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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, 2002
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 0-49711
NEW ENGLAND BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
United States 04-3693643
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
660 Enfield Street, Enfield, Connecticut 06082
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(860) 253-5200
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(Issuer's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
The Issuer had 2,049,875 shares of common stock, par value $0.01 per
share, outstanding as of November 13, 2002.
Transitional Small Business Disclosure Format (Check one): Yes No X
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NEW ENGLAND BANCSHARES, INC.
FORM 10-QSB
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2002
and March 31, 2002 (unaudited) .................................. 3
Condensed Consolidated Statements of Income for the Three Months
and Six Months Ended September 30, 2002 and 2001 (unaudited)..... 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended September 30, 2002 and 2001 (unaudited)......... 5
Notes to Condensed Consolidated Financial Statements
(unaudited)...................................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition or Plan of Operation................................... 9
Item 3. Controls and Procedures.......................................... 16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................................ 17
Item 2. Changes in Securities............................................ 17
Item 3. Defaults Upon Senior Securities.................................. 17
Item 4. Submission of Matters to a Vote of Security Holders.............. 17
Item 5. Other Information................................................ 17
Item 6. Exhibits and Reports on Form 8-K................................. 17
SIGNATURES................................................................ 18
CERTIFICATIONS............................................................ 19
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<table>
<caption>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
NEW ENGLAND BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, MARCH 31,
(In thousands) 2002 2002
----------------- -------------
ASSETS: (UNAUDITED)
------
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Cash and due from banks............................................... $8,243 $6,376
Interest-bearing demand deposits with other banks..................... 131 159
Federal funds sold.................................................... 3,200 4,500
Money Market mutual funds............................................. 2,087 1,437
------------- -------------
Total cash and cash equivalents................................. 13,661 12,472
Investments in available-for-sale securities (at fair value).......... 42,118 36,165
Federal Home Loan Bank stock, at cost................................. 820 820
Loans, net of allowance for loan losses of $893 as of
September 30, 2002 and $773 as of March 31, 2002................... 85,793 80,468
Premises and equipment, net........................................... 2,464 1,631
Accrued interest receivable........................................... 516 395
Deferred income taxes................................................. 308 546
Cash surrender value of life insurance................................ 3,483 3,391
Other assets.......................................................... 446 423
------------- -------------
Total assets.................................................... $149,609 $136,311
============= =============
LIABILITIES AND CAPITAL ACCOUNTS
--------------------------------
Deposits:
Noninterest-bearing................................................ $4,337 $3,726
Interest-bearing................................................... 114,777 111,272
------------- -------------
Total deposits.................................................. 119,114 114,998
Advance payments by borrowers for taxes and insurance.............. 225 266
Federal Home Loan Bank advances.................................... 6,678 6,108
Other liabilities.................................................. 659 587
------------- -------------
Total liabilities............................................... 126,676 121,959
Stockholders' Equity:
Common stock, par value $.01 per share: 10,000,000 shares
authorized 2,049,875 shares issued ............................ 20 --
Paid in capital.................................................... 8,484 --
Retained earnings.................................................. 14,901 14,460
Accumulated other comprehensive income (loss)...................... 266 (108)
Unearned ESOP shares............................................... (738) --
------------- -------------
Total stockholders' equity...................................... 22,933 14,352
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Total liabilities and stockholders' equity...................... $149,609 $136,311
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</table>
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<table>
<caption>
NEW ENGLAND BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
(In thousands) 2002 2001 2002 2001
---------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
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Interest and dividend income:
Interest and fees on loans...................... $1,596 $1,424 $3,142 $2,795
Interest and dividends on securities:
Taxable ..................................... 458 542 888 1,112
Tax-exempt................................... 21 -- 48 --
Dividends on Federal Home Loan Bank stock.... 7 11 15 24
