SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
-------- THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
-------- THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
COMMISSION FILE NUMBER: [000-50810]
MONADNOCK COMMUNITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
FEDERAL 42-1634975
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE JAFFREY ROAD, PETERBOROUGH, NH 03458
(Address of principal executive office) (Zip Code)
(603)924-9654
(Registrant's telephone number, including area code)
Indicate by check whether the registrant: (1)has filed all reports required to
be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes No X*
--- ---
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes No X*
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date: Common Stock, $.01 par value - no shares outstanding as of June 25, 2004.*
* The registrant's Registration Statement on Form SB-2 was declared effective
on May 13, 2004.
FORM 10-QSB
MONADNOCK COMMUNITY BANCORP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1: Financial Statements (Unaudited)
Monadnock Community Bancorp, Inc. (the "Company") was formed to serve
as the stock holding company for Monadnock Community Bank (the "Bank")
as part of the Bank's reorganization into a mutual holding company
structure. As of the date hereof, the Bank has not completed its
reorganization, and accordingly, the Company has not yet issued any
stock, has no assets or liabilities, and has not conducted any
business other than that of an organizational nature. For a further
discussion of the Company's formation and operations, see the
Company's Registration Statement on Form SB-2, as amended, initially
filed on March 19, 2004 and declared effective on May 13, 2004 (File
Number 333-113783). Based upon the foregoing, the Unaudited Interim
Financial Statements filed as a part of this quarterly report are
those of the Bank as follows:
Statements of Financial Condition as of March 31, 2004
and December 31, 2003 1
Statements of Income for the Three Months Ended March 31,
2004 and 2003 2
Statements of Cash Flows for the Three Months Ended
March 31, 2004 and 2003 3
Selected Notes to Financial Statements 4
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Item 3: Quantitative and Qualitative Disclosures
About Market Risk 12
Item 4: Controls and Procedures 13
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 13
Item 2: Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities 13
Item 3: Defaults upon Senior Securities 14
Item 4: Submission of Matters to a Vote of
Security Holders 14
Item 5: Other Information 14
Item 6: Exhibits and Reports on Form 8-K 14
SIGNATURES 14
MONADNOCK COMMUNITY BANK
STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
ASSETS 2004 2003
Cash and due from banks $ 511,172 $ 441,782
Federal Home Loan Bank overnight deposit 150,511 1,315,455
Interest-bearing demand deposits with other banks 37,989 65,386
------------------- -------------------
Total cash and cash equivalents 699,672 1,822,623
Interest-bearing time deposit in other bank 100,000 100,000
Investments in available-for-sale securities (at fair value) 11,536,018 10,073,066
Federal Home Loan Bank stock, at cost 485,300 485,300
Loans, net of allowance for loan losses of
$320,802 and $319,592 as of March 31, 2004
and December 31, 2003, respectfully 31,375,493 30,728,184
Premises and equipment 191,868 188,622
Other real estate owned 12,500 12,500
Accrued interest receivable 148,239 124,299
Other assets 252,917 205,740
------------------- -------------------
Total assets $ 44,802,007 $ 43,740,334
=================== ===================
LIABILITIES AND EQUITY
Deposits:
Noninterest-bearing $ 2,204,284 $ 2,103,332
Interest-bearing 31,348,355 32,328,201
------------------- -------------------
Total deposits 33,552,639 34,431,533
Federal Home Loan Bank advances 8,671,065 6,746,550
Other liabilities 50,967 79,259
------------------- -------------------
Total liabilities 42,274,671 41,257,342
------------------- -------------------
Equity:
Retained earnings 2,567,405 2,551,055
Accumulated other comprehensive loss (40,069) (68,063)
------------------- -------------------
Total equity 2,527,336 2,482,992
------------------- -------------------
Total liabilities and equity $ 44,802,007 $ 43,740,334
=================== ===================
The accompanying notes are an integral part of these financial statements.
