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 September 30, 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
- ------------------------------------------------ -------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
333 CHURCH STREET, NAUGATUCK, CONNECTICUT 06770
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(203) 720-5000
----------------------------------------------------
(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|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of November 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 September 30, 2005 and
December 31, 2004 ......................................................... 3
Consolidated Statements of Income for the three and nine months ended
September 30, 2005 and 2004 ............................................... 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 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 ............................................................. 9
Liquidity and Capital Resources ........................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................ 15
Item 4. 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 ........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders ....................... 16
Item 5. Other Information ......................................................... 16
Item 6. Exhibits .................................................................. 16
Signatures
Exhibits
Item 1. Financial Statements.
2
[LOGO] Naugatuck Valley
Financial Corporation
Condensed Consolidated Statements of Financial Condition
(In thousands, except share data)
- -------------------------------------------------------------------------------------------------
September 30, December 31,
2005 2004
- --------------------------------------------------------------------------------- ------------
(Unaudited)
ASSETS
Cash and due from depository institutions $ 5,727 $ 7,552
Investment in federal funds 6,871 23
Investment securities 58,924 36,264
Loans receivable, net 238,326 203,820
Deferred income taxes 1,184 1,042
Other assets 18,784 16,748
--------- ---------
Total assets $ 329,816 $ 265,449
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 231,922 $ 193,366
Advances from Federal Home Loan Bank of Boston 44,259 15,826
Other liabilities 2,923 4,686
--------- ---------
Total liabilities 279,104 213,878
--------- ---------
Commitments and contingencies
Stockholders' Equity
Common stock, $.01 par value; 25,000,000 shares authorized;
7,604,375 shares issued and outstanding 76 76
Preferred stock, $.01 par value; 1,000,000 shares authorized;
no shares issued or outstanding -- --
Paid-in capital 33,116 33,089
Retained earnings 22,168 21,362
Unearned ESOP shares (2,932) (2,932)
Unearned stock awards (1,551) --
Accumulated other comprehensive income (loss) (165) (24)
--------- ---------
Total stockholders' equity 50,712 51,571
--------- ---------
Total liabilities and stockholders' equity $ 329,816 $ 265,449
===============================================================================================
3
[LOGO] Naugatuck Valley
Financial Corporation
Consolidated Statements of Income
(In thousands, except share data)
- ---------------------------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------- -------------------
2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------
(Unaudited)
Interest and dividend income
Interest on loans $ 9,782 $ 8,266 $ 3,520 $ 2,859
Interest and dividends on investments and deposits 1,581 1,082 604 406
-------- ------- ------- -------
Total interest income 11,363 9,348 4,124 3,265
-------- ------- ------- -------
Interest expense
Interest on deposits 2,275 1,725 954 593
Interest on borrowed funds 997 1,069 413 349
-------- ------- ------- -------
Total interest expense 3,272 2,794 1,367 942
-------- ------- ------- -------
Net interest income 8,091 6,554 2,757 2,323
Provision for loan losses 32 -- -- --
-------- ------- ------- -------
Net interest income after provision for loan losses 8,059 6,554 2,757 2,323
-------- ------- ------- -------
Noninterest income
Loan fees and service charges 679 660 237 232
Income from bank owned life insurance 146 146 49 49
Income from investment advisory services 160 97 60 32
Gain on sale of mortgages -- 5 -- --
Gain (loss) on sale of investments 47 (156) -- (180)
Other income 71 46 28 17
-------- ------- ------- -------
Total noninterest income 1,103 798 374 150
-------- ------- ------- -------
Noninterest expense
Compensation, taxes and benefits 4,364 3,351 1,546 1,148
Office occupancy 1,126 894 368 280
FHLB advances prepayment fee -- 498 -- 498
Computer processing 473 403 170 133
Advertising 425 239 119 66
Charitable contributions 30 1,573 11 1,539
Gain on foreclosed real estate, net (34) (58) (2) (21)
Other expenses 1,120 745 384 249
-------- ------- ------- -------
Total noninterest expense 7,504 7,645 2,596 3,892
-------- ------- ------- -------
