UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number: 0-50876
NAUGATUCK VALLEY FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
UNITED STATES 65-1233977
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(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
333 CHURCH STREET, NAUGATUCK, CONNECTICUT 06770
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(Address of principal executive offices) (Zip Code)
(203) 720-5000
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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As of May 1, 2005, there were 7,604,375 shares of the registrant's common
stock outstanding.
NAUGATUCK VALLEY FINANCIAL CORPORATION
Table of Contents
Part I. Financial Information Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at March 31, 2005 and
December 31, 2004.............................................................. 3
Consolidated Statements of Income for the three months ended
March 31, 2005 and 2004........................................................ 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 and 2004........................................................ 5
Notes to Unaudited Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................. 7
Liquidity and Capital Resources................................................ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 12
Item 4. Controls and Procedures........................................................ 13
Part II. Other Information
Item 1. Legal Proceedings.............................................................. 13
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................... 13
Item 3. Defaults Upon Senior Securities................................................ 13
Item 4. Submission of Matters to a Vote of Security Holders............................ 13
Item 5. Other Information.............................................................. 13
Item 6. Exhibits....................................................................... 13
Signatures
Exhibits
Item 1. Financial Statements.
2
[LOGO] Naugatuck Valley
Financial Corporation
Condensed Consolidated Statements of Financial Condition
(In Thousands, except per share data)
- ----------------------------------------------------------------------------------------------
March 31, December 31,
2005 2004
- ----------------------------------------------------------------------------- -------------
(Unaudited)
ASSETS
Cash and due from depository institutions $ 5,197 $ 7,552
Investment in federal funds 3,704 23
Investment securities 44,867 36,264
Loans receivable, net 210,616 203,820
Deferred income taxes 1,217 1,042
Other assets 17,543 16,748
------------- -------------
Total assets $ 283,144 $ 265,449
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 194,508 $ 193,366
Advances from Federal Home Loan Bank of Boston 33,924 15,826
Other liabilities 3,068 4,686
------------- -------------
Total liabilities 231,500 213,878
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Commitments and contingencies
Capital Accounts
Common stock, $.01 par value; 25,000,000 shares authorized; 76 76
7,604,375 shares issued and outstanding
Preferred stock, $.01 par value; 1,000,000 shares authorized;
no shares issued or outstanding
Paid-in capital 33,089 33,089
Retained earnings 21,640 21,362
Unearned ESOP shares (293,180 shares) (2,932) (2,932)
Accumulated other comprehensive income (loss) (229) (24)
------------- -------------
Total capital accounts 51,644 51,571
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Total liabilities and stockholders' equity $ 283,144 $ 265,449
==============================================================================================
3
[LOGO] Naugatuck Valley
Financial Corporation
Consolidated Statements of Income
(In Thousands, except per share data)
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Three Months Ended
March 31,
--------------------
2005 2004
- --------------------------------------------------------------------------------
(Unaudited)
Interest and dividend income
Interest on loans $ 3,029 $ 2,695
Interest and dividends on investments and deposits 403 331
------- -------
Total interest income 3,432 3,026
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Interest expense
Interest on deposits 588 570
Interest on borrowed funds 225 366
------- -------
Total interest expense 813 936
------- -------
Net interest income 2,619 2,090
Provision for loan losses 15 --
------- -------
Net interest income after provision for loan losses 2,604 2,090
------- -------
Noninterest income
Loan fees and service charges 209 211
Income from bank owned life insurance 48 48
Income from investment advisory services 63 36
Gain on sale of mortgages -- 5
Gain on sale of investments -- 24
Other income 20 14
------- -------
Total noninterest income 340 338
------- -------
Noninterest expense
Compensation, taxes and benefits 1,390 1,122
Office occupancy 397 311