Interest on federal funds sold, interest-bearing
deposits and money market mutual funds..... 40 48 91 149
-------- -------- -------- --------
Total interest and dividend income..... 2,122 2,025 4,184 4,080
-------- -------- -------- --------
Interest expense:
Interest on deposits............................ 781 1,096 1,611 2,243
Interest on advanced payments by borrowers for
taxes and insurance....................... 1 2 2 3
Interest on Federal Home Loan Bank advances..... 69 4 133 4
-------- -------- -------- --------
Total interest expense....................... 851 1,102 1,746 2,250
-------- -------- -------- --------
Net interest and dividend income............. 1,271 923 2,438 1,830
Provision for loan losses.......................... 60 36 120 72
-------- -------- -------- --------
Net interest and dividend income after
provision for loan losses................. 1,211 887 2,318 1,758
Noninterest income:
Service charges on deposit accounts.......... 55 42 107 78
Gain on sales and calls of available-for-sale
securities, net......................... 1 1 13 63
Gain on sales of other real estate owned
(net)................................... -- 7 -- 1
Increase in cash surrender value of life
insurance
Policies.................................. 41 39 79 78
Other income................................. 1 1 2 2
-------- -------- -------- --------
Total noninterest income.................. 98 90 201 222
-------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits............... 597 432 1,087 874
Occupancy and equipment expense.............. 136 126 253 251
Advertising and promotion.................... 14 19 40 50
Professional fees............................ 62 29 102 66
Data processing expense...................... 43 40 83 88
Stationery and supplies...................... 21 12 38 35
Other expense................................ 143 110 267 212
-------- -------- -------- --------
Total noninterest expense................. 1,016 768 1,870 1,576
-------- -------- -------- --------
Income before income taxes................ 293 209 649 404
Income tax expense........................... 92 65 208 146
-------- -------- -------- --------
Net income................................ $ 201 $ 144 $ 441 $ 258
======== ======== ======== ========
Basic and diluted earnings per share: $ 0.10 N/A N/A N/A
The accompanying notes are an integral part of these condensed consolidated financial statements.
</table>
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<table>
<caption>
NEW ENGLAND BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
--------------- ----------------
(in thousands) (Unaudited) (Unaudited)
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Cash flows from operating activities:
Net income.......................................... $441 $258
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization (accretion) of securities, net.... 37 (18)
Gain on sales and calls of available-for-sale
securities, net.............................. (13) (63)
Provision for loan losses...................... 120 72
Decrease in deferred loan origination fees..... -- (32)
Depreciation and amortization.................. 107 103
Gain on sales of other real estate owned, net.. -- (1)
(Increase) decrease in accrued interest
receivable................................... (121) 34
Increase in cash surrender value life
insurance policies........................... (79) (78)
Increase in prepaid expenses and other assets.. (23) (108)
Increase in accrued expenses and other
liabilities.................................. 72 66
----------- -----------
Net cash provided by operating activities........... 541 233
----------- -----------
Cash flows from investing activities:
Purchases of available-for-sale securities..... (23,091) (21,652)
Proceeds from sales of available-for-sale
securities................................... 4,708 7,258
Proceeds from maturities of available-for-sale
securities................................... 13,018 9,608
Loan originations and principal collections,
net.......................................... (9,639) (9,298)
Loan to ESOP................................... (738)
Capital expenditures - premises and equipment.. (940) (278)
Proceeds from sales of other real estate
owned........................................ -- 241
Capital expenditures - other real estate owned. --
Investments in life insurance policies......... (13) (38)
----------- -----------
Net cash used in investing activities.......... (12,501) (14,230)
----------- -----------
Cash flows from financing activities:
Net increase in demand, NOW and savings
accounts..................................... 2,685 2,697
Net increase (decrease) in time deposits....... 1,431 (614)
Net increase (decrease) in advanced payments
by borrowers for taxes and insurance......... (41) 4
Proceeds from Federal Home Loan Bank long-term
Advances................................... 1,000 1,500
Principal payments on Federal Home Loan Bank
long-term advances........................... (430) --
Proceeds from sale of stock net of costs 8,504 --
----------- -----------
Net cash provided by financing activities...... 13,149 3,587
Net increase (decrease) in cash and cash equivalents.... 1,189 (10,410)
Cash and cash equivalents at beginning of period........ 12,472 17,759
----------- -----------
Cash and cash equivalents at end of period.............. $13,661 $7,349
=========== ===========
Supplemental disclosures:
Interest paid.................................. $1,741 $2,245
Income taxes paid.............................. 468 117
Loans transferred to other real estate owned... -- 124
Loans originated from sales of other real
estate owned................................. -- 52
The accompanying notes are an integral part of these condensed consolidated financial statements.