Income (loss) before provision (benefit)
for income taxes 1,658 (293) 535 (1,419)
Provision (benefit) for income taxes 299 (178) (2) (526)
-------- ------- ------- -------
Net Income (Loss) $ 1,359 $ (115) $ 537 $ (893)
-------- ------- ------- -------
Earnings per common share - Basic and Diluted $ 0.19 N/M $ 0.07 N/M
===================================================================================================
4
[LOGO] Naugatuck Valley
Financial Corporation
Consolidated Statements of Cash Flows
(In thousands)
- ------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
---------------------
2005 2004
- ------------------------------------------------------------------------------------------------------
Cash flows from operating activities (Unaudited)
Net income (loss) $ 1,359 $ (115)
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan losses 32 --
Depreciation and amortization expense 516 494
Charitable contribution of company stock -- 1,521
Stock based compensation 71 --
Provision for deferred taxes (69) (532)
Net gain on sale of real estate owned (46) (68)
Gain on sale of mortgages -- (5)
Loans originated for sale -- (1,927)
Proceeds from the sale of loans -- 1,932
(Gain) Loss on sale of investments (47) 156
(Increase) decrease in accrued income receivable (355) 31
Increase (decrease) in deferred loan fees 25 (96)
Increase in bank owned life insurance asset (146) (146)
Decrease (increase) in other assets 122 (175)
(Decrease) increase in other liabilities (334) 55,293
-------- --------
Net cash provided by operating activities 1,128 56,363
-------- --------
Cash flows from investing activities
Proceeds from sales and maturities of available-for-sale securities 18,186 25,101
Proceeds from maturities of held-to-maturity securities 285 --
Purchase of available-for-sale securities (40,842) (7,802)
Purchase of held-to-maturity securities (500) (3,610)
Purchase of Federal Home Loan Bank stock (404) --
Loan originations net of principal payments (34,562) (21,730)
Additions to foreclosed real estate (47) --
Proceeds from the sale of foreclosed real estate 113 276
Purchase of property and equipment (1,746) (892)
-------- --------
Net cash used by investing activities (59,517) (8,657)
-------- --------
Cash flows from financing activities
Net change in time deposits 31,766 (2,340)
Net change in other deposit accounts 6,790 13,802
Advances from Federal Home Loan Bank 62,968 18,650
Repayment of advances from Federal Home Loan Bank (34,535) (28,623)
Net change in mortgagors' escrow accounts (1,482) (1,042)
Net proceeds from issuance of common stock -- 31,740
Contribution of proceeds to Naugatuck Valley Mutual Holding Company -- (100)
Payment to acquire common stock for ESOP -- (2,981)
Stock repurchase for equity incentive plan (1,720) --
Dividends paid to stockholders (375) --
-------- --------
Net cash provided by financing activities 63,412 29,106
-------- --------
Increase in cash and cash equivalents 5,023 76,812
Cash and cash equivalents at beginning of period 7,575 9,775
-------- --------
Cash and cash equivalents at end of period $ 12,598 $ 86,587
======================================================================================================
Cash paid during the period for:
Interest $ 3,277 $ 2,801
Income taxes 588 454
5
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated interim financial statements are
unaudited and include the accounts of Naugatuck Valley Financial Corporation
(the "Company"), Naugatuck Valley Savings and Loan (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 and nine months ended September 30, 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
consolidated financial statements and notes thereto included in the Company's
2004 Annual Report to Stockholders.
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 net income per common share is calculated by dividing the net income
available to common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted net income per common share is computed
in a manner similar to basic net income per common share except that the
weighted-average number of common shares outstanding is increased to include the
incremental common shares (as computed using the treasury stock method) that
would have been outstanding if all potentially dilutive common stock equivalents
were issued during the period. The Company's common stock equivalents relate
solely to stock option and restricted stock awards. Anti-dilutive shares are
common stock equivalents with weighted-average exercise prices in excess of the
weighted-average market value for the periods presented. The Company had no
anti-dilutive common shares outstanding for the three months and nine months
ended September 30, 2005. Unallocated common shares held by the ESOP are not
included in the weighted-average number of common shares outstanding for
purposes of calculating either basic or diluted net income per common share.
