UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 June 30, 2008
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________
Commission File Number 0-51589
NEW ENGLAND BANCSHARES, INC.
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(Exact name of small business issuer as specified in its charter)
Maryland 04-3693643
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
855 Enfield Street, Enfield, Connecticut 06082
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(Address of principal executive offices) (Zip Code)
(860) 253-5200
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(Issuer's telephone number)
Not Applicable
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(Former name, former address and former fiscal year, if changed since
last report)
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 past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. (See definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act).
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]
Smaller Reporting Company [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]
The Issuer had 5,990,973 shares of common stock, par value $0.01 per share,
outstanding as of August 11, 2008.
NEW ENGLAND BANCSHARES, INC.
FORM 10-QSB
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2008 (Unaudited)
and March 31, 2008 ................................................... 1
Condensed Consolidated Statements of Income for the
Three Months Ended June 30, 2008 and 2007 (Unaudited) ................ 2
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 2008 and 2007 (Unaudited) ................ 3
Notes to Condensed Consolidated Financial Statements (Unaudited) ..... 4
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations ............................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........... 15
Item 4T. Controls and Procedures .............................................. 16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings .................................................... 17
Item 1A Risk Factors ......................................................... 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .......... 17
Item 3. Defaults Upon Senior Securities ...................................... 17
Item 4. Submission of Matters to a Vote of Security Holders .................. 17
Item 5. Other Information .................................................... 17
Item 6. Exhibits ............................................................. 18
SIGNATURES ...................................................................... 18
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
---------------------
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(Dollars in thousands)
June 30, March 31,
2008 2008
----------- -----------
(Unaudited)
ASSETS
- ------
Cash and due from banks .................................................. $ 11,684 $ 9,115
Interest-bearing demand deposits with other banks ........................ 172 160
Federal funds sold ....................................................... 18,904 21,591
Money market mutual funds ................................................ 510 5,373
----------- -----------
Total cash and cash equivalents ...................................... 31,270 36,239
Interest-bearing time deposits with other banks .......................... 297 693
Investments in available-for-sale securities, at fair value .............. 77,468 63,544
Federal Home Loan Bank stock, at cost .................................... 3,571 3,571
Loans, net of allowance for loan losses of $4,158 as of June 30, 2008 and
$4,046 as of March 31, 2008 ............................................ 380,577 371,769
Premises and equipment, net .............................................. 6,536 6,678
Accrued interest receivable .............................................. 2,369 2,165
Deferred income taxes, net ............................................... 1,788 1,140
Cash surrender value of life insurance ................................... 8,935 8,847
Identifiable intangible assets ........................................... 2,537 2,671
Goodwill ................................................................. 14,701 14,701
Other assets ............................................................. 7,429 6,161
----------- -----------
Total assets ......................................................... $ 537,478 $ 518,179
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing .................................................... $ 41,816 $ 40,347
Interest-bearing ....................................................... 349,782 329,965
----------- -----------
Total deposits ....................................................... 391,598 370,312
Advanced payments by borrowers for taxes and insurance ................... 1,685 909
Federal Home Loan Bank advances .......................................... 61,152 61,928
Subordinated debentures .................................................. 3,895 3,893
Securities sold under agreements to repurchase ........................... 8,587 8,555
Other liabilities ........................................................ 3,233 3,845
----------- -----------
Total liabilities .................................................... 470,150 449,442
----------- -----------
Stockholders' Equity:
Preferred stock, par value $.01 per share: 1,000,000 shares authorized;
none issued .......................................................... -- --
Common stock, par value $.01 per share: 19,000,000 shares authorized;
6,441,072 issued and outstanding at June 30, 2008 and 6,420,891 shares
issued and outstanding at March 31, 2008 ............................. 64 64
Paid-in capital ........................................................ 56,349 56,412
Retained earnings ...................................................... 19,324 19,055
Unearned ESOP shares, 283,183 shares at June 30, 2008 and
March 31, 2008 ....................................................... (2,428) (2,428)
Treasury stock, 435,099 shares at June 30, 2008 and 322,399 shares at
March 31, 2008 ....................................................... (4,777) (3,772)
Unearned shares, stock-based plans, 67,898 shares at June 30, 2008 and
March 31, 2008 ....................................................... (761) (796)
Accumulated other comprehensive (loss) income .......................... (443) 202
----------- -----------
Total stockholders' equity ........................................... 67,328 68,737
----------- -----------
Total liabilities and stockholders' equity ........................... $ 537,478 $ 518,179
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
June 30,
-------------------------
2008 2007
----------- -----------
Interest and dividend income:
Interest on loans ........................................................ $ 6,102 $ 3,266
Interest and dividends on securities:
Taxable ................................................................ 743 568
Tax-exempt ............................................................. 169 82
Interest on federal funds sold, interest-bearing deposits and dividends on
money market mutual funds .............................................. 175 256
----------- -----------
Total interest and dividend income ..................................... 7,189 4,172
----------- -----------
Interest expense:
Interest on deposits ..................................................... 2,524 1,281
Interest on advanced payments by borrowers for taxes and insurance ....... 4 3
Interest on Federal Home Loan Bank advances .............................. 679 378
Interest on subordinated debentures ...................................... 68 --
Interest on securities sold under agreements to repurchase ............... 37 118
----------- -----------
Total interest expense ................................................. 3,312 1,780
----------- -----------
Net interest and dividend income ....................................... 3,877 2,392