</table>
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NEW ENGLAND BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 --Organization
New England Bancshares, Inc. (the "Company") is a federal corporation
formed on June 4, 2002 for the purpose of acquiring all of the common stock of
Enfield Federal Savings and Loan Association (the "Association") concurrent with
its reorganization from a mutual savings institution to the mutual holding
company form of organization. The reorganization was consummated on June 4,
2002. In connection with the reorganization, the Company sold 922,444 shares of
its common stock, par value $0.01 per share, in a subscription offering and sold
1,127,431 shares to Enfield Mutual Holding Company raising approximately $8.5
million, net of costs. Approximately $6.8 million of those proceeds were
contributed to the Association.
The Association, a federally chartered savings and loan association
headquartered in Enfield, Connecticut, operates from its six full-service branch
offices in Enfield, Manchester, Windsor Locks and Suffield, Connecticut. The
Association provides banking products and services to individuals and small
businesses, including residential and commercial mortgages, commercial loans,
consumer loans, and a variety of deposit instruments.
NOTE 2 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial statements and the
instructions to Form 10-QSB, and accordingly do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, the accompanying unaudited consolidated financial
statements reflect all adjustments necessary, consisting of only normal
recurring accruals, to present fairly the financial position, results of
operations and cash flows of the Company for the periods presented. In preparing
the interim financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. The interim results of
operations are not necessarily indicative of the operating results to be
expected for the year ending March 31, 2003.
While management believes that the disclosures presented are adequate so
as not to make the information misleading, it is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes included in the Company's Form 10-KSB for the year ended
March 31, 2002.
The condensed consolidated balance sheet as of March 31, 2002 was derived
from the audited financial statements of Enfield Federal Savings and Loan
Association, but does not include all the disclosures required by accounting
principals generally accepted in the United States.
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NOTE 3 - Earnings Per Share
When presented, basic EPS is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. There were no dilutive securities for the quarter
ended September 30, 2002. Because the formation of the Company was completed on
June 4, 2002, per share earnings data is not meaningful for prior comparative
periods and is therefore not presented.
NOTE 4 - Recent Accounting Pronouncements
FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." This Statement replaced
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and rescinded SFAS Statement No. 127, "Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS No.
140 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. This Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. This Statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001; however, the disclosure provisions
are effective for fiscal years ending after December 15, 2000. The adoption of
this Statement did not have a material impact on the Company's financial
position or results of operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This
statement addresses financial accounting and reporting for business combinations
and supercedes APB Opinion No. 16, "Business Combinations," and SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises." Under
Opinion 16, business combinations were accounted for using one of two methods,
the pooling-of-interests method or the purchase method. All business
combinations in the scope of SFAS No. 141 are to be accounted for using the
purchase method. The provisions of SFAS No. 141 apply to all business
combinations initiated after June 30, 2001 and to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later.
The adoption of SFAS No. 141 did not have any effect on the Company's
consolidated financial statements since it had no pending business combinations
as of June 30, 2001 or as of the date of the issuance of these consolidated
financial statements. If the Company consummates business combinations in the
future, any such combinations that would have been accounted for by the
pooling-of-interests method under Opinion 16 will be accounted for under the
purchase method and the difference in accounting could have a substantial impact
on the Company's consolidated financial statements.
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In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This Statement addresses financial accounting and reporting for
required goodwill and other intangible assets and supercedes APB Opinion No. 17,
"Intangible Assets." The initial recognition and measurement provisions of SFAS
No. 142 apply to intangible assets that are defined as assets (not including
financial assets) that lack physical substance. The term "intangible assets" is
used in SFAS No. 142 to refer to intangible assets other than goodwill. The
accounting for a recognized intangible asset is based on its useful life. An
intangible asset with a finite useful life is amortized; an intangible asset
with an indefinite useful life is not amortized. An intangible asset that is
subject to amortization shall be reviewed for impairment in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS No. 142 provides that goodwill shall not be amortized. Goodwill is
defined as the excess of the cost of an acquired entity over the net of the
amounts assigned to assets acquired and liabilities assumed. SFAS No. 142
further provides that goodwill shall be tested for impairment at a level of
reporting referred to as a reporting unit. Impairment is the condition that
exists when the carrying amount of goodwill exceeds its implied fair value.
