SECURITIES AND EXCHANGE COMMISSION
100 F Street NE
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended March 31, 2009
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 No. 001-51589
New England Bancshares
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(Exact name of registrant as specified in its charter)
Maryland 04-3693643
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
855 Enfield Street, Enfield, Connecticut 06082
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(Address of Principal Executive Offices) Zip Code
(860) 253-5200
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(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $0.01 par value The NASDAQ Stock Market, LLC
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. YES [ ] NO [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES [ ] NO [X]
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X].
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. as defined in Rule
12b-2 of the Exchange Act).
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check box if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
As of June 5, 2009, there were outstanding 5,873,960 shares of the
Registrant's Common Stock.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant, computed by reference to the last sale
price on June 5, 2009, is $31,323,203.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2009 Annual Meeting of Stockholders of the Registrant
(Part III).
INDEX
PAGE
PART I
ITEM 1. DESCRIPTION OF BUSINESS ...................................... 1
ITEM 1A. RISK FACTORS ................................................. 17
ITEM 1B. UNRESOLVED STAFF COMMENTS .................................... 19
ITEM 2. PROPERTIES ................................................... 20
ITEM 3. LEGAL PROCEEDINGS ............................................ 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......... 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ............ 21
ITEM 6. SELECTED FINANCIAL DATA ...................................... 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS .................................... 22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK .... 45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .................. 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ..................................... 83
ITEM 9A(T). CONTROLS AND PROCEDURES ...................................... 83
ITEM 9B. OTHER INFORMATION ............................................ 84
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE........ 84
ITEM 11. EXECUTIVE COMPENSATION ....................................... 85
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS .............................. 85
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE ........................................ 86
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ....................... 87
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ................... 87
SIGNATURES ............................................................... 89
This annual report on Form 10-K contains certain forward-looking statements
which are based on certain assumptions and describe the Company's future plans,
strategies and expectations. These forward-looking statements may be identified
by the use of such words as "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the Company's
operations include, but are not limited to, the items described in "Risk
Factors" appearing in Part I, Item 1A of this annual report and changes in:
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality and composition of our
loan and investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. 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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
New England Bancshares, Inc. New England Bancshares, Inc. (the "Company")
is a Maryland corporation, which was organized in 2005. In December 2005, New
England Bancshares, Inc. became the holding company parent of Enfield Federal
Savings following the completion of the "second-step" mutual-to-stock conversion
of Enfield Mutual Holding Company. Reference is made to "New England Bancshares"
or the "Company" for periods both before and after the second-step conversion.
The principal assets of the Company are its investments in Enfield Federal
Savings and Loan Association (the "Association" or "Enfield Federal") and Valley
Bank (the "Bank" or "Valley Bank"). In 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 transaction expenses, payout of stock options and employee expenses
totaling $2.4 million, creating $13.6 million of goodwill.
Enfield Federal Savings and Loan Association. The Association,
incorporated in 1916, is a federally chartered savings association headquartered
in Enfield, Connecticut. The Association's deposits are insured by the Federal
Deposit Insurance Corporation (the "FDIC"). 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. In June 2002, the Association reorganized from the mutual form
of organization to the mutual holding company structure. In December 2003, the
Association acquired Windsor Locks Community Bank, FSL. At March 31, 2009, the
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Association operated from eight locations in Connecticut and had total assets of
$325.8 million and total deposits of $227.5 million.
Valley Bank. The Bank, incorporated in 1999, is a state chartered
commercial bank headquartered in Bristol, Connecticut. The Bank's deposits are
insured by the FDIC. The Bank is engaged principally in the business of
attracting deposits from the general public and investing those deposits
primarily in commercial real estate loans, and commercial and small business
loans. At March 31, 2009, the Bank operated from four locations in Connecticut
and had total assets of $245.1 million and total deposits of $194.0 million.
Merger of Enfield Federal and Valley Bank. On January 5, 2009, the Company
announced its intention to merge its wholly-owned federal savings bank
subsidiary, Enfield Federal, with and into its wholly-owned Connecticut
commercial banking subsidiary, Valley Bank ("Valley"), and rename the combined
bank "New England Bank." The Company will retain the name of each bank at their
respective branches and operate the branches as divisions of New England Bank.
The subsidiary merger is designed to improve the efficiencies of the Company by
eliminating the additional regulatory and administrative costs of maintaining
two separately chartered banking subsidiaries with similar products, services
and operations. The consolidation will allow the Company to reduce its operating
expenses while maintaining the financial products and services offered by both
banks. The combined structure will also assist the combined bank in offering a
higher level of customer service. It is anticipated that the subsidiary merger
will allow the Company to reduce annual expenses in excess of $750,000. The
merger of the banking subsidiaries was completed on May 1, 2009.
Acquisition. On January 14, 2009 the Company announced its intention to
acquire Apple Valley Bank & Trust Company ("Apple Valley") of Cheshire,
Connecticut. As part of the acquisition, Apple Valley Bank was merged into New
England Bancshares' wholly-owned banking subsidiary, Valley Bank. The
transaction increased New England Bancshares' assets from $541 million at
September 30, 2008 to approximately $624 million and increase its banking
offices from 12 to 15. Under the terms of the transaction, shareholders of Apple
Valley Bank were entitled to elect to receive either one share of New England
Bancshares common stock or $8.50 in cash for each share of Apple Valley Bank
common stock, subject to an aggregate allocation of 60% stock and 40% cash.
Based upon the $8.50 per share price at January 14, 2009, the consideration was
approximately 119% of Apple Valley Bank's tangible book value and represented a
2% franchise premium to core deposits. New England Bancshares expects the
transaction to be accretive to earnings per share in the first full year of
combined operations. The transaction was completed on June 8, 2009.
New England Bancshares' Website and Availability of Securities and Exchange
Commission Filings
New England Bancshares' internet website is www.enfieldfederal.com. New
England Bancshares makes available free of charge on or through its website its
annual reports on Forms 10-K, quarterly reports on Forms 10-Q, current reports
on Forms 8-K and any amendments to these reports filed or furnished pursuant to
the Securities and Exchange act of 1934, as soon as reasonably practicable after
New England Bancshares electronically files such material with, or furnishes it
to, the Securities and Exchange Commission. Except as specifically incorporated
by reference into this annual report, information on our website is not a part
of this annual report.
Market Area
The Association conducts its operations through its main office and one
additional branch office in Enfield and the branch offices in Broad Brook, East
Windsor, Manchester, Ellington, Suffield and Windsor Locks, Connecticut.
Deposits are gathered from, and lending activities are concentrated primarily in
the towns of, and the communities contiguous to, its branch offices.
The Bank conducts its operations through its main office and one other
branch office in Bristol and branch offices in Terryville and Southington,
Connecticut. Deposits are gathered from, and lending activities are concentrated
primarily in the towns of, and the communities contiguous to, its branch
offices.
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According to published statistics, Hartford County's 2006 population was
approximately 882,000 and consisted of approximately 344,000 households. The
population increased approximately 2.1% from 2000. Per capita income in 2005 for
Hartford County was approximately $32,000, which was less than the Connecticut
average of approximately $35,000. Likewise, median household income for Hartford
County was $59,000, compared to approximately $63,000 for Connecticut.
Competition
We face intense competition both in making loans and attracting deposits.
As of June 30, 2008, the most recent date for which data is available from the
FDIC, we held approximately 1.3% of the deposits in Hartford County, which was
the 11th largest share of deposits out of 30 financial institutions in the
county. North-central Connecticut has a high concentration of financial
institutions and financial services providers, many of which are branches of
large money centers, super-regional and regional banks which have resulted from
the consolidation of the banking industry in New England. Many of these
competitors have greater resources than we do and may offer products and
services that we do not provide.
Our competition for loans comes from commercial banks, savings
institutions, mortgage banking firms, credit unions, finance companies,
insurance companies and brokerage and investment banking firms. Our most direct
competition for deposits has historically come from commercial banks, savings
banks, savings and loan associations, credit unions and mutual funds. We face
additional competition for deposits from short-term money market funds and other
corporate and government securities funds and from brokerage firms and insurance
companies.
We expect competition to increase in the future as a result of
legislative, regulatory and technological changes and the continuing trend of
consolidation in the financial services industry. Technological advances, for
example, have lowered the barriers to market entry, allowed banks to expand
their geographic reach by providing services over the Internet and made it
possible for non-depository institutions to offer products and services that
traditionally have been provided by banks. Changes in federal law permit
affiliation among banks, securities firms and insurance companies, which
promotes a competitive environment in the financial services industry.
Competition for deposits and the origination of loans could limit our future
growth.
Lending Activities
General. The largest segments of our loan portfolio are residential real
estate loans and commercial real estate loans. The other significant segments of
our loan portfolio are commercial loans, construction loans and consumer loans.
We originate loans for investment purposes.
Residential Loans. At March 31, 2009, residential loans, excluding home
equity loans and lines of credit, totaled $125.2 million or 29.8% of total
loans. At March 31, 2009, 84.0% of our residential loans were fixed-rate and
16.0% were adjustable-rate.
We originate fixed-rate fully amortizing loans with maturities ranging
between 10 and 30 years. Management establishes the loan interest rates based on
market conditions. We offer mortgage loans that conform to Fannie Mae and
Freddie Mac guidelines, as well as jumbo loans, which presently are loans in
amounts over $417,000.
We also currently offer adjustable-rate mortgage loans, with an interest
rate based on the one-year Constant Maturity Treasury Bill index, which adjust
annually from the outset of the loan or which adjust annually after a three-,
five- or ten-year initial fixed period and with terms of up to 30 years, with
the majority of adjustable rate loans adjusting after a five-year period.
Interest rate adjustments on such loans are generally limited to no more than 2%
during any adjustment period and 6% over the life of the loan.
We underwrite fixed-rate and variable-rate one- to four-family residential
mortgage loans with loan-to-
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value ratios of up to 100% and 95%, respectively, provided that a borrower
obtains private mortgage insurance on loans that exceed 80% of the appraised
value or sales price, whichever is less, of the secured property. We also
require that fire, casualty, title, hazard insurance and, if appropriate, flood
insurance be maintained on all properties securing real estate loans made by us.
An independent licensed appraiser generally appraises all properties.
The Association previously offered its full-time employees who satisfy
certain criteria and our general underwriting standards fixed- and
adjustable-rate residential mortgage loans with reduced interest rates that are
currently 50 basis points below the rates offered to our other customers. The
employee mortgage rate normally ceases upon termination of employment. Upon
termination of the employee mortgage rate, the interest rate reverts to the
contract rate in effect at the time that the loan was extended. All other terms
and conditions contained in the original mortgage and note continued to remain
in effect. Currently, the Bank does not offer this type of program. As of March
31, 2009, we had $2.6 million of employee residential mortgage loans, or 0.63%
of net loans.
