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 September 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 No.)
incorporation or organization)
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 5,980,660 shares of common stock, par value $0.01 per share,
outstanding as of November 11, 2008.
NEW ENGLAND BANCSHARES, INC.
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2008
(Unaudited) and March 31, 2008..................................... 1
Condensed Consolidated Statements of Income for the
Three and Six Months Ended September 30, 2008 and 2007 (Unaudited). 2
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended September 30, 2008 and 2007 (Unaudited)........... 3
Notes to Condensed Consolidated Financial Statements (Unaudited)... 5
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations ......................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 19
Item 4T. Controls and Procedures............................................ 20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 20
Item 1A Risk Factors....................................................... 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 21
Item 3. Defaults Upon Senior Securities.................................... 21
Item 4. Submission of Matters to a Vote of Security Holders................ 21
Item 5. Other Information.................................................. 21
Item 6. Exhibits........................................................... 21
SIGNATURES................................................................... 22
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(Dollars in thousands)
September 30, March 31,
2008 2008
------------ ------------
ASSETS (Unaudited)
- ------
Cash and due from banks ................................................... $ 12,007 $ 9,115
Interest-bearing demand deposits with other banks ......................... 698 160
Federal funds sold ........................................................ 17,955 21,591
Money market mutual funds ................................................. 13 5,373
------------ ------------
Total cash and cash equivalents ..................................... 30,673 36,239
Interest-bearing time deposits with other banks ........................... 99 693
Investments in available-for-sale securities, at fair value ............... 77,674 63,544
Federal Home Loan Bank stock, at cost ..................................... 3,688 3,571
Loans, net of allowance for loan losses of $4,228 as of September 30, 2008
and $4,046 as of March 31, 2008 .............................. 389,109 371,769
Premises and equipment, net ............................................... 6,387 6,678
Accrued interest receivable ............................................... 2,305 2,165
Deferred income taxes, net ................................................ 2,128 1,140
Cash surrender value of life insurance .................................... 9,027 8,847
Identifiable intangible assets ............................................ 2,411 2,671
Goodwill .................................................................. 14,701 14,701
Other assets .............................................................. 3,261 6,161
------------ ------------
Total assets ........................................................ $ 541,463 $ 518,179
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest-bearing .................................................. $ 42,267 $ 40,347
Interest-bearing ..................................................... 352,320 329,965
------------ ------------
Total deposits ................................................... 394,587 370,312
Advanced payments by borrowers for taxes and insurance .................... 800 909
Federal Home Loan Bank advances ........................................... 63,657 61,928
Subordinated debentures ................................................... 3,897 3,893
Securities sold under agreements to repurchase ............................ 10,401 8,555
Other liabilities ......................................................... 3,541 3,845
------------ ------------
Total liabilities ................................................... 476,883 449,442
------------ ------------
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 shares issued at September 30, 2008 and 6,420,891
shares issued at March 31, 2008 ................................ 64 64
Paid-in capital ....................................................... 56,381 56,412
Retained earnings ..................................................... 17,091 19,055
Unearned ESOP shares, 283,183 shares at September 30, 2008 and
March 31, 2008 ............................................... (2,428) (2,428)
Treasury stock, 460,412 shares at September 30, 2008 and 322,399
shares at March 31, 2008 ..................................... (5,033) (3,772)
Unearned shares, stock-based plans, 31,912 shares at September 30,
2008 and 67,898 shares at March 31, 2008 ..................... (727) (796)
Accumulated other comprehensive (loss) income ......................... (768) 202
------------ ------------
Total stockholders' equity .......................................... 64,580 68,737
------------ ------------
Total liabilities and stockholders' equity .......................... $ 541,463 $ 518,179
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
September 30, September 30,