Computer processing 144 146
Advertising 131 76
Charitable contributions 10 23
Gain on foreclosed real estate, net (37) (32)
Other expenses 345 238
------- -------
Total noninterest expense 2,380 1,884
------- -------
Income before provision
for income taxes 564 544
Provision for income taxes 161 166
------- -------
Net Income $ 403 $ 378
------- -------
Earnings per common share - Basic $ 0.06 N/A
===============================================================================
4
[LOGO] Naugatuck Valley
Financial Corporation
Consolidated Statements of Cash Flows
(In Thousands)
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Three Months Ended
March 31,
--------------------
2005 2004
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Cash flows from operating activities (Unaudited)
Net income $ 403 $ 378
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan losses 15 --
Depreciation and amortization expense 168 165
Provision for deferred taxes (benefit) (69) 1
Net gain on sale of real estate owned (46) (37)
Gain on sale of mortgages -- (5)
Loans originated for sale -- (1,927)
Proceeds from the sale of loans -- 1,932
Gain on sale of investments -- (24)
Increase (decrease) in accrued income receivable (158) 42
Increase (decrease) in deferred loan fees (10) 87
Increase in bank owned life insurance asset (48) (48)
Decrease in other assets 62 50
Decrease in other liabilities (288) (311)
-------- --------
Net cash provided by operating activities 29 303
-------- --------
Cash flows from investing activities
Proceeds from sales and maturities of available-for-sale securities 740 10,878
Proceeds from maturities of held-to-maturity securities 190 --
Purchase of available-for-sale securities (9,855) (4,029)
Purchase of held-to-maturity securities -- (950)
Loan originations net of principal payments (6,801) (2,020)
Proceeds from the sale of foreclosed real estate 113 114
Purchase of property and equipment (875) (216)
-------- --------
Net cash (used) provided by investing activities (16,488) 3,777
-------- --------
Cash flows from financing activities
Net change in time deposits 3,770 239
Net change in other deposit accounts (2,628) 3,780
Advances from Federal Home Loan Bank 39,545 650
Repayment of Advances from Federal Home Loan Bank (21,447) (5,502)
Net change in mortgagors' escrow accounts (1,330) (1,104)
Dividends paid to stockholders (125) --
-------- --------
Net cash provided (used) by financing activities 17,785 (1,937)
-------- --------
Increase in cash and cash equivalents 1,326 2,143
Cash and cash equivalents at beginning of period 7,575 9,775
-------- --------
Cash and cash equivalents at end of period $ 8,901 $ 11,918
====================================================================================================
Cash paid during the period for:
Interest $ 818 $ 928
Income taxes 68 --
5
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated interim financial statements are
unaudited and include the accounts of the Company, the Bank, and those of
Naugatuck Valley Mortgage Servicing Corporation, a wholly owned subsidiary of
the Bank. The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
("GAAP") for interim financial information and with the instructions to SEC Form
10-Q. Accordingly, they do not include all the information and footnotes
required by GAAP for complete financial statements. All significant intercompany
accounts and transactions have been eliminated in the consolidation. These
financial statements reflect, in the opinion of Management, all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the Company's financial position and the results of its
operations and its cash flows for the periods presented. Operating results for
the three months ended March 31, 2005 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2005. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's 2004 Annual Report.
The year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by GAAP.
NOTE 2 -EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earning per share reflect 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 Company. The Company had no dilutive
securities outstanding during the period ended March 31, 2005. Earnings per
share for the period ended March 31, 2004 are not meaningful because the Company
did not complete its initial public offering until September 30, 2004.
NOTE 3 -COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," establishes standards for disclosure of comprehensive
income, which includes net income and any changes in equity from non-owner
sources that are not recorded in the income statement (such as changes in the
net unrealized gain (loss) on available-for-sale securities). The purpose of
reporting comprehensive income is to report a measure of all changes in equity
that result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. The Company's
one source of other comprehensive income is the net unrealized gain (loss) on
its available-for-sale securities.
