
and Monadnock Community Bank.................................
Description of Capital Stock of Monadnock Community Bancorp, Inc.
Transfer Agent and Registrar....................................
Experts.........................................................
Legal and Tax Opinions..........................................
Additional Information..........................................
Index to Consolidated Financial Statements......................
- -----------------------------------------------------
DEALER PROSPECTUS DELIVERY OBLIGATIONS
Until the later of _____, 2004 or 25 days after the commencement of the
syndicated Community offering, if any, all dealers effecting
transactions in the registered securities, whether or not participating
in this distribution, may be required to deliver a prospectus. This is
in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 545.121 of the Office of Thrift Supervision (OTS) regulations
provides indemnification for directors and officers of the Monadnock Community
Bank. Although there are no indemnification provisions in the charter and bylaws
of the Registrant, all the directors and officers of the Registrant hold the
same position with Monadnock Community Bank and have indemnification under OTS
Regulations as described below.
Generally, federal regulations define areas for indemnity coverage for
federal savings associations as follows:
(a) Any person against whom any action is brought or threatened
because that person is or was a director or officer of the savings association
shall be indemnified by the savings association for:
(i) Any amount for which that person becomes liable under a
judgment in such action; and
(ii) Reasonable costs and expenses, including reasonable
attorneys' fees, actually paid or incurred by that
person in defending or settling such action, or in
enforcing his or her rights under this section if he or
she attains a favorable judgment in such enforcement
action.
(b) Indemnification shall be made to such person under paragraph (b)
of this Section only if:
(i) Final judgment on the merits is in his or her favor; or
(ii) In case of:
a. Settlement,
b. Final judgment against him or her, or
c. Final judgment in his or her favor, other than
on the merits, if a majority of the
disinterested directors of the savings
association determine that he or she was acting
in good faith within the scope of his or her
employment or authority as he or she could
reasonably have perceived it under the
circumstances and for a purpose he or she could
reasonably have believed under the circumstances
was in the best interest of the savings
association or its members. However, no
indemnification shall be made unless the
association gives the Office at least 60 days
notice of its intention to make such
indemnification. Such notice shall state the
facts on which the action arose, the terms of
any settlement, and any disposition of the
action by a court. Such notice, a copy thereof,
and a certified copy of the resolution
containing the required determination by the
board of directors shall be sent to the Regional
Director, who shall promptly acknowledge receipt
thereof. The notice period shall run from the
date of such receipt. No such indemnification
shall be made if the OTS advises the association
in writing, within such notice period, of its
objection thereto.
(c) As used in this paragraph:
(i) "Action" means any judicial or administrative
proceeding, or threatened proceeding, whether civil,
criminal, or otherwise, including any appeal or other
proceeding for review;
(ii) "Court" includes, without limitation, any court to which
or in which any appeal or any proceeding for review is
brought;
(iii) "Final Judgment" means a judgment, decree, or order
which is not appealable or as to which the period for
appeal has expired with no appeal taken;
(iv) "Settlement" includes the entry of a judgment by consent
or confession or a plea of guilty or of nolo contendere.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Amount
------
* Legal Fees and Expenses...................................... $ 100,000
* Accounting Fees and Expenses................................. 70,000
* Conversion Agent and Data Processing Fees.................... 13,000
* Marketing Agent Fees (1)..................................... 125,000
* Marketing Agent Expenses, including legal fees and expenses.. 40,000
* Appraisal and Business Plan Fees and Expenses................ 35,000
* Printing, Postage, Mailing and EDGAR......................... 75,000
* OTS Filing Fee............................................... 14,400
* Registration and Filing Fees (Nasdaq and SEC)................ 1,000
* State "Blue Sky" Filing Fees................................. 15,000
* Stock Transfer Agent and Certificates and Other Expenses..... 11,600
-----------
* Total ....................................................... $ 500,000
===========
- ------------------
* Estimated
(1) Monadnock Community Bancorp, Inc. has retained Ryan Beck & Co., Inc. to
assist in the sale of common stock on a best efforts basis in the
offerings.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable.
ITEM 27. EXHIBITS:
The exhibits filed as part of this registration statement are as
follows:
(a) LIST OF EXHIBITS
1.1 Engagement Letter by and between Monadnock Community Bank and Ryan Beck
& Co., Inc.
1.2 Form of Agency Agreement by and among Monadnock Community Bancorp, Inc.,
Monadnock Community Bank and Ryan Beck & Co., Inc.*
2 Plan of Mutual Holding Company Reorganization and Stock Issuance
3.1 Federal Stock Charter of Monadnock Community Bancorp, Inc.
3.2 Bylaws of Monadnock Community Bancorp, Inc.
4 Form of common stock certificate of Monadnock Community Bancorp, Inc.
5 Opinion of Luse Gorman Pomerenk & Schick, P.C. regarding legality of
securities being registered
8.1 Form of Federal Tax Opinion of Luse Gorman Pomerenk & Schick, P.C.
10.1 Employee Stock Ownership Plan*
21 Subsidiaries of Registrant
23.1 Consent of Luse Gorman Pomerenk & Schick, P.C. (contained in Opinions
included at Exhibits 5 and 8.1)
23.2 Consent of Shatswell, MacLeod & Company, P.C.
23.3 Consent of RP Financial, LC.
24 Power of Attorney (set forth on signature page)
99.1 Appraisal Agreement by and between Monadnock Community Bank and RP
Financial, LC.