- -----------------------------------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------- --------------------------
2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------
Net income $ 1,359 $ (115) $ 537 $ (893)
Weighted-average common shares outstanding:
Basic 7,311,195 N/A 7,311,195 N/A
Effect of dilutive stock options
and restrictive stock awards 7,609 N/A 22,827 N/A
---------- ----------
Diluted 7,318,804 7,334,022
Net income per common share:
Basic $ 0.19 N/A $ 0.07 N/A
Diluted $ 0.19 N/A $ 0.07 N/A
Per common share data is not presented for the three months and the nine months
ended September 30, 2004, as the Company had no shares outstanding prior to the
Company's initial public offering on September 30, 2004.
6
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board revised Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123R"). This Statement eliminates the alternative intrinsic
value method of accounting, in accordance with the Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" for recognizing the
cost of employee services received in share-based payment transactions, thereby
reflecting the economic consequences of those transactions in the financial
statements. SFAS 123R requires all entities to follow the same accounting
standard and account for such transactions using the fair-value-based method.
This Statement does not address the accounting for employee stock ownership
plans. On March 29, 2005, the SEC staff issued Staff Accounting Bulletin No. 107
("SAB 107"). SAB 107 expresses the views of the SEC staff regarding SFAS 123R
and certain rules and regulations and provides the SEC's views regarding the
valuation of share-based payment arrangements for public companies. On April 14,
2005, the Securities and Exchange Commission (the "SEC") delayed the effective
date for SFAS 123R, which allows companies to implement the statement at the
beginning of their first fiscal year beginning after June 15, 2005. The Company
has elected to comply with SFAS 123R beginning with the period ended September
30, 2005. See Note 6 - Equity Incentive Plan for details on the impact of SFAS
123R on the Company's financial statements.
In May 2005, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"). This Statement replaces Accounting Principles Board
Opinion No. 20 ("APB 20"), "Accounting Changes" and Statement of Financial
Accounting Standard No. 3, "Reporting Accounting Changes in Interim Financial
Statements," and changes the requirements for the accounting for and reporting
of a change in accounting principle. In accordance with the prior guidance of
APB 20, most voluntary changes in an accounting principle required recognizing
the cumulative effect of a change in accounting principle in net income in the
period of change. SFAS 154 requires retrospective application to prior periods'
financial statements for the direct effects of a change in accounting principle,
unless it is impracticable to determine either the period-specific effects of
the cumulative effect of the change. Indirect effects of a change in accounting
principle should be recognized in the period of accounting change. SFAS 154
carries forward the guidance of APB 20 relating to the reporting for correction
of an error in previously issued financial statements, change in accounting
estimate and the justification requirement for a change in accounting principle
on the basis of preferability. Provisions of this statement are effective for
accounting changes made in the fiscal years beginning after December 15, 2005.
At this time, the Company is uncertain how the application of SFAS 154 will
impact prior period financial statements for the implementation of future
accounting pronouncements.
NOTE 4 - 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.
- ----------------------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------- ---------------------
2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------
(In thousands)
Net income (loss) $ 1,359 $ (115) $ 537 $ (893)
Net unrealized (loss) gain on
securities available for sale
during the period, net of tax (141) (96) (104) 322
------- ------- ------- -------
Total Comprehensive Income (Loss) $ 1,218 $ (211) $ 433 $ (571)
==============================================================================================
7
NOTE 5 - 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.
NOTE 6 - EQUITY INCENTIVE PLAN
At the annual meeting of stockholders on May 5, 2005, stockholders of the
Company approved the Naugatuck Valley Financial Corporation 2005 Equity
Incentive Plan (the "Incentive Plan"). Under the Incentive Plan, the Company may
grant up to 372,614 stock options and 149,045 shares of restricted stock to its
employees, officers and directors for an aggregate amount of up to 521,659
shares of the Company's common stock for issuance upon the grant or exercise of
awards. Both incentive stock options and non-statutory stock options may be
granted under the Incentive Plan.
