UNITED STATES
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 SEPTEMBER 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. Yes X No
--- ---
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At November 1, 2004, there were
939,631 shares of Common Stock outstanding, $.01 par value per share.
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 Balance Sheets as of
September 30, 2004 and December 31, 2003 1
Condensed Consolidated Statements of Income for
the Three Months and Nine Months Ended
September 30, 2004 and 2003 2
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 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 8
Item 3: Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 15
Item 2: Unregistered Sales of Equity Securities, and
Use of Proceeds 15
Item 3: Defaults upon Senior Securities 15
Item 4: Submission of Matters to a Vote of Security Holders 15
Item 5: Other Information 15
Item 6: Exhibits 15
SIGNATURES 16
MONADNOCK COMMUNITY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
ASSETS 2004 2003
Cash and due from banks $ 526,234 $ 441,782
Federal Home Loan Bank overnight deposit 325,659 1,315,455
Interest-bearing demand deposits with other
banks 85,499 65,386
------------------- -------------------
Total cash and cash equivalents 937,392 1,822,623
Interest-bearing time deposit in other bank 100,000 100,000
Investments in available-for-sale securities
(at fair value) 29,034,730 10,073,066
Federal Home Loan Bank stock, at cost 1,220,400 485,300
Loans, net of allowance for loan losses of $325,143 and $319,592
as of September 30, 2004 and December 31, 2003, respectively 33,821,985 30,728,184
Premises and equipment 397,185 188,622
Other real estate owned 12,500 12,500
Accrued interest receivable 203,613 124,299
Other assets 160,210 205,740
------------------- -------------------
Total assets $ 65,888,015 $ 43,740,334
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 2,901,055 $ 2,191,321
Interest-bearing 33,537,546 32,240,212
------------------- -------------------
Total deposits 36,438,601 34,431,533
Federal Home Loan Bank advances 24,008,580 6,746,550
Other liabilities 174,945 79,259
------------------- -------------------
Total liabilities 60,622,126 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,
939,631 shares issued and outstanding at September 30, 2004
and none issued at December 31, 2003 9,396 0
Additional paid in capital 2,783,101 0
Retained earnings 2,575,405 2,551,055
Unearned compensation (135,304) 0
Accumulated other comprehensive income (loss) 33,291 (68,063)
------------------- -------------------
Total equity 5,265,889 2,482,992
------------------- -------------------
Total liabilities and equity $ 65,888,015 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Interest and dividend income:
Interest and fees on loans $ 458,774 $ 377,203 $ 1,337,824 $ 1,034,815
Interest on investments-taxable 195,612 91,789 363,884 395,695
Other interest income 11,192 7,131 22,161 18,603
----------- ----------- ----------- -----------
Total interest and dividend income 665,578 476,123 1,723,869 1,449,113
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits 136,446 132,709 387,129 435,651
Interest on Federal Home Loan
Bank advances 135,015 70,822 272,930 205,960
----------- ----------- ----------- -----------
Total interest expense 271,461 203,531 660,059 641,611
----------- ----------- ----------- -----------
Net interest and dividend income 394,117 272,592 1,063,810 807,502
Provision for loan losses 0 0 0 0
----------- ----------- ----------- -----------
Net interest and dividend income after
provision for loan losses 394,117 272,592 1,063,810 807,502
----------- ----------- ----------- -----------
Noninterest income:
Net gain (loss) on sales of
available-for-sale securities 0 (10,044) 0 54,871
Service charges on deposits 21,883 12,572 50,345 41,685
Gain on sale of loans, net 0 11,124 25,415 11,124
Loan commissions 5,077 16,427 13,035 45,954
Other income 11,327 7,586 29,165 21,627
----------- ----------- ----------- -----------
Total noninterest income 38,287 37,665 117,960 175,261