Home Equity Loans and Lines of Credit. We offer home equity loans and home
equity lines of credit, both of which are secured by owner-occupied one- to
four-family residences. At March 31, 2009, home equity loans and equity lines of
credit totaled $33.1 million, or 7.9% of total loans. Additionally, at March 31,
2009, the unadvanced amounts of home equity lines of credit totaled $8.8
million. Home equity loans are offered with fixed rates of interest and with
terms up to 15 years. Home equity lines of credit are offered with adjustable
rates of interest that are indexed to the prime rate as reported in The Wall
Street Journal. Interest rate adjustments on home equity lines of credit are
limited to a maximum of 18% or 6% above the initial interest rate, whichever is
lower.
The procedures for underwriting home equity loans and lines of credit
include an assessment of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loans. We will
offer home equity loans with maximum combined loan-to-value ratios of 90%,
provided that loans in excess of 80% will generally be charged a higher rate of
interest. A home equity line of credit may be drawn down by the borrower for an
initial period of 10 years from the date of the loan agreement. During this
period, the borrower has the option of paying, on a monthly basis, either
principal and interest or only interest. If not renewed, the Association
requires the borrower to pay back the amount outstanding under the line of
credit over a term not to exceed 10 years, beginning at the end of the 10-year
period. After the initial 10-year period, the Bank requires the borrower to pay
back the amount outstanding in full.
Commercial Real Estate Loans. We originate commercial real estate loans
that are generally secured by properties used for business purposes such as
small office buildings, industrial facilities or retail facilities primarily
located in our primary market area. At March 31, 2009, commercial real estate
loans totaled $162.8 million, or 38.8% of total loans. Our commercial real
estate loans are generally made with terms of up to 25 years. These loans are
offered with interest rates that are fixed or adjust periodically and are
generally indexed to the prime rate as reported in The Wall Street Journal plus
a margin of 100 basis points or the five-year Federal Home Loan Bank (the
"FHLB") Classic Advance Rate plus a margin of 225 to 325 basis points. At March
31, 2009, the largest commercial real estate loan was a $3.8 million loan, which
was secured by three car wash locations. This loan was performing according to
its terms at March 31, 2009. We generally do not make these loans with
loan-to-value ratios exceeding 80%.
Construction Loans. We originate construction loans to individuals for the
construction and acquisition of single-family personal residences. At March 31,
2009, residential construction loans amounted to $813,000, or 0.2% of total
loans. At March 31, 2009, the unadvanced portion of these construction loans
totaled $312,000. Our residential mortgage construction loans generally provide
for the payment of interest only during the construction phase, which is usually
12 months. At the end of the construction phase, the loan converts to a
permanent mortgage loan. Loans generally can be made with a maximum
loan-to-value ratio of 90% of the appraised value or cost of the project,
whichever is less. At March 31, 2009, the largest residential construction loan
commitment was for $215,000, all of which was disbursed. The loan was performing
according to its terms at March 31, 2009.
We make construction loans for commercial and residential development
projects. The projects include subdivision, multi-family, apartment, small
industrial, retail and office buildings. These loans generally have an
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interest-only phase during construction, which is usually 12 months, and then
convert to permanent financing. Disbursements of funds are at the sole
discretion of the Association and Bank and are based on the progress of
construction. At March 31, 2009, commercial construction loans totaled $14.7
million, or 3.6% of total loans. At March 31, 2009, the unadvanced portion of
these construction loans totaled $8.1 million. Loans generally can be made with
a maximum loan-to-value ratio of 75% of the appraised value or cost of the
project, whichever is less. At March 31, 2009, the largest commercial loan
commitment was for $2.3 million, all of which was disbursed. The loan was
performing according to its terms at March 31, 2009.
Commercial Loans. At March 31, 2009, we had $76.9 million in commercial
loans, which amounted to 18.3% of total loans. In addition, at such date, we had
$26.2 million of unadvanced commercial lines of credit. We make commercial
business loans primarily in our market area to a variety of professionals, sole
proprietorships and small businesses. Commercial lending products include term
loans, revolving lines of credit and Small Business Administration guaranteed
loans. Commercial loans and lines of credit are made with either variable or
fixed rates of interest. Variable rates are based on the prime rate as published
in The Wall Street Journal, plus a margin. Fixed-rate business loans are
generally indexed to the two-, five- or ten-year FHLB Amortizing Advance Rate,
as corresponds to the term of the loan, plus a margin. The Company generally
does not make unsecured commercial loans.
When making commercial loans, we consider the financial statements of the
borrower, our lending history with the borrower, the debt service capabilities
of the borrower, the projected cash flows of the business and the value of the
collateral, primarily accounts receivable, inventory and equipment, and are
supported by personal guarantees. Depending on the collateral used to secure the
loans, commercial loans are made in amounts of up to 80% of the value of the
collateral securing the loan. At March 31, 2009, our largest commercial loan was
a $3.3 million loan secured by all business assets. This loan was classified as
substandard and on non-accrual status at March 31, 2009.
Consumer Loans. We offer fixed rate loans secured by mobile homes. These
loans have terms up to 25 years and loan to values up to 90% of the home's value
and require that the borrower obtain hazard insurance. At March 31, 2009, mobile
home loans totaled $4.2 million or 1.0% of total loans and 64.0% of consumer
loans. We also offer fixed-rate automobile loans for new or used vehicles with
terms of up to 66 months and loan-to-value ratios of up to 90% of the lesser of
the purchase price or the retail value shown in the NADA Car Guide. At March 31,
2009, automobile loans totaled $800,000 or 0.2% of total loans and 12.3% of
consumer loans. For the fiscal year ended March 31, 2009, the Company originated
$1.4 million of mobile home loans.
Other consumer loans at March 31, 2009 amounted to $1.5 million, or 0.4%
of total loans and 23.7% of consumer loans. These loans include secured and
unsecured personal loans. Personal loans generally have a fixed-rate, a maximum
borrowing limitation of $10,000 and a maximum term of four years. Collateral
loans are generally secured by a passbook account or a certificate of deposit.
Loan Underwriting Risks. While we anticipate that adjustable-rate loans
will better offset the adverse effects of an increase in interest rates as
compared to fixed-rate mortgages, the increased mortgage payments required of
adjustable-rate loan borrowers in a rising interest rate environment could cause
an increase in delinquencies and defaults. The marketability of the underlying
property also may be adversely affected in a high interest rate environment. In
addition, although adjustable-rate mortgage loans help make our asset base more
responsive to changes in interest rates, the extent of this interest sensitivity
is limited by the annual and lifetime interest rate adjustment limits.
Loans secured by multi-family and commercial real estate generally have
larger balances and involve a greater degree of risk than one- to four-family
residential mortgage loans. Of primary concern in multi-family and commercial
real estate lending is the borrower's creditworthiness and the feasibility and
cash flow potential of the project. Payments on loans secured by income
properties often depend on successful operation and management of the
properties. As a result, repayment of such loans may be subject to a greater
extent than residential real estate loans to adverse conditions in the real
estate market or the economy. To monitor cash flows on income properties, we
require borrowers and loan guarantors, if any, to provide annual financial
statements on multi-family and
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commercial real estate loans. In reaching a decision on whether to make a
multi-family and commercial real estate loan, we consider the net operating
income of the property, the borrower's expertise, credit history, and
profitability and the value of the underlying property. In addition, with
respect to commercial real estate rental properties, we will also consider the
term of the lease and the quality of the tenants. We have generally required
that the properties securing these real estate loans have debt service coverage
ratios (the ratio of earnings before debt service divided by debt service) of at
least 1.20x. Independent appraisals and environmental surveys are generally
required for commercial real estate loans of $250,000 or more.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan depends largely upon the accuracy of the initial
estimate of the property's value at completion of construction and the estimated
cost (including interest) of construction. During the construction phase, a
number of factors could result in delays and cost overruns. If the estimate of
construction costs proves to be inaccurate, we may be required to advance funds
beyond the amount originally committed to permit completion of the building. If
the estimate of value proves to be inaccurate, we may be confronted, at or
before the maturity of the loan, with a building having a value which is
insufficient to assure full repayment. If we are forced to foreclose on a
building before or at completion due to a default, there can be no assurance
that we will be able to recover all of the unpaid balance of, and accrued
interest on, the loan as well as related foreclosure and holding costs.
Unlike residential mortgage loans, which generally are made on the basis
of the borrower's ability to make repayment from his or her employment or other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial loans are of higher risk and typically are made
on the basis of the borrower's ability to make repayment from the cash flow of
the borrower's business. As a result, the availability of funds for the
repayment of commercial loans may depend substantially on the success of the
business itself. Further, any collateral securing such loans may depreciate over
time, may be difficult to appraise and may fluctuate in value.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly. In such cases, repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, consumer loan
collections depend on the borrower's continuing financial stability, and
therefore are more likely to be adversely affected by job loss, divorce, illness
or personal bankruptcy. Furthermore, the application of various federal and
state laws, including federal and state bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans.
Loan Originations, Purchases and Sales. Our mortgage lending activities
are conducted by our salaried loan representatives. We underwrite all loans that
we originate under our loan policies and procedures, which model those of Fannie
Mae and Freddie Mac. We originate both adjustable-rate and fixed-rate mortgage
loans. Our ability to originate fixed- or adjustable-rate loans is dependent
upon the relative customer demand for such loans, which is affected by the
current and expected future level of interest rates.
We generally retain most of the loans that we originate for our portfolio;
however, we will sell participation interests to local financial institutions,
primarily on the portion of loans that exceed our borrowing limits. The sales
occur at time of origination; therefore no loans have been classified as
held-for-sale. We sold $2.0 million of these loans in fiscal 2009 and $2.6
million in fiscal 2008. In fiscal 2007, the Association commenced selling
long-term, fixed rate residential loans to the Federal Home Loan Bank (the
"FHLB") to assist with managing our interest rate risk and increasing our net
interest margin. Loans are sold with servicing retained and the loans have
recourse to the Company on a formula basis. The Association sold $1.7 million of
these loans in fiscal 2009. The Bank originates and sells one- to four-family
residential loans to several mortgage brokers and mortgage bankers. One such
arrangement requires the Bank to repurchase any loans which become delinquent
within four months after the date of sale; no such repurchases have been
required. The Bank sold $5.4 million of these loans in fiscal 2009.
We purchase participation interests from other community-based financial
institutions, primarily commercial real estate loans, commercial construction
loans, commercial loans and residential loans. Such loans totaled $49.9 million
and $34.5 million at March 31, 2009 and 2008, respectively. We perform our own
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underwriting analysis on each of our participation interests before purchasing
such loans and therefore believe there is no greater risk of default on these
obligations. However, in a purchased participation loan, we do not service the
loan and thus are subject to the policies and practices of the lead lender with
regard to monitoring delinquencies, pursuing collections and instituting
foreclosure proceedings. We are permitted to review all of the documentation
relating to any loan in which we participate, including any annual financial
statements provided by a borrower. Additionally, we receive periodic updates on
the loan from the lead lender. We have not historically purchased any whole
loans. However, we would entertain doing so if a loan was presented to us that
met our underwriting criteria and fit within our interest rate strategy.
