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 December 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 0-49711
NEW ENGLAND BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
United States 04-3693643
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
660 Enfield Street, Enfield, Connecticut 06082
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(Address of principal executive offices) (Zip Code)
(860) 253-5200
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(Issuer's telephone number)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
The Issuer had 2,257,651 shares of common stock, par value $0.01 per
share, outstanding as of February 9, 2005.
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
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
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Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
NEW ENGLAND BANCSHARES, INC.
FORM 10-QSB
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at December 31, 2004
and March 31, 2004 (Unaudited)....................................... 1
Condensed Consolidated Statements of Income for the
Three and Nine Months Ended December 31, 2004 and 2003 (Unaudited)... 2
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended December 31, 2004 and 2003 (Unaudited)............. 3
Notes to Condensed Consolidated Financial Statements (Unaudited)..... 5
Item 2. Management's Discussion and Analysis or Plan of Operation............ 9
Item 3. Controls and Procedures.............................................. 16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......... 16
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 ............................................................ 17
SIGNATURES ................................................................... 18
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
December 31, March 31,
2004 2004
------------- -------------
ASSETS: (Unaudited)
- -------
Cash and due from banks ..................................................... $ 5,023 $ 8,421
Interest-bearing demand deposits with other banks ........................... 227 170
Federal funds sold .......................................................... 3,850 5,570
Money market mutual funds ................................................... 6,353 5,518
------------- -------------
Total cash and cash equivalents ....................................... 15,453 19,679
Interest-bearing time deposits with other banks ............................. 6,056 8,450
Investments in available-for-sale securities (at fair value) ................ 47,380 42,309
Federal Home Loan Bank stock, at cost ....................................... 1,008 1,008
Loans, net of allowance for loan losses of $1,355 as of December 31, 2004 and
$1,301 as of March 31, 2004 .............................................. 129,097 121,404
Premises and equipment, net ................................................. 2,543 2,643
Accrued interest receivable ................................................. 818 788
Deferred income taxes, net .................................................. 607 337
Cash surrender value of life insurance ...................................... 3,866 3,736
Identifiable intangible assets .............................................. 797 864
Goodwill .................................................................... 1,090 1,090
Other assets ................................................................ 792 860
------------- -------------
Total assets .......................................................... $ 209,507 $ 203,168
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing .................................................... $ 11,948 $ 11,041
Interest-bearing ....................................................... 151,076 151,749
------------- -------------
Total deposits ..................................................... 163,024 162,790
Advanced payments by borrowers for taxes and insurance ...................... 1,043 536
Federal Home Loan Bank advances ............................................. 12,483 9,926
Securities sold under agreements to repurchase .............................. 3,756 788
Due to broker ............................................................... -- 806
Other liabilities ........................................................... 838 728
------------- -------------
Total liabilities ..................................................... 181,144 175,574
------------- -------------
Stockholders' Equity:
Preferred stock, par value $.01 per share: 1,000,000 shares authorized;
none issued ...................................................... -- --
Common stock, par value $.01 per share: 10,000,000 shares authorized;
2,257,651 shares issued and outstanding .......................... 23 23
Paid-in capital ......................................................... 12,534 12,465
Retained earnings ........................................................ 16,842 15,985
Accumulated other comprehensive (loss) income ............................ (169) 143
Unearned ESOP shares, 51,661 and 59,040 shares .......................... (517) (590)
Unearned shares, stock-based incentive plan, 29,137 shares .............. (350) (432)
------------- -------------
Total stockholders' equity ............................................ 28,363 27,594
------------- -------------
Total liabilities and stockholders' equity ............................ $ 209,507 $ 203,168
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Interest and dividend income:
Interest on loans ................................................. $ 1,985 $ 1,741 $ 5,894 $ 5,135
Interest on debt securities:
Taxable ........................................................ 405 347 1,137 939
Tax-exempt ..................................................... 41 41 127 85
Dividends on Federal Home Loan Bank stock ......................... 9 7 23 20
Interest on federal funds sold, interest-bearing deposits and
dividends on money market mutual funds ........................... 120 58 363 103
-------- -------- -------- --------
Total interest and dividend income ............................. 2,560 2,194 7,544 6,282
-------- -------- -------- --------
Interest expense:
Interest on deposits .............................................. 653 600 1,923 1,864
Interest on advanced payments by borrowers for
taxes and insurance ......................................... 6 7 7 7
Interest on Federal Home Loan Bank advances ....................... 90 76 265 234
Interest on securities sold under agreements to repurchase ........ 17 2 30 2
-------- -------- -------- --------
Total interest expense ......................................... 766 685 2,225 2,107
-------- -------- -------- --------
Net interest and dividend income ............................... 1,794 1,509 5,319 4,175
Provision for loan losses ............................................... 3 60 127 180
-------- -------- -------- --------
Net interest and dividend income after provision for loan losses 1,791 1,449 5,192 3,995
-------- -------- -------- --------
Noninterest income:
Service charges on deposit accounts ............................... 131 63 339 175
Gain on sales and calls of investments, net ....................... 3 50 37 88
Increase in cash surrender value of life insurance policies ....... 41 34 123 113
Other income ...................................................... 37 35 112 61
-------- -------- -------- --------
Total noninterest income ....................................... 212 182 611 437
-------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits .................................... 904 673 2,703 1,991
Occupancy and equipment expense ................................... 200 195 618 584
Advertising and promotion ......................................... 38 53 115 105
Professional fees ................................................. 61 45 137 170
Data processing expense ........................................... 71 48 203 140
Stationery and supplies ........................................... 23 28 74 55
Amortization of identifiable intangible assets .................... 22 -- 67 --
Other expense ..................................................... 206 160 611 504
-------- -------- -------- --------
Total noninterest expense ...................................... 1,525 1,202 4,528 3,549
-------- -------- -------- --------
Income before income taxes ..................................... 478 429 1,275 883
Income taxes ............................................................ 159 140 418 278
-------- -------- -------- --------
Net income ..................................................... $ 319 $ 289 $ 857 $ 605
======== ======== ======== ========
Earnings per share:
Basic ....................................................... $ 0.15 $ 0.14 $ 0.40 $ 0.30
Diluted ..................................................... $ 0.14 $ 0.14 $ 0.39 $ 0.30
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended
December 31,
2004 2003
-------- --------
Cash flows from operating activities:
Net income ....................................................................... $ 857 $ 605
Adjustments to reconcile net income to net cash provided by operating activities:
Net accretion of fair value adjustments .................................... (61) --
Amortization of securities, net ............................................ 155 398
Gain on sales and calls of investments, net ................................ (37) (88)
Provision for loan losses .................................................. 127 180
Change in deferred loan origination fees ................................... 8 17
Depreciation and amortization .............................................. 221 226
Increase in accrued interest receivable .................................... (30) (163)
Deferred income tax benefit ................................................ (71) (55)
Increase in cash surrender value life insurance policies ................... (123) (113)
Decrease in prepaid expenses and other assets .............................. 62 224
Amortization of identifiable intangible assets ............................. 67 --
Increase (decrease) in accrued expenses and other liabilities .............. 147 (185)
ESOP shares released ....................................................... 105 61
Compensation cost for stock-based incentive plan ........................... 82 83
-------- --------
Net cash provided by operating activities ........................................ 1,509 1,190
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities ................................. (22,480) (30,335)
Proceeds from sales of available-for-sale securities ....................... 4,618 7,921
Proceeds from maturities of available-for-sale securities .................. 11,356 22,173
Cash and cash equivalents acquired from Windsor Locks Community Bank,
FSL, net of expenses of $257 .......................................... -- 3,569
Loan originations and principal collections, net ........................... (7,840) (9,662)
Proceeds from maturities of interest bearing time deposits with other banks 2,394 --