SFAS No. 142 is effective as follows:
All of the provisions of SFAS No. 142 shall be applied in fiscal years
beginning after December 15, 2001 to all goodwill and intangible assets
recognized in an entity's statement of financial position at the beginning of
that fiscal year, regardless of when those previously recognized assets were
initially recognized.
The adoption of SFAS No. 142 did not have any material effect on its
consolidated financial statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain
Financial Institutions", an Amendment of SFAS Nos. 72 and 144 and FASB
Interpretation No. 9. SFAS No. 72 "Accounting for Certain Acquisitions of
Banking or Thrift Institutions" and FASB Interpretation No. 9 "Applying APB
Opinions No. 16 and 17 When a Savings and Loan Association or a Similar
Institution Is Acquired in a Business Combination Accounted for by the Purchase
Method" provided interpretive guidance on the application of the purchase method
to acquisitions of financial institutions. Except for transactions between two
or more mutual enterprises, FASB Statement No. 147 removes acquisitions of
financial institutions from the scope of both Statement 72 and Interpretation 9
and requires that those transactions be accounted for in accordance with FASB
Statements No. 141 "Business Combinations" and No. 142 "Goodwill and Other
Intangible Assets." Thus, the requirement in paragraph 5 of Statement 72 to
recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of FASB Statement No. 147. In addition, FASB
Statement No. 147 amends FASB Statement No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and
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impairment loss recognition and measurement provisions that FASB Statement No.
144 requires for other long-lived assets that are held and used.
Paragraph 5 of FASB Statement No. 147, which relates to the application of
the purchase method of accounting, is effective for acquisitions for which the
date of acquisition is on or after October 1, 2002. The provisions in paragraph
6 related to accounting for the impairment or disposal of certain long-term
customer-relationship intangible assets are effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
in paragraphs 8-14 are effective on October 1, 2002, with earlier application
permitted. The Company does not expect that there will be any substantial impact
on the Company's consolidated financial statements on adoption of this
Statement.
NOTE 5. Certain information previously reported was reclassified for
presentation in this report. These changes do not affect the overall results.
(amounts in thousands)
Three months ended June 30, 2002 2001
Service charges on deposit accounts
As originally reported $ 3 $ 2
Restated 52 36
Other Income
As originally reported 50 35
Restated 1 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operation.
------------
The following analysis discusses changes in the financial condition and
results of operations at and for the three and six months ended September 30,
2002 and 2001, and should be read in conjunction with the Company's Condensed
Consolidated Financial Statements and the notes thereto, appearing in Part I,
Item 1 of this document.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations of the Company and its subsidiary include, but are not limited to,
changes in: interest rates, general economic conditions, 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, the
quality
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or composition of the loan or investment portfolios, demand for loan products,
deposit flows, competition, demand for financial services in the Company's
market area and accounting principles and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements. Further information
concerning the Company and its business, including additional factors that could
materially affect the Company's financial results, is included in the Company's
filings with the Securities and Exchange Commission.
Except as required by applicable law and regulation, the Company does not
undertake - and specifically disclaims any obligation - to publicly release the
result of any revisions that may be made to any forward-looking statements to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2002 AND MARCH 31, 2002
ASSETS
Total assets of the Company were $149.6 million at September 30, 2002, an
increase of $13.3 million, or 9.8%, compared to $136.3 million at March 31,
2002, primarily due to increased loan and investment securities balances. Net
loans outstanding rose $5.3 million to $85.8 million at September 30, 2002
compared to $80.5 million at March 31, 2002. The growth was primarily in
commercial loans, that reflects management's efforts to meet the borrowing needs
of that important segment of its market. Investment in available-for-sale
securities increased $5.9 million, or 16.3%, to $42.1 million at September 30,
2002 compared to $36.2 million at March 31, 2002. Premises and equipment
increased $833,000, or 51.1%, due to equipment and technology upgrades and the
purchase in April 2002 of a property in Manchester, Connecticut for the Bank's
newest banking office which commenced operation on October 1, 2002. Total cash
and cash equivalents increased 9.5%, or $1.2 million, from $12.5 million at
March 31, 2002 to $13.7 million at September 30, 2002 because of an increase in
checks in the process of collection. This account fluctuates as the Association
clears its customers' deposited checks.