------------------- ------ -------------
2008 2007 2008 2007
-------- -------- -------- --------
Interest and dividend income:
Interest on loans ................................................. $ 6,130 $ 5,734 $ 12,232 $ 9,000
Interest and dividends on securities:
Taxable ........................................................ 819 692 1,562 1,260
Tax-exempt ..................................................... 201 121 370 203
Interest on federal funds sold, interest-bearing deposits and
dividends on money market mutual funds and FHLB stock .......... 124 366 299 622
-------- -------- -------- --------
Total interest and dividend income ............................. 7,274 6,913 14,463 11,085
-------- -------- -------- --------
Interest expense:
Interest on deposits .............................................. 2,543 2,645 5,067 3,926
Interest on advanced payments by borrowers for
taxes and insurance ......................................... 3 2 7 5
Interest on borrowed funds ........................................ 669 418 1,348 796
Interest on subordinated debentures ............................... 68 70 136 70
Interest on securities sold under agreements to repurchase ........ 36 122 73 240
-------- -------- -------- --------
Total interest expense ......................................... 3,319 3,257 6,631 5,037
-------- -------- -------- --------
Net interest and dividend income ............................... 3,955 3,656 7,832 6,048
Provision for loan losses ............................................... 159 108 307 170
-------- -------- -------- --------
Net interest and dividend income after provision for loan losses 3,796 3,548 7,525 5,878
-------- -------- -------- --------
Noninterest (charge) income:
Service charges on deposit accounts ............................... 276 248 545 378
Gain (loss) on sales and calls of investments, net ................ 4 7 12 (218)
Gain on sale of loans ............................................. 18 35 30 35
Increase in cash surrender value of life insurance policies ....... 91 37 175 73
Write down - investment securities ................................ (2,473) -- (2,473) --
Other income ...................................................... 90 105 184 134
-------- -------- -------- --------
Total noninterest (charge) income .............................. (1,994) 432 (1,527) 402
-------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits .................................... 1,925 1,890 3,840 3,107
Occupancy and equipment expense ................................... 742 723 1,454 1,140
Advertising and promotion ......................................... 81 59 174 76
Professional fees ................................................. 123 156 247 237
Data processing expense ........................................... 128 112 237 202
Stationery and supplies ........................................... 44 44 80 66
Amortization of identifiable intangible assets .................... 126 97 260 119
Other expense ..................................................... 449 468 870 705
-------- -------- -------- --------
Total noninterest expense ...................................... 3,618 3,549 7,162 5,652
-------- -------- -------- --------
(Loss) income before income taxes .............................. (1,816) 431 (1,164) 628
Income taxes ............................................................ 178 184 378 332
-------- -------- -------- --------
Net (loss) income .............................................. $ (1,994) $ 247 $ (1,542) $ 296
======== ======== ======== ========
(Loss) earnings per share:
Basic ....................................................... $ (0.35) $ 0.04 $ (0.27) $ 0.05
Diluted ..................................................... (0.35) 0.04 (0.27) 0.05
Dividends per share .................................................. 0.04 0.03 0.07 0.06
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)
Six Months Ended
September 30,
2008 2007
-------- --------
Cash flows from operating activities:
Net (loss) income ................................................................. $ (1,542) $ 296
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Net amortization of fair value adjustments .................................. 7 26
Accretion of securities, net ................................................ (30) (14)
(Gain) loss on sales and calls of investments, net .......................... (12) 218
Writedown - investment securities ........................................... 2,473 --
Provision for loan losses ................................................... 307 170
Gain on sale of loans, net .................................................. (30) (35)
Change in deferred loan origination costs, net .............................. (104) (217)
Depreciation and amortization ............................................... 448 337
Increase in accrued interest receivable ..................................... (137) (173)
Deferred income tax benefit ................................................. (369) (277)
Increase in cash surrender value of life insurance policies.. ............... (175) (73)
(Increase) decrease in prepaid expenses and other assets .................... (309) 240
Amortization of identifiable intangible assets .............................. 260 119
Increase in accrued expenses and other liabilities .......................... 349 88