Loan Approval Procedures and Authority. Our lending policies and loan
approval limits are recommended by senior management, reviewed by the Executive
Credit Committee of the Boards of Directors and approved by the Association's
and Bank's Board of Directors. The Executive Credit Committee consists of 5
independent directors of the Association's or Bank's Board of Directors and the
Chief Executive Officer and President of the Company. One of the independent
directors serves as the Chairman of the Committee. The Senior Loan Officers of
the Association and Bank and the Senior Risk Officer of the Company also serve
as non-voting members of the committee. Each individual's lending authority
limit is based on his or her experience and capability and reviewed annually by
the Association's and Bank's board. Loan approvals consist of at least 2
management signatures with the higher lending authority determining the level of
approval. Any extension of credit that exceeds management's authority requires
the approval of the Association's or Bank's Credit Committee. The Association's
and Bank's Credit Committee can approve extensions of credit in amounts up to
$1.5 million. Extensions of credit between $1.5 million and $4.5 million must be
approved by the Executive Credit Committee. Any extensions of credit which would
exceed $4.5 million for the Company also require the approval of each
subsidiaries' Board of Directors. Notwithstanding individual and joint lending
authority, board approval is required for any request involving any compromise
of indebtedness, such as the forgiveness of unpaid principal, accrued interest,
accumulated fees, or acceptance of collateral or other assets in lieu of
payment.
Loan Commitments. We issue commitments for fixed-rate and adjustable-rate
mortgage loans, and commercial loans conditioned upon the occurrence of certain
events. Commitments to originate mortgage loans are legally binding agreements
to lend to our customers.
Investment Activities
The Boards of Directors of the Association and the Bank review and approve
the respective investment policies annually. The Boards of Directors are
responsible for establishing policies for conducting investment activities,
including the establishment of risk limits. The Boards of Directors review the
investment portfolio and review investment transactions on a monthly basis and
is responsible for ensuring that the day-to-day management of the investment
portfolio is conducted by qualified individuals. The Boards of the Association
and the Bank have directed the Association and the Bank to implement investment
policies based on the Boards' established guidelines as reflected in the
respective written investment policies, and other established guidelines,
including those set periodically by the Asset/Liability Management Committees.
The Association and the Bank present the respective Asset/Liability Management
Committees with potential investment strategies and investment portfolio
performance reports, on a quarterly basis.
The investment portfolio is primarily viewed as a source of liquidity. Our
policy is to invest funds in assets with varying maturities that will result in
the best possible yield while maintaining the safety of the principal invested
and assists in managing interest rate risk. The investment portfolio management
policy is designed to:
1. enhance profitability by maintaining an acceptable spread over the
cost of funds;
2. absorb funds when loan demand is low and infuse funds into loans
when loan demand is high;
3. provide both the regulatory and the operational liquidity necessary
to conduct our daily business activities;
4. provide a degree of low-risk, quality assets to the balance sheet;
7
5. provide a medium for the implementation of certain interest rate
risk management measures intended to establish and maintain an
appropriate balance between the sensitivity to changes in interest
rates of: (i) interest income from loans and investments, and (ii)
interest expense from deposits and borrowings;
6. have collateral available for pledging requirements;
7. generate a favorable return on investments without undue compromise
of other objectives; and
8. evaluate and take advantage of opportunities to generate tax-exempt
income when appropriate.
In determining its investment strategies, we consider the interest rate
sensitivity, yield, credit risk factors, maturity and amortization schedules,
collateral value and other characteristics of the securities to be held. We also
consider the secondary market for the sale of assets and the ratings of debt
instruments in which it invests and the financial condition of the obligors
issuing such instruments.
We have authority to invest in various types of assets, including U.S.
Treasury obligations, securities of various federal agencies, mortgage-backed
securities, certain certificates of deposit of insured financial institutions,
overnight and short-term loans to other banks, corporate debt instruments, and
auction market securities. We primarily invest in: U.S. agency obligations;
collateralized mortgage obligations and mortgage-backed securities; municipal
obligations; and equity investments. With respect to municipal obligations, our
investment policy provides that all municipal issues must be rated investment
grade or higher to qualify for its portfolio. If any such municipal issues in
our investment portfolio are subsequently downgraded below the minimum
requirements, it is our general policy to liquidate the investment.
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of our funds
for lending and other investment purposes. Loan repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are significantly influenced by general interest rates and money market
conditions.
Deposit Accounts. Substantially all of our depositors are residents of the
State of Connecticut. Deposits are attracted from within our market area through
the offering of a broad selection of deposit instruments, including non
interest-bearing demand accounts (such as checking accounts), interest-bearing
demand accounts (such as NOW and money market accounts), passbook and savings
accounts, and certificates of deposit. At March 31, 2009, core deposits, which
consist of savings, demand, NOW and money market accounts, comprised 40.8% of
our deposits. We do not currently utilize brokered funds. Deposit account terms
vary according to the minimum balance required, the time periods the funds must
remain on deposit and the interest rate, among other factors. In determining the
terms of our deposit accounts, we consider the rates offered by our competition,
our liquidity needs, profitability to us, matching deposit and loan products and
customer preferences and concerns. We generally review our deposit mix and
pricing weekly. Our current strategy is to offer competitive rates, but not to
be the market leader.
In addition to accounts for individuals, we also offer deposit accounts
designed for the businesses operating in our market area. Our business banking
deposit products and services include a non-interest-bearing commercial checking
account, a NOW account for sole proprietors and a commercial cash management
account for larger businesses. We have sought to increase our commercial
deposits through the offering of these products, particularly to our commercial
borrowers.
Borrowings. We utilize advances from the Federal Home Loan Bank of Boston
and securities sold under agreements to repurchase to supplement our supply of
investable funds and to meet deposit withdrawal requirements. The Federal Home
Loan Bank functions as a central reserve bank providing credit for member
financial institutions. As members, the Association and Bank are required to own
capital stock in the Federal Home
8
Loan Bank and are authorized to apply for advances on the security of such stock
and certain of our mortgage loans and other assets (principally securities which
are obligations of, or guaranteed by, the United States), provided certain
standards related to creditworthiness have been met. Advances are made under
several different programs, each having its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of an institution's net worth or on the
Federal Home Loan Bank's assessment of the institution's creditworthiness. Under
its current credit policies, the Federal Home Loan Bank generally limits
advances to 25% of a member's assets, and short-term borrowings of less than one
year may not exceed 10% of the institution's assets. The Federal Home Loan Bank
determines specific lines of credit for each member institution.
Securities sold under agreements to repurchase are customer deposits that
are invested overnight in U.S. government or U.S. government agency securities.
The customers, predominantly commercial customers, set a predetermined balance
and deposits in excess of that amount are transferred into the repurchase
account from each customer's checking account. The next banking day, the funds
are recredited to their individual checking account along with interest earned
at market rates. These types of accounts are often referred to as sweep
accounts.
Financial Services
In 2006 the Bank started offering full-time access to advisory and
investment services to consumers and businesses on retirement planning,
individual investment portfolios, and strategic asset management. The services
provided by the Bank through Riverside Investment Services include mutual funds,
life insurance, tax and estate planning, and investment portfolio analysis. The
Bank has a broker/dealer relationship with Linsco/Private Ledger. For the period
ended March 31, 2009 the Bank recorded income of $341,000 from such services.
The Association had a partnership with a third-party registered
broker-dealer, Infinex Investments, Inc., which was terminated during fiscal
2008. Infinex operated an office at Enfield Federal and offered customers a
complete range of nondeposit investment products, including mutual funds, debt,
equity and government securities, retirement accounts, insurance products and
fixed and variable annuities. The Association received a portion of the
commissions generated by Infinex from sales to customers. For the year ended
March 31, 2008 the Association received fees of $17,000 through the relationship
with Infinex.
Personnel
As of March 31, 2009, we had 98 full-time employees and 19 part-time
employees, none of whom is represented by a collective bargaining unit. We
believe our relationship with our employees is good.
REGULATION AND SUPERVISION
General
As a bank holding company, New England Bancshares is required by federal
law to file reports with and otherwise comply with, the rules and regulations,
of the Federal Reserve. Enfield Federal, as a federal savings association, is
subject to extensive regulation, examination and supervision by the Office of
Thrift Supervision, as its primary federal regulator, and the Federal Deposit
Insurance Corporation, as its deposit insurer. Valley Bank, as a state
commercial bank, is subject to extensive regulation, examination and supervision
by the Connecticut Department of Banking, as its primary state regulator, and
the Federal Deposit Insurance Corporation, as its deposit insurer. Both Enfield
Federal and Valley Bank are members of the Federal Home Loan Bank System.
Enfield Federal must file reports with the Office of Thrift Supervision and the
Federal Deposit Insurance Corporation concerning its activities and financial
condition in addition to obtaining
9
regulatory approvals before entering into certain transactions such as mergers
with, or acquisitions of, other savings institutions. The Office of Thrift
Supervision conducts periodic examinations to test Enfield Federal's safety and
soundness and compliance with various regulatory requirements. Valley Bank must
file reports with the Connecticut Department of Banking and the Federal Deposit
Insurance Corporation concerning its activities and financial condition in
addition to obtaining regulatory approvals before entering into certain
transactions such as mergers with, or acquisitions of, other savings
institutions. The Connecticut Department of Banking and the Federal Deposit
Insurance Corporation conduct periodic examinations to test Valley Bank's safety
and soundness and compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulatory
requirements and policies, whether by the Office of Thrift Supervision,
Connecticut Department of Banking, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or the United States Congress, could have a material
adverse impact on New England Bancshares, Enfield Federal, Valley Bank and their
operations.
Certain of the applicable regulatory requirements are referred to below.
This description of statutory provisions and regulations applicable to savings
institutions and their holding companies does not purport to be a complete
description of such statutes and regulations and their effect on New England
Bancshares, Enfield Federal and Valley Bank and is qualified in its entirety by
reference to the actual statutes and regulations involved.
Federal Banking Regulation
Business Activities. The activities of Enfield Federal, a federal savings
association, are governed by federal law and regulations. These laws and
regulations delineate the nature and extent of the activities in which federal
associations may engage. In particular, certain lending authority for federal
associations, e.g., commercial, non-residential real property loans and consumer
loans, is limited to a specified percentage of the institution's capital or
assets. The activities of Valley Bank, a state commercial bank, are governed by
the Connecticut Department of Banking and the FDIC, which regulate, among other
things, the scope of the business of a bank, the investments a bank must
maintain, the nature and amount of collateral for certain loans a bank makes,
the establishment of branches and the activities of a bank with respect to
mergers and acquisitions.
Loans-to-One-Borrower Limitations. Enfield Federal and Valley Bank are
generally subject to the same limits on loans to one borrower as a national
bank. With specified exceptions, the Association's and Bank's total loans or
extensions of credit to a single borrower cannot exceed 15% of its unimpaired
capital and surplus. They may lend additional amounts up to 10% of its
unimpaired capital and surplus, if the loans or extensions of credit are
fully-secured by readily-marketable collateral. At March 31, 2009, Enfield
Federal's and Valley Bank's loans-to-one borrower limitation were $4.0 million
and $3.7 million, respectively. Enfield Federal's and Valley Bank's largest
aggregate outstanding balance of loans to one borrower was $5.2 million and $3.4
million, respectively.