----------- ----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 217,865 162,466 603,906 521,705
Occupancy expense 27,814 24,053 80,963 71,678
Equipment expense 41,955 43,959 113,848 109,866
Blanket bond insurance 5,510 5,435 16,531 20,215
Professional fees 35,028 4,046 75,398 25,877
Supplies and printing 5,605 10,945 17,845 24,678
Telephone expense 10,434 8,038 25,146 22,926
Marketing expense 11,103 5,458 32,316 33,123
Postage expense 6,253 5,416 20,449 16,328
REO expense (income) (8,757) 227 (2,671) (265)
Other expense 60,520 45,912 160,074 118,960
----------- ----------- ----------- -----------
Total noninterest expense 413,330 315,955 1,143,805 965,091
----------- ----------- ----------- -----------
Income (loss) before income
tax expense (benefit) 19,074 (5,698) 37,965 17,672
Income tax expense (benefit) 6,774 (4,341) 13,615 3,896
----------- ----------- ----------- -----------
Net income (loss) $ 12,300 $ (1,357) $ 24,350 $ 13,776
=========== =========== =========== ===========
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)
- ---------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2004 2003
-------------- ---------------
Cash flows from operating activities:
Net income $ 24,350 $ 13,776
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Net gain on sales of available-for-sale securities (54,871)
Net amortization of securities 53,302 89,615
Change in deferred loan origination costs, net (25,001) (112,412)
Gain on sale loans, net (25,415) (11,124)
Depreciation and amortization 43,299 44,300
Gain on sale of other real estate owned (8,757) 0
(Increase) decrease in accrued interest receivable (79,314) 42,886
Increase in other assets (403) (4,428)
(Increase) decrease in loan servicing rights and
interest-only strips (4,077) 2,977
Increase in prepaid expenses (31,679) (58,112)
Decrease (increase) in taxes receivable 15,210 (29,046)
Increase in accrued expenses 23,908 1,792
Increase in accrued interest payable 2,711 1,583
Increase (decrease) in other liabilities 69,067 (17,210)
-------------- ---------------
Net cash provided by (used in) operating activities 57,201 (90,274)
-------------- ---------------
Cash flows from investing activities:
Purchase of available-for-sale securities (22,768,897) (8,326,510)
Proceeds from sales of available-for-sale securities 10,890,938
Proceeds from maturities and paydowns of available-for-
sale securities 3,921,764 5,305,418
Purchases of Federal Home Loan Bank stock (735,100) (22,400)
Loan originations and principal collections, net (3,452,420) (9,572,640)
Recoveries of previously charged off loans 5,551 620
Proceeds from sales of loans 327,640 187,509
Capital expenditures - premises and equipment (251,862) (47,352)
Proceeds from the sale of real estate owned 84,601 0
-------------- ---------------
Net cash used in investing activities (22,868,723) (1,584,417)
-------------- ---------------
Cash flows from financing activities:
Net (decrease) increase in demand deposits, savings and
NOW deposits (200,153) 3,176,468
Net increase (decrease) in time deposits 2,207,221 (2,476,908)
Long-term advances from Federal Home Loan Bank 8,042,854 4,554,550
Net change on short-term advances from Federal Home Loan
Bank 9,219,176 (2,500,000)
Proceeds from issuance of common stock 2,657,193 0
-------------- ---------------
Net cash provided by financing activities 21,926,291 2,754,110
-------------- ---------------
Net (decrease) increase in cash and cash equivalents (885,231) 1,079,419
Cash and cash equivalents at beginning of period 1,822,623 1,268,615
-------------- ---------------
Cash and cash equivalents at end of period $ 937,392 $ 2,348,034
============== ===============
3
Supplemental disclosures:
Interest paid $ 657,348 $ 640,028
Income taxes (received) paid (1,595) 32,942
Loans transferred to other real estate owned 75,844 0
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 nine month periods ended September
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 September 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.
5
RECENT ACCOUNTING PRONOUNCEMENTS: 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.