2
MONADNOCK COMMUNITY BANK
STATEMENTS OF INCOME
(UNAUDITED)
--------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2004 2003
----------------- ------------------
Interest and dividend income:
Interest and fees on loans $ 438,643 $ 322,187
Interest on investments-taxable 73,109 160,448
Other interest income 3,972 5,155
---------------- -----------------
Total interest and dividend income 515,724 487,790
---------------- -----------------
Interest expense:
Interest on deposits 126,410 159,074
Interest on Federal Home Loan Bank advances 54,846 61,612
---------------- -----------------
Total interest expense 181,256 220,686
---------------- -----------------
Net interest and dividend income 334,468 267,104
(Benefit) provision for loan losses
---------------- -----------------
Net interest and dividend income after (benefit) provision for
loan losses 334,468 267,104
---------------- -----------------
Other income:
Net gain on sales of available-for-sale securities 34,507
Service charges on deposits 13,775 14,088
Gain on sale of loans, net 8,704
Loan commissions 8,692 14,844
Other income 8,112 6,545
---------------- -----------------
Total other income 39,283 69,984
---------------- -----------------
Other expense:
Salaries and employee benefits 193,382 181,761
Occupancy expense 25,599 23,945
Equipment expense 36,221 33,290
Blanket bond insurance 5,485 8,367
Professional fees 22,373 11,152
Supplies and printing 4,751 7,414
Telephone expense 6,681 7,575
Marketing expense 4,342 17,061
Postage expense 6,189 4,255
Other expense 43,955 29,705
---------------- -----------------
Total other expense 348,978 324,525
---------------- -----------------
Income before income tax expense 24,773 12,563
Income tax expense 8,423 4,417
---------------- -----------------
Net income $ 16,350 $ 8,146
================ =================
The accompanying notes are an integral part of these financial statements
3
MONADNOCK COMMUNITY BANK
STATEMENTS OF CASH FLOWS
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2004 2003
----------------- -----------------
Cash flows from operating activities: $ 16,350 $ 8,146
Net income
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Net gain on sales of available-for-sale securities (34,507)
Net amortization of securities 12,806 427,808
Change in deferred loan origination costs, net (9,185) (10,093)
Gain on sale loans, net (8,704)
Depreciation and amortization 14,578 14,857
(Increase) decrease in accrued interest receivable (23,940) 16,462
(Increase) decrease in other assets (79,246) 7,043
Decrease in loan servicing rights and interest-only strips 771 2,172
Decrease in prepaid expenses 1,769 4,362
Decrease (increase) in taxes receivable 11,166 (3,657)
Decrease in accrued expenses (10,867) (4,937)
Increase in accrued interest payable 520 525
Decrease in other liabilities (17,945) (13,114)
----------------- -----------------
Net cash (used in) provided by operating activities (91,927) 415,067
----------------- -----------------
Cash flows from investing activities:
Purchase of available-for-sale securities (2,218,842) (5,926,265)
Proceeds from sales of available-for-sale securities 3,574,491
Proceeds from maturities of available-for-sale securities 789,440 1,671,185
Loan originations and principal collections, net (764,999) (938,773)
Recoveries of previously charged off loans (chargeoffs) 1,209 (1,000)
Proceeds from sales of loans 134,371
Capital expenditures - premises and equipment (17,824) (29,354)
Increase in repossessed assets (3,430)
----------------- -----------------
Net cash used in investing activities (2,076,645) (1,653,146)
----------------- -----------------
Cash flows from financing activities:
Net (decrease) increase in demand deposits, savings and NOW deposits (393,304) 115,352
Net decrease in time deposits (485,590) (413,156)
Long-term advances from Federal Home Loan Bank 1,924,515 1,500,000
Payments on long-term advances from Federal Home Loan Bank (500,000)
----------------- -----------------
Net cash provided by financing activities 1,045,621 702,196
----------------- -----------------
Net decrease in cash and cash equivalents (1,122,951) (535,883)
Cash and cash equivalents at beginning of period 1,822,623 1,268,615
----------------- -----------------
Cash and cash equivalents at end of period $ 699,672 $ 732,732
================= =================
Supplemental disclosures:
Interest paid $ 180,736 $ 220,162
Income taxes (received) paid (2,743) 8,074
The accompanying notes are an integral part of these financial statements
4
MONADNOCK COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Monadnock Community Bancorp, Inc. (the "Company") is being
formed in connection with the mutual holding company reorganization of Monadnock
Community Bank (the "Bank"). The Company's sole subsidiary, the Bank, is a
federally chartered savings bank, which provides retail and commercial banking
services to individuals and business customers from its office in Peterborough,
New Hampshire.