Compensation cost for stock option plan ..................................... 63 110
Compensation cost for stock-based incentive plan ............................ 69 119
-------- --------
Net cash provided by operating activities ......................................... 1,268 934
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities .................................. (22,395) (16,270)
Proceeds from sales of available-for-sale securities ........................ 916 8,111
Proceeds from maturities of available-for-sale securities ................... 5,860 7,726
Cash acquired from First Valley Bancorp, net of cash paid of $12,417 ........ -- 6,596
Purchases of Federal Home Loan Bank stock ................................... (117) (150)
Loan originations and principal collections, net ............................ (21,613) (10,597)
Purchases of loans .......................................................... -- (2,610)
Loans sold .................................................................. 4,105 2,762
Proceeds from maturities of interest bearing time deposits with other banks. 594 593
Investments in life insurance policies ...................................... (5) (5)
Receipt of cash surrender value of life insurance policy .................... -- 30
Capital expenditures - premises and equipment ............................... (135) (86)
-------- --------
Net cash used in investing activities ....................................... (32,790) (3,900)
-------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
(continued)
Six Months Ended
September 30,
2008 2007
--------- ---------
Cash flows from financing activities:
Net increase in demand, NOW, MMDA and savings accounts ............... 2,470 3,422
Net increase in time deposits ........................................ 21,805 4,774
Net decrease in advanced payments by borrowers for taxes and insurance (109) (304)
Proceeds from Federal Home Loan Bank long-term advances .............. 4,000 2,000
Principal payments on Federal Home Loan Bank long-term advances ...... (2,279) (2,918)
Net increase in securities sold under agreement to repurchase ........ 1,846 3,683
Purchase of treasury stock ........................................... (1,495) (17)
Exercise of stock options ............................................ 140 40
Payments of cash dividends on common stock ........................... (422) (330)
--------- ---------
Net cash provided by financing activities ........................................ 25,956 10,350
--------- ---------
Net (decrease) increase in cash and cash equivalents ............................. (5,566) 7,384
Cash and cash equivalents at beginning of period ................................. 36,239 18,640
--------- ---------
Cash and cash equivalents at end of period ....................................... $ 30,673 $ 26,024
========= =========
Supplemental disclosures:
Interest paid ........................................................ $ 6,650 $ 4,935
Income taxes paid .................................................... 739 598
Decrease in due to broker ............................................ 651 --
Decrease in due from broker .......................................... 709 --
Acquisition of First Valley Bancorp:
Assets acquired
Cash and cash equivalents ............................................ $ -- $ 19,013
Investments in available-for-sale securities ......................... -- 22,648
Federal Home Loan Bank stock, at cost ................................ -- 602
Loans, net of allowance for loan losses .............................. -- 141,041
Premises and equipment, net .......................................... -- 2,946
Accrued interest receivable .......................................... -- 836
Deferred income taxes, net ........................................... -- 105
Other assets ......................................................... -- 928
Identifiable intangible assets ....................................... -- 2,459
--------- ---------
Total assets acquired .......................................................... -- 190,578
--------- ---------
Liabilities assumed
Deposits ............................................................. -- 168,370
Advanced payments by borrowers for taxes and insurance ............... -- 192
Borrowed funds ....................................................... -- 8,513
Other liabilities .................................................... -- 1,369
--------- ---------
Total liabilities assumed ...................................................... -- 178,444
--------- ---------
Net assets acquired .............................................................. -- 12,134
Acquisition costs ................................................................ -- 25,660
--------- ---------
Goodwill ......................................................................... $ -- $ 13,526
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
September 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 September 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-Q, 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. No dilutive shares are included for the three and
six months ended September 30, 2008 as the Company recorded a net loss for the
periods. The Company had 123,563 anti-dilutive shares for the three and six
months ended September 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.