In December 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 03-3 ("SOP 03-3") "Accounting for Certain
Loans or Debt Securities Acquired in a Transfer." SOP 03-3 requires loans
acquired through a transfer, such as a business combination, where there are
differences in expected cash flows and contractual cash flows due in part to
credit quality be recognized at their fair value. The excess of contractual
6
cash flows over expected cash flows is not to be recognized as an adjustment of
yield, loss accrual, or valuation allowance. Valuation allowances cannot be
created nor "carried over" in the initial accounting for loans acquired in a
transfer on loans subject to SFAS 114, "Accounting by Creditors for Impairment
of a Loan." This SOP is effective for loans acquired in fiscal years beginning
after December 15, 2004, with early adoption encouraged. The Company does not
believe the adoption of SOP 03-3 will have a material impact on the Company's
financial position or results of operations.
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
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.
NOTE 3 - ACQUISITION OF BRANCH
On August 3, 2004, the Board of Directors of Monadnock Community Bank entered
into an agreement with Fitchburg Savings Bank, FSB to purchase certain assets
and assume the deposits of a branch located at 172 Central Street, Winchendon,
Massachusetts. The transfer was completed on Friday, October 15, 2004. The final
allocation of the purchase price has not been finalized, however, the exchange
of funds between the institutions was approximately $5.0 million. This includes
total
7
deposits assumed of $5.4 million, while line of credit on overdraft protection
of checking accounts totaled $6,000.
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 states of New Hampshire and Massachusetts, legislative and regulatory
changes, monetary and fiscal policies of the U.S. Government, including policies
of the U.S. Treasury and the Federal Reserve Board, fiscal policies of the New
Hampshire and Massachusetts State Governments, 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.
CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 2003 TO SEPTEMBER 30, 2004
GENERAL. The Bank's total assets increased by $22.2 million, or 50.8%, to $65.9
million at September 30, 2004 compared to $43.7 million at December 31, 2003.
The increase primarily reflected growth in investment securities of $18.9
million to $29.0 million from $10.1 million and in the net loan portfolio of
$3.1 million to $33.8 million from $30.7 million. To fund the increase in
assets, Federal Home Loan Bank advances increased by $17.3 million to $24.0
million from $6.7 million and to a lesser extent an increase in deposits of $2.0
million to $36.4 million from $34.4 million.
ASSETS. The Bank's net loan portfolio increased $3.1 million, or 10.1%, from
$30.7 million at December 31, 2003 to $33.8 million at September 30, 2004. The
largest increase was in one-to-four-family residential loans, as interest rates
continued to remain favorably low. These loans increased $2.5 million to $19.0
million from $16.5 million. In addition, commercial real estate loans, increased
$100,000, or 1.2%, to $8.5 million from $8.4 million. One-to-four family home
equity revolving open-end loans increased $500,000 from $2.0 million to $2.5
million. This increase was partially offset by the commercial business loan
portfolio which decreased $100,000 to $3.0 million from $3.1 million.
Cash and cash equivalents decreased $885,000, or 48.6%, to $937,000 at September
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 and
to a lesser extent deposits, allowed the purchase of securities and the increase
in total loans. The Bank's interest-bearing deposits in other financial
institutions decreased $1.0 million to $411,000 at September 30, 2004 from $1.4
million at December 31, 2003. The decrease was primarily due to the purchasing
of securities and to fund loan growth.
The investment portfolio increased $18.9 million to $29.0 million at September
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 $22.8 million, partially
offset by paydowns and maturities of $3.9 million in the current portfolio.
8
DEPOSITS. The Bank's total deposits increased $2.0 million, or 5.8%, to $36.4
million at September 30, 2004 from $34.4 million at December 31, 2003.
Interest-bearing deposits increased $1.3 million, to $33.5 million from $32.2
million, while noninterest-bearing deposits increased $710,000, to $2.9 million
from $2.2 million.