QTL Test. Under federal law, Enfield Federal must comply with the
qualified thrift lender, or "QTL" test. Under the QTL test, Enfield Federal is
required to maintain at least 65% of its "portfolio assets" in certain
"qualified thrift investments" in at least nine months of the most recent
12-month period. "Portfolio assets" means, in general, Enfield Federal's total
assets less the sum of:
(1) specified liquid assets up to 20% of total assets;
(2) goodwill and other intangible assets; and
(3) the value of property used to conduct Enfield Federal's business.
"Qualified thrift investments" includes various types of loans made for
residential and housing purposes, investments related to such purposes,
including certain mortgage-backed and related securities, and loans for
personal, family, household and certain other purposes up to a limit of 20% of
Enfield Federal's portfolio assets. Recent legislation broadened the scope of
"qualified thrift investments" to include 100% of an institution's credit card
loans, education loans and small business loans. Enfield Federal may also
satisfy the QTL test by qualifying as a "domestic building and loan association"
as defined in the Internal Revenue Code of 1986 (the "Code").
10
If Enfield Federal fails the QTL test it must either operate under certain
restrictions on its activities or convert to a bank charter. Enfield Federal met
the QTL test at March 31, 2009, and in each of the prior 12 months, and,
therefore, qualifies as a thrift lender.
Capital Requirements. Office of Thrift Supervision regulations require
Enfield Federal to meet three minimum capital standards:
(1) a tangible capital ratio requirement of 1.5% of total assets, as
adjusted under the Office of Thrift Supervision regulations;
(2) a leverage ratio requirement of 3% of core capital to adjusted total
assets, if a savings association has been assigned the highest
composite rating of 1 under the Uniform Financial Institutions
Ratings System (the minimum leverage capital ratio for any other
depository institution that does not have a composite examination
rating of 1 is 4%, unless a higher leverage capital ratio is
warranted by the particular circumstances or risk profile of the
depository institution) and is not anticipating or expecting
significant growth and have well-diversified risks; and
(3) a risk-based capital ratio requirement of 8% of core and
supplementary capital to total risk-weighted assets of which at
least half must be core capital.
In determining compliance with the risk-based capital requirement, Enfield
Federal must compute its risk-weighted assets by multiplying its assets and
certain off-balance sheet items by risk-weights, which range from 0% for cash
and obligations issued by the United States Government or its agencies to 100%
for consumer and commercial loans, as assigned by the Office of Thrift
Supervision capital regulation based on the risks that the Office of Thrift
Supervision believes are inherent in the type of asset.
Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related surplus and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain mortgage
servicing rights) and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain qualifying
credit card relationships. Supplementary capital currently includes cumulative
and other perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and the allowance for loan
and lease losses. In addition, up to 45% of unrealized gains on
available-for-sale equity securities with a readily determinable fair value may
be included in supplementary capital. The allowance for loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets, and the amount of supplementary capital that may be
included as total capital cannot exceed the amount of core capital.
The Office of Thrift Supervision also has authority to establish
individual minimum capital requirements in appropriate cases upon a
determination that an institution's capital level is or may become inadequate in
light of the particular circumstances. At March 31, 2009, Enfield Federal met
each of its capital requirements.
The following table presents the Association's capital position at March
31, 2009.
OTS Minimum
Capital Requirements
---------------------
Actual Ratio Actual Ratio
--------- ------- ------- -----------
(Dollar amounts in thousands)
Tangible .................. $24,502 7.52% $ 4,887 >= 1.5%
Core (Leverage) ........... $24,502 7.52% $13,031 >= 4.0%
Risk-based ................ $26,756 12.19% $17,564 >= 8.0%
Valley Bank is subject to capital adequacy rules and guidelines issued by
the FDIC. The rules require the Bank to maintain certain minimum ratios of
capital to adjusted total assets and/or risk-weighted assets. Under the
11
provision of the Federal Deposit Insurance Corp. Improvement Act of 1991, the
Federal regulatory agencies are required to implement and enforce these rules in
a stringent manner.
The following table presents the Bank's capital position at March 31,
2009.
For Capital
Actual Adequacy Purposes
--------------- ------------------
Amount Ratio Amount Ratio
------- ----- ------- -------
(Dollar amounts in thousands)
Total Capital (to Risk Weighted Assets) ....... $22,882 11.56% $15,841 >= 8.0%
Tier 1 Capital (to Risk Weighted Assets) ...... 20,385 10.29 7,921 >= 4.0
Tier 1 Capital (to Average Assets) ............ 20,385 8.98 9,076 >= 4.0
Standards For Safety and Soundness. The Office of Thrift Supervision and
Connecticut Department of Banking have adopted a set of guidelines prescribing
safety and soundness standards. These guidelines establish the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. If the Office of Thrift Supervision or Connecticut Department of
Banking determines that an institution fails to meet any standard prescribed by
the guidelines, it may require the institution to submit and implement an
acceptable plan to achieve compliance with the standard.
Limitation on Capital Distributions. Office of Thrift Supervision and
Connecticut Department of Banking regulations impose limitations on capital
distributions, including cash dividends, payments to repurchase its shares and
payments to stockholders of another institution in a cash-out merger. Under the
regulations, an application to and the prior approval of the appropriate
regulatory agency is required prior to any capital distribution if the
institution does not meet the criteria for "expedited treatment" of applications
under the regulations (i.e., generally, examination ratings, including safety
and soundness, compliance and Community Reinvestment Act, in the two top
categories), the total capital distributions for the calendar year exceed net
income for that year plus the amount of retained net income for the preceding
two years, the institution would be undercapitalized following the distribution
or the distribution would otherwise be contrary to a statute, regulation or
agreement with the regulatory agency. If an application is not required, the
institution must still provide prior notice to the regulatory agency of the
capital distribution if the institution is a subsidiary of a holding company. If
the Association's or Bank's capital fell below its regulatory requirements or a
regulatory agency notified it that it was in need of increased supervision, its
ability to make capital distributions could be restricted. In addition, a
regulatory agency could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the
regulatory agency determines that such distribution would constitute an unsafe
or unsound practice.
Assessments. Savings institutions are required to pay assessments to the
Office of Thrift Supervision to fund the agency's operations. The general
assessments, paid on a semi-annual basis, are computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the institution's latest quarterly thrift financial report. The assessments paid
by Enfield Federal for the year ended March 31, 2009 totaled $88,000.
Valley Bank's operations are subject to examination by the FDIC and the
State of Connecticut Department of Banking. The assessments paid by Valley Bank
for the year ended March 31, 2009 totaled $7,000.
Prompt Corrective Regulatory Action. The Office of Thrift Supervision is
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
undercapitalization. Generally, a savings institution that has a ratio of total
capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core)
capital to risk-weighted assets of less than 4% or a ratio of core capital to
total assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a
12
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the Office of Thrift Supervision is required to appoint a receiver or
conservator within specified time frames for an institution that is "critically
undercapitalized." The regulation also provides that a capital restoration plan
must be filed with the Office of Thrift Supervision within 45 days of the date a
savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The Office of Thrift Supervision could also take any one of a number
of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
Valley Bank is subject to capital adequacy rules and guidelines issued by
the FDIC. The rules require the Bank to maintain certain minimum ratios of
capital to adjusted total assets and/or risk-weighted assets. Under the
provision of the Federal Deposit Insurance Corp. Improvement Act of 1991, the
Federal regulatory agencies are required to implement and enforce these rules in
a stringent manner.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has the authority to bring action
against the institution and all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers or directors,
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
$1.0 million per day in especially egregious cases. The Federal Deposit
Insurance Corporation has the authority to recommend to the Director of the
Office of Thrift Supervision that enforcement action be taken with respect to a
particular savings institution. If action is not taken by the Director, the
Federal Deposit Insurance Corporation has authority to take such action under
certain circumstances. Federal and state law also establishes criminal penalties
for certain violations. Valley Bank is subject to the federal regulations
promulgated pursuant to the Financial Institutions Supervisory Act to prevent
banks from engaging in unsafe and unsound practices, as well as various other
federal and state laws and consumer protection laws.
Insurance of Deposit Accounts. The Federal Deposit Insurance Corporation
imposes an assessment against all depository institutions for deposit insurance.
This assessment is based on the risk category of the institution and, prior to
2009, ranged from five to 43 basis points of the institution's deposits. On
October 7, 2008, as a result of decreases in the reserve ratio of the Deposit
Insurance Fund, the Federal Deposit Insurance Corporation issued a proposed rule
establishing a Restoration Plan for the Deposit Insurance Fund. The rulemaking
proposed that, effective January 1, 2009, assessment rates would increase
uniformly by seven basis points for the first quarter 2009 assessment period.
The rulemaking proposed to alter the way in which the Federal Deposit Insurance
Corporation's risk-based assessment system differentiates for risk and set new
deposit insurance assessment rates, effective April 1, 2009. Under the proposed
rule, the Federal Deposit Insurance Corporation would first establish an
institution's initial base assessment rate. This initial base assessment rate
would range, depending on the risk category of the institution, from 10 to 45
basis points. The Federal Deposit Insurance Corporation would then adjust the
initial base assessment (higher or lower) to obtain the total base assessment
rate. The adjustment to the initial base assessment rate would be based upon an
institution's levels of unsecured debt, secured liabilities, and brokered
deposits. The total base assessment rate would range from eight to 77.5 basis
points of the institution's deposits. On December 22, 2008, the Federal Deposit
Insurance Corporation published a final rule raising the current deposit
insurance assessment rates uniformly for all institutions by seven basis points
(to a range from 12 to 50 basis points) for the first quarter of 2009. However,
the Federal Deposit Insurance Corporation approved an extension of the comment
period on the parts of the proposed rulemaking that would become effective on
April 1, 2009. The Federal Deposit Insurance Corporation expects to issue a
second final rule early in 2009, to be effective April 1, 2009, to change the
way that the Federal Deposit Insurance Corporation's assessment system
differentiates for risk and to set new assessment rates beginning with the
second quarter of 2009.
On February 27, 2009, as later amended, the Federal Deposit Insurance
Corporation announced a one-time special assessment on all depository
institutions equal to 5 basis points of total assets less Tier 1 Capital. This
special assessment is payable by September 30, 2009 based on data as of June 30,
2009, and is expected to result in
13
additional non-interest expense ranging from $300,000 to $350,000. In addition,
the Federal Deposit Insurance Corporation may assess additional special premiums
in the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance
Corporation upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The
management of Enfield Federal and Valley Bank do not know of any practice,
condition or violation that might lead to termination of deposit insurance.
Transactions with Related Parties. Enfield Federal's authority to engage
in transactions with its "affiliates" (e.g., any company that controls or is
under common control with an institution, including New England Bancshares) is
limited by federal law. In general, these transactions must be on terms which
are as favorable to Enfield Federal as comparable transactions with
non-affiliates. In addition, certain types of these transactions are restricted
to an aggregate percentage of Enfield Federal's capital. Collateral in specified
amounts must usually be provided by affiliates to receive loans from Enfield
Federal. The purchase of low quality assets from affiliates is generally
prohibited. In addition, the Office of Thrift Supervision regulations prohibit a
savings association from lending to any of its affiliates that is engaged in
activities that are not permissible for bank holding companies and from
purchasing the securities of any affiliate, other than a subsidiary.