On July 26, 2005, the Company awarded 352,624 options to purchase the Company's
common stock and 139,712 shares of restricted stock. Stock option awards are
granted with an exercise price equal to the market price of the Company's stock
at the date of grant ($11.10) with maximum term of ten years. Both stock option
and restricted stock awards vest at 20% per year beginning on the first
anniversary of the date of grant.
Stock options and restricted stock awards are considered common stock
equivalents for the purpose of computing earnings per share on a diluted basis.
The Company has elected to comply with the Financial Accounting Standards
Board's SFAS No.123(R), "Share Based Payment", beginning with the period ended
September 30, 2005, prior to the mandatory compliance date for the Company of
January 1, 2006. In accordance with Statement No.123 (R), the Company has
recorded share-based compensation expense related to outstanding stock option
and restricted stock awards based upon the fair value at the date of grant over
the vesting period of such awards on a straight-line basis. The fair value of
each restricted stock allocation, based on the market price at the date of
grant, is recorded to unearned stock awards. Compensation expenses related to
unearned restricted shares are amortized to compensation, taxes and benefits
expense over the vesting period of the restricted stock awards. The fair value
of each stock option award is estimated on the date of grant using the
Black-Scholes option pricing method which includes several assumptions such as
volatility, expected dividends, expected term and risk-free rate for each stock
option award. The Company recorded share-based compensation expense of $71,341
for the three and nine months ended September 30, 2005 in connection with the
stock option and restricted stock awards.
8
The weighted-average fair value of stock options granted on July 26, 2005 using
the Black-Scholes option pricing method was $2.53 per share. Assumptions used to
determine the weighted-average fair value of stock options granted were as
follows:
Dividend yield: 1.44%
Expected volatility: 11.47%
Risk-free rate: 4.18%
Expected life in years: 6.5
NOTE 7 - DIVIDENDS
On July 25, 2005, the Company's Board of Directors declared a cash dividend of
$0.04 per outstanding common share, which was paid on September 1, 2005, to
stockholders of record as of the close of business on August 5, 2005. Naugatuck
Valley Mutual Holding Company, the Company's mutual holding company parent,
waived receipt of its dividend upon non-objection from the Office of Thrift
Supervision ("OTS").
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 2004 Annual Report to Stockholders.
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 are discussed in the
Company's 2004 Annual Report to Stockholders on Form 10-K 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 September 30, 2005 and December 31, 2004
Total assets increased by $64.4 million, or 24.3% to $329.8 million during the
period from December 31, 2004 to September 30, 2005, primarily due to an
increase in loans of $34.5 million, an increase in investments of $22.7 million
and an increase in cash and cash equivalents of $5.0 million. The increases in
loans and investments were primarily funded by increases in deposits and
borrowings. The increase in loans primarily reflects an increase in our
commercial mortgages, one-to-four family mortgages and home equity loans.
Total liabilities were $279.1 million at September 30, 2005 compared to $213.9
million at December 31, 2004. Deposits at September 30, 2005 increased $38.6
million, or 19.9%, over December 31, 2004 due to increased advertising and more
aggressive pricing. Advances from the Federal Home Loan Bank of Boston increased
from $15.8 million to $44.3 million. The increases in deposits and borrowings
were used primarily to fund loans and investments.
Total stockholders' equity decreased from $51.6 million at December 31, 2004 to
$50.7 million at September 30, 2005. The decrease in equity was primarily due to
$1.7 million in capital adjustments related to the Company's 2005 Equity
9
Incentive Plan, year-to-date dividends of $375,000 paid to stockholders and a
net increase to the unrealized loss on available-for-sale securities of
$141,000, offset by net income of $1.4 million for the nine month period.
Comparison of Operating Results For the Three and Nine Months Ended September
30, 2005 and 2004
General. For the three months ended September 30, 2005, the Company had net
income of $537,000 compared to a net loss of $893,000 for the three months ended
September 30, 2004. Net income increased to $1.4 million for the nine months
ended September 30, 2005 from a net loss of $115,000 for the nine months ended
September 30, 2004. The increases in both periods were primarily due to an
increase in net interest income, an increase in noninterest income and a
decrease in noninterest expense.