BASIS OF PRESENTATION: The financial statements presented in this quarterly
report include the accounts of the Bank. The financial statements of the Bank
have been prepared in conformity with accounting principles generally accepted
in the United States of America (GAAP) for interim financial information and
predominant practices followed by the financial services industry, and are
unaudited. Interim statements are subject to possible adjustment in connection
with the annual audit of the Company for the year ending December 31, 2004. In
the opinion of the Company's management, all adjustments consisting of normal
recurring accruals necessary for a fair presentation of the financial condition
and results of operations for the interim periods included herein have been
made.
The results of operations for the three month period ended March 31, 2004 are
not necessarily indicative of the results of operations that may be expected for
any other interim period or for the year ending December 31, 2004. Certain
information and note disclosures normally included in the Company's annual
financial statements have been condensed or omitted. Therefore, these financial
statements and notes thereto should be read in conjunction with a reading of the
financial statements and notes included in the Registration Statement on Form
SB-2 filed by the Company with the Securities and Exchange Commission (File
Number 333-113783), as amended, initially filed on March 19, 2004, and declared
effective on May 13, 2004 ("Registration Statement").
USE OF ESTIMATES: The preparation of the financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect amounts
reported in the financial statements. Changes in these estimates and assumptions
are considered reasonably possible and may have a material impact on the
financial statements and thus actual results could differ from the amounts
reported and disclosed herein. The Company considers the allowance for loan
losses and the amortization of loan purchase premiums to be critical accounting
estimates.
At March 31, 2004, there were no material changes in the Company's significant
accounting policies or critical accounting estimates from those disclosed in the
Company's Registration Statement.
NOTE 2 - ADOPTION OF PLAN OF MUTUAL HOLDING COMPANY REORGANIZATION AND STOCK
ISSUANCE
On March 11, 2004, the Board of Directors adopted a plan of mutual holding
company reorganization and stock issuance pursuant to which the Company will
sell a minority interest of its common stock to eligible depositors of the Bank
in a subscription offering and, if necessary, to the general public if a
community or a syndicated community offering is held. The majority of the common
stock will be owned by Monadnock Mutual Holding Company, the parent holding
company for the Company.
5
Pursuant to regulations of the Office of Thrift Supervision (the "OTS") the
Company will not initiate any action within the term of its three year business
plan in the furtherance of payment of a special distribution or return of
capital to stockholders of the Company.
The OTS imposes various restrictions or requirements on the ability of savings
institutions to make capital distributions, including cash dividends.
A savings institution that is a subsidiary of a savings and loan holding
company, such as the Bank, must file an application or a notice with the OTS at
least thirty days before making a capital distribution. A savings institution
must file an application for prior approval of a capital distribution if: (i) it
is not eligible for expedited treatment under the applications processing rules
of the OTS; (ii) the total amount of all capital distributions, including the
proposed capital distribution, for the applicable calendar year would exceed an
amount equal to the savings bank's net income for that year to date plus the
institution's retained net income for the preceding two years; (iii) it would
not adequately be capitalized after the capital distribution; or (iv) the
distribution would violate an agreement with the OTS or applicable regulators.
A liquidation account will not be established since the Bank's members retain
their rights as members of the mutual holding company.
The Bank will be required to file a capital distribution notice or application
with the OTS before paying any dividend to the Company. However, capital
distributions by the Company, as a savings and loan holding company, will not be
subject to the OTS capital distribution rules.
The OTS may disapprove a notice or deny an application for a capital
distribution if (i) the savings institution would be undercapitalized following
the capital distribution; (ii) the proposed capital distribution raises safety
and soundness concerns; or (iii) the capital distribution would violate a
prohibition contained in any statute, regulation or agreement.