99.2 Business Plan Agreement by and between Monadnock Community Bank and RP
Financial, LC.
99.3 Appraisal Report of RP Financial, LC.**
99.4 Letter of RP Financial, LC. with respect to Subscription Rights
99.5 Marketing Materials and Stock Order and Acknowledgment Form*
- ---------------------------------
* To be filed supplementally or by amendment.
** Supporting financial schedules filed pursuant to Rule 202 of Regulation
S-T.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii)Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, to
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
(3) To file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
The small business issuer will provide to the underwriter at
the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Peterborough, State of New Hampshire on March 18, 2004.
MONADNOCK COMMUNITY BANCORP, INC.
By: /s/ William M. Pierce, Jr.
--------------------------------------------
William M. Pierce, Jr.
President and Chief Executive Officer, Director
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of Monadnock Community
Bancorp, Inc. (the "Company") hereby severally constitute and appoint William J.
Pierce, Jr. as our true and lawful attorney and agent, to do any and all things
in our names in the capacities indicated below which said William J. Pierce, Jr.
may deem necessary or advisable to enable the Company to comply with the
Securities Act of 1933, and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with the registration
statement on Form SB-2 relating to the offering of the Company's Common Stock,
including specifically, but not limited to, power and authority to sign for us
in our names in the capacities indicated below the registration statement and
any and all amendments (including post-effective amendments) thereto; and we
hereby approve, ratify and confirm all that said William J. Pierce, Jr. shall do
or cause to be done by virtue thereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates stated.
Signatures Title Date
---------- ----- ----
/s/ William M. Pierce, Jr. President, Chief Executive Officer March 18, 2004
- ------------------------------------ and Director (Principal Executive
William M. Pierce, Jr. Officer)
/s/ Donald R. Blanchette Chief Financial Officer, Vice March 18, 2004
- ------------------------------------ President and Treasurer (Principal
Donald R. Blanchette Financial and Accounting Officer)
/s/ Richard J. Wargo Chairman of the Board and Director March 18, 2004
- ------------------------------------
Richard J. Wargo
/s/ Samuel J. Hackler Vice Chairman of the Board and March 18, 2004
- ------------------------------------ Director
Samuel J. Hackler
/s/ Kenneth A. Christian Director March 18, 2004
- ------------------------------------
Kenneth A. Christian
/s/ Jack Goldstein Director March 18, 2004
- ------------------------------------
Jack Goldstein
/s/ Thomas C. LaFortune Director March 18, 2004
- ------------------------------------
Thomas C. LaFortune
/s/ Kenneth R. Simonetta Director March 18, 2004
- ------------------------------------
Kenneth R. Simonetta
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH ___, 2004
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
REGISTRATION STATEMENT
ON
FORM SB-2
MONADNOCK COMMUNITY BANCORP, INC.
PETERBOROUGH, NEW HAMPSHIRE
EXHIBIT INDEX
1.1 Engagement Letter by and between Monadnock Community Bank and Ryan Beck
& Co., Inc.
1.2 Form of Agency Agreement by and among Monadnock Community Bancorp, Inc.,
Monadnock Community Bank and Ryan Beck & Co., Inc.*
2 Plan of Mutual Holding Company Reorganization and Stock Issuance
3.1 Federal Stock Charter of Monadnock Community Bancorp, Inc.
3.2 Bylaws of Monadnock Community Bancorp, Inc.
4 Form of common stock certificate of Monadnock Community Bancorp, Inc.
5 Opinion of Luse Gorman Pomerenk & Schick, P.C. regarding legality of
securities being registered
8.1 Form of Federal Tax Opinion of Luse Gorman Pomerenk & Schick, P.C.
10.1 Form of Employee Stock Ownership Plan*
21 Subsidiaries of Registrant
23.1 Consent of Luse Gorman Pomerenk & Schick, P.C. (contained in Opinions
included at Exhibits 5 and 8.1)
23.2 Consent of Shatswell, MacLeod & Company, P.C.
23.3 Consent of RP Financial, LC.
24 Power of Attorney (set forth on signature page)
99.1 Appraisal Agreement by and between Monadnock Community Bank and RP
Financial, LC.
99.2 Business Plan Agreement by and between Monadnock Community Bank and RP
Financial, LC.
99.3 Appraisal Report of RP Financial, LC.**
99.4 Letter of RP Financial, LC. with respect to Subscription Rights
99.5 Marketing Materials and Stock Order and Acknowledgment Form*
- ----------------------------------------------------------
* To be filed supplementally or by amendment.
** Supporting financial schedules filed pursuant to Rule 202 of Regulation
S-T.