Net Interest Income. Net interest income increased $434,000, or 18.7%, to $2.8
million for the three months ended September 30, 2005 and increased by $1.5
million, or 23.4%, to $8.1 million for the nine months ended September 30, 2005.
The increase in net interest income during both the three and nine month periods
was the result of a 16.8% increase in the average balance of interest earning
assets in both periods, along with an increase in the average rate earned on
these assets of 42 basis points in the three month period and 22 basis points in
the nine month period over the 2004 rates. The increases in interest income were
partially offset by an increase in interest expense. Interest expense increased
by 45.1% in the three month period and by 17.1% in the nine month period due to
rising rates on deposits along with increases in the average balances of
deposits and borrowings.
The following table summarizes changes in interest income and interest expense
for the three and nine months ended September 30, 2005 and 2004.
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2005 2004 % change 2005 2004 % change
------ ------ -------- ------ ------ --------
(Dollars in thousands)
Interest income:
Loans $3,520 $2,859 23.12% $9,782 $8,266 18.34%
Fed Funds sold 15 72 -79.17% 46 96 -52.08%
Investment securities 562 320 75.63% 1,461 955 52.98%
Federal Home Loan Bank stock 27 14 92.86% 74 31 138.71%
------ ------ ------ ------
Total interest income 4,124 3,265 26.31% 11,363 9,348 21.56%
Interest expense:
Certificate accounts 779 448 73.88% 1,814 1,341 35.27%
Regular savings accounts 107 66 62.12% 234 162 44.44%
Checking and Now accounts 10 11 -9.09% 32 36 -11.11%
Money market savings accounts 58 68 -14.71% 195 186 4.84%
------ ------ ------ ------
Total interest-bearing deposits 954 593 60.88% 2,275 1,725 31.88%
FHLB advances 413 349 18.34% 997 1,069 -6.74%
------ ------ ------ ------
Total interest expense 1,367 942 45.12% 3,272 2,794 17.11%
------ ------ ------ ------
Net interest income $2,757 $2,323 18.68% $8,091 $6,554 23.45%
====== ====== ====== ======
10
The following table summarizes average balances and average yields and costs for
the three and nine months ended September 30, 2005 and 2004.
Three Months Ended September 30, Nine Months Ended September 30,
2005 2004 2005 2004
------------------ ------------------ ------------------ ------------------
Average Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Cost Balance Cost Balance Cost Balance Cost
------- ------ ------- ------ ------- ------ ------- ------
(Dollars in thousands)
Interest-earning assets
Loans $231,196 6.09% $195,817 5.84% $217,825 5.99% $187,003 5.89%
Fed Funds sold 2,157 2.78% 18,688 1.54% 2,081 2.95% 9,780 1.31%
Investment securities 57,685 3.90% 34,765 3.68% 49,783 3.91% 34,323 3.71%
Federal Home Loan Bank stock 2,530 4.27% 2,080 2.69% 2,368 4.17% 1,873 2.21%
-------- -------- -------- --------
Total interest-earning assets $293,568 5.62% $251,350 5.20% $272,057 5.57% $232,979 5.35%
======== ======== ======== ========
Interest-bearing liabilities
Certificate accounts $105,907 2.94% $ 85,231 2.10% $ 93,002 2.60% $ 85,709 2.09%
Regular savings accounts & escrow 52,918 0.81% 66,875 0.39% 50,075 0.62% 51,484 0.42%
Checking and NOW accounts 41,191 0.10% 37,622 0.12% 38,433 0.11% 35,195 0.14%
Money market savings accounts 23,628 0.98% 28,265 0.96% 26,373 0.99% 26,726 0.93%
-------- -------- -------- --------
Total interest-bearing deposits 223,644 1.71% 217,993 1.09% 207,884 1.46% 199,114 1.16%
FHLB advances 41,561 3.97% 32,249 4.33% 34,890 3.81% 30,789 4.63%
-------- -------- -------- --------
Total interest-bearing liabilities $265,205 2.06% $250,241 1.51% $242,774 1.80% $229,903 1.62%
======== ======== ======== ========
Interest and dividend income increased $859,000, or 26.3%, for the three months
ended September 30, 2005 as a result of an increase in the average balance of
interest-earning assets to $293.6 million from $251.4 million along with an
increase in the average yield on interest-earning assets from 5.20% to 5.62%.