BORROWINGS. Additional Federal Home Loan Bank advances were obtained to fund
investment security purchases and loan growth. Federal Home Loan Bank advances
increased $17.3 million to $24.0 million at September 30, 2004 from $6.7 million
at December 31, 2003. The increased borrowings were used 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 $2.8 million, or 112.0%, to $5.3 million at
September 30, 2004 from less than $2.5 million at December 31, 2003. The Bank's
equity to assets ratio was 8.0% at September 30, 2004 compared to 5.7% at
December 31, 2003. The increase in the equity to assets ratio was primarily a
result of the issuance of common stock in June, 2004 which raised $2.7 million
in additional capital. An increase in unrealized gains in the market value of
available-for-sale securities of $100,000 and net income for the nine months
ended September 30, 2004 of $24,000 contributed to the increase in total equity.
The increase in unrealized gains in the market value of available-for-sale
securities is net of deferred taxes.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2004 AND 2003.
GENERAL. The Bank recorded net income of $12,000 for the three months ended
September 30, 2004 compared to a net loss of $1,000 for the three months ended
September 30, 2003. The income for the three months ended September 30, 2004 was
mostly attributable to increased income of $104,000 from investments and $82,000
from loans, partially offset by increased interest expense of $64,000 on Federal
Home Loan Bank advances and a small increase in interest expense of $4,000 on
deposits.
While other income remained relatively constant from one year ago, other expense
increased $97,000 for the same period which also contributed to offset the large
increase in interest income. Salaries and benefits increased $56,000 due to the
increased net mortgage origination costs in 2004. Additional expenses were
incurred with the addition of one full-time equivalent employee to the current
workforce besides the annual employee insurance premiums and normal salary
increases, bonuses and vacation accruals. Professional fees in the area of legal
expense increased $31,000 during the third quarter of 2004 as legal counsel was
used to review all submissions of reporting to the Securities and Exchange
Commission in addition to the implementation of an employee stock ownership plan
and the purchase of a new branch. Other miscellaneous expenses that increased
from one year ago included a $4,000 increase in the semi-annual Office of Thrift
Supervision assessment based on the bank's increased deposits. The increase in
deposits also resulted in increased Federal Deposit Insurance premiums of
$2,000. The Bank also expanded its network of ATMs, renting 7 ATMs to broaden
the visibility of the Bank's name in the area. This resulted in increased ATM
expenses of $4,000.
NET INTEREST INCOME. Net interest income increased $121,000, or 44.3%, to
$394,000 for the three months ended September 30, 2004 compared to $273,000 for
the three months ended September 30, 2003, reflecting a $190,000, or 40.0%,
increase in interest income, and a $68,000, or 33.4%, increase in interest
expense. The Bank's interest rate spread decreased slightly to 2.3% for the
three months ended September 30, 2004 compared to 2.4% for the three months
ended September 30, 2003. The average investment portfolio increased $11.0
million and the average loan portfolio increased $8.0 million from one year ago.
The funding for these assets came from Federal Home Loan Bank advances as the
average balance during this period increased $13.0 million and the average
deposit balance increased $2.5 million. In addition, the ratio of average
interest-earning assets to average interest-bearing liabilities
9
increased to 113.3% for the three months ended September 30, 2004 compared to
109.7% for the three months ended September 30, 2003.
INTEREST INCOME. Total interest income increased by $190,000, or 40.0%, to
$666,000 for the three months ended September 30, 2004 from $476,000 for the
three months ended September 30, 2003. The increase was primarily the result of
the increase in mortgage-backed GNMA securities, and loans, particularly
one-to-four family mortgages. The average investment portfolio grew by $11.0
million to $25.3 million for the three months ended September 30, 2004 from
$14.3 million for the three months ended September 30, 2003. The average yield
on mortgage-backed securities increased to 3.1% for the three months ended
September 30, 2004 from 2.6% for the three months ended September 30, 2003, as
new higher yielding GNMA's were purchased during this time.