ALLOWANCE FOR LOAN LOSSES
The Company determines the adequacy of the allowance for loan losses on a
quarterly basis. The determination is based upon management's assessment of
credit quality or "risk rating" of loans. Loans are risk weighted when they are
originated. If there is deterioration in the credit, the risk rating is changed
accordingly. The analysis considers the type of loans being originated,
historical loan losses and delinquency figures. It also examines delinquency
trends. The table below indicates the relationships between the allowance for
loan losses, total loans outstanding and nonperforming loans as of September 30,
2002 and March 31, 2002 respectively.
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(amounts in thousands)
At At
September 30, 2002 March 31, 2002
------------------ --------------
Allowance for loan losses $893 $773
Gross loans outstanding 86,686 81,241
Nonperforming loans 439 201
Allowance/ Loans outstanding 1.0% 0.95%
Allowance/ Nonperforming loans 203.4% 384.6%
PAST DUE AND NONPERFORMING LOANS
The following table sets forth information regarding past due and
non-accrual loans:
(amounts in thousands)
At At
September 30, 2002 March 31, 2002
------------------ --------------
Past due 30 days through 89 days and accruing $1,012 $288
Past due 90 days or more and nonaccruing 439 201
LIABILITIES
Total liabilities increased $4.7 million, or 3.9%, from $122.0 million at
March 31, 2002 to $126.7 million at September 30, 2002, primarily due to an
increase in deposits and Federal Home Loan Bank advances. Deposits increased
$4.1 million, or 3.6%, from $115.0 million at March 31, 2002 to $119.1 million
at September 30, 2002. Federal Home Loan Bank advances increased $570,000, or
9.3%, from $6.1 million at March 31, 2002 to $6.7 million at September 30, 2002.
These funds were used to fund loan growth.
STOCKHOLDERS' EQUITY
Total stockholders' equity increased $8.5 million, or 59.0%, from $14.4
million at March 31, 2002 to $22.9 million at September 30, 2002, due primarily
to the equity raised through the issuance of common stock by the Company on June
4, 2002, through an increase in accumulated other comprehensive income
reflecting the increase in the net unrealized gain on available-for-sale
securities, net of tax, of $374,000 for the period and net income of $441,000
for the six months ended September 30, 2002.
COMPARISON OF OPERATING RESULTS
GENERAL
The Company's results of operations depend primarily on net interest
income, which is the difference between the interest income earned on its
interest-earning assets, such as loans and securities, and the interest expense
on its interest-bearing liabilities, such as deposits and borrowings. The
Company also generates noninterest income, primarily from fees and service
charges. Gains on sales of securities and cash surrender value of life insurance
policies are added sources of noninterest income. The Company's noninterest
expenses primarily consist of
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employee compensation and benefits, occupancy expense, advertising, data
processing, professional fees and other operating expenses.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001
NET INCOME
During the three months ended September 30, 2002, the Company reported net
income of $201,000. This was $57,000, or 39.6%, more that reported for the same
period last year. Net interest income increased $348,000, or 37.7%, for the
quarter ended September 30, 2002 compared to the quarter ended September 30,
2001. Growth in earning assets and an improvement in the net interest margin
were primarily responsible for this result. Noninterest income increased $8,000
during the period while noninterest expense rose $248,000 or 32.2%. Provisions
for loan losses amounted to $60,000 for the quarter, up from $36,000 a year ago.
NET INTEREST AND DIVIDEND INCOME
For the following discussion, net interest income is presented on a fully
tax equivalent ("FTE") basis. FTE interest income restates reported interest
income on tax exempt loans and securities as if such interest were taxed at the
Company's effective income tax rate of 39% for all periods presented.