Costs, including underwriting discounts, if any, to complete the stock offering
are expected to be deferred and deducted from the proceeds from the sale of
capital stock. If the stock offering is not completed, all costs incurred will
be charged to expense. Deferred costs aggregated $ 79,034 as of March 31, 2004
and are included in other assets in the March 31, 2004 Statement of Financial
Condition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-QSB contains forward-looking statements, which
are based on assumptions and describe future plans, strategies and expectations
of the Company and the Bank. These forward-looking statements are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar words. Our ability to predict results or the
actual effect of future plans or strategies is uncertain. Factors which could
have a material adverse effect on our operations include, but are not limited
to, changes in interest rates, general economic conditions, economic conditions
in the 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.
6
CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 2003 TO MARCH 31, 2004
GENERAL. Our total assets increased by $1.1 million, or 2.5%, to $44.8 million
at March 31, 2004 compared to $43.7 million at December 31, 2003. The increase
primarily reflected growth in our investment securities of $1.4 million to $11.5
million from $ 10.1 million and in our net loan portfolio of $700,000 to $31.4
million from $30.7 million. To fund the increase in assets, Federal Home Loan
Bank advances increased by $2.0 million to $8.7 million from $6.7 million offset
by a decrease in deposits of $800,000 to $33.6 million from $34.4 million.
ASSETS. Our net loan portfolio increased $700,000, or 2.3%, from $30.7 million
at December 31, 2003 to $31.4 million at March 31, 2004. The largest increase
was in commercial real estate loans, due to the favorable lower market interest
rates. These loans increased $600,000, or 7.1%, to $9.0 million from $8.4
million. In addition, one-to-four-family residential loans increased $200,000 to
$16.7 million from $16.5 million. The commercial business loan portfolio
decreased $400,000 to $2.7 million from $3.1 million.
Cash and cash equivalents decreased $1.1 million, or 61.1%, to $700,000 at March
31, 2004 from $1.8 million at December 31, 2003 due to the purchase of
securities and the increase in total loans which was partially offset by
decreases in deposits. Our interest-bearing deposits in other financial
institutions decreased $1.2 million to $300,000 at March 31, 2004 from $1.5
million at December 31, 2003. The decrease was primarily due to the purchasing
of securities and to loan growth.
Our investment portfolio increased $1.4 million to $11.5 million at March 31,
2004 from $10.1 million at December 31, 2003. The increase was due to the
purchase of mortgage-backed securities in the amount of $2.2 million, partially
offset by paydowns of $800,000 in the current portfolio.
DEPOSITS. Our total deposits decreased $800,000, or 2.3%, to $33.6 million at
March 31, 2004 from $34.4 million at December 31, 2003. Interest-bearing
deposits decreased $1.0 million, to $31.3 million from $32.3 million, and
non-interest-bearing deposits increased $100,000, to $2.2 million from $2.1
million.
BORROWINGS. Additional Federal Home Loan Bank advances were obtained to offset
the decrease in deposits and fund investment security purchases and loan growth.
Federal Home Loan Bank advances increased $2.0 million to $8.7 million at March
31, 2004 from $6.7 million at December 31, 2003. We used the increased
borrowings for the funding of loans and as part of our capital and interest rate
risk management strategies.
EQUITY. Total equity increased by $44,000, or 2.0%, to $2.5 million at March 31,
2004 from less than $2.5 million at December 31, 2003. Our equity to assets
ratio was 5.6% at March 31, 2004 compared to 5.7% at December 31, 2003. The
decrease in our equity to assets ratio was primarily a result of our asset
growth. Total equity increased as a result of net income of $16,000 for the
three months ended March 31, 2004 and an unrealized increase in the market value
of available-for-sale securities of $28,000. This adjustment to equity is net of
deferred taxes.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004
AND 2003.
GENERAL. We recorded net income of $16,000 for the three months ended March 31,
2004 and $8,000 for the three months ended March 31, 2003. Our profit for the
three months ended March 31, 2004 was partially attributable to a gain on the
sale of loans in the amount of $9,000; and a profit would not have been realized
for the three months ended March 31, 2003 without a gain on the sale of
securities in the amount of $35,000. These types of earnings may not recur or,
if recurring, will likely be modest.