Capital expenditures - premises and equipment .............................. (115) (31)
Investments in life insurance policies ..................................... (7) (12)
-------- --------
Net cash used in investing activities ...................................... (12,074) (6,377)
-------- --------
Cash flows from financing activities:
Net increase in demand, NOW and savings accounts ........................... 745 964
Net decrease in time deposits .............................................. (438) (1,764)
Net increase in advanced payments by borrowers for taxes and insurance ..... 507 558
Proceeds from Federal Home Loan Bank long-term advances .................... 5,000 --
Principal payments on Federal Home Loan Bank long-term advances ............ (2,443) (908)
Net increase in securities sold under agreement to repurchase .............. 2,968 677
Recovery of expenditure relating to initial public offering ................ -- 18
-------- --------
Net cash provided by (used in) financing activities .................................... 6,339 (455)
-------- --------
Net decrease in cash and cash equivalents .............................................. (4,226) (5,642)
Cash and cash equivalents at beginning of period ....................................... 19,679 20,963
-------- --------
Cash and cash equivalents at end of period ............................................. $ 15,453 $ 15,321
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Continued
Nine Months Ended
December 31,
2004 2003
---------------------
Supplemental disclosures:
Interest paid ...................................... $ 2,234 $ 2,106
Income taxes paid .................................. 365 132
Due to broker ...................................... (806) --
Transfer from premises and equipment to other assets -- 40
Acquisition of Windsor Locks Community Bank:
Assets acquired
Cash and cash equivalents ..................... $ -- $ 3,826
Interest-bearing time deposits ................ -- 8,759
Securities .................................... -- 6,969
Federal Home Loan Bank Stock, at cost ......... -- 188
Loans ......................................... -- 16,399
Bank premises and equipment ................... -- 355
Other assets .................................. -- 215
Core deposit intangible ....................... -- 886
-------- --------
-- 37,597
Liabilities assumed
Deposits ...................................... -- 34,357
Securities sold under agreements to repurchase -- 190
Other liabilities ............................. -- 565
-------- --------
-- 35,112
Net assets acquired ................................ -- 2,485
Acquisition costs .................................. -- 3,575
-------- --------
Goodwill ........................................... $ -- $ 1,090
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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
issued 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 Company is a majority owned subsidiary of
Enfield Mutual Holding Company.
On December 12, 2003, the Association acquired Windsor Locks Community
Bank, FSL (the "Acquisition"). Neither the Association nor the Company was
required to pay any consideration directly to any affiliated party, including
Windsor Locks Community Bank's members, in the merger. However, the Company was
required to issue additional shares of common stock to Enfield Mutual Holding
Company in an amount equal to the value of Windsor Locks Community Bank as
determined by an independent appraisal, which amounted to 171,355 shares.
The Acquisition was accounted for using the purchase method of
accounting. Accordingly, the assets acquired and liabilities assumed were
recorded by the Company at their fair values at the consummation date. During
the appraisal process, a core deposit intangible of $886,000 was calculated and
is being amortized to expense over a period of 10 years. Goodwill resulting from
the Acquisition totaled $1.1 million and is analyzed for impairment on at least
an annual basis. Financial statement amounts for Windsor Locks Community Bank
are included in the Company's consolidated financial statements beginning on the
acquisition date.
The Association, a federally chartered savings and loan association
headquartered in Enfield, Connecticut, operates from its seven full-service
branch offices in Broad Brook, 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
5
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, 2005.
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, 2004.
The condensed consolidated balance sheet as of March 31, 2004 was derived
from the audited financial statements of New England Bancshares, Inc., but does
not include all the disclosures required by accounting principles generally
accepted in the United States.
NOTE 3 - Earnings Per Share (EPS)
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.
Quarter Ended Nine Months Ended
December 31, December 31,
---------------- -----------------
(In thousands, except per share data) 2004 2003 2004 2003
------ ------ ------- ------
Net income $ 319 $ 289 $ 857 $ 605
Weighted average common shares
outstanding for computation of basic
EPS 2,170 2,019 2,170 1,995
Effect of dilutive stock options and
stock awards 48 54 47 45
------ ------ ------ ------
Weighted average common shares for
computation of diluted EPS 2,218 2,073 2,217 2,040
------ ------ ------ ------
Earnings per share:
Basic $ 0.15 $ 0.14 $ 0.40 $ 0.30
Diluted $ 0.14 $ 0.14 $ 0.39 $ 0.30
- --------------------------------------------------------------------------------
NOTE 4 - 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.