Valley Bank's authority to engage in transactions with its affiliates is
governed by the Federal Reserve Act and implementing regulations. The Federal
Reserve Act limits the extent to which a bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
bank's capital stock and retained earnings, and limits all such transactions
with all affiliates to an amount equal to 20% of such capital stock and retained
earnings. Any covered transaction with an affiliate, such as the making of
loans, purchase of assets, issuance of guarantees and other similar types of
transactions, must be on terms that are substantially the same, or at least as
favorable to the bank, as those that would be provided to a non-affiliate.
The Sarbanes-Oxley Act generally prohibits loans by the Company to its
executive officers and directors. However, that act contains a specific
exception for loans by Enfield Federal and Valley Bank to its executive officers
and directors in compliance with federal banking laws. Under such laws, Enfield
Federal's and Valley Bank's authority to extend credit to executive officers,
directors and 10% stockholders ("insiders"), as well as entities such persons
control, is limited. Among other things, these provisions require that
extensions of credit to insiders be made on terms that are substantially the
same as, and follow credit underwriting procedures that are not less stringent
than, those prevailing for comparable transactions with unaffiliated persons and
that do not involve more than the normal risk of repayment or present other
unfavorable features. There is an exception for loans made pursuant to a benefit
or compensation program that is widely available to all employees of the
institution and does not give preference to insiders. There are also certain
limitations on the amount of credit extended to insiders, individually and in
the aggregate, which limits are based, in part, on the amount of Enfield
Federal's and Valley Bank's capital. In addition, extensions of credit in excess
of certain limits must be approved by Enfield Federal's and Valley Bank's board
of directors.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
as implemented by Office of Thrift Supervision and FDIC regulations, Enfield
Federal and Valley Bank have a continuing and affirmative obligation to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for Enfield Federal or Valley Bank, nor does it limit their discretion
to develop the types of products and services that it believes are best suited
to its particular community, consistent with the CRA. The CRA requires the
Office of Thrift Supervision and the FDIC, in connection with their examinations
of Enfield Federal and Valley Bank, respectively, to assess Enfield Federal's
and Valley Bank's record of meeting the credit needs of its community and to
take the record into account in its evaluation of certain applications by
Enfield Federal and Valley Bank. The CRA also requires all institutions to make
public disclosure of their CRA ratings. Both Enfield Federal and Valley Bank
received a "Satisfactory" CRA rating in their most recent examination.
Federal Home Loan Bank System. Enfield Federal and Valley Bank are members
of the Federal Home Loan Bank of Boston, which is one of the 12 regional Federal
Home Loan Banks making up the Federal Home Loan
14
Bank System. Each Federal Home Loan Bank provides a central credit facility
primarily for its member institutions. Enfield Federal is required to acquire
and hold shares of capital stock in that Federal Home Loan Bank. As of March 31,
2009, Enfield Federal and Valley Bank were in compliance with this requirement
with investments in the capital stock of the Federal Home Loan Bank of Boston of
$3.1 million and $766,000, respectively.
The Federal Home Loan Banks have been required to provide funds for the
resolution of insolvent thrifts and to contribute funds for affordable housing
programs. These requirements could reduce the amount of earnings that the
Federal Home Loan Banks can pay as dividends to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, Enfield Federal's and Valley Bank's
net interest income would be affected.
Federal Reserve System
Under Federal Reserve Board regulations, Enfield Federal and Valley Bank
are required to maintain noninterest-earning reserves against its transaction
accounts. The Federal Reserve Board regulations generally require that reserves
of 3% must be maintained against aggregate transaction accounts of $48.3 million
or less, subject to adjustment by the Federal Reserve Board, and reserves of
10%, subject to adjustment by the Federal Reserve Board, against that portion of
total transaction accounts in excess of $48.3 million. The first $7.8 million of
otherwise reservable balances, subject to adjustment by the Federal Reserve
Board, are exempted from the reserve requirements. Enfield Federal and Valley
Bank are in compliance with these requirements.
Holding Company Regulation
New England Bancshares is subject to examination, regulation, and periodic
reporting under the Bank Holding Company Act of 1956, as amended, as
administered by the Federal Reserve Board. New England Bancshares is required to
obtain the prior approval of the Federal Reserve Board to acquire all, or
substantially all, of the assets of any bank or bank holding company. Prior
Federal Reserve Board approval would be required for New England Bancshares to
acquire direct or indirect ownership or control of any voting securities of any
bank or bank holding company if, after such acquisition, it would, directly or
indirectly, own or control more than 5% of any class of voting shares of the
bank or bank holding company. In addition to the approval of the Federal Reserve
Board, before any bank acquisition can be completed, prior approval may also be
required to be obtained from other agencies having supervisory jurisdiction over
the bank to be acquired.
A bank holding company is generally prohibited from engaging in, or
acquiring, direct or indirect control of more than 5% of the voting securities
of any company engaged in non-banking activities. One of the principal
exceptions to this prohibition is for activities found by the Federal Reserve
Board to be so closely related to banking or managing or controlling banks as to
be a proper incident thereto. Some of the principal activities that the Federal
Reserve Board has determined by regulation to be so closely related to banking
are: (i) making or servicing loans; (ii) performing certain data processing
services; (iii) providing discount brokerage services; (iv) acting as fiduciary,
investment or financial advisor; (v) leasing personal or real property; (vi)
making investments in corporations or projects designed primarily to promote
community welfare; and (vii) acquiring a savings and loan association.
The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that
meets specified conditions, including being "well capitalized" and "well
managed," to opt to become a "financial holding company" and thereby engage in a
broader array of financial activities than previously permitted. Such activities
can include insurance underwriting and investment banking.
New England Bancshares is subject to the Federal Reserve Board's capital
adequacy guidelines for bank holding companies (on a consolidated basis), which
are substantially similar to those of the Office of Thrift Supervision for
Enfield Federal.
A bank holding company is generally required to give the Federal Reserve
Board prior written notice of any purchase or redemption of then outstanding
equity securities if the gross consideration for the purchase or redemption,
when combined with the net consideration paid for all such purchases or
redemptions during the
15
preceding 12 months, is equal to 10% or more of the company's consolidated net
worth. The Federal Reserve Board may disapprove such a purchase or redemption if
it determines that the proposal would constitute an unsafe and unsound practice,
or would violate any law, regulation, Federal Reserve Board order or directive,
or any condition imposed by, or written agreement with, the Federal Reserve
Board. The Federal Reserve Board has adopted an exception to this approval
requirement for well-capitalized bank holding companies that meet certain other
conditions.
The Federal Reserve Board has issued a policy statement regarding the
payment of dividends by bank holding companies. In general, the Federal Reserve
Board's policies provide that dividends should be paid only out of current
earnings and only if the prospective rate of earnings retention by the bank
holding company appears consistent with the organization's capital needs, asset
quality and overall financial condition. The Federal Reserve Board's policies
also require that a bank holding company serve as a source of financial strength
to its subsidiary banks by standing ready to use available resources to provide
adequate capital funds to those banks during periods of financial stress or
adversity and by maintaining the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its subsidiary banks where
necessary. Under the prompt corrective action laws, the ability of a bank
holding company to pay dividends may be restricted if a subsidiary bank becomes
undercapitalized. These regulatory policies can affect the ability of New
England Bancshares to pay dividends or otherwise engage in capital
distributions.
Under the Federal Deposit Insurance Act, depository institutions are
liable to the Federal Deposit Insurance Corporation for losses suffered or
anticipated by the Federal Deposit Insurance Corporation in connection with the
default of a commonly controlled depository institution or any assistance
provided by the Federal Deposit Insurance Corporation to such an institution in
danger of default.
New England Bancshares, Enfield Federal and Valley Bank are affected by
the monetary and fiscal policies of various agencies of the United States
Government, including the Federal Reserve System. In view of changing conditions
in the national economy and in the money markets, it is impossible for
management to accurately predict future changes in monetary policy or the effect
of such changes on the business or financial condition of New England
Bancshares, Enfield Federal or Valley Bank.
The status of New England Bancshares as a registered bank holding company
under the Bank Holding Company Act will not exempt it from certain federal and
state laws and regulations applicable to corporations generally, including,
without limitation, certain provisions of the federal securities laws.
FEDERAL AND STATE TAXATION
Federal Taxation
General. New England Bancshares, Enfield Federal and Valley Bank report
their consolidated taxable income on a fiscal year basis ending March 31, using
the accrual method of accounting and are subject to federal income taxation in
the same manner as other corporations. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to New England Bancshares, Enfield
Federal and Valley Bank. The Company is not currently under audit nor has it
ever been audited by the Internal Revenue Service.
Distributions. To the extent that the Company makes "non-dividend
distributions" to stockholders, such distributions will be considered to result
in distributions from its unrecaptured tax bad debt reserve as of December 31,
1987 (the "base year reserve"), to the extent thereof and then from the
Company's supplemental reserve for losses on loans, and an amount based on the
amount distributed will be included in the Company's income. Non-dividend
distributions include distributions in excess of the Company's current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. Dividends paid out of the
Company's current or accumulated earnings and profits will not be included in
the Company's income.
The amount of additional income created from a non-dividend distribution
is equal to the lesser of the base year reserve and supplemental reserve for
losses on loans or an amount that, when reduced by the tax attributable to
16
the income, is equal to the amount of the distribution. Thus, in some
situations, approximately one and one-half times the non-dividend distribution
would be includable in gross income for federal income tax purposes, assuming a
34% federal corporate income tax rate. The Company does not intend to pay
dividends that would result in the recapture of any portion of the bad debt
reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income at a rate of 20%. Only 90% of alternative minimum taxable
income can be offset by alternative minimum tax net operating loss carryovers of
which the Company currently has none. Alternative minimum taxable income is also
adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items. Alternative minimum tax is due when it exceeds the regular income tax.
The Company has not had a liability for a tax on alternative minimum taxable
income during the past five years.
Elimination of Dividends. New England Bancshares may exclude from its
income 100% of dividends received from Enfield Federal and Valley Bank as a
member of the same affiliated group of corporations.
State Taxation
New England Bancshares, Enfield Federal and Valley Bank file Connecticut
income tax returns on a consolidated basis. Generally, the income of financial
institutions in Connecticut, which is calculated based on federal taxable
income, subject to certain adjustments, is subject to Connecticut tax. The
Company is not currently under audit with respect to its Connecticut income tax
returns and its state tax returns have not been audited for the past five years.
ITEM 1A. RISK FACTORS
Our increased emphasis on commercial and construction lending may expose us to
increased lending risks.