Provision for loan losses ................................................... 148 62
----------- -----------
Net interest and dividend income after provision for loan losses ....... 3,729 2,330
----------- -----------
Noninterest income:
Service charges on deposit accounts ...................................... 269 130
Gain (loss) on securities, net ........................................... 8 (225)
Gain on sale of loans .................................................... 12 --
Increase in cash surrender value of life insurance policies .............. 84 36
Other income ............................................................. 94 29
----------- -----------
Total noninterest income (charges) ..................................... 467 (30)
----------- -----------
Noninterest expense:
Salaries and employee benefits ........................................... 1,915 1,217
Occupancy and equipment expense .......................................... 712 417
Advertising and promotion ................................................ 93 17
Professional fees ........................................................ 124 81
Data processing expense .................................................. 109 90
Stationery and supplies .................................................. 36 22
Amortization of identifiable intangible assets ........................... 134 22
Other expense ............................................................ 421 237
----------- -----------
Total noninterest expense .............................................. 3,544 2,103
----------- -----------
Income before income taxes ............................................. 652 197
Income taxes ................................................................ 200 148
----------- -----------
Net income ............................................................. $ 452 $ 49
=========== ===========
Earnings per share:
Basic ............................................................... $ 0.08 $ 0.01
Diluted ............................................................. $ 0.08 $ 0.01
Dividends per share ....................................................... $ 0.03 $ 0.03
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended
June 30,
2008 2007
--------- --------
Cash flows from operating activities:
Net income ........................................................................... $ 452 $ 49
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of fair value adjustments ........................................ 5 2
(Accretion) amortization of securities, net ....................................... (13) (1)
(Gain) loss on sales and calls of investments, net ................................ (8) 225
Provision for loan losses ......................................................... 148 62
Gain on sale of loans, net ........................................................ (12) --
Change in deferred loan origination costs, net .................................... (55) (102)
Depreciation and amortization ..................................................... 221 126
Increase in accrued interest receivable ........................................... (201) (25)
Deferred income tax (benefit) expense ............................................. (236) 45
Increase in cash surrender value of life insurance policies ....................... (83) (36)
(Increase) decrease in prepaid expenses and other assets .......................... (1,990) 132
Amortization of identifiable intangible assets .................................... 134 22
Increase in accrued expenses and other liabilities ................................ 41 101
Compensation cost for stock option plan ........................................... 32 56
Compensation cost for stock-based incentive plan .................................. 35 59
--------- --------
Net cash (used in) provided by operating activities .................................. (1,530) 715
--------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities ........................................ (19,534) (4,809)
Proceeds from sales of available-for-sale securities .............................. 709 6,735
Proceeds from maturities of available-for-sale securities ......................... 3,923 1,425
Purchases of Federal Home Loan Bank stock ......................................... -- (98)
Loan originations and principal collections, net .................................. (11,925) (1,580)
Purchases of loans ................................................................ -- (959)
Loans sold ........................................................................ 3,039 1,800
Proceeds from maturities of interest bearing time deposits with other banks ....... 396 296
Investments in life insurance policies ............................................ (5) (5)
Receipt of cash surrender value of life insurance policy .......................... -- 30
Capital expenditures - premises and equipment ..................................... (71) (54)
--------- --------
Net cash (used in) provided by investing activities ............................... (23,468) 2,781
--------- --------
3
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
(continued)
Three Months Ended
June 30,
2008 2007
--------- --------
Cash flows from financing activities:
Net increase in demand, NOW, MMDA and savings accounts ............................... 7,459 320
Net increase in time deposits ........................................................ 13,827 2,891
Net increase in advanced payments by borrowers for taxes and insurance ............... 776 604
Principal payments on Federal Home Loan Bank long-term advances ...................... (782) (653)
Net increase (decrease) in securities sold under agreement to repurchase ............. 32 4,966
Purchase of treasury stock ........................................................... (1,240) --
Exercise of stock options ............................................................ 140 40
Payments of cash dividends on common stock ........................................... (183) (149)
--------- --------
Net cash provided by financing activities ............................................... 20,029 8,019
--------- --------
Net (decrease) increase in cash and cash equivalents .................................... (4,969) 11,515
Cash and cash equivalents at beginning of period ........................................ 36,239 18,640
---------
Cash and cash equivalents at end of period .............................................. $ 31,270 $ 30,155
========= ========
Supplemental disclosures:
Interest paid ........................................................................ $ 3,371 $ 1,198
Income taxes paid .................................................................... 312 175
Decrease in due to broker ............................................................ 653 --
Decrease in due from broker .......................................................... 714 --
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
NEW ENGLAND BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 - Organization
New England Bancshares, Inc. New England Bancshares, Inc. (the "Company")
is a Maryland corporation which was organized in December 2005 to be the holding
company parent of Enfield Federal Savings and Loan Association (the
"Association" or "Enfield Federal"), following the completion of the
"second-step" mutual-to-stock conversion of Enfield Mutual Holding Company. The
principal assets of the Company are its investments in Enfield Federal and
Valley Bank. As a part of the second-step conversion, the Company sold 3,075,855
shares resulting in net proceeds of $27.2 million, of which $12.2 million was
retained as capital by the Company and $15.0 million was infused as capital into
the Association. Shareholders of the Company immediately prior to the completion
of the second-step conversion received 2.3683 shares for each share of common
stock they held in the Company, resulting in an additional 1,311,863 shares
being issued.