6
Quarter Ended Six Months Ended
September 30, September 30,
------------------ ------------------
(In thousands, except per share data) 2008 2007 2008 2007
------- ------- ------- -------
Net (loss) income $(1,994) $ 247 $(1,542) $ 296
Weighted average common shares
outstanding for computation of basic
EPS 5,644 5,871 5,676 5,406
Effect of dilutive stock options and
stock awards -- 164 -- 172
------- ------- ------- -------
Weighted average common shares for
computation of diluted EPS 5,644 6,035 5,676 5,578
------- ------- ------- -------
(Loss) earnings per share:
Basic $ (0.35) $ 0.04 $ (0.27) $ 0.05
Diluted $ (0.35) $ 0.04 $ (0.27) $ 0.05
- --------------------------------------------------------------------------------
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
7
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 did not 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 earlier adoption permitted. The
Company's adoption of this statement did not 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 did not 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 April 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.
8
NOTE 5 - Stock-Based Incentive Plan
At September 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 six months ended September 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 charged
against income in the six months ended September 30, 2008 and 2007 for the
granting of stock options under the plans was $63,000 and $110,000,
respectively. During the six months ended September 30, 2008, the Company
granted 2,000 options.
The compensation cost that has been charged against income for the
granting of restricted stock awards under the plan for the six months ended
September 30, 2008 and 2007 was $69,000 and $119,000, respectively.
NOTE 6 - Other-Than-Temporary Impairment of Investments
During the three and six months ended September 30, 2008 the Company
recorded an other-than-temporary charge of $2.5 million. This charge related to
auction rate preferred securities issued by trusts with assets consisting solely
of Fannie Mae and Freddie Mac preferred securities and by three additional
corporations. The Company recorded a $1.7 million charge related to the Fannie
Mae and Freddie Mac auction rate securities, which had a book value of $1.8
million at June 30, 2008, and an $810,000 charge related to the other three
corporate auction rate securities, which had a book value of $1.6 million at
June 30, 2008. At September 30, 2008, the remaining book value of all the
auction rate securities is $927,000. For the three and six months ended
September 30, 2008 the Company did not recognize a tax benefit on the charges
due to the classification as capital losses. However, due to a change in tax
legislation the charge related to the Fannie Mae and Freddie Mac auction rate
securities are considered ordinary losses as of October 29, 2008 and the Company
will record a tax benefit during the Company's fiscal third quarter of
approximately $650,000. The charge related to the three other corporate auction
rate securities will continue to be classified as a capital loss for which the
Company will be able to offset future capital gains, if any.
NOTE 7 - 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. The fair value hierarchy established by SFAS No. 157 is based on
observable and unobservable inputs participants use to price an asset or
liability. SFAS No. 157 has prioritized these inputs into the following fair
value hierarchy:
Level 1 Inputs - Unadjusted quoted prices in active markets for
identical assets or liabilities that are available at the measurement date.
9
Level 2 Inputs - Inputs other than quoted prices included within Level
1 that are observable for the asset or liability, either directly or indirectly.
These might include quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities in markets
that are not active, inputs other than quoted prices that are observable for the
asset or liability (such as interest rates, volatilities, prepayment speeds,
credit risks, etc.) or inputs that are derived principally from or corroborated
by market data by correlation or other means.
Level 3 Inputs - Unobservable inputs for determining the fair value of
the asset or liability and are based on the entity's own assumptions about the
assumptions that market participants would use to price the asset or liability.
Assets measured at fair value on a recurring and non-recurring basis at
September 30, 2008 are summarized below. There are no liabilities measured at
fair value.
Fair Value Measurements at Reporting Date Using
-----------------------------------------------
Quoted Prices
In Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
Description September 30, 2008 (Level 1) (Level 2) (Level 3)
- ----------- ------------------ --------- --------- ---------
(In Thousands)
Recurring:
- ----------
Available-for-sale
securities $ 77,674 $ 519 $ 77,155 $ --
Non-recurring:
- --------------
Impaired securities included
in other assets 927 -- 927 --
Impaired loans 1,586 -- -- 1,586
------------ ------------ ------------ ------------
Total assets $ 80,187 $ 519 $ 78,082 $ 1,586
============ ============ ============ ============
Item 2. Management's Discussion and Analysis of Financial Conditions and
----------------------------------------------------------------
Results of Operations.