Interest and dividend income also increased for the nine month period, from $9.3
million to $11.4 million, again as a result of an increase in the average
balance of interest-earning assets from $233.0 million to $272.1 million, along
with an increase in the average yield to 5.35% from 5.57%. Interest on federal
funds sold decreased during the three and nine months ended September 30, 2005
due to a decrease in the average balances, partially offset by an increase in
the average yield. The average balances in the 2004 periods included funds
associated with the stock issuance.
Provision for Loan Losses. The following table summarizes the activity in the
allowance for loan losses and provision for loan losses for the three and nine
months ended September 30, 2005 and 2004.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2005 2004 2005 2004
------- ------- ------- -------
(In thousands)
Allowance at beginning of period $ 1,877 $ 1,825 $ 1,829 $ 1,810
Provision for loan losses -- -- 32 --
Charge-offs -- (26) (3) (46)
Recoveries 1 15 20 50
------- ------- ------- -------
Net recoveries (charge-offs) 1 (11) 17 4
------- ------- ------- -------
Allowance at end of period $ 1,878 $ 1,814 $ 1,878 $ 1,814
======= ======= ======= =======
The Company did not record a provision for loan losses in the three month period
while a provision of $32,000 was recorded for the nine month period ended
September 30, 2005. There were no provisions made in the 2004 periods. The
provisions in 2005 are due primarily to increased balances in the commercial
loan portfolio.
11
The following table provides information with respect to the Company's
nonperforming assets at the dates indicated. The Company acquired one property
through foreclosure in April 2005. The Company did not have any accruing loans
past due 90 days or more at the dates presented.
At September 30, At December 31,
2005 2004 % change
---------------- --------------- ---------
(Dollars in thousands)
Nonaccrual loans $ 260 $ 596 -56.38%
Real estate owned 46 68 -33.03%
------- -------
Total nonperforming assets $ 306 $ 664 -53.98%
======= =======
Total nonperforming loans to total loans 0.11% 0.29% -62.07%
Total nonperforming loans to total assets 0.08% 0.22% -63.64%
Total nonperforming assets to total assets 0.09% 0.25% -64.00%
Noninterest Income. The following table summarizes noninterest income for the
three and nine months ended September 30, 2005 and 2004.
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2005 2004 % Change 2005 2004 % Change
------ ------ -------- ------ ------ --------
(Dollars in thousands)
Loan fees and service charges $ 237 $ 232 2.16% $ 679 $ 660 2.88%
Income from bank owned life insurance 49 49 0.00% 146 146 0.00%
Gain on sale of mortgages -- -- N/A -- 5 -100.00%
Gain (loss) on sale of investments -- (180) -100.00% 47 (156) -130.13%
Income from investment advisory services 60 32 87.50% 160 97 64.95%
Other income 28 17 64.71% 71 46 54.35%
------ ------ ------ ------
Total $ 374 $ 150 149.33% $1,103 $ 798 38.22%
====== ====== ====== ======
Noninterest income increased 149.3% during the three months ended September 30,
2005 primarily as a result of a $180,000 loss on the sale of investments in the
2004 period, combined with an increase in income from investment advisory
services to $60,000 from $32,000, or 87.5%, in the 2005 period. Noninterest
income increased by 38.2% during the nine months ended September 30, 2005
primarily as a result of an increase in the gain on the sale of investments in
the 2005 period versus a loss on the sale of investments in the 2004 period,
combined with an increase in income from investment advisory services and income
from loan fees and charges. The increase in income from investment advisory
services is a result of the program becoming more mature along with enhanced
cross-selling efforts on behalf of the employees.
12
Noninterest Expense. The following table summarizes noninterest expense for the
three and nine months ended September 30, 2005 and 2004.