The second-step conversion was accounted for as a change in corporate form
with no subsequent change in the historical carrying amounts of the Company's
assets and liabilities. Consolidated stockholders' equity increased by the net
cash proceeds from the offering. All references in the consolidated financial
statements and notes thereto to share data (including the number of shares and
per share amounts) have been adjusted to reflect the additional shares
outstanding as a result of the offering and the share exchange.
On July 12, 2007 the Company acquired First Valley Bancorp, Inc., Bristol,
Connecticut. First Valley Bancorp was the holding company for Valley Bank,
Bristol, Connecticut. Under the terms of the transaction, shareholders of First
Valley Bancorp received 0.8907 shares of Company common stock and $9.00 in cash
for each share of First Valley Bancorp common stock for a total of 1,068,625
shares and $10.8 million. In addition, the Company incurred cash payments for
deal expenses, payout of stock options and employee expenses totaling $2.4
million, creating $13.6 million of goodwill, none of which is deductible for tax
purposes.
Enfield Federal Savings and Loan Association. The Association,
incorporated in 1916, is a federally chartered savings association headquartered
in Enfield, Connecticut. The Association is engaged principally in the business
of attracting deposits from the general public and investing those deposits
primarily in residential and commercial real estate loans, and to a lesser
extent, in consumer, construction, commercial and small business loans. At June
30, 2008, the Association operated from eight locations in Connecticut.
Valley Bank. Valley Bank is a state chartered commercial bank that
commenced operations on November 15, 1999. The Bank is engaged principally in
the business of attracting deposits from the general public and investing those
deposits in small business, commercial real estate, residential real estate and
consumer loans. At June 30, 2008, the Bank operated from four locations in
Connecticut.
5
NOTE 2 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial statements and the
instructions to Form 10-QSB, and accordingly do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, the accompanying unaudited consolidated financial
statements reflect all adjustments necessary, consisting of only normal
recurring accruals, to present fairly the financial position, results of
operations and cash flows of the Company for the periods presented. In preparing
the interim financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. The interim results of
operations are not necessarily indicative of the operating results to be
expected for the year ending March 31, 2009 or any other interim period.
While management believes that the disclosures presented are adequate so
as not to make the information misleading, it is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes included in New England Bancshares' Form 10-K for the year
ended March 31, 2008.
The condensed consolidated balance sheet as of March 31, 2008 was derived
from the audited financial statements of New England Bancshares, Inc., but does
not include all the disclosures required by accounting principles generally
accepted in the United States of America.
NOTE 3 - Earnings Per Share (EPS)
Basic EPS is computed by dividing income available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. The Company had 123,563 anti-dilutive shares for the
three months ended June 30, 2008 and 15,000 anti-dilutive shares for the three
months ended June 30, 2007. Anti-dilutive shares are stock options with
weighted-average exercise prices in excess of the weighted-average market value
for the same period. Unallocated common shares held by the Association's
employee stock ownership plan are not included in the weighted-average number of
common shares outstanding for purposes of calculating both basic and diluted
EPS.
Quarter Ended
June 30,
-------------------
(In thousands, except per share data) 2008 2007
-------- --------
Net income $ 452 $ 49
Weighted average common shares
outstanding for computation of basic
EPS 5,708 4,935
Effect of dilutive stock options and
stock awards 124 196
------ ------
Weighted average common shares for
computation of diluted EPS 5,832 5,131
------ ======
Earnings per share:
Basic $ 0.08 $ 0.01
Diluted $ 0.08 $ 0.01
- --------------------------------------------------------------------------------
6
NOTE 4 - Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board (FASB) issued
SFAS No. 155, "Accounting for Certain Hybrid Instruments" (SFAS 155), which
permits, but does not require, fair value accounting for any hybrid financial
instrument that contains an embedded derivative that would otherwise require
bifurcation in accordance with SFAS 133. The statement also subjects beneficial
interests issued by securitization vehicles to the requirements of SFAS No. 133.