7
NET INTEREST INCOME. Net interest income increased $68,000, or 25.5%, to
$335,000 for the three months ended March 31, 2004 compared to $267,000 for the
three months ended March 31, 2003, reflecting a $28,000, or 5.7%, increase in
interest income, and a $40,000, or 18.1%, decrease in interest expense. Our
interest rate spread increased to 2.9% for the three months ended March 31, 2004
compared to 2.4% for the three months ended March 31, 2003, 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 and Federal Home Loan Bank advances. In addition, the ratio of average
interest-earning assets to average interest-bearing liabilities increased to
110.7% for the three months ended March 31, 2004 compared to 108.9% for the
three months ended March 31, 2003.
INTEREST INCOME. Total interest income increased by $28,000, or 5.7%, to
$516,000 for the three months ended March 31, 2004 from $488,000 for the three
months ended March 31, 2003. The increase was primarily the result of the
increase in loans, particularly one-to-four family mortgages, partially offset
by lower rate mortgage-backed securities. Our average loan portfolio balance
grew by $12.4 million to $31.4 million for the three months ended March 31, 2004
from $19.0 million for the three months ended March 31, 2003. Interest earned on
total loans for the three months ended March 31, 2004 was $439,000 compared to
$322,000 for the three months ended March 31, 2003. The average yield on total
loans decreased to 5.6% for the three months ended March 31, 2004 compared to
6.8% for the three months ended March 31, 2003, 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 $89,000,
or 53.6%, for the three months ended March 31, 2004 to $77,000 from $166,000 for
the three months ended March 31, 2003. The change was a result of a decrease in
the average balance of the securities portfolio of $9.7 million to $12.2 million
for the three months ended March 31, 2004 from $21.9 million for the three
months ended March 31, 2003, combined with a decrease in the overall average
yield on total investments to 2.5% for the three months ended March 31, 2004 as
compared to 3.1% for the three months ended March 31, 2003. 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 $40,000 for the three
months ended March 31, 2004 was primarily due to the lower interest rates.
Average Federal Home Loan Bank advances increased by $300,000 to $7.8 million
for the three months ended March 31, 2004 from $7.5 million for the three months
ended March 31, 2003. Although average Federal Home Loan Bank advances
increased, the lower rates resulted in reduced interest costs of $7,000 as
interest expense on Federal Home Loan Bank advances was $55,000 for the three
months ended March 31, 2004 compared to $62,000 the previous year. Overall, the
average outstanding balance of deposits remained relatively constant, however,
average certificate of deposit balances decreased by $2.4 million to $14.4
million for the three months ended March 31, 2004 from $16.8 million for the
year ended March 31, 2003. The average yield on interest bearing liabilities
decreased from 2.3% at March 31, 2003 to 1.8% at March 31, 2004, 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.
ALLOWANCE FOR LOAN LOSSES. There was no benefit or provision for loan losses for
the three months ended March 31, 2004. The allowance for loan losses as a
percent of total loans was 1.0% at March 31, 2004 as compared to 1.9% at March
31, 2003. We believe that our allowance for loan losses covers known
identifiable loan losses as well as estimated losses inherent in the portfolio
for which the losses are probable but not specifically identifiable. See
8
"Business of Monadnock Community Bank - Asset Quality-Allowance for Loan
Losses."
NON-INTEREST INCOME. Non-interest income amounted to $39,000 for the three
months ended March 31, 2004, compared to $70,000 for the three months ended
March 31, 2003. For the three months ended March 31, 2004, gain on the sale of
loans was $9,000, while there was no gain or loss in the three months ended
March 31, 2003. Service charges on deposits remained stable in the three months
ended March 31, 2004 compared to the three months ended March 31, 2003. Fees
paid to us by a mortgage banking company to whom we referred loans for closing,
but did not accept for our portfolios, were recorded as loan commissions and
totaled $9,000 in the three months ended March 31, 2004 and $15,000 in the three
months ended March 31, 2003. There was no net gain on the sale of
available-for-sale securities in the three months ended March 31, 2004 compared
to a net gain of $35,000 in the three months ended March 31, 2003. 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.
NON-INTEREST EXPENSE. Non-interest expense increased $24,000, or 7.4%, to
$349,000 for the three months ended March 31, 2004 compared to $325,000 for the
three months ended March 31, 2003. The increase during 2004 was primarily due to
overall increases in salary and benefits of $12,000, professional fees of
$11,000, and miscellaneous fees totaling $14,000. These increases were partly
offset by a decrease in marketing fees of $13,000.