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
2005 2004 % Change 2005 2004 % Change
------- ------- -------- ------- ------- --------
(Dollars in thousands)
Compensation, taxes and benefits $ 1,546 $ 1,148 34.67% $ 4,364 $ 3,351 30.23%
Office occupancy 368 280 31.43% 1,126 894 25.95%
Computer processing 170 133 27.82% 473 403 17.37%
Advertising 119 66 80.30% 425 239 77.82%
Charitable contributions 11 1,539 -99.29% 30 1,573 -98.09%
FHLBB advances prepayment fee -- 498 -100.00% -- 498 -100.00%
Gain on foreclosed real estate, net (2) (21) -90.48% (34) (58) -41.38%
Other expenses 384 249 54.22% 1,120 745 50.34%
------- ------- ------- -------
Total $ 2,596 $ 3,892 -33.30% $ 7,504 $ 7,645 -1.84%
======= ======= ======= =======
Noninterest expense decreased in both the three and nine months ended September
30, 2005 primarily as a result of a $1.5 million charitable contribution expense
associated with the establishment and funding of the Naugatuck Valley Savings
and Loan Foundation along with the $498,000 prepayment fee paid to the Federal
Home Loan Bank of Boston for early payoff of $9.6 million in borrowings in the
2004 periods. In both the three and nine month periods ended September 30, 2005,
the Company experienced increases in compensation, taxes and benefits along with
increases in office occupancy expenses, computer processing and advertising. The
increase in these expenses is primarily a result of the opening of the Seymour
branch office in January 2005 and the relocation of the Shelton branch office in
July 2005. During this period the Company also began to amortize share-based
compensation awards that were granted under the 2005 equity incentive plan.
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. The Company's 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
September 30, 2005, cash and cash equivalents totaled $12.6 million, including
federal funds of $6.9 million. Securities classified as available-for-sale,
which provide additional sources of liquidity, totaled $58.8 million at
September 30, 2005. At September 30, 2005, the Company had the ability to borrow
a total of $107.2 million from the Federal Home Loan Bank of Boston, of which
$44.3 million was outstanding. At September 30, 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 September 30, 2005, the Company had the
ability to borrow $2.0 million from a correspondent bank. The Company had no
advances outstanding on these lines at September 30, 2005.
13
At September 30, 2005, the Company had commitments of $18.0 million in unused
home equity lines of credit, $3.2 million in unadvanced commercial lines, $6.1
million in mortgage commitments, $3.8 million in commercial loan commitments,
$16.4 million in unadvanced construction mortgage commitments, $3.2 million in
letters of credit and $94,000 in overdraft line of credit availability.
Certificates of deposit due within one year of September 30, 2005 totaled $54.4
million, or 23.5% 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 September 30, 2006. Based on past experience, however, the Company
believes 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 was 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.
The Company's primary investing activities are the origination of loans and the
purchase of securities. For the nine months ended September 30, 2005 the Company
originated $69.5 million of loans, including renewals and refinances, and
purchased $41.3 million of securities. These activities were funded primarily by
the proceeds from sales and maturities of available-for-sale and
held-to-maturity securities of $18.5 million, an increase of deposits of $38.6
million and net advances from the Federal Home Loan Bank of Boston of $28.4
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 $38.6 million for the nine months ended September 30, 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 a net increase in Federal Home Loan Bank advances of $28.4
million for the nine months ended September 30, 2005. The increases in deposit
accounts and Federal Home Loan Bank advances primarily funded our investing and
lending activities.
The Company is not subject to separate regulatory capital requirements. At
September 30, 2005, the Bank was 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 September 30, 2005, the
Bank exceeded all of its regulatory capital requirements. The Bank is considered
"well capitalized" under regulatory guidelines.
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 nine months ended September 30, 2005, we 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.
