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 JUNE 30, 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.
1. Yes X No
--- ---
2. 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, 938,631 shares outstanding as of August 11,
2004.
FORM 10-QSB
MONADNOCK COMMUNITY BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1: Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Statements of Financial
Condition as of June 30, 2004 and
December 31, 2003 1
Condensed Consolidated Statements of Income for
the Three Months and Six Months Ended June 30,
2004 and 2003 2
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2004 and 2003 3
Selected Notes to Condensed Consolidated
Financial Statements 5
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 BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
ASSETS 2004 2003
Cash and due from banks $ 461,874 $ 441,782
Federal Home Loan Bank overnight deposit 2,192 1,315,455
Interest-bearing demand deposits with other
banks 30,392 65,386
------------------- -------------------
Total cash and cash equivalents 494,458 1,822,623
Interest-bearing time deposit in other bank 100,000 100,000
Investments in available-for-sale securities
(at fair value) 19,431,236 10,073,066
Federal Home Loan Bank stock, at cost 783,000 485,300
Loans, net of allowance for loan losses of $322,468 and $319,592
as of June 30, 2004 and December 31, 2003, respectively 32,755,257 30,728,184
Premises and equipment 190,013 188,622
Other real estate owned 88,345 12,500
Accrued interest receivable 168,856 124,299
Other assets 397,707 205,740
------------------- -------------------
Total assets $ 54,408,872 $ 43,740,334
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 2,962,085 $ 2,191,321
Interest-bearing 30,993,199 32,240,212
------------------- -------------------
Total deposits 33,955,284 34,431,533
Federal Home Loan Bank advances 15,289,404 6,746,550
Other liabilities 74,090 79,259
------------------- -------------------
Total liabilities 49,318,778 41,257,342
------------------- -------------------
Shareholders' Equity:
Preferred stock, $.01 par value 2,000,000
shares authorized, none issued Common
stock, $.01 par value, 18,000,000 shares
authorized, 938,631 shares issued and
outstanding at June 30, 2004 and none
issued at December 31, 2003 9,808
Additional paid in capital 2,792,264
Retained earnings 2,563,105 2,551,055
Unearned compensation (135,304)
Accumulated other comprehensive loss (139,779) (68,063)
------------------- -------------------
Total equity 5,090,094 2,482,992
------------------- -------------------
Total liabilities and equity $ 54,408,872 $ 43,740,334
=================== ===================
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
MONADNOCK COMMUNITY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Interest and dividend income:
Interest and fees on loans $ 440,407 $ 335,425 $ 879,050 $ 657,612
Interest on investments-taxable 95,163 143,458 168,272 303,906
Other interest income 6,997 6,317 10,969 11,472
----------- ----------- ----------- -----------
Total interest and dividend
income 542,567 485,200 1,058,291 972,990
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits 124,273 143,868 250,683 302,942
Interest on Federal Home Loan
Bank advances 83,069 73,527 137,915 135,138
----------- ----------- ----------- -----------
Total interest expense 207,342 217,395 388,598 438,080
----------- ----------- ----------- -----------
Net interest and dividend
income 335,225 267,805 669,693 534,910
(Benefit) provision for loan losses 0 0 0 0
----------- ----------- ----------- -----------
Net interest and dividend income after
(benefit) provision for loan losses 335,225 267,805 669,693 534,910
----------- ----------- ----------- -----------
Other income:
Net gain on sales of available-
for-sale securities 0 30,408 0 64,915
Service charges on deposits 14,687 15,025 28,462 29,113
Gain on sale of loans, net 16,712 0 25,415 0
Loan commissions (734) 14,683 7,958 29,527
Other income 9,726 7,496 17,838 14,041
----------- ----------- ----------- -----------
Total other income 40,391 67,612 79,673 137,596
----------- ----------- ----------- -----------
Other expense:
Salaries and employee benefits 192,660 177,478 386,041 359,239
Occupancy expense 27,550 23,680 53,149 47,625
Equipment expense 35,672 32,617 71,893 65,907
Blanket bond insurance 5,535 6,413 11,021 14,780
