1
November 7, 2005
VIA EDGAR
- ---------
Mr. Todd Schiffman
Assistant Director
U.S. Securities and Exchange Commission Division of Corporation Finance
100 F Street, N.E.
Washington, DC 20549
RE: NEBS BANCSHARES, INC.
AMENDMENT NUMBER ONE TO REGISTRATION STATEMENT ON FORM SB-2
FILED OCTOBER 26, 2005
FILE NO. 333-128277
-------------------
Dear Mr. Schiffman:
On behalf of NEBS Bancshares, Inc., this response is being filed in
response to the Staff's comment letter, dated November 3, 2005. To aid in your
review, we have repeated the Staff's comment followed by NEBS Bancshares'
response.
COMMENT NO. 1:
FINANCIAL STATEMENTS
- --------------------
NOTE 3 - INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES, PAGE F-14
- ---------------------------------------------------------------
WE NOTE YOUR REVISED DISCLOSURE ON PAGE F-16 IN RESPONSE TO COMMENT 12 OF
OUR LETTER DATED OCTOBER 11, 2005. PLEASE PROVIDE US WITH YOUR COMPREHENSIVE
ANALYSIS BASED ON THE FACTORS DESCRIBED IN SAB TOPIC 5.M EXPLAINING YOUR BASIS
FOR CONCLUDING THAT YOUR INVESTMENT IN BOND MUTUAL FUNDS WAS NOT OTHER THAN
TEMPORARILY IMPAIRED AS OF MARCH 31, 2005 AND JUNE 30, 2005. IN YOUR ANALYSIS,
EXPLAIN HOW YOU DETERMINED THAT YOU HAVE THE INTENT AND ABILITY TO RETAIN THESE
INVESTMENTS FOR A PERIOD OF TIME SUFFICIENT TO ALLOW FOR ANY ANTICIPATED
RECOVERY IN MARKET VALUE IN LIGHT OF THE FACT THAT THESE ARE EQUITY INVESTMENTS
FOR WHICH THERE ARE NO CONTRACTUAL PROVISIONS FOR A RETURN OF YOUR PRINCIPAL
INVESTMENT. PLEASE TELL US THE TIME PERIOD YOU ESTIMATE UNTIL THE FORECASTED
RECOVERY OF FAIR VALUE UP TO THE COST OF THE INVESTMENT AND YOUR BASIS FOR THAT
ESTIMATE.
2
Mr. Todd Schiffman
November 7, 2005
Page 2
RESPONSE TO COMMENT NO. 1:
The Staff is supplementally advised that the two marketable equity
securities in an unrealized loss position at June 30, 2005 are mutual fund
investments (Ultra Short Mortgage Fund and Ultra Short Fund) with Asset
Management Fund. The Ultra Short Mortgage Fund invests in short-term mortgage
related investments and the Ultra Short Fund invests in short-term mortgage and
income producing investments. Both funds are rated "AAAf" by Standard & Poor's,
the highest rating given by that agency. Management has assessed these two
marketable equity securities, which are classified as available-for-sale, for
other than temporary impairment at June 30, 2005 and March 31, 2005 and
determined the decline in fair value below amortized cost to be temporary.
In making this determination management considered: (1) the period of time
the securities were in a loss position; (2) the percentage decline in comparison
to the securities' amortized cost; (3) the financial condition of the issuer;
and (4) the ability and intent of New England Bancshares, Inc. (the "Company")
to hold these securities until their fair value recovers to their amortized
cost. The Company's analysis of the four factors is as follows:
THE PERIOD OF TIME THE SECURITIES WERE IN A LOSS POSITION AND THE
PERCENTAGE DECLINE IN COMPARISON TO THE SECURITIES' AMORTIZED COST. The Company
has been invested in the Ultra Short Mortgage Fund since its inception in 1991
and has been invested in the Ultra Short Fund since 2001. Since the date of
investment, the net asset values of the funds have fluctuated based on
short-term interest rates since the duration of the underlying investments in
both funds is approximately 0.9 years.
The mutual funds' net asset values primarily react to the movement of the
one-year CMT rate. Since the duration of the underlying securities is
approximately 0.9 years, we have analyzed the relationship of the one-year CMT
rate to the lagging CMT rate twelve months prior and the percentage over and
under the twelve-month prior one-year CMT rate. There is typically a high
correlation between the net asset value and the movement of the lagging
twelve-month one-year CMT rate in relation to the one-year CMT rate.