(amounts in thousands)
Three months ended September 30,
2002 2001
---- ----
Interest and dividend income
As reported $2,122 $2,025
Tax equivalent adjustment 18 -
------ ------
Total interest income (FTE) 2,140 2,025
Interest Expense 851 1,102
------ ------
Net interest and dividend income (FTE) $1,289 $ 923
====== ======
Net interest and dividend income for the three months ended September 30,
2002 totaled $1.3 million (FTE) compared to $923,000 (FTE) for the same period
in 2001. This represented an increase of $366,000 or 39.7%. Interest and
dividends earned (FTE) amounted to $2.1 million for the three months ended
September 30, 2002, up from $2.0 million earned during the same period in 2001.
Interest expense for the quarter was $851,000, $251,000, or 22.7%, less than
$1.1 million reported in the same quarter of last year. The change in net
interest income was due to increased levels of average assets and liabilities
coupled with lower interest rates earned or paid on those balances due to the
lower interest rate environment.
Interest-earning assets averaged $135.7 million for the quarter ended
September 30, 2002, an increase of $20.0 million, or 17.3%, compared to $115.7
million for the quarter ended September 30, 2001. The increase resulted
primarily from increased average balances of $11.7 million in loans and $6.6
million in investments. The additional volume added approximately $200,000 to
interest income.
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Average interest-bearing liabilities grew $11.4 million during the quarter
ended September 30, 2002 from $107.8 million to $119.2 million which resulted in
an additional $95,000 in interest expense.
For the quarter ended September 30, 2002, interest-earning assets had an
average yield of 6.34%, down 0.68% from a 7.02% for the same period last year,
due to the lower market interst rate environment. The change reduced net
interest income $98,000 in the quarter. As market rates continued to decline,
the average rate paid on interest-bearing liabilities was 2.85% for the quarter
ended September 30, 2002 compared to 4.11% in the year earlier quarter. The
decrease of 1.26% reduced interest expense $235,000.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the quarter ended September 30, 2002 was
$60,000 compared to $36,000 during the same period last year. The provision for
loan losses was increased by $24,000 due to loan growth. There were no
charge-offs recorded during the quarter ended September 30, 2002 or the quarter
ended September 30, 2001.
NONINTEREST INCOME
During the quarter ended September 30, 2002, noninterest income was
$98,000 compared to $90,000 in the same quarter a year ago. The increase in
noninterest income was primarily due to $13,000, or 31.0%, increase in deposit
related fees due to increased transactions on more deposit accounts that was
partially offset by a $7,000 decrease in gains from sales of other real estate
owned.
NONINTEREST EXPENSE
Noninterest expense for the quarter ended September 30, 2002 was $1.1
million, an increase of $248,000, or 32.3%, from $768,000 in the quarter ended
September 30, 2001. Salaries and employee benefits increased $165,000, or 38.2%,
reflecting normal salary increases, higher costs for employee benefits,
including funding for the newly established employee stock ownership plan, the
Association's defined benefit plan, increasing costs for health insurance
provided to employees, and additions to staff to support the growth of the
Company. Professional fees increased $33,000, or 113.8%, to $62,000 in the
quarter reflecting an increase in legal and consulting expenses associated with
the opening of two branches in 2002. All other expenses increased $50,000, or
16.3%.
PROVISION FOR INCOME TAXES
Reflecting the increase in pretax net income, the income tax provision for
the quarter ended September 30, 2002 was $92,000 compared to $65,000 for the
quarter ended September 30, 2001.
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<page> 14
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2002
AND 2001
NET INCOME
During the six months ended September 30, 2002, the Company reported net
income of $441,000. This was $183,000, or 70.9%, more than reported for the same
period last year. Net interest income increased $608,000, or 33.2%, during the
period. Growth in earning assets and an improvement in the net interest margin
were primarily responsible for this result. The increase in net interest income
was offset by a decrease in noninterest income of $21,000 during the period and
an increase in noninterest expense $294,000 or 18.7%. Provision for loan losses
amounted to $120,000 for the quarter, up from $72,000 a year ago.
NET INTEREST AND DIVIDEND INCOME
Net interest income is presented on a fully tax equivalent ("FTE") basis.