The statement is effective as of April 1, 2007. The adoption of SFAS 155 did not
have a material impact on the Company's financial condition and results of
operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets- an amendment of FASB Statement No. 140" (SFAS No. 156). SFAS
No. 156 requires an entity to recognize a servicing asset or servicing liability
each time it undertakes an obligation to service a financial asset by entering
into a servicing contract in specific situations. Additionally, the servicing
asset or servicing liability shall be initially measured at fair value; however,
an entity may elect the "amortization method" or "fair value method" for
subsequent balance sheet reporting periods. SFAS No. 156 is effective as of an
entity's first fiscal year beginning after September 15, 2006. Early adoption is
permitted as of the beginning of an entity's fiscal year, provided the entity
has not yet issued financial statements, including interim financial statements,
for any period of that fiscal year. The adoption of this statement did not have
a material impact on its financial condition, results of operations or cash
flows.
In June 2006 the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement 109" ("FIN
48"). FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken, or
expected to be taken, in a tax return and provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The adoption of FIN 48 did not have a material impact on the
Company's financial statements.
In September 2006, the FASB ratified the consensus reached by the Emerging
Issues Task Force ("EITF") on Issue No. 06-4 "Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements," ("EITF 06-4"). EITF 06-4 requires companies with an
endorsement split-dollar life insurance arrangement to recognize a liability for
future postretirement benefits. The effective date is for fiscal years beginning
after December 15, 2007, with earlier application permitted. Companies should
recognize the effects of applying this issue through either (a) a change in
accounting principle through a cumulative effect adjustment to retained earnings
or (b) a change in accounting principle through retrospective application to all
periods. The Company's adoption of this issue is not expected to have a material
impact on its financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
(SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring
fair value under generally accepted accounting principles (GAAP) and enhances
disclosures about fair value measurements. SFAS 157 retains the exchange price
notion and clarifies that the exchange price is the price that would be received
for an asset or paid to transfer a liability (an exit price) in an orderly
transaction between market participants on the measurement date. SFAS 157 is
effective for the Company's consolidated financial statements for the year
beginning on April 1, 2008, with
7
earlier adoption permitted. The Company does not expect the adoption of this
statement to have a material impact on its financial condition and results of
operations.
In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities including an amendment of FASB
Statement No. 115" (SFAS 159). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
The new standard is effective at the beginning of the Company's fiscal year
beginning April 1, 2009, and early adoption may be elected in certain
circumstances. The adoption of this statement is not expected to have a
significant impact on the Company's financial position, results of operations or
cash flow.
In December 2007, the FASB issued SFAS No. 141 (Revised 2008), "Business
Combinations" (SFAS 141(R)). SFAS 141(R) will significantly change the
accounting for business combinations. Under SFAS 141(R), an acquiring entity
will be required to recognize all the assets acquired and liabilities assumed in
a transaction at the acquisition-date fair value with limited exceptions. It
also amends the accounting treatment for certain specific items including
acquisition costs and non controlling minority interests and includes a
substantial number of new disclosure requirements. SFAS 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after January 1, 2009. The Company does not expect the adoption of this
statement to have a material impact on its financial condition and results of
operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133" (SFAS
161). SFAS 161 changes the disclosure requirements for derivative instruments
and hedging activities. Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. The guidance in SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. This statement encourages, but does not
require, comparative disclosures for earlier periods at initial adoption. The
Company does not expect the adoption of this statement to have a material impact
on its financial condition and results of operations.
NOTE 5 - Stock-Based Incentive Plan
At June 30, 2008, the Company maintained a stock-based incentive plan and
an equity incentive plan. The Company currently accounts for the plans under the
recognition and measurement principles of Statement of Financial Accounting
Standards (SFAS) No. 123, (amended 2004), "Share-Based Payment" ("SFAS 123R").
SFAS 123R required the Company to recognize the cost resulting from all
share-based payment transactions in the consolidated financial statements as of
the beginning of the first annual reporting period that began after December 15,
2005. For the three months ended June 30, 2008 and 2007, compensation cost for
the Company's stock plans was measured at the grant date based on the value of
the award and was recognized over the service period, which was the vesting
period. The compensation cost that has been
8
charged against income in the three months ended June 30, 2008 and 2007 for the
granting of stock options under the plans was $32,000 and $56,000, respectively.
During the three months ended June 30, 2008, the Company did not grant any
options.
The compensation cost that has been charged against income for the
granting of restricted stock awards under the plan for the three months ended
June 30, 2008 and 2007 was $35,000 and $59,000, respectively.