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
--------------------
2005 2004
- --------------------------------------------------------------------------------
(In thousands)
Net income $ 403 $378
Net unrealized (loss) gain on
securities available for sale
during the period, net of tax (204) 61
----- ----
Total Comprehensive Income $ 199 $439
================================================================================
6
NOTE 4 - CRITICAL ACCOUNTING POLICIES
The Company considers accounting policies involving significant judgments and
assumptions by management that have, or could have, a material impact on the
carrying value of certain assets or on income to be critical accounting
policies. The Company considers the following to be critical accounting
policies: allowance for loan losses and deferred income taxes.
Allowance for Loan Losses. Determining the amount of the allowance for loan
losses necessarily involves a high degree of judgment. Management reviews the
level of the allowance on a quarterly basis, at a minimum, and establishes the
provision for loan losses based on the composition of the loan portfolio,
delinquency levels, loss experience, economic conditions, and other factors
related to the collectibility of the loan portfolio.
Although the Company believes that it uses the best information available to
establish the allowance for loan losses, future additions to the allowance may
be necessary based on estimates that are susceptible to change as a result of
changes in economic conditions and other factors. The Company engages an
independent review of its commercial loan portfolio annually and adjusts its
loan ratings based upon this review. In addition, the Company's regulatory
authorities, as an integral part of their examination process, periodically
review the Company's allowance for loan losses. Such an agency may require the
Company to recognize adjustments to the allowance based on its judgments about
information available to it at the time of its examination.
Deferred Income Taxes. The Company uses the asset and liability method of
accounting for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. If current available information
raises doubt as to the realization of the deferred tax assets, a valuation
allowance is established. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The Company
exercises significant judgment in evaluating the amount and timing of
recognition of the resulting tax liabilities and assets, including projections
of future taxable income. These judgments and estimates are reviewed continually
as regulatory and business factors change.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This discussion should be read in conjunction with the Company's Consolidated
Financial Statements for the year ended December 31, 2004 included in the
Company's Annual Report.
Forward-Looking Statements
This report contains forward-looking statements that are based on assumptions
and may describe future plans, strategies and expectations of the Company. These
forward-looking statements 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 subsidiaries
include, but are not limited to, changes in interest rates, national and
regional 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 and composition of the loan or
investment portfolios, demand for loan products, deposit flows, competition,
demand for financial services in the Company's market area, changes in real
estate market values in the Company's market area, and changes in relevant
accounting principles and guidelines. Additional factors that may affect our
results are discussed in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004 under "Item 1. Business - Risk Factors." These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements. Except as required by
applicable law or regulation, the Company does not undertake, and specifically
disclaims any obligation, to release publicly the result of any revisions that
may be made to any forward-looking statements to reflect events or circumstances
after the date of the statements or to reflect the occurrence of anticipated or
unanticipated events.
Comparison of Financial Condition at March 31, 2005 and December 31, 2004
Total assets increased by $17.7 million, or 6.7% to $283.1 million during the
period from December 31, 2004 to March 31, 2005, primarily due to an increase in
investments of $8.6 million, an increase in loans of $6.8 million and
7
an increase in federal funds of $3.7 million. The increase in loans primarily
reflects an increase in our home equity loans and commercial mortgages. These
increases were partially offset by a decrease in cash of $2.4 million.
Total liabilities were $231.5 million at March 31, 2005 compared to $213.9
million at December 31, 2004. Deposits at March 31, 2005 increased $1.1 million
over December 31, 2004. Advances from the Federal Home Loan Bank of Boston
increased from $15.8 million to $33.9 million. These borrowings were used to
fund investments and loans. Other liabilities decreased by $1.6 million
primarily due to the decrease in the balances of mortgage escrow accounts as
taxes were paid on most properties in January.
Total capital was $51.6 million in both periods due to net income of $403,000
for the quarter, offset by an adjustment to unrealized gain (loss) on
available-for-sale securities of ($205,000) and a dividend of $125,000 paid to
stockholders during the period.
Comparison of Operating Results For The Three Months Ended March 31, 2005 and
2004
General. For the three months ended March 31, 2005, the Company had net income
of $403,000 compared to net income of $378,000 the three months ended March 31,
2004, primarily due to an increase in net interest income, partially offset by
an increase in noninterest expense.