Professional fees 17,997 10,679 40,370 21,831
Supplies and printing 7,489 6,319 12,240 13,733
Telephone expense 8,032 7,313 14,712 14,888
Marketing expense 16,871 10,604 21,213 27,665
Postage expense 8,007 6,657 14,196 10,912
REO expense (income) 6,035 (716) 6,086 (492)
Other expense 55,650 43,567 99,554 73,048
----------- ----------- ----------- -----------
Total other expense 381,498 324,611 730,475 649,136
----------- ----------- ----------- -----------
Income (loss) before income
tax expense (5,882) 10,806 18,891 23,370
Income tax (benefit) expense (1,582) 3,820 6,841 8,237
----------- ----------- ----------- -----------
Net (loss) income $ (4,300) $ 6,986 $ 12,050 $ 15,133
=========== =========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
MONADNOCK COMMUNITY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
-----------------------------------
2004 2003
-------------- ---------------
Cash flows from operating activities:
Net income $ 12,050 $ 15,133
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Net gain on sales of available-for-sale securities (64,915)
Net amortization of securities 29,939 95,324
Change in deferred loan origination costs, net (19,294) (47,135)
Gain on sale loans, net (25,415)
Depreciation and amortization 29,152 29,939
(Increase) decrease in accrued interest receivable (44,558) 44,353
(Increase) decrease in other assets (130,838) 5,319
(Increase) decrease in loan servicing rights and
interest-only strips (5,542) 4,343
Increase in prepaid expenses (17,877) (59,284)
Decrease (increase) in taxes receivable 9,329 (20,073)
Increase in accrued expenses 4,633 5,518
Increase in accrued interest payable 1,045 1,051
Decrease in other liabilities (10,847) (13,047)
Net cash used in operating activities (168,223) (3,474)
Cash flows from investing activities:
Purchase of available-for-sale securities (11,604,003) (8,326,510)
Proceeds from sales of available-for-sale securities 9,814,880
Proceeds from maturities of available-for-sale
securities 2,097,140 3,667,361
Purchases of Federal Home Loan Bank stock (297,700) (14,600)
Loan originations and principal collections, net (2,388,724) (4,096,414)
Recoveries of previously charged off loans 2,875 620
Proceeds from sales of loans 327,640
Capital expenditures - premises and equipment (30,543) (35,453)
-------------- ---------------
Net cash used in investing activities (11,893,315) 1,009,884
Cash flows from financing activities:
Net (decrease) increase in demand deposits, savings and
NOW deposits (620,861) 1,943,117
Net increase (decrease) in time deposits 144,612 (2,042,592)
Long-term advances from Federal Home Loan Bank 6,042,854 3,399,550
Net change on short-term advances from Federal Home Loan
Bank 2,500,000 (2,500,000)
Issuance of common stock at par 9,808
Proceeds on common stock in excess of par 2,792,264
Unearned compensation of ESOP (135,304)
-------------- ---------------
Net cash provided by financing activities 10,733,373 800,075
-------------- ---------------
Net (decrease) increase in cash and cash equivalents (1,328,165) 1,806,485
Cash and cash equivalents at beginning of period 1,822,623 1,268,615
-------------- ---------------
Cash and cash equivalents at end of period $ 494,458 $ 3,075,100
============== ===============
3
Supplemental disclosures:
Interest paid $ 387,553 $ 437,029
Income taxes (received) paid (2,488) 28,310
Transfer from loans to other real estate owned 75,845
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
MONADNOCK COMMUNITY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Monadnock Community Bancorp, Inc. (the "Company") was 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 consolidated financial statements presented in this
quarterly report include the accounts of the Bank. The consolidated 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 and six month periods ended June 30,
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 consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect amounts reported in the consolidated financial statements. Changes in
these estimates and assumptions are considered reasonably possible and may have
a material impact on the financial statements and thus actual results could
differ from the amounts reported and disclosed herein. The Company considers the
allowance for loan losses and the amortization of loan purchase premiums to be
critical accounting estimates.