At March 31, 2009, our loan portfolio consisted of $162.8 million, or
38.8% of commercial real estate loans, $15.5 million, or 3.7% of construction
loans and $76.9 million, or 18.3% of commercial business loans. We intend to
increase our emphasis on these types of loans. These types of loans generally
expose a lender to greater risk of non-payment and loss than residential
mortgage loans because repayment of the loans often depends on the successful
operation of the property, the income stream of the borrowers and, for
construction loans, the accuracy of the estimate of the property's value at
completion of construction and the estimated cost of construction. Such loans
typically involve larger loan balances to single borrowers or groups of related
borrowers compared to residential mortgage loans. Commercial business loans
expose us to additional risks since they typically are made on the basis of the
borrower's ability to make repayments from the cash flow of the borrower's
business and are secured by non-real estate collateral that may depreciate over
time. In addition, since such loans generally entail greater risk than
residential mortgage loans, we may need to increase our allowance for loan
losses in the future to account for the likely increase in probable incurred
credit losses associated with the growth of such loans. Also, many of our
commercial and construction borrowers have more than one loan outstanding with
us. Consequently, an adverse development with respect to one loan or one credit
relationship can expose us to a significantly greater risk of loss compared to
an adverse development with respect to a one- to four-family residential
mortgage loan.
Changes in interest rates could have an impact on earnings.
The Company's earnings and financial condition are dependent to a large
degree upon net interest income, which is the difference between interest earned
from loans and investments, and interest paid on deposits and borrowings. The
financial services industry has been experiencing a narrowing of interest rate
spreads, the difference between interest rates earned on loans and investments
and the interest rates paid on deposits and borrowings. This situation could
adversely affect the Company's earnings and financial condition. While the
Company cannot predict or control changes in interest rates, the Company has
policies and procedures to manage the risks associated with changes in market
interest rates.
17
Changes in interest rates also affect the value of our interest-earning
assets, and in particular our securities portfolio. Generally, the value of
fixed-rate securities fluctuates inversely with changes in interest rates.
Unrealized gains and losses on securities available for sale are reported as a
separate component of equity, net of tax. Decreases in the fair value of
securities available for sale resulting from increases in interest rates could
have an adverse effect on stockholders' equity.
Strong competition within our market area could hurt our profits and slow
growth.
We face intense competition both in making loans and attracting deposits.
This competition has made it more difficult for us to make new loans and has
occasionally forced us to offer higher deposit rates. Price competition for
loans and deposits might result in us earning less on our loans and paying more
on our deposits, which reduces net interest income. As of June 30, 2008, we held
1.3% of the deposits in Hartford County, which was the 10th largest market share
of deposits out of the 30 financial institutions in the county. Some of the
institutions with which we compete have substantially greater resources and
lending limits than we have and may offer services that we do not provide. We
expect competition to increase in the future as a result of legislative,
regulatory and technological changes and the continuing trend of consolidation
in the financial services industry. Our profitability depends upon our continued
ability to compete successfully in our market area.
If we do not achieve profitability on our new branches, they may negatively
impact our earnings.
The Association opened its East Windsor branch office in October 2005 and
its Ellington branch in April 2006, and the Bank opened its Farmington Avenue
branch office in March 2007 and its Southington branch office in January 2007.
Numerous factors contribute to the performance of a new branch, such as a
suitable location, qualified personnel and an effective marketing strategy.
Additionally, it takes time for a new branch to generate significant deposits
and make sufficient loans to produce enough income to offset expenses, some of
which, like salaries and occupancy expense, are relatively fixed costs. We
expect that it may take a period of time before the new branch offices can
become profitable. During this period, operating these new branch offices may
negatively impact our net income.
A downturn in the Connecticut economy or a decline in real estate values could
hurt our profits.
Nearly all of our real estate loans are secured by real estate in
Connecticut. We are operating in a challenging and uncertain economic
environment, both nationally and locally, as the U.S. economy entered a
recession in early 2008. The continued declines in real estate values and home
sales volumes along with greater financial stress on borrowers due to the
uncertain economic environment and rising unemployment could have an adverse
effect on our borrowers or their customers, which could adversely affect our
financial condition and results of operations. Decreases in real estate values
could adversely affect the value of property used as collateral for our loans.
Continued economic uncertainty may also have a negative effect on the ability of
our borrowers to make timely repayments of their loans, which could result in
increased loan delinquencies, problem assets and foreclosures. If poor economic
conditions result in decreased demand for the Company's products and services
our financial condition and results of operations could be adversely affected.
We operate in a highly regulated environment and we may be adversely affected by
changes in laws and regulations.
The Company and its subsidiaries are subject to extensive regulation,
supervision and examination by the Office of Thrift Supervision, the
Association's chartering authority, the Connecticut Department of Banking, the
Bank's chartering authority, and by the Federal Deposit Insurance Corporation,
as insurer of its deposits. New England Bancshares is subject to regulation and
supervision by the Federal Reserve. Such regulation and supervision govern the
activities in which an institution and its holding company may engage, and are
intended primarily for the protection of the insurance fund and for the
depositors and borrowers of Enfield Federal. The regulation and supervision by
the Office of Thrift Supervision, Connecticut Department of Banking, Federal
Reserve and the Federal Deposit Insurance Corporation are not intended to
protect the interests of investors in New England Bancshares common stock.
Regulatory authorities have extensive discretion in their supervisory and
enforcement activities, including the imposition of restrictions on our
operations, the classification of our assets and
18
determination of the level of our allowance for loan losses. Any change in such
regulation and oversight, whether in the form of regulatory policy, regulations,
legislation or supervisory action, may have a material impact on our operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
19
ITEM 2. PROPERTIES
The Company currently conducts its business through twelve full-service
banking offices and two administrative offices. The net book value of the
Company's properties or leasehold improvements was $6.0 million at March 31,
2009.
Original
Leased or Year Leased Date of Lease
Location Owned or Acquired Expiration
--------- ----------- -------------
Executive/Branch Office:
855 Enfield Street, Enfield, Connecticut ............ Leased 2006 2031
Enfield Federal Branch Offices:
268 Hazard Avenue, Enfield, Connecticut ............. Owned 1962 --
112 Mountain Road, Suffield, Connecticut ............ Leased 1988 2010
23 Main Street, Manchester, Connecticut ............. Owned 2002 --
124 Main Street, Broad Brook, Connecticut ........... Owned 2003 --
20 Main Street, Windsor Locks, Connecticut .......... Leased 2002 2012(1)
One Shoham Road, East Windsor, Connecticut .......... Leased 2005 2015(2)
287 Somers Road, Ellington, Connecticut ............. Owned 2005 --
Valley Bank Branch Offices:
Four Riverside Avenue, Bristol, Connecticut ......... Leased 1999 2014(3)
Eight South Main Street, Terryville, Connecticut .... Leased 2002 2012(4)
98 Main Street, Southington, Connecticut ............ Leased 2006 2028(5)
888 Farmington Avenue, Bristol, Connecticut ......... Owned 2004 --
Valley Bank Operations Center:
45 North Main Street, Bristol, Connecticut .......... Leased 2006 2017(6)
- --------------------------------------------------------------------------------
(1) We have an option to renew this lease for one additional five-year term.
(2) We have an option to renew this lease for two additional seven-year terms.
(3) We have an option to renew this lease for three additional five-year terms.
(4) We have an option to renew this lease for one additional ten-year term.
(5) We have an option to terminate this lease in 2018.
(6) We have an option to renew this lease for two additional five-year terms.
20
ITEM 3. LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits involving the
Company, the Association and the Bank, such as claims to enforce liens,
condemnation proceedings on properties in which the Association or the Bank hold
security interests, claims involving the making and servicing of real property
loans and other issues incident to the Association's or the Bank's business. In
the opinion of management, after consultation with the Company's legal counsel,
no such pending claims or lawsuits are expected to have a material adverse
effect on the financial condition or operations of the Company, taken as a
whole. The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended March 31, 2009.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Beginning on December 28, 2005, the Company's common stock was quoted on
the NASDAQ Global Market under the symbol "NEBS." Before that date, the
Company's common stock was quoted on the OTC Bulletin Board under the symbol
"NEBS." According to the records of its transfer agent, the Company had
approximately 1,008 stockholders of record as of June 5, 2009. This number does
not reflect stockholders who hold their shares in "street name." The following
table sets forth the high and low bid information for the Company's common stock
for each of the fiscal quarters in the two-year period ended March 31, 2009. The
stock prices and dividends have been adjusted to reflect that each share of
former New England Bancshares common stock was exchanged for 2.3683 shares of
current New England Bancshares common stock in connection with the Company's
second-step conversion on December 28, 2005.
High Low Dividends
-------- -------- ---------
Fiscal 2009:
Fourth Quarter .......... $ 8.50 $ 5.70 $ 0.04
Third Quarter ........... 10.00 7.97 0.04
Second Quarter .......... 10.25 8.75 0.04
First Quarter ........... 11.25 10.25 0.03
-------- -------- ---------
Fiscal 2008:
Fourth Quarter .......... $ 11.35 $ 10.50 $ 0.03
Third Quarter ........... 12.20 10.00 0.03
Second Quarter .......... 10.90 10.26 0.03
First Quarter ........... 13.57 12.31 0.03
21
The Company repurchased 56,700 shares of its common stock in the quarter
ended March 31, 2009 as follows:
Total number of shares Maximum number
For the three Average purchased as part of shares that may
months ended Total shares price paid of publicly announced yet be purchased under
March 31, 2009 repurchased per share plan or program the plan or program
- -----------------------------------------------------------------------------------------------
January 1-31 -- $ -- 177,700 127,224
February 1-28(1) 26,700 6.60 204,400 100,524
March 1-31(1) 30,000 6.04 234,400 70,524
- -----------------------------------------------------------------------------------------------
Total 56,700 $6.30
- -----------------------------------------------------------------------------------------------
(1) This repurchase of stock was pursuant to the Company's stock repurchase
program that was authorized on May 12, 2008 to repurchase 304,924 shares, or 5%
of the Company's outstanding shares. The repurchases were made on the open
market and through privately negotiated transactions.
ITEM 6. SELECTED FINANCIAL DATA
Not completed due to Registrant's status as a smaller reporting company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The objective of this section is to help understand our views on our
results of operations and financial condition. You should read this discussion
in conjunction with the consolidated financial statements and notes to the
consolidated financial statements that appear under Part II, Item 8 of this
annual report.
Overview
Income. Our primary source of pre-tax income is net interest and dividend
income. Net interest and dividend income is the difference between interest and
dividend income, which is the income that we earn on our loans and investments,
and interest expense, which is the interest that we pay on our deposits and
borrowings. To a much lesser extent, we also recognize pre-tax income from
service charge income - mostly from service charges on deposit accounts, from
the increase in cash surrender value of our bank-owned life insurance and from
the sale of securities and loans.
Allowance for Loan Losses. The allowance for loan losses is a valuation
allowance for probable losses inherent in the loan portfolio. We evaluate the
need to establish allowances against losses on loans on a monthly basis. When
additional allowances are necessary, a provision for loan losses is charged to
earnings.
Expenses. The expenses we incur in operating our business consist of
salaries and employee benefits expenses, occupancy and equipment expenses,
advertising and promotion expenses, professional fees, data processing expense,
stationery and supplies expense, amortization of identifiable intangible assets
and other miscellaneous expenses.