Net Interest Income. Net interest income increased $529,000, or 25.3%, to $2.6
million for the three months ended March 31, 2005. The primary reason for the
increase in net interest income for the period was a 13.4% increase in total
interest income combined with a 13.1% decrease in interest expense. The increase
in net interest income is attributed primarily to an increase in interest earned
on commercial mortgages and investments, as a result of a 54.3% increase in the
average balance of commercial mortgages and a 19.2% increase in the average
balance of investments outstanding over the prior period. The decrease in
interest expense is attributed to a 21.3% decrease in the average balance of
borrowings over the period, which was partially offset by a small increase in
interest expense on deposits.
The following table summarizes changes in interest income and interest expense
for the three months ended March 31, 2005 and 2004.
Three Months
Ended March 31,
---------------
2005 2004 % change
------ ------ --------
(Dollars in thousands)
Interest income:
Loans $3,029 $2,695 12.39%
Fed Funds sold 7 11 -36.36%
Investment securities 375 310 20.97%
Federal Home Loan Bank stock 21 10 110.00%
------ ------
Total interest income 3,432 3,026 13.42%
Interest expense:
Certificate accounts 457 453 0.88%
Regular savings accounts 45 47 -4.26%
Checking and Now accounts 11 15 -26.67%
Money market savings accounts 75 55 36.36%
------ ------
Total interest-bearing deposits 588 570 3.16%
FHLB advances 225 366 -38.52%
------ ------
Total interest expense 813 936 -13.14%
------ ------
Net interest income $2,619 $2,090 25.31%
====== ======
8
The following table summarizes average balances and average yields and costs for
the three months ended March 31, 2005 and 2004.
Three Months Ended March 31,
2005 2004
------------------- -------------------
Average Yield/ Average Yield/
Balance Cost Balance Cost
-------- -------- -------- --------
(Dollars in thousands)
Interest-earning assets
Loans $206,050 5.88% $180,803 5.96%
Fed Funds sold 1,015 2.76% 4,991 0.88%
Investment securities 38,255 3.92% 32,091 3.86%
FHLB Stock 2,180 3.85% 1,757 2.28%
-------- --------
Total interest-earning assets $247,500 5.55% $219,642 5.51%
======== ========
Interest-bearing liabilities
Certificate accounts $ 82,272 2.22% $ 86,163 2.10%
Regular savings accounts & escrow 45,946 0.39% 42,179 0.45%
Checking and NOW accounts 34,919 0.13% 31,662 0.19%
Money market savings accounts 29,652 1.01% 24,854 0.89%
-------- --------
Total interest-bearing deposits 192,789 1.22% 184,857 1.23%
FHLB advances 24,117 3.73% 30,635 4.78%
-------- --------
Total interest-bearing liabilities $216,906 1.50% $215,493 1.74%
======== ========
Interest and dividend income increased $406,000, or 13.4%, for the three months
ended March 31, 2005 as a result of an increase in the average balance of
interest-earning assets to $247.5 million from $219.6 million along with an
increase in the average yield on interest-earning assets to 5.55% from 5.51%.
Interest on loans increased during the three months ended March 31, 2005 due to
the increase in the average balance of those assets, partially offset by the
decrease in the average yield on loans. Interest on federal funds sold decreased
during the three months ended March 31, 2005 due to a decrease in the average
balance of those assets partially offset by an increase in the average yield.
Interest on securities increased during the three months ended March 31, 2005
due to an increase in the average yield on securities along with an increase in
the average balance of those assets. During the three months ended March 31,
2005, the Company originated loans at lower interest rates due to the prevailing
low interest rate environment, while repositioning some investment securities in
an effort to increase the portfolio's yield.