6
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
Company is required to apply FIN 46, as revised, to all entities subject to it
no later than the end of the first reporting period ending after March 15, 2004.
However, prior to the required application of FIN 46, as revised, the Company
shall apply FIN 46 or FIN 46 (R) to those entities that are considered to be
special-purpose entities as of the end of the first fiscal year or interim
period ending after December 15, 2003. The adoption of this interpretation did
not have a material effect on the Company's consolidated financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an amendment of
SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132 (revised 2003)"). This
Statement revises employers' disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans required by SFAS No. 87, "Employers' Accounting for Pensions,"
SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
Statement retains the disclosure requirements contained in SFAS No. 132,
"Employers' Disclosures About Pensions and Other Postretirement Benefits," which
it replaces. It requires additional disclosures to those in the original
Statement 132 about assets, obligations, cash flows and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. This Statement is effective for financial statements with fiscal years
ending after December 15, 2003 and interim periods beginning after December 15,
2003. Adoption of this Statement did not have a material impact 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
7
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 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 or
"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.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payments" ("SFAS 123R"). This Statement revises FASB Statement No.
123, "Accounting for Stock Based Compensation" and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees," and its related implementation
guidance. SFAS 123R requires that the cost resulting from all share-based
payment transactions be recognized in the consolidated financial statements. It
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a fair-value
based measurement method in accounting for share-based payment transactions with
employees except for equity instruments held by employee share ownership plans.
This Statement is effective for the Company as of the beginning of the first
interim or annual reporting period that begins after December 15, 2005. The
Company does not believe the adoption of this Statement will have a material
impact on the Company's financial position or results of operations.
NOTE 5 - Stock-Based Incentive Plan
At December 31, 2004, the Company had a stock-based incentive plan. The
Company accounts for the plan under the recognition and measurement principles
of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Statement of Financial Accounting Standards (SFAS) No. 123,
(amended 2004), "Share-Based Payments" ("SFAS 123R") requires the Company to
recognize the cost resulting from all share-based payment transactions in the
consolidated financial statements as of the beginning of the first interim or
annual reporting period that begins after December 15, 2005. Compensation cost
is measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. However, until the
required implementation date of SFAS 123R, an entity is permitted to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting prescribed by Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," whereby compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date (or
other measurement date) over the amount an employee must pay to acquire the
stock. Stock options issued under the Company's stock-based incentive plan have
no intrinsic value at the grant date, and under Opinion No. 25 no compensation
cost is recognized for them.
The compensation cost that has been charged against income for the
granting of stock awards under the plan was $27,000 and $55,000, respectively,
for the three and nine months ended December 31, 2004 and $28,000 and $56,000,
respectively, for the three and nine months ended December 31, 2003.
8
The following table illustrates the effect on net income if the Company
had applied the fair value recognition provisions of SFAS 123R to stock-based
employee compensation for the three and nine months ended December 31, 2004 and
2003.
Quarter Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
(Dollars in thousands, except per share data) 2004 2003 2004 2003
------ ------ ------ ------
Net income, as reported $ 319 $ 289 $ 857 $ 605
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 30 24 89 71
------ ------ ------ ------
Pro forma net income $ 289 $ 265 $ 768 $ 534
------ ------ ------ ------
Earnings per share:
Basic - as reported $ 0.15 $ 0.14 $ 0.40 $ 0.30
Basic - pro forma $ 0.13 $ 0.13 $ 0.35 $ 0.27
Diluted - as reported $ 0.14 $ 0.14 $ 0.39 $ 0.30
Diluted - pro forma $ 0.13 $ 0.13 $ 0.35 $ 0.26
- ------------------------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis or Plan of Operation.