Salaries and employee benefits expenses consist primarily of the salaries
and wages paid to our employees, payroll taxes and expenses for health
insurance, retirement plans and other employee benefits. It also includes
expenses related to our employee stock ownership plan and restricted stock
awards granted under our stock-based incentive plan. Expense for the employee
stock ownership plan is based on the average market value of the shares
committed to be released. An equal number of shares are released each year over
terms of the two loans from New England Bancshares that were used to fund the
employee stock ownership plan's purchase of shares in the stock offering in both
the mutual holding company reorganization and the second-step conversion.
Expense for shares of restricted stock awards is based on the fair market value
of the shares on the date of grant. Compensation and
22
related expenses is recognized on a straight-line basis over the vesting period.
We began expensing stock options in fiscal 2007 and are included in salaries and
employee benefits expenses and the consolidated statements of income.
Occupancy and equipment expenses, which are the fixed and variable costs
of land, building and equipment, consist primarily of lease payments, real
estate taxes, depreciation charges, furniture and equipment expenses,
maintenance and costs of utilities. Depreciation of premises and equipment is
computed using the straight-line method based on the useful lives of the related
assets, which range from ten to 50 years for buildings and premises and three to
20 years for furniture, fixtures and equipment. Leasehold improvements are
amortized over the shorter of the useful life of the asset or term of the lease.
Advertising and promotion expenses include expenses for print
advertisements, promotions and premium items.
Professional fees primarily include fees paid to our independent auditors,
our attorneys, our internal auditor and any consultants we employ, such as to
review our loan or investment portfolios.
Data processing expenses include fees paid to our third-party data
processing service and ATM expense.
Stationery and supplies expense consists of expenses for office supplies.
Amortization of identifiable intangible assets consists of the
amortization, on a straight-line basis over a ten-year period, of the $886,000
core deposit intangible that was incurred in connection with Enfield Federal's
acquisition of Windsor Locks Community Bank, FSL in December 2003 and on a
sum-of-years digits basis over a ten year period, of the $2.5 million core
deposit intangible that was incurred in conjunction with the Company's
acquisition of First Valley.
Other expenses include federal insurance deposit premiums, charitable
contributions, regulatory assessments, telephone, insurance and other
miscellaneous operating expenses.
Critical Accounting Policies
We consider accounting policies involving significant judgments and
assumptions by management that have, or could have, a material impact on the
carrying value of certain assets or income to be critical accounting policies.
We consider accounting policies relating to the allowance for loan losses and
goodwill and other intangibles to be critical accounting policies.
Allowance for Loan Losses. The allowance for loan losses is the amount
estimated by management as necessary to cover losses inherent in the loan
portfolio at the balance sheet date. The allowance is established through the
provision for loan losses, which is charged to income. Determining the amount of
the allowance for loan losses necessarily involves a high degree of judgment.
Among the material estimates required to establish the allowance are: loss
exposure at default; the amount and timing of future cash flows on impacted
loans; the value of collateral; and determination of loss factors to be applied
to the various elements of the portfolio. All of these estimates are susceptible
to significant change.
Management reviews the level of the allowance on a monthly basis and
establishes the provision for loan losses based on an evaluation of the
portfolio, past loss experience, economic conditions and business conditions
affecting our primary market area, credit quality trends, collateral value, loan
volumes and concentrations, seasoning of the loan portfolio, the duration of the
current business cycle, bank regulatory examination results and other factors
related to the collectability of the loan portfolio. Although we believe that we
use the best information available to establish the allowance for loan losses,
future additions to the allowance may be necessary if certain future events
occur that cause actual results to differ from the assumptions used in making
the evaluation. For example, a downturn in the local economy could cause
increases in non-performing loans. Additionally, a decline in real estate values
could cause some of our loans to become inadequately collateralized. In either
case, this may require us to increase our provisions for loan losses, which
would negatively impact earnings. Further, the Office of Thrift
23
Supervision, and Federal Deposit Insurance Corporation and State of Connecticut
Department of Banking, as an integral part of their examination processes,
review the Association's and Bank's allowances for loan losses. Such agencies
may require us to recognize adjustments to the allowance based on its judgments
about information available to it at the time of its examination. An increase to
the allowance required to be made by an agency would negatively impact our
earnings. Additionally, a large loss could deplete the allowance and require
increased provisions to replenish the allowance, which would negatively affect
earnings. See notes 2 and 4 to the notes to consolidated financial statements
included in Part II, Item 8 of this annual report.
Goodwill and Other Intangibles. We record all assets and liabilities
acquired in purchase acquisitions, including goodwill and other intangibles, at
fair value as required by Statement of Financial Accounting Standards No. 141.
Goodwill is subject, at a minimum, to annual tests for impairment. Other
intangible assets are amortized over their estimated useful lives using
straight-line and accelerated methods, and are subject to impairment if events
or circumstances indicate a possible inability to realize the carrying amount.
The initial goodwill and other intangibles recorded, and subsequent impairment
analysis, requires us to make subjective judgments concerning estimates of how
the acquired assets will perform in the future. Events and factors that may
significantly affect the estimates include, among others, customer attrition,
changes in revenue grown trends, specific industry conditions and changes in
competition.
Operating Strategy
Our mission is to operate and further expand a profitable
community-oriented financial institution. We plan to achieve this by executing
our strategy of:
o pursuing opportunities to increase multi-family and commercial real
estate and commercial business lending in our market area;
o continuing to emphasize the origination of one- to four-family
residential real estate loans;
o expanding our delivery system through a combination of increased
uses of technology and additional branch facilities;
o aggressively attracting core deposits;
o managing our net interest margin and net interest spread by having a
greater percentage of our assets in loans, especially
higher-yielding loans, which generally have a higher yield than
securities; and
o managing interest rate risk by emphasizing the origination of
adjustable-rate or shorter duration loans.
Pursue opportunities to increase commercial real estate and commercial
business lending in our market area
Commercial real estate and commercial business loans provide us with the
opportunity to earn more income because they tend to have higher interest rates
than residential mortgage loans. In addition, these loans are beneficial for
interest rate risk management because they typically have shorter terms and
adjustable interest rates. Commercial real estate and commercial business loans
increased $49.3 million and $121.6 million for the years ended March 31, 2009
and 2008, respectively, and at March 31, 2009 comprised approximately 57.1% of
total loans. There are many multi-family and commercial properties and
businesses located in our market area, and with the additional capital we raised
in the offering we may pursue the larger lending relationships associated with
these opportunities, while continuing to originate any such loans in accordance
with what we believe are our conservative underwriting guidelines. We have added
expertise in our commercial loan department in recent years. Additionally, we
may employ additional commercial lenders in the future to help increase our
multi-family and commercial lending.
24
However, these types of loans generally expose a lender to greater risk of
non-payment and loss than one- to four-family residential mortgage loans because
repayment of the loans often depends on the successful operation of the property
and the income stream of the borrowers. Such loans typically involve larger loan
balances to single borrowers or groups of related borrowers compared to one- to
four-family residential mortgage loans. Commercial business loans expose us to
additional risks since they typically are made on the basis of the borrower's
ability to make repayments from the cash flow of the borrower's business and are
secured by non-real estate collateral that may depreciate over time. In
addition, since such loans generally entail greater risk than one- to
four-family residential mortgage loans, we may need to increase our allowance
for loan losses in the future to account for the likely increase in probable
incurred credit losses associated with the growth of such loans. Also, many of
our commercial borrowers have more than one loan outstanding with us.
Consequently, an adverse development with respect to one loan or one credit
relationship can expose us to a significantly greater risk of loss compared to
an adverse development with respect to a one- to four-family residential
mortgage loan.
Expand our delivery system through a combination of increased uses of
technology and additional branch facilities
We intend to expand the ways in which we reach and serve our customers. We
implemented internet banking in fiscal 2003, which allows our customers to
access their accounts and pay bills online. In fiscal 2006, we introduced an
enhancement to our website to enable customers to obtain loan information to
apply for a residential or commercial loan online. Additionally, in fiscal 2008
we introduced remote deposit capture, a product which allows commercial
customers to deposit checks from their office with the use of a scanner; thereby
eliminating the need to physically visit an office to make a deposit. Also, we
opened new branch offices in East Windsor, Connecticut in October 2005 and
Ellington, Connecticut in April 2006 and the Bank opened its Farmington Avenue
branch office in March 2007 and its Southington branch office in January 2007.
We intend to pursue expansion in our market area in the future, whether through
de novo branching or acquisition. However, we have not entered into any binding
commitments regarding our expansion plans.
Aggressively attract core deposits
Core deposits (accounts other than certificates of deposit) comprised
40.8% of our total deposits at March 31, 2009. We value core deposits because
they represent longer-term customer relationships and a lower cost of funding
compared to certificates of deposit. We aggressively seek core deposits through
competitive pricing and targeted advertising. In addition, we offer business
checking accounts for our commercial customers. We also hope to increase core
deposits by pursuing expansion inside and outside of our market area through de
novo branching.
Manage net interest margin and net interest spread by having a greater
percentage of our assets in loans, especially higher-yielding loans, which
generally have a higher yield than securities
We intend to continue to manage our net interest margin and net interest
spread by seeking to increase lending levels and by originating higher-yielding
loans. Loans secured by multi-family and commercial real estate and commercial
business loans are generally larger and involve a greater degree of risk than
one-to four-family residential mortgage loans. Consequently, multi-family and
commercial real estate and commercial business loans typically have higher
yields, which increase our net interest margin and net interest spread. In
addition, the Bank has started, and expects to continue, to sell one- to
four-family mortgage loans in an effort to increase yields on the overall loan
portfolio.
Manage interest rate risk by emphasizing the origination of
adjustable-rate or shorter duration loans
We manage our interest rate sensitivity 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 longer-term loans because of
the shorter maturities of deposits. As a result, sharp increases in interest
rates may adversely affect our earnings while decreases in interest rates may
beneficially affect our earnings. To reduce the potential volatility of our
earnings, we have sought to: (1) improve the match between asset and liability
maturities and rates, while maintaining an acceptable interest rate spread; and
(2) decrease the maturities of our assets, in part by the origination
25
of adjustable-rate and shorter-term loans. To this end the Company started to
sell some of its long term fixed rate residential mortgage loans.
Balance Sheet Analysis
Loans. We originate real estate loans secured by residential real estate,
commercial real estate and construction loans, which are secured by residential
and commercial real estate. At March 31, 2009, real estate loans totaled $336.6
million, or 80.1% of total loans, compared to $317.8 million, or 84.5%, of total
loans at March 31, 2008.
The largest segment of our real estate loans is commercial real estate
loans. Commercial real estate loans totaled $162.8 million at March 31, 2009,
which represented 48.4% of real estate loans and 38.8% of total loans, compared
to $138.5 million at March 31, 2008, which represented 43.6% of real estate
loans and 36.8% of total loans. Commercial real estate loans increased $24.3
million, or 17.6%, for the year ended March 31, 2009 primarily due to the
Company focusing on this type of lending.