Net interest income increased $529,000, or 25.3%, for the three months ended
March 31, 2005 as a result of a decrease in the average cost of interest-bearing
liabilities to 1.50% from 1.74% for the three month period along with an
increase in the average balance of interest-earning assets to $247.5 million
from $219.6 million for the three month period. Interest expense decreased
$123,000, or 13.1%, for the three months ended March 31, 2005 as a result of a
decrease in the average cost of interest-bearing liabilities to 1.50% from 1.74%
for the three month period which was partially offset by an increase in the
average balance of interest-bearing liabilities to $216.9 million from $215.5
million for the three month period. The average rates paid on advances from the
Federal Home Loan Bank decreased to 3.73% from 4.78% along with a decrease in
average balances of those liabilities for the three month period. The average
balance of interest-bearing deposits increased to $192.8 million from $184.9
million for the three month period while the average rate paid on these
liabilities decreased to 1.22% from 1.23%.
9
Provision for Loan Losses. The following table summarizes the activity in the
allowance for loan losses and provision for loan losses for the three months
ended March 31, 2005 and 2004.
Three Months Ended
March 31,
------------------
2005 2004
------ ------
(In thousands)
Allowance at beginning of period $1,829 $1,810
Provision for loan losses 15 --
Charge-offs (3) --
Recoveries 1 1
------ ------
Net (charge-offs) recoveries (2) 1
------ ------
Allowance at end of period $1,842 $1,811
====== ======
The Company recorded a provision for loan losses of $15,000 for the three month
period ended March 31, 2005, compared to no provision in the 2004 period. The
provision in 2005 is due primarily to increased balances in the commercial loan
portfolio. The charge-off during the 2005 period was due to one loan.
The following table provides information with respect to the Company's
nonperforming assets at the dates indicated. We did not have any troubled debt
restructurings or any accruing loans past due 90 days or more at the dates
presented.
At March 31, At December 31,
2005 2004 % change
------------ --------------- ---------
(Dollars in thousands)
Nonaccrual loans $ 592 $ 596 -0.67%
Real estate owned -- 68 -100.00%
-------- --------
Total nonperforming assets $ 592 $ 664 -10.84%
======== ========
Total nonperforming loans to total loans 0.28% 0.29% -3.45%
Total nonperforming loans to total assets 0.21% 0.22% -4.55%
Total nonperforming assets to total assets 0.21% 0.25% -16.00%
Noninterest Income. The following table summarizes noninterest income for the
three months ended March 31, 2005 and 2004.
Three Months
Ended March 31,
------------------
2005 2004 % Change
------ ------ --------
(Dollars in thousands)
Loan fees and service charges $ 209 $ 211 -0.95%
Income from bank owned life insurance 48 48 0.00%
Gain on sale of mortgages -- 5 -100.00%
Gain on sale of investments -- 24 -100.00%
Income from investment advisory services 63 36 75.00%
Other income 20 14 42.86%
------ ------
Total $ 340 $ 338 0.59%
====== ======
10
Noninterest income increased during the three months ended March 31, 2005
primarily as a result of a $27,000 increase in income from investment advisory
services to $63,000 from $36,000, or 75%. In the third quarter of 2003, we began
offering investment advisory services through a third party registered
broker-dealer. This increase was offset by the lack of gains on the sale of
investments and loans. There were no sales of either type of these assets during
the 2005 period.
Noninterest Expense. The following table summarizes noninterest expense for the
three months ended March 31, 2005 and 2004.
Three Months
Ended March 31,
---------------------
2005 2004 % Change
------- ------- -------
(Dollars in thousands)
Compensation, taxes and benefits $ 1,390 $ 1,122 23.89%
Office occupancy 397 311 27.65%
Computer processing 144 146 -1.37%
Advertising 131 76 72.37%
Charitable contributions 10 23 -56.52%
Gain on foreclosed real estate, net (37) (32) 15.63%
Other expenses 345 238 44.96%
======= =======
Total $ 2,380 $ 1,884 26.33%
======= =======
Noninterest expense increased in the three months ended March 31, 2005 primarily
as a result of an increase in compensation, taxes and benefits along with
increases in office occupancy expenses and advertising. The increase in these
expenses is primarily a result of the opening of our Seymour branch office in
January 2005. Other expenses increased due to increases in legal fees,
supervisory examination fees, internal and external auditing fees along with
expenses associated with being a public company.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future short-term financial
obligations. Our primary sources of funds consist of deposit inflows, loan
repayments, maturities and sales of investment securities and advances from the
Federal Home Loan Bank of Boston. While maturities and scheduled amortization of
loans and securities are predictable sources of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition.