---------------------------------------------------------
The following analysis discusses changes in the financial condition and
results of operations at and for the three and nine months ended December 31,
2004 and 2003, 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 Litigation 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, legislation and
regulations, monetary and fiscal policies of the U.S. government, including
policies of the U.S. Treasury and the Federal Reserve Board, the quality 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.
9
Comparison of Financial Condition at December 31, 2004 and March 31, 2004
Assets
Assets were $209.5 million at December 31, 2004, an increase of $6.3
million, or 3.1%, compared to $203.2 million at March 31, 2004. The increase in
assets was caused primarily by a $7.7 million increase in net loans and a $5.1
million increase in available-for-sale securities, partially offset by a $4.2
million decrease in cash and cash equivalents, and a $2.4 million decrease in
interest-bearing time deposits with other banks. The $7.7 million increase in
net loans was caused primarily by a $3.7 million increase in commercial loans, a
$3.1 million increase in residential loans and a $940,000 increase in consumer
loans. The $5.1 million increase in available-for-sale securities resulted
primarily from a $6.8 million increase in U.S. agency securities, a $2.6 million
increase in municipal securities, partially offset by a $3.7 million decrease in
mortgage-backed securities and collateralized mortgage obligations.
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 the
credit quality of the loan portfolio, previous loss experience, current economic
conditions and their effect on borrowers and the market area in general, and the
performance of individual credits in relation to the contract terms.
Provisions for loan losses are charges to earnings to bring the total
allowance for loan losses to a level considered by management as adequate to
provide for estimated loan losses based on management's evaluation of the
collectibility of the loan portfolio. While management believes that, based on
information currently available, the Company's allowance for loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurances can be given that the Company's level of allowance for loan losses
will be sufficient to cover actual loan losses incurred by the Company or that
future adjustments to the allowance for loan losses will not be necessary if
economic and other conditions differ substantially from the economic and other
conditions used by management to determine the current level of the allowance
for loan losses. In addition, the Office of Thrift Supervision as an integral
part of its examination process, periodically reviews the Company's allowance
for loan losses and may require the Company to provide additions to the
allowance based upon judgments different from management.
The table below indicates the relationships between the allowance for loan
losses, total loans outstanding and non-accrual loans at December 31, 2004 and
March 31, 2004, respectively.
December 31, 2004 March 31, 2004
----------------- --------------
(Dollars in thousands)
Allowance for loan losses $ 1,355 $ 1,301
Gross loans Outstanding 130,813 123,058
Non-accrual loans 605 937
Allowance/ Loans outstanding 1.04% 1.06%
Allowance/ Non-accrual loans 223.97% 138.85%
10
Past due and Nonperforming Loans
The following table sets forth information regarding past due loans:
December 31, 2004 March 31, 2004
----------------- --------------
(In thousands)
Past due 30 days through 89 days $2,268 $1,998
Past due 90 days or more 551 1,212
The decrease in total loans past due 90 days or more was caused by the
reduction of past due commercial loans as the properties or businesses were
sold.
Liabilities
Liabilities were $181.1 million at December 31, 2004, an increase of $5.5
million, or 3.1%, compared to $175.6 million at March 31, 2004. The increase in
liabilities was caused primarily by a $2.6 million increase in Federal Home Loan
Bank advances, a $3.0 million increase in securities sold under agreements to
repurchase and a $507,000 increase in advanced payments by borrowers for taxes
and insurance, partially offset by an $806,000 decrease in due to broker.
Securities sold under agreements to repurchase are overnight sweep deposit
accounts from commercial customers. The $3.0 million increase was caused by the
Bank obtaining several commercial accounts since March 31, 2004.
Stockholders' Equity
Total stockholders' equity increased $769,000 to $28.4 million at December
31, 2004 from $27.6 million at March 31, 2004. The increase was caused primarily
by $857,000 in net income, an $82,000 decrease in unearned shares due to the
vesting of restricted shares, and a $73,000 decrease in unearned ESOP shares as
shares were allocated to participants, partially offset by a $312,000 decrease
in accumulated other comprehensive income.