At June 30, 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.
RECENT ACCOUNTING PRONOUNCEMENTS: 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.
5
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 Company's consolidated
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 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 Company's consolidated 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 Company's consolidated
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 Company's consolidated financial statements.
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 would
6
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 was held. On June 28, 2004, the
reorganization was completed. The Company sold 422,834 shares to the public
raising $2.86 million net proceeds and issued 516,797 shares to Monadnock Mutual
Holding Company.
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 was not 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.
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.
7
CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 2003 TO JUNE 30, 2004
GENERAL. Our total assets increased by $10.7 million, or 24.5%, to $54.4 million
at June 30, 2004 compared to $43.7 million at December 31, 2003. The increase
primarily reflected growth in our investment securities of $9.3 million to $19.4
million from $10.1 million and in our net loan portfolio of $2.0 million to
$32.7 million from $30.7 million. To fund the increase in assets, Federal Home
Loan Bank advances increased by $8.6 million to $15.3 million from $6.7 million
partially offset by a decrease in deposits of $500,000 to $33.9 million from
$34.4 million.
ASSETS. Our net loan portfolio increased $2.0 million, or 6.5%, from $30.7
million at December 31, 2003 to $32.7 million at June 30, 2004. The largest
increase was in one-to-four-family residential loans, due to the favorable lower
market interest rates. These loans increased $1.8 million to $18.3 million from
$16.5 million. In addition, commercial real estate loans, increased $200,000, or
2.5%, to $8.6 million from $8.4 million. Our one-to-four family home equity
revolving open-end loans increased $300,000 from $2.0 million to $2.3 million.
This increase was offset by the commercial business loan portfolio which
decreased $300,000 to $2.8 million from $3.1 million.
Cash and cash equivalents decreased $1.3 million, or 72.9%, to $500,000 at June
30, 2004 from $1.8 million at December 31, 2003. The decrease in cash and cash
equivalents along with increased borrowings from the Federal Home Loan Bank,
partially offset by decreases in deposits, allowed the purchase of securities
and the increase in total loans. Our interest-bearing deposits in other
financial institutions decreased $1.4 million to $100,000 at June 30, 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 $9.3 million to $19.4 million at June 30,
2004 from $10.1 million at December 31, 2003. The increase was due to the
purchase of mortgage-backed securities in the amount of $11.6 million, partially
offset by paydowns and maturities of $2.1 million in the current portfolio.
DEPOSITS. Our total deposits decreased $500,000, or 1.4%, to $33.9 million at
June 30, 2004 from $34.4 million at December 31, 2003. Interest-bearing deposits
decreased $1.2 million, to $31.0 million from $32.2 million, while
non-interest-bearing deposits increased $800,000, to $3.0 million from $2.2
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 $8.5 million to $15.3 million at June
30, 2004 from $6.8 million at December 31, 2003. We used the increased
borrowings for the purchasing of investment securities, funding of loans and as
part of our capital and interest rate risk management strategies.
EQUITY. Total equity increased by $2.6 million, or 105.0%, to $5.1 million at
June 30, 2004 from less than $2.5 million at December 31, 2003. Our equity to
assets ratio was 9.4% at June 30, 2004 compared to 5.7% at December 31, 2003.
The increase in our equity to assets ratio was primarily a result of the
issuance of common stock which raised $2.6 million in additional capital. The
increase in total equity was marginally offset by a net loss of $4,000 for the
three months ended June 30, 2004 and an unrealized decrease in the market value
of available-for-sale securities of $100,000. This adjustment to equity is net
of deferred taxes.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND
2003.