---------------------
The following analysis discusses changes in the financial condition and
results of operations at and for the three and six months ended September 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.
10
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 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 September 30, 2008 and March 31, 2008
Assets
Total assets were $541.5 million at September 30, 2008, an increase of
$23.3 million compared to $518.2 million at March 31, 2008. The increase in
total assets was primarily due to a $14.1 million increase in available-for-sale
investments and a $17.3 million increase in net loans, partially offset by a
$5.6 million decrease in cash and cash equivalents and a $2.9 million decrease
in other assets. At September 30, 2008, commercial real estate and commercial
loans accounted for 52.5% 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
11
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.
The following table indicates the relationship between the allowance
for loan losses, total loans outstanding and nonperforming loans at the dates
indicated.
September 30, 2008 March 31, 2008
------------------ --------------
(Dollars in thousands)
Allowance for loan losses $ 4,228 $ 4,046
Gross loans outstanding 393,463 376,038
Nonaccrual loans:
Residential mortgage loans $ 1,463 $ 737
Commercial mortgage loans 1,841 --
Construction mortgage loans 478 398
Commercial business loans 1,863 10
Consumer loans 22 22
-------- --------
Total nonaccrual loans 5,667 1,167
Repossessed assets 51 --
-------- --------
Total nonperforming assets $ 5,718 $ 1,167
======== ========
Allowance/Loans outstanding 1.07% 1.08%
Allowance/Nonperforming loans 74.61% 346.70%
Allowance/Nonperforming assets 73.94% 346.70%
The $5.7 million balance of nonaccrual loans at September 30, 2008 was
comprised of twenty seven loans - ten residential real estate loans, ten
commercial loans, four commercial real estate loans, two construction loans and
one consumer 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. Repossessed assets at September 30, 2008 consists of one
automobile loan and one mobile home loan; there were no repossessed assets at
March 31, 2008.
Liabilities
Total liabilities were $476.9 million at September 30, 2008, an
increase of $27.5 million compared to $449.4 million at March 31, 2008. The
increase in total liabilities was caused primarily by a $24.3 million increase
in total deposits, a $1.8 million increase in securities sold under agreements
to repurchase and a $1.7 million increase in FHLB advances. At September 30,
2008, deposits are comprised of savings accounts totaling $55.6 million, money
market deposit accounts totaling $63.3 million, demand and NOW accounts totaling
$53.2 million, and certificates of deposits totaling $222.5 million. Since March
31, 2005, the Company has experienced a shift in
12
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 $4.1 million to $64.6 million at
September 30, 2008 from $68.7 million at March 31, 2008. The decrease was
primarily caused by a net loss of $1.5 million, $1.5 million of treasury stock
purchases, a $970,000 increase in the accumulated other comprehensive loss,
dividends declared of $422,000, partially offset by $202,000 of stock options
exercised.
Comparison of Operating Results for the Three Months Ended September 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 (Loss) Income
For the three months ended September 30, 2008, the Company reported a
net loss of $2.0 million, compared to net income of $247,000 for the year ago
period. Basic and diluted earnings per share for the quarter ended September 30,
2008 were each $(0.35), compared to $0.04 for the quarter ended September 30,
2007. During the three months ended September 30, 2008, the Company recorded a
$2.5 million charge for an other-than-temporary impairment on investments
described below; the Company did not record any tax benefits related to the
charge.
Net Interest and Dividend Income
Net interest and dividend income for the three months ended September
30, 2008 totaled $4.0 million compared to $3.7 million for the same period in
2007. This represented an increase of $299,000 or 8.2%. The increase for the
quarter was primarily due to an increase in average interest earning assets of
$72.8 million and a 69 basis point decrease in the rate paid on average interest
bearing liabilities, partially offset by a $77.5 million increase in average
interest bearing liabilities and a 62 basis point decrease in the yield on
average interest earning 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 2.97% for the quarter ended
September 30, 2007 to 3.05% for the quarter ended September 30, 2008. The
Company's net interest margin for the quarter ended September 30, 2008 was 3.38%
compared to 3.59% in the year earlier period.