Comparison of Operating Results for the Quarter Ended December 31, 2004
and 2003
General
The Company's results of operations depend primarily on net interest and
dividend income, which is the difference between the interest and dividend
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 increases in cash
surrender value of life insurance policies are added sources of noninterest
income. The Company's noninterest expenses primarily consist of employee
compensation and benefits, occupancy and equipment expense, advertising, data
processing, professional fees and other operating expenses.
Net Income
For the three months ended December 31, 2004, the Company reported net
income of $319,000, an increase of $30,000 compared to the year ago period.
Basic and diluted earnings
11
per share for the quarter ended December 31, 2004 were $0.15 and $0.14,
respectively, and for the quarter ended December 31, 2003 were $0.14. The
increase in net income was due primarily to a $285,000 increase in net interest
and dividend income, a $57,000 decrease in the provision for loan losses and a
$30,000 increase in noninterest income, partially offset by a $323,000 increase
in noninterest expense.
Net Interest and Dividend Income
Net interest and dividend income for the three months ended December 31,
2004 totaled $1.8 million compared to $1.5 million for the same period in 2003.
This represented an increase of $285,000 or 18.9%. The change in net interest
and dividend income was primarily due to increased levels of average
interest-earning assets coupled with a lower cost of funds due to the lower
interest rate environment.
Interest and dividend income amounted to $2.6 million and $2.2 million for
the three months ended December 31, 2004 and 2003, respectively. Average
interest-earning assets were $194.3 million for the quarter ended December 31,
2004, an increase of $37.3 million, or 23.8%, compared to $157.0 million for the
quarter ended December 31, 2003. The increase in average interest-earning assets
resulted primarily from the acquisition of Windsor Locks Community Bank in
December 2003. The yield earned on average assets decreased to 5.27% for the
three months ended December 31, 2004 from 5.57% for the three months ended
December 31, 2003 due to the lower interest rate environment.
Interest expense for the quarter was $766,000, an increase of $81,000, or
11.8%, from the $685,000 reported in the same quarter last year. Average
interest-bearing liabilities grew $28.7 million during the quarter ended
December 31, 2004 from $137.7 million to $166.4 million primarily due to
liabilities assumed in the acquisition of Windsor Locks Community Bank. The
average rate paid on interest bearing liabilities decreased to 1.83% for the
quarter ended December 31, 2004 from 1.97% for the year ago period, due
primarily to the lower interest rate environment.
Provision for Loan Losses
The provision for loan losses for the quarters ended December 31, 2004 and
2003 was $3,000 and $60,000, respectively. The Company recorded $65,000 of
charge-offs and no recoveries for the quarter ended December 31, 2004. The
decrease was caused primarily by the decrease in non-accrual loans due to lower
loans past due 90 days or more.
Noninterest Income
For the quarter ended December 31, 2004, noninterest income was $212,000
compared to $182,000 in the same quarter a year ago. The increase in noninterest
income was primarily due to an increase of $68,000 in deposit related fees due
to increased transactions and more deposit accounts due primarily to the
acquisition of Windsor Locks Community Bank. In addition, during the second
fiscal quarter the Bank introduced overdraft privilege, this allows customers to
overdraw their account up to a certain dollar amount while being charged an
overdraft fee. The increase was partially offset by a $47,000 decrease in gain
on sales and calls of investments.
12
Noninterest Expense
Noninterest expense for the quarter ended December 31, 2004 was $1.5
million, an increase of $323,000, or 26.9%, from $1.2 million in the quarter
ended December 31, 2003. Salaries and employee benefits increased $231,000, or
34.3%, reflecting normal salary increases, higher costs for employee benefits
due in part to the increased stock price, and additions to staff caused by the
acquisition of Windsor Locks Community Bank. Data processing expense increased
$23,000, amortization of identifiable assets increased $22,000 and other
noninterest expense increased $46,000.