Ultra Short Mortgage Fund:
Unit Unit Unrealized
Investment Net Asset Gain/(Loss) One-year
DATE Price Value % CMT
---- ----- ----- ----------- ---
3/31/00 $9.98 $9.84 (1.4)% 6.30%
3/31/01 9.97 9.94 (0.3) 4.19
3/31/02 9.96 9.93 (0.3) 2.70
3/31/03 9.96 9.95 (0.1) 1.27
3/31/04 9.98 9.89 (0.9) 1.17
3/31/05 9.98 9.79 (1.9) 3.38
6/30/05 9.98 9.75 (2.3) 3.46
3
Mr. Todd Schiffman
November 7, 2005
Page 3
Ultra Short Fund:
Unit Unit Unrealized
Investment Net Asset Gain/(Loss) One-year
DATE Price Value % CMT
---- ----- ----- ----------- ---
3/31/02 $9.97 $9.97 - % 2.70%
3/31/03 9.97 9.97 - 1.27
3/31/04 9.97 9.95 (0.2) 1.17
3/31/05 9.97 9.82 (1.5) 3.38
6/30/05 9.97 9.81 (1.6) 3.46
The tables above show the relationship between the unrealized gain/loss of
the marketable equity securities and the one-year CMT rate. Due to the 0.9 year
fund duration, it is necessary to compare the one-year CMT rate to the one-year
CMT rate twelve months earlier. For example, the large increase in the
unrealized loss for the Ultra Short Mortgage Fund from March 31, 2004 to March
31, 2005 was caused by a 221 basis point increase in the one-year CMT Rate for
the same time period. Conversely, for the period from March 31, 2000 to March
31, 2001, when the one-year CMT rate decreased by 211 basis points, the
unrealized loss as a percentage of the Company's cost basis decreased from 1.4%
to 0.3%. The only exception to that trend occurred around March 31, 2002, due to
rates declining to 40 year lows. As this fund is comprised largely of
mortgage-related securities, the majority of borrowers refinanced their loans
and negatively impacted the value of the fund. However, as the one-year CMT rate
decreased by an additional 143 basis points at March 31, 2003 the unrealized
loss decreased from 0.3% at March 31, 2002 to 0.1% at March 31, 2003.
As of June 30, 2005, the one-year CMT rate exceeded the lagging
twelve-month CMT rate by 37% and the resulting net asset value of the Ultra
Short Mortgage Fund was $9.75 per share. The same 37% relationship existed
between the twelve-month lagging one-year CMT rate and the one-year CMT rate in
July 1994. At that date, the net asset value per share of the fund was $9.84.
Over the following eighteen months, the relationship reversed so that the
twelve-month lagging one-year CMT rate exceeded the one-year CMT rate by 39%
and the and the fund's net asset value per share increased to $9.99 compared to
our cost basis of $9.98. This same cycle repeated itself during the period of
October 1999 through October 2001.
The Company subscribes to an interest rate forecast service by Global
Insight, the leading economic and financial forecasting company in the world.
Global Insight predicts the Federal Reserve Bank's tightening monetary policy
will cease in the first quarter of 2006 and that short-term rates will stabilize
and remain flat for a period of at least one year. As such, based on the
historical performance of the fund, we anticipate that the net asset value per
share of both the Ultra Short Mortgage Fund and the Ultra Short Fund will rise
and eventually match or exceed our cost basis in the funds.
THE FINANCIAL CONDITION OF THE ISSUER. Standard & Poor's has rated both
funds "AAAf" which is their highest rating.
4
Mr. Todd Schiffman
November 7, 2005
Page 4
THE ABILITY AND INTENT OF THE COMPANY TO HOLD THESE SECURITIES UNTIL THEIR
FAIR VALUE RECOVERS TO THEIR AMORTIZED COST. The Company is not reliant on the
proceeds from these investments for its operations. Accordingly, the Company has
the ability to hold onto these securities for a long period of time without
negative impact to its liquidity. The Company intends to hold these securities
until the fair values recover to the amortized costs. As can be seen with the
fourteen-year holding period of the Ultra Short Mortgage Fund, the Company
considers these funds to be core investment holdings.
Management believes the decline in fair value is directly related to the
historically low interest rate environment in fiscal 2003 and 2004 and the
subsequent 229 basis point increase in the one-year CMT for the fifteen months
ended June 30, 2005, and not to the credit deterioration of the individual
issuer or the underlying investments. Based on this and the above analysis, the
Company believes that the two marketable equity securities are not considered to
be other than temporarily impaired.
If you have any questions concerning this submission, please telephone the
undersigned at (202) 686-4930.
Very truly yours,
MULDOON MURPHY & AGUGGIA LLP
/s/ Scott A. Brown
Scott A. Brown
cc: Jessica Livingston, Securities and Exchange Commission
Nancy Maloney, Securities and Exchange Commission
Joyce Sweeney, Securities and Exchange Commission
Donald W. Dwyer, Office of Thrift Supervision - DC
John P. Harootunian, Office of Thrift Supervision - DC
Karen Marcotte, Office of Thrift Supervision - DC
Roger Smith, Office of Thrift Supervision - DC
Lauren S. Yablonsky, Office of Thrift Supervision - NE
David J. O'Connor, NEBS Bancshares, Inc.
Scott D. Nogles, NEBS Bancshares, Inc.
Lawrence M. F. Spaccasi, Esq., Muldoon Murphy & Aguggia LLP
Michael J. Brown, Esq., Muldoon Murphy & Aguggia LLP