Interest and dividend income amounted to $7.3 million and $6.9 million
for the three months ended September 30, 2008 and 2007, respectively. Average
interest-earning assets were
13
$483.8 million for the quarter ended September 30, 2008, an increase of $72.7
million, or 17.7%, compared to $411.1 million for the quarter ended September
30, 2007. The increase in average interest-earning assets was caused primarily
by a $63.5 million increase in average net loans. The yield earned on average
interest-earning assets decreased to 6.11% for the three months ended September
30, 2008 from 6.73% for the three months ended September 30, 2007, due primarily
to the lower yields on loans, federal funds sold and FHLB stock.
Interest expense for the quarter was $3.3 million, an increase of
$62,000, or 1.9%, from the amount reported in the same quarter last year.
Average interest-bearing liabilities grew $77.5 million during the quarter ended
September 30, 2008 from $343.7 million to $421.2 million primarily due to a
$39.5 million increase in certificates of deposit, a $20.1 million increase in
FHLB borrowings and a $17.9 million increase in money market deposit accounts.
The average rate paid on interest-bearing liabilities decreased to 3.07% for the
quarter ended September 30, 2008 from 3.76% for the year ago period, due
primarily to the decrease in rates paid on certificates of deposit, money market
deposit accounts and securities sold under agreements to repurchase. The average
rate paid on certificates of deposit decreased from 4.58% for the quarter ended
September 30, 2007 to 3.71% 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 September 30, 2008
and 2007 was $159,000 and $108,000, respectively. The additions to the allowance
for loan losses reflected continued growth in the loan portfolio and the
increase in nonaccrual loans.
Noninterest (Charge) Income
For the quarter ended September 30, 2008, noninterest charge was $2.0
million, compared to noninterest income of $432,000 in the same quarter a year
ago. Affecting noninterest charge for the three months ended September 30, 2008
was an other-than-temporary impairment charge of $2.5 million. The Company had a
$1.7 million charge on auction rate preferred securities issued by trusts with
assets consisting solely of Fannie Mae and Freddie Mac preferred stock, which
had a book value of $1.8 million at June 30, 2008. In addition, the Company
recorded an $810,000 charge related to three pass-through auction rate
securities issued by trusts with assets consisting solely of corporate preferred
stock, which had a book value at June 30, 2008 of $1.6 million. Excluding the
$2.5 million charge, noninterest income increased $47,000, or 10.9%. The
adjusted increase was caused by a $28,000 increase in service charges on deposit
accounts and a $54,000 increase in cash surrender value increase of life
insurance policies, partially offset by a $17,000 decrease in gain on sale of
loans and a $15,000 decrease in other income.
Noninterest Expense
Noninterest expense for the quarter ended September 30, 2008 was $3.6
million, an increase of $69,000, or 1.9%, from $3.5 million in the quarter ended
September 30, 2007. Salaries and employee benefits increased $35,000 and
amortization of identifiable intangible assets increased $29,000.
14
Provision for Income Taxes
The income tax provision for the quarter ended September 30, 2008 was
$178,000, compared to $184,000 for the quarter ended September 30, 2007.
Currently, the impairment charges described above are recorded as capital losses
and as such the Company has established a full valuation allowance, therefore no
tax benefit for the charges are recognized. The effective tax rate for the three
months ended September 30, 2007 was 42.7% and 27.1% for the current year period
excluding the impairment charges described above. The decrease in the effective
tax rate is due primarily to an increase in the percentage of non-taxable income
to pre-tax income recorded by the Company.