Provision for Income Taxes
Reflecting the increase in pretax net income, the income tax provision for
the quarter ended December 31, 2004 was $159,000 compared to $140,000 for the
quarter ended December 31, 2003. The effective tax rate increased marginally
from 32.6% for the quarter ended December 31, 2003 to 33.3% for the current year
quarter.
Comparison of Operating Results for the Nine Months Ended December 31, 2004 and
2003
Net Income
For the nine months ended December 31, 2004, the Company reported net
income of $857,000, an increase of $252,000 compared to the year ago period.
Basic and diluted earnings per share for the nine months ended December 31, 2004
were $0.40 and $0.39, respectively, and for the nine months ended December 31,
2003 were $0.30. The increase in net income was due primarily to a $1.1 million
increase in net interest and dividend income, a $174,000 increase in noninterest
income and a $53,000 decrease in the provision for loan losses, partially offset
by a $979,000 increase in noninterest expense.
Net Interest and Dividend Income
Net interest and dividend income for the nine months ended December 31,
2004 totaled $5.3 million compared to $4.2 million for the same period in 2003.
This represented an increase of $1.1 million or 26.2%. The change in net
interest and dividend income was primarily due to an increase in average
interest-earning assets and a lower cost of funds due to the lower interest rate
environment.
Interest and dividend income amounted to $7.5 million and $6.3 million for
the nine months ended December 31, 2004 and 2003, respectively. Average
interest-earning assets were $191.7 million for the nine months ended December
31, 2004, an increase of $41.1 million, or 27.3%, compared to $150.6 million for
the nine months ended December 31, 2003. The increase in average
interest-earning assets resulted primarily from the acquisition of Windsor Locks
Community Bank. The yield earned on average assets decreased to 5.27% for the
nine months ended December 31, 2004 from 5.60% for the nine months ended
December 31, 2003 due to the lower interest rate environment.
Interest expense for the nine months ended December 31, 2004 was $2.2
million, an increase of $118,000, or 5.6%, from the $2.1 million reported in the
same period last year. Average interest-bearing liabilities grew $31.8 million
during the nine months ended December
13
31, 2004 from $133.2 million to $165.0 million primarily due to liabilities
assumed in the acquisition of Windsor Locks Community Bank. The average rate
paid on interest bearing liabilities decreased to 1.79% for the nine months
ended December 31, 2004 from 2.10% for the year ago period, due primarily to the
lower interest rate environment.
Provision for Loan Losses
The provision for loan losses for the nine months ended December 31, 2004
and 2003 was $127,000 and $180,000, respectively. The Company recorded
charge-offs and recoveries totaling $95,000 and $23,000, respectively, for the
nine months ended December 31, 2004. The decrease was caused primarily by the
decrease in non-accrual loans due to lower loans past due 90 days or more.
Noninterest Income
For the nine months ended December 31, 2004, noninterest income was
$611,000 compared to $437,000 in the same period a year ago. The increase in
noninterest income was primarily due to an increase of $164,000 in deposit
related fees due to increased transactions and more deposit accounts due
primarily to the acquisition of Windsor Locks Community Bank. In addition,
during the second fiscal quarter the Bank introduced overdraft privilege, this
allows customers to overdraw their account up to a certain dollar amount while
being charged an overdraft fee. The increase in noninterest income was also due
to a $51,000 increase in other noninterest income, caused primarily by
commissions derived from the Bank's arrangement with a third party registered
broker-dealer. These increases were partially offset by a $51,000 decrease in
gain on sales and calls of investments.
Noninterest Expense
Noninterest expense for the nine months ended December 31, 2004 was $4.5
million, an increase of $979,000, or 27.6%, from $3.5 million in the nine months
ended December 31, 2003. Salaries and employee benefits increased $712,000, or
35.8%, reflecting normal salary increases, higher costs for employee benefits
due in part to the increased stock price, and additions to staff caused by the
acquisition of Windsor Locks Community Bank. Data processing expense increased
$63,000, amortization of identifiable intangible assets increased $67,000 and
other noninterest expense increased $107,000.