Salaries and employee benefits represented 55.4% and 56.0% of total non-interest
expense for the three months ended March 31, 2004 and 2003, respectively. Total
salaries and employee benefits increased $12,000, or 6.6%, to $194,000 for the
three months ended March 31, 2004 from $182,000 for the same period in 2003. The
increase was primarily due to normal salary increases, bonuses and vacation
accruals.
Federal income tax expense for the first three months of 2004 was $8,000. In the
first three months of 2003, federal income tax expense was $4,000.
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 formerly 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
9
Home Loan Bank advances to leverage our capital base and provide funds for our
lending and investment activities, and enhance our interest rate risk
management.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, we maintain a strategy of
investing in various lending products 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 March 31, 2004, the total approved
loan commitments unfunded amounted to $ 3.6 million, which includes the
unadvanced portion of loans of $ 3.4 million. Certificates of deposits and
advances from the Federal Home Loan Bank of Boston scheduled to mature in one
year or less at March 31, 2004, totaled $ 8.8 million and $ 1 million,
respectively. Based on historical experience, we believe that a significant
portion of maturing deposits will remain with the Bank. We anticipate that we
will continue to have sufficient funds, through deposits and borrowings, to meet
our current commitments.
At March 31, 2004, we had available additional advances from the Federal Home
Loan Bank of Boston in the amount of $ 6.45 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 equity was $ 2.5 million at March
31, 2004, or 5.64%, of total assets on that date. As of March 31, 2004, we
exceeded all regulatory capital requirements. Our regulatory capital ratios at
March 31, 2004 were as follows: core capital 5.73%; Tier I risk-based capital
10.78% and total risk-based capital 12.03%. 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 in this prospectus have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). These principles require the measurement of financial position
and operating results in terms of historical dollars, without considering
changes in the relative purchasing power of money over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result, interest
rates have a more significant impact on our performance than the effects of
general levels of inflation. Interest rates, however, do not necessarily move in
the same direction or with the same magnitude as the price of goods and
services, since such prices are affected by inflation. In a period of rapidly
rising interest rates, the liquidity and maturity structure of our assets and
liabilities are critical to the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest rates, on
earnings is in the area of non-interest expense. 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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
asset/liability and funds management policies to better match the maturities and
repricing terms of our interest-earning assets and interest-bearing liabilities.
The board of directors sets and recommends the asset and liability and funds
management policies of the Bank, which are implemented by the asset/liability
management committee.
The purpose of the asset/liability committee is to communicate, coordinate and
control asset/liability management consistent with our business plan and board
approved policies. The committee establishes and monitors the volume and mix of
assets and funding sources taking into account relative costs and spreads,
interest rate sensitivity and liquidity needs. The objectives are to manage
assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk and profitability goals.
The asset/liability management committee generally meets quarterly to review,
among other things, economic conditions and interest rate outlook, current and
projected liquidity needs and capital position, anticipated changes in the
volume and mix of assets and liabilities and interest rate risk exposure limits
versus current projections using a net present value of portfolio equity
analysis and income simulations. The asset/liability management committee
recommends appropriate strategy changes based on this review.
In order to manage our assets and liabilities and achieve the desired liquidity,
credit quality, interest rate risk, profitability and capital targets, we have
focused our strategies on:
o 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 not more than a 20 year maturity.
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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 20 years.
ITEM 4. CONTROLS AND PROCEDURES
Our management evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934) occurred
during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Charter of Monadnock Community Bancorp, Inc.(1)
3.2 Bylaws of Monadnock Community Bancorp, Inc. (1)
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act
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32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act
(b) Reports on Form 8-K
None.
-------------------
(1) Filed as an exhibit to the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-113783), and incorporated herein
by reference
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Monadnock Community Bancorp, Inc.
Date: June 25, 2004 /s/ William M. Pierce, Jr.
--------------------------
William M. Pierce, Jr.
President and Chief Executive Officer
/s/ Donald R. Blanchette
--------------------------
Donald R. Blanchette
Chief Financial Officer
13