Comparison of Operating Results for the Six Months Ended September 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 (Loss) Income
For the six months ended September 30, 2008, the Company reported a net
loss of $1.5 million, compared to net income of $296,000 for the year ago
period. Basic and diluted earnings per share for the quarter ended September 30,
2008 were each $(0.27), compared to $0.05 for the six months ended September 30,
2007. During the six months ended September 30, 2008 the Company recorded a $2.5
million charge for an other-than-temporary impairment on investments described
below; the Company did not record any tax benefits related to the charge. During
the six months ended September 30, 2007, the Company sold $6.4 million of
securities, recording a loss of $222,000 ($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 six months ended September 30,
2008 totaled $7.8 million compared to $6.0 million for the same period in 2007.
This represented an increase of $1.8 million or 29.5%. The increase for the
period was primarily due to an increase in average interest earning assets of
$140.7 million and a 50 basis point decrease in the rate paid on average
interest bearing liabilities, partially offset by a $137.4 million increase in
average interest bearing liabilities and a 49 basis point decrease in the yield
on average interest earning assets. The spread stayed constant at 2.99% for the
six months ended September 30, 2008 and 2007. The Company's net interest margin
for the six months ended September 30, 2008 was 3.40% compared to 3.63% in the
year earlier period.
15
Interest and dividend income amounted to $14.5 million and $11.1
million for the six months ended September 30, 2008 and 2007, respectively.
Average interest-earning assets were $478.6 million for the six months ended
September 30, 2008, an increase of $140.8 million, or 41.7%, compared to $337.8
million for the six months ended September 30, 2007. The increase in average
interest-earning assets was caused primarily by the merger with First Valley
Bancorp and its subsidiary Valley Bank. The operations of Valley Bank was
included for the full six months ended September 30, 2008 compared to only two
and a half months for the six months ended September 30, 2007. The yield earned
on average interest-earning assets decreased to 6.12% for the six months ended
September 30, 2008 from 6.61% for the six months ended September 30, 2007, due
primarily to the lower yields on loans, federal funds sold and FHLB stock.
Interest expense for the six months ended September 30, 2008 was $6.6
million, an increase of $1.6 million, or 31.6%, from the amount reported in the
same quarter last year. Average interest-bearing liabilities grew $137.4 million
during the six months ended September 30, 2008 from $277.5 million to $415.0
million primarily due to the merger with First Valley Bancorp and its subsidiary
Valley Bank. The operations of Valley Bank were included for the full six months
ended September 30, 2008, compared to only two and a half months for the six
months ended September 30, 2007. The average rate paid on interest-bearing
liabilities decreased to 3.12% for the six months ended September 30, 2008 from
3.62% for the year ago period, due primarily to the decrease in rates paid on
certificates of deposit, money market deposit accounts and securities sold under
agreements to repurchase. The average rate paid on certificates of deposit
decreased from 4.48% for the quarter ended September 30, 2007 to 3.84% for the
current year period as rates have decreased for this type of deposit.
Provision for Loan Losses
The provision for loan losses for the six months ended September 30,
2008 and 2007 was $307,000 and $170,000, respectively. The additions to the
allowance for loan losses reflected continued growth in the loan portfolio and
the increase in nonaccrual loans.
Noninterest (Charge) Income
For the six months ended September 30, 2008, noninterest charge was
$1.5 million, compared to noninterest income of $402,000 in the same quarter a
year ago. Affecting noninterest charge for the six months ended September 30,
2008 was an other-than-temporary impairment charge of $2.5 million. The Company
had a $1.7 million charge on auction rate preferred securities issued by trusts
with assets consisting solely of Fannie Mae and Freddie Mac preferred stock,
which had a book value of $1.8 million at June 30, 2008. In addition, the
Company recorded an $810,000 charge related to three pass-through auction rate
securities issued by trusts with assets consisting solely of corporate preferred
stock, which had a book value at June 30, 2008 of $1.6 million. Affecting
noninterest income for the six months ended June 30, 2007 was a $225,000 loss on
sale of investments, of which $222,000 was related to the sale of two mutual
funds totaling $6.4 million. The Company recognized a $167,000 increase in
service charges on deposit accounts and a $102,000 increase in cash surrender
values of life insurance policies.