Provision for Income Taxes
Reflecting the increase in pretax net income, the income tax provision for
the nine months ended December 31, 2004 was $418,000 compared to $278,000 for
the year ago period. The effective tax rate increased from 31.5% for the nine
months ended December 31, 2003 to 32.8% for the nine months ended December 31,
2004.
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,
14
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 deposits, scheduled amortization and
prepayments of loan principal and mortgage-related securities, funds provided by
operations and, to a much lesser extent, 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 December
31, 2004 of $12.5 million with unused borrowing capacity of $42.8 million.
The Association's primary investing activities are the origination of
loans and the purchase of mortgage and investment securities. During the nine
months ended December 31, 2004 and 2003, the Association originated loans, net
of principal paydowns of approximately $7.8 million and $9.7 million,
respectively. Purchases of investment securities totaled $22.5 million and $30.3
million for the nine months ended December 31, 2004 and 2003, 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. Total deposits were $163.0 million at December
31, 2004, a $234,000 increase from the $162.8 million balance at March 31, 2004.
At December 31, 2004, the Association had outstanding commitments to
originate $8.2 million of loans, and available home equity and unadvanced lines
of credit and construction loans of approximately $8.8 million. Management of
the Association anticipates that it will have sufficient funds to meet its
current loan commitments. Retail certificates of deposits scheduled to mature in
one year or less at December 31, 2004 totaled $52.2 million. The Association
relies on competitive rates, customer service and long-standing relationships
with customers to retain deposits. Based on the Association's experience with
deposit retention and current retention strategies, management believes that,
although it is not possible to predict future terms and conditions upon renewal,
a significant portion of such deposits will remain with the Association.
The Association was well-capitalized at December 31, 2004 and exceeded
each of the applicable regulatory capital requirements at such date. The table
below presents the capital required as a percentage of total assets and the
percentage and the total amount of capital maintained at December 31, 2004.
(dollars in thousands)
Required Association
-------- ----------------
Tier 1 Capital 4% $24,622 11.85%
Total Risk based Capital 8% $25,977 23.92%
Tier 1 Risk based Capital 8% $24,622 22.67%
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.
15
Off-Balance Sheet Arrangements
In addition to the normal course of operations, the Association engages in
a variety of financial transactions that, in accordance with generally accepted
accounting principals, are not recorded in our financial statements. These
transactions involve, to varying degrees, elements of credit, interest rate, and
liquidity risk. Such transactions are used primarily to manage customers'
requests for funding and take the form of loan commitments, lines of credit, and
letters of credit.
For the three months ended December 31, 2004, the Association engaged in
no off-balance sheet transactions reasonably likely to have a material effect on
our financial condition, results of operations or cash flows.
Item 3. Controls and Procedures.
------------------------
The Company's management, including the Company's principal executive
officer and principal financial officer, have evaluated the effectiveness of the
Company's "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act"). Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the "SEC") (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and (2) is accumulated and communicated to the Company's
management, including its principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the Company's internal control over
financial reporting identified in connection with the evaluation required by
Rule 13a-15 that occurred during the Company's last fiscal quarter that has
materially affected or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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. Unregistered Sales of Equity Securities and Use of Proceeds.
-----------------------------------------------------------
The Company did not repurchase its common stock in the quarter ended
December 31, 2004. Further, the Company does not have publicly announced stock
repurchase programs outstanding.
16
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.
--------
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.*
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
---------------------
* Incorporated by reference into this document from New England
Bancshares, Inc.'s Form SB-2 as filed on February 15, 2002,
Registration Statement filed under the Securities Act of 1933,
Registration No. 333-63271
** Incorporated by reference into this document from the Exhibits to
the Form 10-QSB for the quarter ended December 31, 2003.
17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NEW ENGLAND BANCSHARES, INC.
Dated: February 9, 2005 By: /s/ Scott D. Nogles
-------------------- ----------------------------------------
Scott D. Nogles
Chief Financial Officer
Dated: February 9, 2005 By: /s/ David J. O'Connor
-------------------- ----------------------------------------
David J. O'Connor
Chief Executive Officer
18