GENERAL. We recorded a net loss of $4,000 for the three months ended June 30,
2004 compared to a net income of $7,000 for the three months ended June 30,
8
2003. Our loss for the three months ended June 30, 2004 was partially
attributable to increased salary and benefits of $15,000 due to the hiring of
additional employees caused by the growth of the bank, increased professional
fees of $7,000, increased occupancy and equipment expense totaling $7,000,
increased REO expense of $7,000, and increased miscellaneous expenses in the
amount of $12,000. Many of the marketing expenses were one-time costs used to
heightened the awareness of the Bank's image in the area while the increased
professional fee expenses included the hiring of an outside firm to continue the
Bank's strong commitment to compliance. The occupancy and equipment expenses
included general building maintenance and technological equipment upgrades along
with increased data processing costs associated with the addition of new
accounts. The increased miscellaneous expenses included many costs that a
growing bank incurs such as ATM and internet expenses, correspondent bank
services, and loan servicing and processing fees. The marketing expenses may not
recur or, if recurring, will likely be modest. The professional fees will
continue as compliance will remain a high priority. We also expect REO expense
to be an isolated incident due to the Bank's quality loan portfolio. Occupancy,
equipment and miscellaneous expenses will continue to increase as the bank
grows.
NET INTEREST INCOME. Net interest income increased $67,000, or 25%, to $335,000
for the three months ended June 30, 2004 compared to $268,000 for the three
months ended June 30, 2003, reflecting a $57,000, or 11.8%, increase in interest
income, and a $10,000, or 4.6%, decrease in interest expense. Our interest rate
spread increased to 2.6% for the three months ended June 30, 2004 compared to
2.4% for the three months ended June 30, 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 111.8% for the three months
ended June 30, 2004 compared to 109.3% for the three months ended June 30, 2003.
INTEREST INCOME. Total interest income increased by $57,000, or 11.8%, to
$542,000 for the three months ended June 30, 2004 from $485,000 for the three
months ended June 30, 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 $10.9 million to $32.2 million for the three months ended June 30, 2004
from $21.3 million for the three months ended June 30, 2003. Interest earned on
total loans for the three months ended June 30, 2004 was $440,000 compared to
$335,000 for the three months ended June 30, 2003. The average yield on total
loans decreased to 5.5% for the three months ended June 30, 2004 compared to
6.3% for the three months ended June 30, 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 $50,000,
or 31.8%, for the three months ended June 30, 2004 to $150,000 from $100,000 for
the three months ended June 30, 2003. The change was a result of a decrease in
the average balance of the securities portfolio of $3.3 million to $15.9 million
for the three months ended June 30, 2004 from $19.2 million for the three months
ended June 30, 2003, combined with a decrease in the overall average yield on
total investments to 4.8% for the three months ended June 30, 2004 as compared
to 5.9% for the three months ended June 30, 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 $10,000 for the three
months ended June 30, 2004 was primarily due to the lower interest rates on
deposits. Average Federal Home Loan Bank advances increased by $4.0 to $12.1
million for the three months ended June 30, 2004 from $8.1 million for the three
months ended June 30, 2003. Although rates on Federal Home Loan Bank
9
advances decreased, the increased volume of advances resulted in increased
interest costs of $10,000 as interest expense on Federal Home Loan Bank advances
was $83,000 for the three months ended June 30, 2004 compared to $73,000 the
previous year. The average outstanding balance of deposits increased $2.2
million to $31.5 million for the three months ended June 30, 2004 from $29.3
million for the three months ended June 30, 2003. However, average certificate
of deposit balances decreased by $1.1 million to $14.5 million for the three
months ended June 30, 2004 from $15.6 million for the year ended June 30, 2003.
The average yield on interest bearing liabilities decreased from 2.3% at June
30, 2003 to 1.9% at June 30, 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 June 30, 2004. The allowance for loan losses as a percent
of total loans was 1.0% at June 30, 2004 as compared to 1.6% at June 30, 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.