Noninterest Expense
Noninterest expense for the six months ended September 30, 2008 was
$7.2 million, an increase of $1.5 million, or 26.7%, from $5.7 million in the
six months ended September 30, 2007. Salaries and employee benefits increased
$733,000 and amortization of identifiable intangible
16
assets increased $141,000. The increase is primarily due to the merger with
First Valley Bancorp and its subsidiary Valley Bank. The operations of Valley
Bank were included for the full six months ended September 30, 2008, compared to
only two and a half months for the six months ended September 30, 2007.
Provision for Income Taxes
The income tax provision for the six months ended September 30, 2008
was $378,000, compared to $332,000 for the six months ended September 30, 2007.
Currently, the impairment charges described above are recorded as capital losses
and as such the Company has established a full valuation allowance, therefore no
tax benefit for the charges are recognized. The effective tax rate for the six
months ended September 30, 2007 was 40.1%, excluding the effect of the mutual
fund sales described above, and 28.9% for the current year period excluding the
impairment charges described above. The decrease in the adjusted effective tax
rate is due primarily to an increase in the percentage of non-taxable income to
pre-tax income recorded by the Company.
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. 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 September 30, 2008 of $63.7 million, with unused borrowing
capacity of $14.2 million.
The Company's primary investing activities are the origination of loans
and the purchase of mortgage and investment securities. During the six months
ended September 30, 2008 and 2007, the Company originated loans, net of
principal paydowns, of approximately $21.6 million and $10.6 million,
respectively. Purchases of investment securities totaled $22.4 million and $16.3
million for the six months ended September 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 $394.6 million at
September 30, 2008, a $24.3 million increase from the $370.3 million balance at
March 31, 2008.
At September 30, 2008, the Company had outstanding commitments to
originate $19.5 million of loans, and available home equity and unadvanced lines
of credit and construction loans of approximately $31.8 million. In addition,
the Company had $2.1 million of commercial letters of credit. Management of the
Association and Valley Bank anticipate that they will have sufficient funds to
meet their current loan commitments. Retail certificates of deposit scheduled to
mature in one year or less totaled $153.7 million, or 38.9% of total deposits at
September 30, 2008. 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
17
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 September 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 September 30, 2008.
(dollars in thousands)
Required Enfield Federal
-------- ---------------
Tier 1 Capital 4% $23,866 7.90%
Total Risk-Based Capital 8% $25,980 12.11%
Tier 1 Risk-Based Capital 4% $23,866 11.12%
Valley Bank was "well capitalized" under regulatory guidelines at
September 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 September 30, 2008.
(dollars in thousands)
Required Valley Bankl
-------- ---------------
Tier 1 Capital 4% $21,212 9.51%
Total Risk-Based Capital 8% $23,326 12.46%
Tier 1 Risk-Based Capital 4% $21,212 11.33%
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 six months ended September 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.
18
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.
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
19
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.
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.
20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
-----------------------------------------------------------
The Company repurchased 25,113 shares of its common stock in the
quarter ended September 30, 2008 as follows:
Maximum
Total Number of
Number of Shares that
Shares May Yet Be
Purchased as Purchased
Average Part of Publicly Under the
For the three months ended Total shares price paid Announced Plans Plans or
September 30, 2008 repurchased per share or Programs Programs
- -------------------------------------------------------------------------------------------------------------------
July --- $ --- --- 192,224
August 15,000 10.08 15,000 177,224
September 10,113 10.13 10,000 167,224
------ ------
Total 25,113 $10.10 25,000 167,224
====== ======
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
None.
Item 6. Exhibits.
--------
3.1 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.
21
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: November 14, 2008 By: /s/ Scott D. Nogles
-------------------- ----------------------------------------
Scott D. Nogles
Chief Financial Officer
Dated: November 14, 2008 By: /s/ David J. O'Connor
-------------------- ----------------------------------------
David J. O'Connor
Chief Executive Officer
22