NOTE 6 - Fair Value Measurement Disclosures
The following table presents the fair value disclosures of assets and
liabilities in accordance with SFAS 157, "Fair Value Measurements" (SFAS 157)
which became effective for the Company's consolidated financial statements on
April 1, 2008:
Fair Value Measurements at Reporting Date Using
-----------------------------------------------
Quoted Prices
In Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
Description June 30, 2008 (Level 1) (Level 2) (Level 3)
- ----------- ------------- ------------- -------------- ------------
(In Thousands)
Available-for-sale
Securities $ 77,468 $ 3,468 $ 74,000 $ --
Item 2. Management's Discussion and Analysis or Plan of Operation.
---------------------------------------------------------
The following analysis discusses changes in the financial condition and
results of operations at and for the three months ended June 30, 2008 and 2007,
and should be read in conjunction with the Company's Condensed Consolidated
Financial Statements and the notes thereto, appearing in Part I, Item 1 of this
document.
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors that 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, general economic conditions, legislation and
regulations, monetary and fiscal policies of the U.S. government, including
policies of the U.S. Treasury and the Federal Reserve Board, the quality or
composition of the loan or investment portfolios, demand for loan products,
deposit flows, competition, demand for financial services in the Company's
market area, accounting principles
9
and guidelines, and our ability to recognize enhancements related to our
acquisition within expected time frames. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's Annual Report on Form
10-K for the year ended March 31, 2008, under Item 1, Description of Business -
Risk Factors" and our other filings with the Securities and Exchange Commission.
Except as required by applicable law and regulation, the Company does not
undertake - and specifically disclaims any obligation - to publicly release the
result of any revisions that may be made to any forward-looking statements to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
Comparison of Financial Condition at June 30, 2008 and March 31, 2008
Assets
Total assets were $537.5 million at June 30, 2008, an increase of $19.3
million compared to $518.2 million at March 31, 2008. The increase in total
assets was primarily due to a $13.9 million increase in available-for-sale
investments, an $8.8 million increase in net loans and a $1.3 million increase
in other assets, partially offset by a $5.0 million decrease in cash and cash
equivalents. At June 30, 2008, commercial real estate and commercial loans
accounted for 51.5% of the total loan portfolio.
Allowance for Loan Losses
Management determines the adequacy of the allowance for loan losses on a
regular basis. The determination is based upon management's assessment of the
credit quality and composition of the loan portfolio, previous loss experience,
current economic conditions and their effect on borrowers and the market area in
general, and the performance of individual credits in relation to the contract
terms.
The Company's methodology for assessing the appropriateness of the
allowance for loan losses consists of specific allowances for identified problem
loans and a general valuation allowance on the remainder of the loan portfolio.
Although we determine the amount of each element of the allowance separately,
the entire allowance for loan losses is available for the entire portfolio.
Provisions for loan losses are charges to earnings to bring the total
allowance for loan losses to a level considered by management as adequate to
provide for estimated loan losses based on management's evaluation of the
collectibility of the loan portfolio. While management believes that, based on
information currently available, the Company's allowance for loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurances can be given that the Company's level of allowance for loan losses
will be sufficient to cover actual loan losses incurred by the Company or that
future adjustments to the allowance for loan losses will not be necessary if
economic and other conditions differ substantially from the economic and other
conditions used by management to determine the current level of the allowance
for loan losses. In addition, regulators as an integral part of its examination
process, periodically review the Company's allowance for loan losses and may
require the Company to provide additions to the allowance based upon judgments
different from management.
10
The table below indicates the relationship between the allowance for loan
losses, total loans outstanding and nonperforming loans at the dates indicated.
June 30, 2008 March 31, 2008
------------- --------------
(Dollars in thousands)
Allowance for loan losses $ 4,158 $ 4,046
Gross loans outstanding 384,903 376,038
Nonaccrual loans 1,406 1,167
Allowance/Loans outstanding 1.08% 1.08%
Allowance/Nonperforming loans 295.73% 346.70%
The $1.4 million balance of nonaccrual loans at June 30, 2008 was
comprised of eleven loans - six residential real estate loans, two consumer
loans, two commercial loans and one construction loan. The nine nonaccrual loans
at March 31, 2008 were six residential real estate loans, one construction loan,
one consumer loan and one commercial loan.
Past due and Nonperforming Loans
The following table sets forth information regarding past due loans:
June 30, 2008 March 31, 2008
------------- --------------
(In thousands)
Past due 30 days through 89 days $4,654 $1,486
Past due 90 days or more 1,017 455
The $4.7 million balance of loans 30 days through 89 days past due at June
30, 2008 was comprised of 27 loans and the $1.0 million balance of loans 90 days
or more past due at June 30, 2008 was comprised of 8 loans. The $1.5 million
balance of loans 30 days through 89 days past due at March 31, 2008 was
comprised of 20 loans and the $455,000 balance of loans 90 days or more past due
at March 31, 2008 was comprised of 2 loans.