The Bank's average loan portfolio balance grew by $8.0 million to $33.5 million
for the three months ended September 30, 2004 from $25.5 million for the three
months ended September 30, 2003. Interest earned on total loans for the three
months ended September 30, 2004 was $459,000 compared to $377,000 for the three
months ended September 30, 2003. The average yield on total loans decreased to
5.5% for the three months ended September 30, 2004 compared to 5.9% for the
three months ended September 30, 2003, primarily due to a commitment to offer
competitive rates in one-to-four family mortgages. The average yield on
one-to-four family mortgages was 4.9% on an $18.5 million average balance for
the three months ended September 30, 2004 compared to a 5.3% yield on an $11.2
million average balance for the three months ended September 30, 2003. The $18.0
million average balance for the quarter ended September 30, 2004, was 55% of the
total loan portfolio.
Dividend income on Federal Home Loan Bank stock and interest income on
interest-bearing deposits with other financial institutions increased $4,000, or
57.1%, for the three months ended September 30, 2004 to $11,000 from $7,000 for
the three months ended September 30, 2003. An increase in the balance of Federal
Home Loan Bank Stock as new stock purchases totaling $735,000 were added during
the three months ended September 30, 2004. The average balance of Federal Home
Loan Bank Stock was $1.1 million for the quarter ended September 30, 2004
compared to $500,000 one year ago.
INTEREST EXPENSE. The increase in interest expense of $64,000 for the three
months ended September 30, 2004 was primarily due to the increase in additional
Federal Home Loan Bank advances average balance to $21.7 million at September
30, 2004 from $8.9 million at September 30, 2003. Attractive borrowing rates
provided incentive to leverage these borrowings to higher yielding assets stated
above. The average cost of funds on Federal Home Loan Bank advances for the
three months ended September 30, 2004 was 2.5% compared to 3.2% at September 30,
2003.
Interest expense on deposits increased $3,000 although the average balance on
deposits rose to $32.2 million at September 30, 2004, from $29.6 million at
September 30, 2003. The average yield on the bank's deposit base for the
quarter ended September 30, 2004 was 1.7% compared to 1.8% one year ago.
The average yield on interest bearing liabilities decreased from 2.1% at
September 30, 2003 to 2.0% at September 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 the
investments and 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 September 30, 2004. The allowance for loan losses as a
percent of total loans was 1.0% at September 30, 2004 as compared to 1.3% at
September 30, 2003. The Bank's management believes that the allowance for loan
losses covers known identifiable loan losses as well as estimated losses
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inherent in the portfolio for which the losses are probable but not specifically
identifiable.
NONINTEREST INCOME. Non-interest income amounted to $38,000 for both the three
months ended September 30, 2004, and September 30, 2003. For the three months
ended September 30, 2004, service charges were $22,000 compared to $13,000 for
the period in 2003. This increase was due to the growth in both the number of
business and consumer checking accounts as the total accounts grew by one third
from one year ago. During the three months ended September 30, 2004, there were
no sales of securities or loan sales, and loan commissions paid to the Bank by a
mortgage banking company for referred loans amounted to $5,000. In a rising rate
environment, home sales and refinances slow and loan commissions are lower.
During the corresponding three months ended September 30, 2003, loan sales
equaled $11,000, loan fees paid to the Bank by the mortgage banking company
amounted to $16,000. These fees were offset by a loss on the sale of securities
of $10,000.
NONINTEREST EXPENSE. Noninterest expense increased $97,000, or 30.7%, to
$413,000 for the three months ended September 30, 2004 compared to $316,000 for
the three months ended September 30, 2003. The increase during 2004 was
primarily due to overall increases in salary and benefits of $56,000,
professional fees of $31,000, Miscellaneous expenses of $15,000, marketing fees
of $6,000, offset by a reduction in supplies of $5,000 and a gain of $9,000 on
the sale of real estate owned property obtained in the second quarter of 2004
and sold in the third quarter.
Salaries and employee benefits represented 52.7% and 51.4% of total noninterest
expense for the three months ended September 30, 2004 and 2003, respectively.