NON-INTEREST INCOME. Non-interest income amounted to $40,000 for the three
months ended June 30, 2004, compared to $68,000 for the three months ended June
30, 2003. For the three months ended June 30, 2004, gain on the sale of loans
was $17,000, while there was no gain or loss in the three months ended June 30,
2003. Service charges on deposits remained stable in the three months ended June
30, 2004 compared to the three months ended June 30, 2003. There were no fees
paid to us by a mortgage banking company to whom we referred loans for closing,
but did not accept for our portfolios in the three months ended June 30, 2004.
However, in the three months ended June 30, 2003, there were $15,000 of fees
paid to us by the mortgage banking company. These fees were recorded as loan
commissions. There was no net gain on the sale of available-for-sale securities
in the three months ended June 30, 2004 compared to a net gain of $30,000 in the
three months ended June 30, 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 $57,000, or 17.5%, to
$382,000 for the three months ended June 30, 2004 compared to $325,000 for the
three months ended June 30, 2003. The increase during 2004 was primarily due to
overall increases in salary and benefits of $15,000, professional fees of
$7,000, Occupancy and equipment expenses of $7,000, REO expense of $7,000,
marketing fees of $6,000, and miscellaneous fees totaling $12,000.
Salaries and employee benefits represented 50.5% and 54.7% of total non-interest
expense for the three months ended June 30, 2004 and 2003, respectively. Total
salaries and employee benefits increased $15,000, or 8.6%, to $193,000 for the
three months ended June 30, 2004 from $178,000 for the same period in 2003. The
increase was primarily due to the addition of 2 new employees to the current
workforce besides the normal salary increases, bonuses and vacation accruals.
There was a federal income tax benefit for the second quarter of 2004 for
$1,500. In the second three months of 2003, federal income tax expense was
$3,800.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND
2003.
GENERAL. We recorded net income of $12,000 for the six months ended June 30,
2004 and $15,000 for the six months ended June 30, 2003. Our profit for the
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six months ended June 30, 2004 was partially attributable to a gain on the sale
of loans in the amount of $25,000; and a profit would not have been realized for
the six months ended June 30, 2003 without a gain on the sale of securities in
the amount of $65,000. These types of earnings may not recur or, if recurring,
will likely be modest.
NET INTEREST INCOME. Net interest income increased $135,000, or 25.2%, to
$700,000 for the six months ended June 30, 2004 compared to $535,000 for the six
months ended June 30, 2003, reflecting an $85,000, or 8.8%, increase in interest
income, and a $50,000, or 11.3%, decrease in interest expense. Our interest rate
spread increased to 2.7% for the six months ended June 30, 2004 compared to
2.48% for the six months ended June 30, 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 111.3% for the six months ended June
30, 2004 compared to 109.1% for the six months ended June 30, 2003.
INTEREST INCOME. Total interest income increased by $85,000, or 8.8%, to
$1,058,000 for the six months ended June 30, 2004 from $973,000 for the six
months ended June 30, 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 $11.6 million to $31.8 million for the six months ended June 30, 2004
from $20.2 million for the six months ended June 30, 2003. Interest earned on
total loans for the six months ended June 30, 2004 was $880,000 compared to
$660,000 for the six months ended June 30, 2003. The average yield on total
loans decreased to 5.5% for the six months ended June 30, 2004 compared to 6.5%
for the six months ended June 30, 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 $135,000,
or 44.6%, for the six months ended June 30, 2004 to $180,000 from $315,000 for
the six months ended June 30, 2003. The change was a result of a decrease in the
average balance of the securities portfolio of $6.5 million to $13.8 million for
the six months ended June 30, 2004 from $20.3 million for the six months ended
June 30, 2003, combined with a decrease in the overall average yield on total
investments to 2.5% for the six months ended June 30, 2004 as compared to 3.0%
for the six months ended June 30, 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 $50,000 for the six months
ended June 30, 2004 was primarily due to the lower interest rates. Average
Federal Home Loan Bank advances increased by $2.1 million to $10.0 million for
the six months ended June 30, 2004 from $7.9 million for the six months ended
June 30, 2003. The increase in average Federal Home Loan Bank advances, combined
with the lower rates resulted in a marginal increase in interest costs of $3,000
as interest expense on Federal Home Loan Bank advances was $138,000 for the six
months ended June 30, 2004 compared to $135,000 the previous year. Overall, the
average outstanding balance of deposits increased by $1.9 million to $31.6
million for the six months ended June 30, 2004 compared to $29.7 million for the
previous year. The average certificate of deposit balances decreased by $1.7
million to $14.5 million for the six months ended June 30, 2004 from $16.2
million for the year ended June 30, 2003. The average yield on interest bearing
liabilities decreased from 2.3% at June 30, 2003 to 1.9% at June 30, 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.