Liabilities
Total liabilities were $470.2 million at June 30, 2008, an increase of
$20.7 million compared to $449.4 million at March 31, 2008. The increase in
total liabilities was caused primarily by a $21.3 million increase in total
deposits, partially offset by a $776,000 decrease in FHLB advances. At June 30,
2008, deposits are comprised of savings accounts totaling $56.8 million, money
market deposit accounts totaling $65.7 million, demand and NOW accounts totaling
$54.5 million, and certificates of deposits totaling $214.6 million. Since March
31, 2005, the Company has experienced a shift in deposits as customers with
generally lower-yielding savings accounts invest those funds in generally
higher-yielding money market accounts and certificates of deposit.
Stockholders' Equity
Total stockholders' equity decreased $1.4 million to $67.3 million at June
30, 2008 from $68.7 million at March 31, 2008. The decrease was primarily caused
by $1.2 million of treasury stock purchases, a $645,000 increase in the
accumulated other comprehensive loss, dividends
11
declared of $183,000, partially offset by net income of $452,000 and $202,000 of
stock options exercised.
Comparison of Operating Results for the Three Months Ended June 30, 2008 and
2007
General
The Company's results of operations depend primarily on net interest and
dividend income, which is the difference between the interest and dividend
income earned on its interest-earning assets, such as loans and securities, and
the interest expense on its interest-bearing liabilities, such as deposits and
borrowings. The Company also generates noninterest income, primarily from fees
and service charges. Gains on sales of securities and increases in cash
surrender value of life insurance policies are additional sources of noninterest
income. The Company's noninterest expense primarily consists of employee
compensation and benefits, occupancy and equipment expense, advertising and
promotion, data processing, professional fees and other operating expense.
Net Income
For the three months ended June 30, 2008, the Company reported net income
of $452,000, an increase of $403,000 compared to the year ago period. Basic and
diluted earnings per share for the quarter ended June 30, 2008 were each $0.08,
compared to $0.01 for the quarter ended June 30, 2007. During the prior year
quarter, the Company sold $6.7 million of securities, recording a loss of
$225,000 ($199,000 on an after-tax basis), as it restructured its balance sheet
to provide a better yield on investments.
Net Interest and Dividend Income
Net interest and dividend income for the three months ended June 30, 2008
totaled $3.9 million compared to $2.4 million for the same period in 2007. This
represented an increase of $1.5 million or 62.1%. The increase for the quarter
was primarily due to an increase in average interest earning assets of $205.8
million and a 20 basis point decrease in the rate paid on average interest
earning liabilities, partially offset by a $197.4 million increase in average
interest bearing liabilities and a 12 basis point decrease in the yield on
average interest bearing assets. The changes of the yield on average interest
earning assets and the rate paid on average interest bearing liabilities caused
the Company's interest rate spread to increase from 2.86% for the quarter ended
June 30, 2007 to 2.94% for the quarter ended June 30, 2008. The Company's net
interest margin for the quarter ended June 30, 2008 was 3.39% compared to 3.60%
in the year earlier period.
Interest and dividend income amounted to $7.2 million and $4.2 million for
the three months ended June 30, 2008 and 2007, respectively. Average
interest-earning assets were $476.8 million for the quarter ended June 30, 2008,
an increase of $205.8 million, or 75.9%, compared to $271.0 million for the
quarter ended June 30, 2007. The increase in average interest-earning assets
resulted primarily from the acquisition of First Valley Bancorp and asset growth
of the consolidated entity. The yield earned on average interest-earning assets
decreased to 6.12% for the three months ended June 30, 2008 from 6.24% for the
three months ended June 30, 2007, due primarily to the lower yields on federal
funds sold and FHLB stock.
12
Interest expense for the quarter was $3.3 million, an increase of $1.5
million, or 86.1%, from the $1.8 million reported in the same quarter last year.
Average interest-bearing liabilities grew $197.4 million during the quarter
ended June 30, 2008 from $211.3 million to $408.7 million primarily due to the
acquisition of First Valley Bancorp and deposit growth of the consolidated
entity. The average rate paid on interest-bearing liabilities decreased to 3.18%
for the quarter ended June 30, 2008 from 3.38% for the year ago period, due
primarily to the decrease in rates paid on certificates of deposit and
securities sold under agreements to repurchase. The average rate paid on
certificates of deposit decreased from 4.25% for the quarter ended June 30, 2007
to 3.99% for the current year quarter as rates have decreased for this type of
deposit.
Provision for Loan Losses
The provision for loan losses for the quarters ended June 30, 2008 and
2007 was $148,000 and $62,000, respectively. The additions to the allowance for
loan losses reflected continued growth in the loan portfolio, partially offset
by continued strong asset quality.
Noninterest Income
For the quarter ended June 30, 2008, noninterest income was $467,000,
compared to noninterest charges of $30,000 in the same quarter a year ago. The
increase in noninterest income was primarily due to an increase of $139,000 in
service charges on deposit accounts, primarily due to the inclusion of Valley
Bank, $12,000 of gain on sale of loans, a $48,000 increase in cash surrender
value of life insurance policies and a $65,000 increase in other income. The
increase in other income was due to investment services income from the
Company's new subsidiary, Valley Bank.