Total salaries and employee benefits increased $56,000, or 34.6%, to $218,000
for the three months ended September 30, 2004 from $162,000 for the same period
in 2003. The increase was due to increased net mortgage origination costs in
2004. Additional expenses were incurred with the addition of one full-time
equivalent employee to the current workforce besides the annual employee
insurance premiums and normal salary increases, bonuses and vacation accruals.
Professional fees in the area of legal fees increased $31,000 during the third
quarter of 2004. Legal counsel was used to review all submissions of reporting
to the Securities and Exchange Commission in addition to the implementation of
an employee stock ownership plan and in connection with the purchase of the new
branch.
There was a federal income tax expense for the third quarter of 2004 for $7,000.
For the third quarter of 2003, there was a federal income tax benefit for
$4,000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
AND 2003.
GENERAL. The Bank recorded net income of $24,000 for the nine months ended
September 30, 2004 and $14,000 for the nine months ended September 30, 2003. The
profit for the nine months ended September 30, 2004 was mainly attributable to
an increase in interest income. Interest income for the nine months ended
September 30, 2004 was $1.7 million compared to $1.4 million for the nine month
period ended September 30, 2003. This increase in interest income was partially
offset by an increase in interest expense of $18,000 to $660,000 at September
30, 2004, from $642,000 at September 30, 2003. Other factors offsetting the
increase in interest income include a decrease of $57,000 in other income as
other income for the nine months ended September 30, 2004, was $118,000 compared
to $175,000 at September 30, 2003. Other noninterest expense increased to $1.1
million at September 30, 2004 compared to $965,000 one year ago.
NET INTEREST INCOME. Net interest income increased $256,000, or 31.7%, to $1.1
million for the nine months ended September 30, 2004 compared to $808,000
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for the nine months ended September 30, 2003, reflecting a $275,000, or 19.0%,
increase in interest income, and an $18,000, or 2.8%, increase in interest
expense. The Bank's interest rate spread increased to 2.6% for the nine months
ended September 30, 2004 compared to 2.4% for the nine months ended September
30, 2003, reflecting significant growth in the loan portfolio and changing the
asset mix due to increased funding of fixed-rate residential real estate loans
and reduced cost of funds on our deposits and Federal Home Loan advances. In
addition, the ratio of average interest-earning assets to average
interest-bearing liabilities increased to 112.1% for the nine months ended
September 30, 2004 compared to 109.3% for the nine months ended September 30,
2003.
INTEREST INCOME. Total interest income increased by $300,000, or 21.4%, to $1.7
million for the nine months ended September 30, 2004 from $1.4 million for the
nine months ended September 30, 2003. The increase was primarily the result of
the increase in loans, particularly one-to-four family mortgages. The Bank's
average loan portfolio balance grew by $10.4 million to $32.4 million for the
nine months ended September 30, 2004 from $22.0 million for the nine months
ended September 30, 2003. Interest earned on total loans for the nine months
ended September 30, 2004 was $1.3 million compared to $1.0 for the nine months
ended September 30, 2003. The average yield on total loans decreased to 5.5% for
the nine months ended September 30, 2004 compared to 6.3% for the nine months
ended September 30, 2003, primarily due to a general decrease in the market
rates of interest.
Interest and dividend income on investment securities, Federal Home Loan Bank
stock and interest-bearing deposits with other financial institutions decreased
$28,000, or 6.8%, for the nine months ended September 30, 2004 to $386,000 from
$414,000 for the nine months ended September 30, 2003. The change was a result
of a slight decrease in yields on the securities portfolio to 2.9% at September
30, 2004 from 3.0% at September 30, 2003. The average balance of the securities
portfolio dropped slightly to $16.9 million for the nine months ended September
30, 2004 from $17.5 million one year ago.