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Qualitative Aspects of Market Risk. The Company's most significant form of
market risk is interest rate risk. The Company manages the interest rate
sensitivity of its interest-bearing liabilities and interest-earning assets in
an effort to minimize the adverse effects of changes in the interest rate
environment. Deposit accounts typically react more quickly to changes in market
interest rates than mortgage loans because of the shorter maturities of
deposits. As a result, sharp increases in interest rates may adversely affect
the Company's earnings while decreases in interest rates may beneficially affect
the Company's earnings. To reduce the potential volatility of the Company's
earnings, the Company has sought to improve the match between assets and
liability maturities (or rate adjustment periods), while maintaining an
acceptable interest rate spread, by originating adjustable-rate mortgage loans
for retention in the loan portfolio, variable-rate home equity lines and
variable-rate commercial loans and by purchasing variable-rate investments and
investments with expected maturities of less than 10 years. The Company
currently does not participate in hedging programs, interest rate swaps or other
activities involving the use of off-balance sheet derivative financial
instruments.
The Bank's Asset/Liability Committee communicates, coordinates and controls all
aspects of asset/liability management. The committee establishes and monitors
the volume and mix of assets and funding sources with the objective of managing
assets and funding sources.
Quantitative Aspects of Market Risk. The Bank uses an interest rate sensitivity
analysis prepared by the Office of Thrift Supervision to review its level of
interest rate risk. This analysis measures interest rate risk by computing
changes in net portfolio value of the Bank's cash flows from assets, liabilities
and off-balance sheet items in the event of a range of assumed changes in market
interest rates. Net portfolio value represents the market value of portfolio
equity and is equal to the market value of assets minus the market value of
liabilities, with adjustments made for off-balance sheet items. This analysis
assesses the risk of loss in market risk sensitive instruments in the event of a
sudden and sustained 100 to 300 basis point increase or 100 to 200 basis point
decrease in market interest rates with no effect given to any steps that we
might take to counter the effect of that interest rate movement. The Bank
measures interest rate risk by modeling the changes in net portfolio value over
a variety of interest rate scenarios. The following table, which is based on
information that the Bank provides to the Office of Thrift Supervision, presents
the change in the Bank's net portfolio value at June 30, 2005 (the most current
information available) that would occur in the event of an immediate change in
interest rates based on Office of Thrift Supervision assumptions, with no effect
given to any steps that the Bank might take to counteract that change. The Bank
expects that its net portfolio value at September 30, 2005 is consistent with
the table below.
--------------------------------------------------------------------------------------
Net Portfolio
Value as % of
Net Portfolio Value Present Value of Assets
Basis Point ("bp") ------------------------------------ -----------------------
Change in Rates $ Amount $ Change % Change NPV Ratio Change
------------------------------------ -----------------------
(Dollars in thousands)
300 bp 37,898 (14,259) -27% 12.79% -3.73%
200 42,973 (9,184) -18% 14.18% -2.34%
100 47,963 (4,194) -8% 15.49% -1.03%
0 52,157 -- -- 16.52% --
(100) 53,145 988 2% 16.68% 0.16%
(200) 51,844 (313) -1% 16.22% -0.30%
======================================================================================
The Office of Thrift Supervision uses certain assumptions in assessing the
interest rate risk of savings associations. These assumptions relate to interest
rates, loan prepayment rates, deposit decay rates, and the market values of
certain assets under differing interest rate scenarios, among others. As with
any method of measuring interest rate risk, certain shortcomings are inherent in
the method of analysis presented in the foregoing table. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate mortgage loans, have features that restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.
15
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)
10.1 Naugatuck Valley Financial Corporation 2005 Equity Incentive
Plan (3)
31.1 Rule 13a-14(a)/15d-14(a) Certification.
31.2 Rule 13a-14(a)/15d-14(a) Certification.
32 Section 1350 Certifications.
- ----------
(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.
(3) Incorporated herein by reference to Appendix C to the Proxy Statement for
the 2005 Annual Meeting of Stockholders filed on April 1, 2005.
16
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: November 14, 2005 by: /s/ John C. Roman
----------------- --------------------------
John C. Roman
President and Chief Executive Officer
Date: November 14, 2005 by: /s/ Lee R. Schlesinger
----------------- --------------------------
Lee R. Schlesinger
Vice President and Treasurer
(Principal Financial Officer)
17