Noninterest Expense
Noninterest expense for the quarter ended June 30, 2008 was $3.5 million,
an increase of $1.4 million, or 68.5%, from $2.1 million in the quarter ended
June 30, 2007. Salaries and employee benefits increased $698,000, occupancy and
equipment expenses increased $295,000, professional fees increased $43,000,
amortization of identifiable intangible assets increased $112,000 and other
noninterest expense increased $184,000, all of which was due primarily to the
acquisition of First Valley Bancorp.
Provision for Income Taxes
The income tax provision for the quarter ended June 30, 2008 was $200,000,
compared to $148,000 for the quarter ended June 30, 2007. The effective tax rate
was 30.7% and 75.1% for the quarters ended June 30, 2008 and 2007, respectively.
For the quarter ended June 30, 2007, the $225,000 loss on sale of the mutual
funds is considered a capital loss and can only be offset by capital gains. The
Company was able to offset $68,000 of the loss from a capital gain previously
recorded; however, the Company is not able to record a tax benefit on the
remaining $154,000 capital loss. The $154,000 is allowed to be carried forward
to offset future capital gains, if any.
Liquidity and Capital Resources
The term liquidity refers to the ability of the Company to meet current
and future short-term financial obligations. The Company further defines
liquidity as the ability to generate adequate amounts of cash to fund loan
originations, deposit withdrawals and operating expenses.
13
Liquidity management is both a daily and long-term function of business
management. The Association's and Valley Bank's primary sources of liquidity are
deposits, scheduled amortization and prepayments of loan principal and
mortgage-related securities, funds provided by operations and borrowings. The
Association and Valley Bank can borrow funds from the Federal Home Loan Bank
based on eligible collateral of loans and securities. The Association and Valley
Bank had Federal Home Loan Bank borrowings as of June 30, 2008 of $61.2 million
with unused borrowing capacity of $35.5 million.
The Company's primary investing activities are the origination of loans
and the purchase of mortgage and investment securities. During the three months
ended June 30, 2008 and 2007, the Company originated loans, net of principal
paydowns of approximately $11.9 million and $1.6 million, respectively.
Purchases of investment securities totaled $19.5 million and $4.8 million for
the three months ended June 30, 2008 and 2007, respectively.
Loan repayment and maturing investment securities are a relatively
predictable source of funds. However, deposit flows, calls of investment
securities and prepayments of loans and mortgage-backed securities are strongly
influenced by interest rates, general and local economic conditions and
competition in the marketplace. These factors reduce the predictability of the
timing of these sources of funds. Total deposits were $391.6 million at June 30,
2008, a $21.3 million increase from the $370.3 million balance at March 31,
2008.
At June 30, 2008, the Company had outstanding commitments to originate
$6.9 million of loans, and available home equity and unadvanced lines of credit
and construction loans of approximately $40.5 million. In addition, the Company
had $2.3 million of commercial letters of credit. Management of the Association
and Valley Bank anticipate that they will have sufficient funds to meet its
current loan commitments. Retail certificates of deposit scheduled to mature in
one year or less at June 30, 2008 totaled $162.0 million, or 41.4% of total
deposits. The Company relies on competitive rates, customer service and
long-standing relationships with customers to retain deposits. Based on the
Company's experience with deposit retention and current retention strategies,
management believes that, although it is not possible to predict future terms
and conditions upon renewal, a significant portion of such deposits will remain
with the Company.
Enfield Federal Savings was "well capitalized" under regulatory guidelines
at June 30, 2008 and exceeded each of the applicable regulatory capital
requirements at such date. The table below presents the capital required as a
percentage of total and risk weighted assets and the percentage and the total
amount of capital maintained at June 30, 2008.
(dollars in thousands)
Required Enfield Federal
-------- ------------------
Tier 1 Capital 4% $ 23,560 7.98%
Total Risk-Based Capital 8% $ 25,670 12.86%
Tier 1 Risk-Based Capital 4% $ 23,560 11.80%
14
Valley Bank was "well capitalized" under regulatory guidelines at June 30,
2008 and exceeded each of the applicable regulatory capital requirements at such
date. The table below presents the capital required as a percentage of total and
risk weighted assets and the percentage and the total amount of capital
maintained at June 30, 2008.
(dollars in thousands)
Required Valley Bank
-------- ------------------
Tier 1 Capital 4% $ 24,687 11.25%
Total Risk-Based Capital 8% $ 26,734 14.21%
Tier 1 Risk-Based Capital 4% $ 24,687 13.12%
Management is not aware of any known trends, events or uncertainties that
will have or are reasonably likely to have a material effect on the Company's,
Enfield Federal Savings' or Valley Bank's liquidity, capital or operations, nor
is management aware of any current recommendations by regulatory authorities
which, if implemented, would have a material effect on the Company's, Enfield
Federal Savings' or Valley Bank's liquidity, capital or operations.