(amounts in thousands)
Six months ended September 30,
2002 2001
---- ----
Interest and dividend income
As reported $4,184 $4,080
Tax equivalent adjustment 36 8
------ ------
Total interest income (FTE) 4,220 4,088
Interest Expense 1,746 2,250
------ ------
Net interest and dividend income (FTE) $2,474 $1,838
====== ======
Net interest and dividend income for the six months ended September 30,
2002 totaled $2.5 million (FTE) compared to $1.8 million (FTE) for the same
period in 2001. This represented an increase of $636,000, or 34.6%. Interest and
dividends earned (FTE) amounted to $4.2 million for the six months ended
September 30, 2002, an increase of $132,000, or 3.2%, from $4.1 million earned
during the same period in 2001. Interest expense for the period was $1.7
million, $504,000, or 22.4%, less than $2.3 million reported in the same quarter
of last year. The change in net interest income was due to increase in the
average assets and liabilities coupled with lower interest rates earned or paid
on those balances, due to the lower rate environment.
Interest-earning assets averaged $134.4 million for the six months ended
September 30, 2002, an increase of $19.4 million, or 16.9%, compared to $115.0
million for the six months ended September 30, 2001. The increase resulted
primarily from increased averages of $12.5 million in loans, $3.6 million in
investments and $3.8 million in Federal Funds sold to other banks. The
additional volume added approximately $482,000 to interest income. For the six
months ended September 30, 2002 interest-earning assets had an average yield of
6.30%, a decrease of 0.85% from the same period a year ago. The change reduced
net interest income $360,000 in the quarter.
Average interest-bearing liabilities grew $14.6 million during the six
months ended September 30, 2002 from $107.2 million to $121.8 million. The
average interest rate paid was 2.87% compared to 4.21% for the same period in
2001. The net decrease in expense for the six months amounted to $505,100, which
resulted from changes in rates and a higher percentage of lower costing funds.
14
<page> 15
During the period, lower cost core deposits increased and time deposits,
typically with higher interest rates declined.
PROVISION FOR LOAN LOSSES
The provision for loans losses for the six months ended September 30, 2002
was $120,000 compared to $72,000 during the same period last year. The provision
for loan losses increased by $48,000 due to loan growth. There were no
charge-offs recorded during the six months ended September 30, 2002 or the six
months ended September 30, 2001.
NONINTEREST INCOME
During the six months ended September 30, 2002, noninterest income was
$201,000 compared to $222,000 in the same period a year ago. The decrease in
noninterest income was primarily due to $50,000, or 79.4%, decrease in gains
from sales of investment securities that were partially offset by a $29,000
increase in deposit related fees.
NONINTEREST EXPENSE
Noninterest expense for the six months ended September 30, 2002 was $1.9
million, an increase of $294,000, or 18.7%, from $1.6 million in the six months
ended September 30, 2001. Salaries and employee benefits increased $213,000, or
24.3%, reflecting normal salary increases, higher costs for employee benefits
and additions to staff to support the growth of the Company. Professional fees
increased $36,000, or 54.5%, to $102,000 in the period reflecting an increase in
legal and consulting expenses associated with the branch openings and employee
plan review and analysis. All other expenses increased $45,000, or 7.1%.
PROVISION FOR INCOME TAXES
Reflecting the increase in pretax net income, the income tax provision for
the six months ended September 30, 2002 was $208,000 compared to $146,000 for
the six months ended September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The term liquidity refers to the ability of the Company and the
Association to meet current and future short-term financial obligations. The
Company and the Association further define liquidity as the ability to generate
adequate amounts of cash to fund loan originations, deposit withdrawals and
operating expenses. Liquidity management is both a daily and long-term function
of business management. The Company's main source of liquidity is the proceeds
it retained from its stock offering. The Association's primary sources of
liquidity are proceeds from the stock offering, deposits, scheduled amortization
and prepayments of loan principal and mortgage-related securities, funds
provided by operations and, to a much lesser extent, Federal Home Loan Bank
borrowings. The Association can borrow funds from the Federal Home Loan Bank
based on eligible collateral of loans and securities. The Association had
Federal Home Loan Bank borrowings as of September 30, 2002 of $6.7 million with
unused borrowing capacity of $43 million.