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ALLOWANCE FOR LOAN LOSSES. There was no benefit or provision for loan losses for
the six months ended June 30, 2004. The allowance for loan losses as a percent
of total loans was 1.0% at June 30, 2004 as compared to 1.6% at June 30, 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.
NON-INTEREST INCOME. Non-interest income amounted to $80,000 for the six months
ended June 30, 2004, compared to $138,000 for the six months ended June 30,
2003. For the six months ended June 30, 2004, gain on the sale of loans was
$25,000, while there was no gain or loss in the six months ended June 30, 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 $8,000 in the six months ended June 30, 2004 and $30,000
in the six months ended June 30, 2003. There was no net gain on the sale of
available-for-sale securities in the six months ended June 30, 2004 compared to
a net gain of $65,000 in the six months ended June 30, 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 $81,000, or 12.5%, to
$730,000 for the six months ended June 30, 2004 compared to $649,000 for the six
months ended June 30, 2003. The increase during 2004 was primarily due to
overall increases in salary and benefits of $27,000, professional fees of
$19,000, occupancy and equipment expense of $12,000, REO expense of $7,000 and
miscellaneous fees totaling $27,000. These increases were partly offset by a
decrease in marketing fees of $6,000.
Salaries and employee benefits represented 52.8% and 55.3% of total non-interest
expense for the six months ended June 30, 2004 and 2003, respectively. Total
salaries and employee benefits increased $27,000, or 7.5%, to $386,000 for the
six months ended June 30, 2004 from $359,000 for the same period in 2003. The
increase was primarily due to the addition of 2 new employees to the current
workforce besides the normal salary increases, bonuses and vacation accruals.
Federal income tax expense for the first six months of 2004 was $7,000. In the
first six months of 2003, federal income tax expense was $8,000.
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,
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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 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. We use our sources of funds primarily to
meet ongoing commitments, to pay maturing time deposits and savings withdrawals,
to fund loan commitments and to maintain our portfolio of mortgage-backed and
related securities. At June 30, 2004, the total approved loan commitments
unfunded amounted to $3.6 million, which includes the unadvanced portion of
loans of $3.1 million. Certificates of deposits and advances from the Federal
Home Loan Bank of Boston scheduled to mature in one year or less at June 30,
2004, totaled $9.2 million and $4 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 June 30, 2004, we had available additional advances from the Federal Home
Loan Bank of Boston in the amount of $ 8.7 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 $5.1 million at June 30,
2004, or 9.36%, of total assets on that date. As of June 30, 2004, we exceeded
all regulatory capital requirements. Our regulatory capital ratios at June 30,
2004 were as follows: core capital 9.59%; Tier I risk-based capital 21.24% and
total risk-based capital 22.49%. The regulatory capital requirements to be
considered well capitalized are 5%, 6% and 10%, respectively.
IMPACT OF INFLATION
The financial statements presented in this filing 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
2.1 Agreement for Purchase and Sale of Assets and Assumption of
Liabilities by and between Fitchburg Savings Bank, FSB and
Monadnock Community Bank, dated August 3, 2003. Schedules
omitted.
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
15
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
On June 28, 2004 the Registrant filed a Current Report on Form 8-K to
report the completion of the holding company reorganization of Monadnock
Community Bank.
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: August 12, 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
16