Off-Balance Sheet Arrangements
In addition to the normal course of operations, the Association and Valley
Bank engage in a variety of financial transactions that, in accordance with
generally accepted accounting principals, are not recorded in our financial
statements. These transactions involve, to varying degrees, elements of credit,
interest rate and liquidity risk. Such transactions are used primarily to manage
customers' requests for funding and take the form of loan commitments, lines of
credit and letters of credit.
For the three months ended June 30, 2008, neither Enfield Federal nor
Valley Bank engaged in 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.
-----------------------------------------------------------
Interest Rate Risk Management
The Association and Bank manage the interest rate sensitivity of their
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 their earnings
while decreases in interest rates may beneficially affect their earnings. To
reduce the potential volatility of their earnings, the Association and Bank have
sought to improve the match between asset and liability maturities and rates,
while maintaining an acceptable interest rate spread. Also, they attempt to
manage their interest rate risk through: their investment portfolio, an
increased focus on commercial and multi-family and commercial real estate
lending, which emphasizes the origination of shorter-term adjustable-rate loans;
and efforts to originate adjustable-rate residential mortgage loans. In
addition, the Association has commenced a program of selling long term,
fixed-rate one- to four-family residential loans in the secondary market. The
Association and the Bank currently do not participate in hedging programs,
interest rate swaps or other activities involving the use of off-balance sheet
derivative financial instruments.
15
The Association and Bank have Asset/Liability Committees, which includes
members of both the board of directors and management, to communicate,
coordinate and control all aspects involving asset/liability management. The
committees establishes and monitors the volume, maturities, pricing and mix of
assets and funding sources with the objective of managing assets and funding
sources to provide results that are consistent with liquidity, growth, risk
limits and profitability goals.
Net Interest Income Simulation Analysis
The Association and Bank analyze their interest rate sensitivity position
to manage the risk associated with interest rate movements through the use of
interest income simulation. The matching of assets and liabilities may be
analyzed by examining the extent to which such assets and liabilities are
"interest sensitive." An asset or liability is said to be interest rate
sensitive within a specific time period if it will mature or reprice within that
time period.
The Association's and Bank's goal is to manage asset and liability
positions to moderate the effects of interest rate fluctuations on net interest
income. Interest income simulations are completed quarterly and presented to the
Asset/Liability Committees. The simulations provide an estimate of the impact of
changes in interest rates on net interest income under a range of assumptions.
The numerous assumptions used in the simulation processes are reviewed by the
Asset/Liability Committees on a quarterly basis. Changes to these assumptions
can significantly affect the results of the simulation. The simulations
incorporate assumptions regarding the potential timing in the repricing of
certain assets and liabilities when market rates change and the changes in
spreads between different market rates. The simulation analyses incorporate
managements' current assessment of the risk that pricing margins will change
adversely over time due to competition or other factors.
The simulation analyses are only an estimate of the Association's and
Bank's interest rate risk exposure at a particular point in time. They
continually review the potential effect changes in interest rates could have on
the repayment of rate sensitive assets and funding requirements of rate
sensitive liabilities.
Item 4T. 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 officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure.
16
There have been no changes in the Company's internal control over
financial reporting identified in connection with the evaluation required by
Rule 13a-15 that occurred during the Company's last fiscal quarter that has
materially affected or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
Item 1A. Risk Factors.
------------
Risk factors that may affect future results were discussed in the
Company's 2008 Annual Report on Form 10-K. The Company's evaluation of its risk
factors has not changed materially since March 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
-----------------------------------------------------------
The Company repurchased 112,700 shares of its common stock in the quarter
ended June 30, 2008 as follows:
Average
For the three months ended Total shares price paid
June 30, 2008 repurchased per share
- --------------------------------------------------------------------------------
April -- $ --
May 102,700 11.03
June 10,000 10.70
- --------------------------------------------------------------------------------
Total 112,700 $ 11.00
- --------------------------------------------------------------------------------
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
None.
17
Item 6. Exhibits.
--------
3.1 Articles of Incorporation of New England Bancshares, Inc. (1)
3.2 Bylaws of New England Bancshares, Inc. (2)
4.1 Specimen stock certificate of New England Bancshares, Inc.(2)
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
----------
(1) Incorporated by reference into this document from the Registration
Statement on Form SB-2 (No. 333-128277) as filed on September 13,
2005.
(2) Incorporated by reference into this document from Exhibit 3.1 to the
Form 8-K as filed with the Securities and Exchange Commission on
October 11, 2007.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NEW ENGLAND BANCSHARES, INC.
Dated: August 13, 2008 By:/s/ Scott D. Nogles
-------------------- -----------------------------------------------
Scott D. Nogles
Chief Financial Officer
Dated: August 13, 2008 By:/s/ David J. O'Connor
-------------------- -----------------------------------------------
David J. O'Connor
Chief Executive Officer
18