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<page> 16
The Association's primary investing activities are the origination of
loans and the purchase of mortgage and investment securities. During the three
months ended September 30, 2002 and fiscal 2002, the Association originated
loans of approximately $5.0 million and $40.0 million, respectively. At
September 30, 2002 and March 31, 2002, the Association had loan commitments to
borrowers of approximately $1.3 million and $688,000, respectively, and
available home equity and unadvanced lines of credit of approximately $3.3
million and $2.7 million, respectively. Purchases of investment securities
totaled $7.5 million and $59.0 million for the three months ended September 30,
2002 and fiscal 2002, respectively.
Loan repayment and maturing investment securities are a relatively
predictable source of funds. However, deposit flows, calls of investment
securities and prepayments of loans and mortgage-backed securities are strongly
influenced by interest rates, general and local economic conditions and
competition in the marketplace. These factors reduce the predictability of the
timing of these sources of funds. Deposit flows are affected by the level of
interest rates, by the interest rates and products offered by competitors and by
other factors. Total deposits were $119.1 million at September 30, 2002, a $4.1
million, or 3.6%, increase from the $115.0 million balance at March 31, 2002.
Total deposits increased by $6.5 million, or 6.0% during the year ended March
31, 2002. The Association monitors its liquidity position frequently and
anticipates that it will have sufficient funds to meet its current funding
commitments.
The Association was well-capitalized at September 30, 2002 and exceeded
each of the applicable regulatory capital requirements at such date. The table
below presents the capital required and maintained at September 30, 2002.
(amounts in thousands)
Required Association
-------- ------------------
Tier 1 Capital 4% $21,707 12.55%
Total Risk based
Capital 8% $22,600 29.45%
Tier 1 Risk based
Capital 8% $22,600 28.28%
Management is not aware of any known trends, events or uncertainties that
will have or are reasonably likely to have a material effect on the Company's or
the Association's liquidity, capital or operations, nor is management aware of
any current recommendations by regulatory authorities which, if implemented,
would have a material effect on the Company's or the Association's liquidity,
capital or operations.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company
-----------------------------------------------------
maintains controls and procedures designed to ensure that the information
required to be disclosed in the reports that the Company files or submits under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed within 90 days of the filing date of this
report, the chief executive officer
16
<page> 17
and the chief financial officer of the Company concluded that the Company's
disclosure controls and procedures were adequate.
(b) Changes in internal controls. The Company made no significant changes
----------------------------
in its internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation of those controls by the
chief executive officer and chief financial officer.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
Item 2. Changes in Securities.
---------------------
None.
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
2.1 Amended Plan of Reorganization From Mutual Savings
and Loan Association to Mutual Holding Company and
Stock Issuance (including the proposed Federal
Charters and Bylaws of Enfield Federal Savings and
Loan Association, New England Bancshares, Inc. and
Enfield Mutual Holding Company)*
3.1 Charter of New England Bancshares, Inc. (Included
in Exhibit 2.1)*
3.2 Bylaws of New England Bancshares, Inc. (Included
in Exhibit 2.1)*
4.1 Specimen stock certificate of New England
Bancshares, Inc.*
99.1 Certification of Chief Executive and Chief
Financial Officer
17
<page> 18
-----------------------------
* Incorporated by reference into this document from New
England Bancshares, Inc.'s Form SB-2, Registration
Statement filed under the Securities Act of 1933,
Registration No. 333-63271
(b) Reports on Form 8-K
Not Applicable.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
NEW ENGLAND BANCSHARES, INC.
Dated: November 14, 2002 By: /s/ David J. O'Connor
-------------------------------------
David J. O'Connor
President, Chief Executive Officer,
Chief Financial Officer and Director
(principal executive, financial
and accounting officer)
18
<page> 19
CERTIFICATION
I, David J. O'Connor, certify, that:
1. I have reviewed this quarterly report on Form 10-QSB of New England
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of the
internal controls which could adversely affect the
registrant's ability to record process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ David J. O'Connor
-------------------------------------------
David J. O'Connor
President and Chief Executive Officer
(principal executive and financial officer)
19