INTEREST EXPENSE. The increase in interest expense of $18,000 for the nine
months ended September 30, 2004 was primarily due to the additional Federal Home
Loan Bank advances obtained during the first nine months of 2004. Average
Federal Home Loan Bank advances increased by $5.7 million to $13.9 million for
the nine months ended September 30, 2004 from $8.2 million for the nine months
ended September 30, 2003. The increase in average Federal Home Loan Bank
advances, partially offset by lower rates on those borrowings resulted in a net
increase in interest costs of $67,000 as interest expense on Federal Home Loan
Bank advances was $273,000 for the nine months ended September 30, 2004 compared
to $206,000 the previous year. This increase was mostly offset by reduced
interest costs on deposits of $49,000 as interest expense totaled $387,000 for
the first nine months through September 30, 2004 compared to $436,000 for the
same period one year ago. Overall, the average outstanding balance of deposits
increased by $2.1 million to $31.8 million for the nine months ended September
30, 2004 compared to $29.7 million for the previous year. The average
certificate of deposit balances decreased by $700,000 to $14.9 million for the
nine months ended September 30, 2004 from $15.6 million for the nine months
ended September 30, 2003. The average yield on interest-bearing liabilities
decreased from 2.3% at September 30, 2003 to 1.9% at September 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 nine months ended September 30, 2004. The allowance for loan losses as a
percent of total loans was 1.0% at September 30, 2004 as compared to 1.3% at
September 30, 2003. The Bank's management believes that the 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.
12
NONINTEREST INCOME. Noninterest income amounted to $118,000 for the nine months
ended September 30, 2004, compared to $175,000 for the nine months ended
September 30, 2003. For the nine months ended September 30, 2003, gain on the
sale securities was $55,000, while there was no gain or loss in the nine months
ended September 30, 2004. Fees paid to the Bank by a mortgage banking company
for referred loans for closing, but were not accepted for the Bank's portfolios,
were recorded as loan commissions and totaled $13,000 in the nine months ended
September 30, 2004 and $46,000 in the nine months ended September 30, 2003.
There was a gain on the sale of loans of $25,000 in the nine months ended
September 30, 2004 compared to a net gain of $11,000 in the nine months ended
September 30, 2003. Fees received and paid on loans that are closed by the
mortgage banking company and placed in the Bank's portfolio are deferred and
amortized as an adjustment of yield.
NONINTEREST EXPENSE. Noninterest expense increased $179,000, or 18.6%, to $1.14
million for the nine months ended September 30, 2004 compared to $965,000 for
the nine months ended September 30, 2003. The increase during 2004 was primarily
due to overall increases in salary and benefits of $82,000, professional fees of
$49,000, occupancy and equipment expense of $13,000, postage of $4,000 and
miscellaneous fees totaling $37,000. These increases were partly offset by a
decrease in supplies of $7,000.
Salaries and employee benefits represented 52.8% and 54.1% of total noninterest
expense for the nine months ended September 30, 2004 and 2003, respectively.
Total salaries and employee benefits increased $82,000, or 15.7%, to $604,000
for the nine months ended September 30, 2004 from $522,000 for the same period
in 2003. The increase was due to increased net mortgage origination costs in
2004. Additional expenses were incurred with the addition of one full-time
equivalent employee to the current workforce besides the annual employee
insurance premiums and normal salary increases, bonuses and vacation accruals
Federal income tax expense for the first nine months of 2004 was $14,000. In the
first nine 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 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.
13
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 September 30, 2004, the total approved loan commitments
unfunded amounted to $4.7 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 September
30, 2004, totaled $11.2 million and $10.7 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 September 30, 2004, we had available additional advances from the Federal
Home Loan Bank of Boston in the amount of $1.1 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 $5.3 million at September
30, 2004, or 8.0%, of total assets on that date. As of September 30, 2004, we
exceeded all regulatory capital requirements. Our regulatory capital ratios at
September 30, 2004 were as follows: core capital 7.21%; Tier I risk-based
capital 18.53% and total risk-based capital 19.78%. 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.
ITEM 3. 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
14
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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
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
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act
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.
15
Monadnock Community Bancorp, Inc.
Date: November 15, 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