Each quarter the Company projects liquidity availability and demands on this
liquidity for the next 90 days. The Company regularly adjusts its investments in
liquid assets based upon our assessment of (1) expected loan demand, (2)
expected deposit flows, (3) yields available on interest-earning deposits and
securities, and (4) the objectives of our asset/liability management program.
Excess liquid assets are invested generally in interest-earning deposits,
federal funds, short- and intermediate-term U.S. Government agency obligations
and to a lesser extent, municipal securities.
The Company's most liquid assets are cash and cash equivalents and
interest-bearing deposits. The levels of these assets depend on our operating,
financing, lending and investing activities during any given period. At March
31, 2005, cash and cash equivalents totaled $8.9 million, including federal
funds of $3.7 million. Securities classified as available-for-sale, which
provide additional sources of liquidity, totaled $39.8 million at March 31,
2005. At March 31, 2005, the Company had the ability to borrow a total of $97.2
million from the Federal Home Loan Bank of Boston, of which $33.9 million was
outstanding. At March 31, 2005, the Company had arranged overnight lines of
credit of $2.5 million with the Federal Home Loan Bank of Boston. The Company
had no overnight advances outstanding with the Federal Home Loan Bank of Boston.
In addition, at March 31, 2005, the Company had ability to borrow $2.0 million
from a correspondent bank. The Company had no advances outstanding on these
lines at March 31, 2005.
At March 31, 2005, the Company had commitments of $15.2 million in unused line
availability on home equity lines of credit, $1.7 million in unadvanced
commercial lines, $7.9 million in mortgage commitments, $1.5 million in
11
commercial loan commitments, $12.5 million in unadvanced construction mortgage
commitments, $3.2 million in letters of credit and $88,000 in overdraft line of
credit availability. Certificates of deposit due within one year of March 31,
2005 totaled $50.7 million, or 26% of total deposits. If these deposits do not
remain with us, the Company will be required to seek other sources of funds,
including other certificates of deposit and our available lines of credit.
Depending on market conditions, the Company may be required to pay higher rates
on such deposits or other borrowings than are currently paid on the certificates
of deposit due on or before March 31, 2006. The Company believes, however, based
on past experience that a significant portion of our certificates of deposit
will remain with us. The Company has the ability to attract and retain deposits
by adjusting the interest rates offered.
Historically, the Company has remained highly liquid, with our liquidity
position increasing substantially over the past two fiscal years. The Company is
not aware of any trends and/or demands, commitments, events or uncertainties
that could result in a material decrease in liquidity. The Company expects that
all of our liquidity needs, including the contractual commitments stated above,
the estimated costs of our branch expansion plans and increases in loan demand
can be met by our currently available liquid assets and cash flows. In the event
loan demand were to increase at a pace greater than expected, or any unforeseen
demand or commitment were to occur, we could access our borrowing capacity with
the Federal Home Loan Bank of Boston. The Company expects that our currently
available liquid assets and our ability to borrow from the Federal Home Loan
Bank of Boston would be sufficient to satisfy our liquidity needs without any
material adverse effect on our liquidity.
Our primary investing activities are the origination of loans and the purchase
of securities. For the three months ended March 31, 2005 we originated $12.6
million of loans and purchased $9.9 million of securities. During the three
months ended March 31, 2005, these activities were funded primarily by the
proceeds from sales and maturities of available-for-sale and held-to-maturity
securities of $1.0 million, an increase of deposits of $1.1 million and advances
from the Federal Home Loan Bank of Boston of $39.5 million.
Financing activities consist primarily of activity in deposit accounts and in
Federal Home Loan Bank advances. The Company experienced a net increase in total
deposits of $1.1 million for the three months ended March 31, 2005. Deposit
flows are affected by the overall level of interest rates, the interest rates
and products offered by us and our local competitors and other factors. The
Company generally manages the pricing of our deposits to be competitive and to
increase core deposit relationships. Occasionally, the Company offers
promotional rates on certain deposit products in order to attract deposits. The
Company experienced an increase in Federal Home Loan Bank advances of $18.1
million for the three months ended March 31, 2005. The increases in deposit
accounts and Federal Home Loan Bank advances primarily funded our investing and
lending activities.
The Bank is subject to the regulatory capital requirements of the Office of
Thrift Supervision, including a risk-based capital measure. The risk-based
capital guidelines include both a definition of capital and a framework for
calculating risk-weighted assets by assigning balance sheet assets and
off-balance sheet items to broad risk categories. At March 31, 2005, the Bank
exceeded all of its regulatory capital requirements. The Bank is considered
"well capitalized" under regulatory guidelines. The Company is not subject to
any regulatory capital requirements.
Off-Balance Sheet Arrangements
In the normal course of operations, the Company engages in a variety of
financial transactions that, in accordance with generally accepted accounting
principles, 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, unused lines of credit, amounts
due on construction loans, amounts due on commercial loans, commercial letters
of credit and commitments to sell loans.
For the three months ended March 31, 2005, the Company did not engage in any
off-balance-sheet transactions reasonably likely to have a material effect on
our financial condition, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
For a discussion of the Company's asset and liability management policies as
well as the potential impact of interest rate changes upon the market value of
portfolio equity, see "Management's Discussion and Analysis and Results of
Operations and Financial Condition - Market Risk Analysis" in the Company's 2004
Annual Report to Stockholders. The main components of market risk for the
Company are interest rate risk and liquidity risk. The
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Company manages interest rate risk and liquidity risk through an Asset/Liability
Committee comprised of one outside Director and senior management. The committee
monitors compliance with the Asset/Liability Policy which provides guidelines to
analyze and manage gap, which is the difference between the amount of assets and
the amounts of liabilities which mature or reprice during specific time frames.
Model simulation is used to measure earnings volatility under both rising and
falling rate scenarios. The Company's interest rate risk position at March 31,
2005 has not materially changed from December 2004.
Item 4. 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's 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 and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings.
The Company is not involved in any pending legal proceedings. The Bank 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 its financial
condition and results of operations.
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds. Not
applicable
Item 3. - Defaults Upon Senior Securities. Not applicable
Item 4. - Submission of Matters to a Vote of Security Holders. Not applicable
Item 5. - Other Information. Not applicable
Item 6. - Exhibits
Exhibits -
3.1 Charter of Naugatuck Valley Financial Corporation (1)
3.2 Bylaws of Naugatuck Valley Financial Corporation (1)
4.1 Specimen Stock Certificate of Naugatuck Valley Financial
Corporation (2)
31.1 Rule 13a-14(a)/15d-14(a) Certification.
31.2 Rule 13a-14(a)/15d-14(a) Certification.
32 Section 1350 Certifications.
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(1) Incorporated by reference to the Company's Form 10-Q for the three months
ended September 30, 2004.
(2) Incorporated herein by reference to the Exhibits to the Company's
Registration Statement on Form S-1, as amended, initially filed on June 18,
2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Naugatuck Valley Financial Corporation
Date: May 13, 2005 by: /s/ John C. Roman
------------------------ ----------------------
John C. Roman
President and Chief Executive Officer
Date: May 13, 2005 by: /s/ Lee R. Schlesinger
------------------------ ----------------------------
Lee R. Schlesinger
Vice President and Treasurer
(Principal Financial Officer)
14