Residential real estate loans totaled $158.3 million at March 31, 2009,
which represented 47.0% of real estate loans and 37.7% of total loans compared
to $158.3 million at March 31, 2008, which represented 49.8% of real estate
loans and 42.1% of total loans. Residential real estate loans increased $51,000
for the year ended March 31, 2009.
We originate construction loans secured by residential and commercial real
estate. This portfolio totaled $15.5 million at March 31, 2009, which
represented 3.7% of total loans, compared to $21.0 million at March 31, 2008,
which represented 5.6% of total loans. Construction loans decreased $5.5
million, or 26.4%, for the year ended March 31, 2009 primarily due to loans
being transferred to other loan categories after successful completion of
construction, partially offset by advances and originations.
We also originate commercial business loans secured by business assets
other than real estate, such as business equipment, inventory and accounts
receivable and letters of credit. Commercial business loans totaled $76.9
million at March 31, 2009, which represented 18.3% of total loans, compared to
$52.0 million at March 31, 2008, which represented 13.8% of total loans.
Commercial business loans increased $25.0 million, or 48.1% for the year ended
March 31, 2009 primarily due to the Company focusing on this type of lending.
We originate a variety of consumer loans, including loans secured by
mobile homes, automobiles and passbook or certificate accounts. Consumer loans
totaled $6.5 million and represented 1.6% of total loans at March 31, 2009 and
$6.3 million at March 31, 2008 which represented 1.7% of total loans.
26
The following table sets forth the composition of our loan portfolio at
the dates indicated.
At March 31,
------------------------------------------------------------------------------------------------------
2009 2008 2007 2006 2005
------------------ ------------------ ------------------- ------------------- ------------------
Percent Percent Percent Percent Percent
Amount Of Total Amount Of Total Amount Of Total Amount Of Total Amount Of Total
-------- -------- -------- -------- --------- -------- --------- -------- -------- --------
(Dollars in thousands)
Mortgage loans:
Residential (1) ......... $158,319 37.69% $158,268 42.09% $ 120,199 59.96% $ 94,682 63.07% $ 89,223 66.42%
Commercial real estate .. 162,809 38.76 138,477 36.82 54,057 26.97 40,596 27.04 27,588 20.54
Construction loans ...... 15,498 3.69 21,043 5.60 8,774 4.38 8,459 5.63 10,949 8.15
-------- -------- -------- -------- --------- -------- --------- -------- -------- --------
Total mortgage loans .. 336,626 80.14 317,788 84.51 183,030 91.31 143,737 95.74 127,760 95.11
Consumer loans ............ 6,491 1.55 6,292 1.67 2,692 1.34 1,005 0.67 1,097 0.81
Commercial loans .......... 76,935 18.31 51,958 13.82 14,733 7.35 5,384 3.59 5,477 4.08
-------- -------- -------- -------- --------- -------- --------- -------- -------- --------
Total loans ........... 420,052 100.00% 376,038 100.00% 200,455 100.00% 150,126 100.00% 134,334 100.00%
======== ======== ======== ======== ========
Deferred loan origination
fees, net ............... (28) (223) (133) (377) (340)
Allowance for loan
losses .................. (6,458) (4,046) (1,875) (1,636) (1,437)
-------- -------- --------- --------- --------
Total loans, net ........ $413,566 $371,769 $ 198,447 $ 148,113 $132,557
======== ======== ========= ========= ========
(1) Includes $33.1 million, $31.9 million, $17.6 million, $13.9 million and
$9.6 million of home equity loans and lines of credit at March 31, 2009,
2008, 2007, 2006 and 2005, respectively.
27
The following table sets forth certain information at March 31, 2009
regarding the dollar amount of principal repayments becoming due during the
periods indicated. The table does not include any estimate of prepayments that
significantly shorten the average life of our loans and may cause our actual
repayment experience to differ from that shown below. Demand loans having no
stated schedule of repayments and no stated maturity are reported as due in one
year or less.
Commercial
Resi- Real Total
dential Estate Construction Consumer Commercial Loans
-------- ---------- ------------ -------- ---------- --------
(In thousands)
Amounts due in:
One year or less .......................... $ 637 $ 9,392 $ 7,761 $ 660 $ 26,240 $ 44,690
More than one year to three years ......... 1,539 2,167 1,224 1,045 11,733 17,708
More than three years to five years ....... 4,231 2,227 1,489 581 17,339 25,867
More than five years to ten years ......... 27,472 26,038 2,322 150 16,229 72,211
More than ten years to fifteen years ...... 21,494 26,841 -- 1,527 1,054 50,916
More than fifteen years ................... 102,946 96,144 2,702 2,528 4,340 208,660
-------- -------- -------- -------- -------- --------
Total amount due ....................... $158,319 $162,809 $ 15,498 $ 6,491 $ 76,935 $420,052
======== ======== ======== ======== ======== ========
The following table sets forth the dollar amount of all loans at March 31,
2009 that are due after March 31, 2010 and have either fixed interest rates or
floating or adjustable interest rates. The amounts shown below exclude
applicable loans in process, unearned interest on consumer loans and deferred
loan fees.
Due After March 31, 2010
------------------------------------------
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- ---------
(In thousands)
Mortgage loans:
Residential loans ........ $ 131,221 $ 26,461 $ 157,682
Commercial real estate ... 28,436 124,981 153,417
Construction loans ....... 3,840 3,897 7,737
----------- --------- ---------
Total mortgage loans .. 163,497 155,339 318,836
Consumer loans .............. 5,818 13 5,831
Commercial loans ............ 39,538 11,157 50,695
----------- --------- ---------
Total loans ........ $ 208,853 $ 166,509 $ 375,362
=========== ========= =========
The following table shows loan activity during the periods indicated.
28
For the Fiscal Year Ended March 31,
-----------------------------------
2009 2008 2007
--------- --------- ---------
(In thousands)
Beginning balance, loans, net ....................... $ 371,769 $ 198,447 $ 148,113
--------- --------- ---------
Originations:
Mortgage loans:
Residential loans ............................. 19,734 27,978 29,478
Commercial real estate ........................ 29,947 29,735 19,161
Construction loans ............................ 2,220 6,691 12,505
--------- --------- ---------
Total mortgage loans ........................ 51,901 64,404 61,144
Consumer loans .................................. 2,503 3,262 2,290
Commercial loans ................................ 32,561 14,201 11,170
--------- --------- ---------
Total loan originations ..................... 86,965 81,867 74,604
Loans sold .......................................... (3,684) (6,958) (3,816)
Loan participations purchased ....................... 13,828 5,860 18,268
Loans acquired in merger ............................ -- 141,041 --
Deduct:
Principal loan repayments and other, net ........ (54,795) (48,371) (38,719)
Loan charge-offs, net of recoveries ............. (517) (117) (3)
--------- --------- ---------
Ending balance, loans, net .......................... $ 413,566 $ 371,769 $ 198,447
========= ========= =========
Available-for-Sale Securities. Our securities portfolio consists primarily
of U.S. government and agency securities, mortgage-backed securities, marketable
equity securities, municipal securities and, to a lesser extent, corporate debt
securities. Although corporate debt securities and municipal securities
generally have greater credit risk than U.S. Treasury and government securities,
they generally have higher yields than government securities of similar
duration. Available-for-sale securities increased $8.3 million, or 13.0%, in the
year ended March 31, 2009 due to increases in the municipal and mortgage-backed
securities categories, partially offset by calls the sale of the majority of the
marketable equity securities. The majority of our mortgage-backed securities
were issued by Ginnie Mae, Fannie Mae or Freddie Mac.
The following table sets forth the carrying values and fair values of our
securities portfolio at the dates indicated.
At March 31,
-----------------------------------------------------------------------
2009 2008 2007
--------------------- --------------------- ---------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-----------------------------------------------------------------------
(In thousands)
Investments in available-for-sale securities:
U.S. government and federal agencies ........... $ 11,930 $ 12,068 $ 11,426 $ 11,501 $ 23,774 $ 23,575
Municipal securities ........................... 16,917 15,712 12,719 12,504 7,493 7,405
Corporate debt securities ...................... -- -- 65 66 100 101
Mortgage-backed securities ..................... 43,618 44,041 38,982 39,473 12,030 11,941
Marketable equity securities ................... 7 7 5,373 5,373 7,224 7,034
--------- -------- --------- -------- --------- --------
Total .................................... 72,472 71,828 68,565 68,917 50,621 50,056
Money market mutual funds included in cash
and cash equivalents ........................ (7) (7) (5,373) (5,373) (587) (587)
--------- -------- --------- -------- --------- --------
Total .................................... $ 72,465 $ 71,821 $ 63,192 $ 63,544 $ 50,034 $ 49,469
========= ======== ========= ======== ========= ========
29
The following table sets forth our available-for-sale securities:
At and For the Fiscal Year Ended March 31,
------------------------------------------
2009 2008 2007
----------- ----------- ------------
(In thousands)
Mortgage-related securities:
Mortgage-related securities, beginning of period (1) ............... $ 39,473 $ 11,941 $ 12,530
Acquired in merger ................................................. -- 11,589 --
Purchases .......................................................... 13,251 22,533 2,609
Sales .............................................................. (753) (2,438) --
Repayments and prepayments ......................................... (7,607) (4,705) (3,224)
Decrease in net premium ............................................ (32) (27) (44)
(Decrease) increase in net unrealized gain ......................... (291) 580 70
----------- ----------- ------------
Net increase (decrease) in mortgage-related securities .......... 4,568 27,532 (589)
----------- ----------- ------------
Mortgage-related securities, end of period (1) ..................... $ 44,041 $ 39,473 $ 11,941
=========== =========== ============
Investment securities:
Investment securities, beginning of period (1) ..................... $ 24,071 $ 37,528 $ 39,767
Acquired in merger ................................................. -- 11,059 --
Purchases .......................................................... 22,732 19,575 15,218
Sales .............................................................. (8,824) (19,215) (14,842)
Maturities ......................................................... (9,636) (21,785) (2,996)
Increase (decrease) in net premium ................................. 94 96 21
Reclass from securities to other assets ............................ -- (3,524) --
(Decrease) increase in net unrealized gain ......................... (657) 337 360
----------- ----------- ------------
Net increase (decrease) in investment securities ................ 3,709 (13,457) (2,239)
----------- ----------- ------------
Investment securities, end of period (1) ........................... $ 27,780 $ 24,071 $ 37,528
=========== =========== ============
- ----------
(1) At fair value
The following table sets forth the maturities and weighted average yields
of securities at March 31, 2009. Weighted average yields are presented on a
tax-equivalent basis.
Within One Year One To Five Years Five To Ten Years After Ten Years Total
------------------ ------------------ ------------------ ------------------ ------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Available-for-sale securities:
U.S. Government and
Federal agencies ........ $ -- --% $ 101 5.02% $ 3,454 5.01% $ 8,513 5.78% $ 12,068 5.55%
Municipal securities ....... -- -- 552 4.84 3,307 5.67 11,853 6.44 15,712 6.22
Mortgage-backed
securities .............. 130 3.64 35 7.56 1,030 4.96 42,846 5.04 44,041 5.04
-------- -------- -------- -------- --------
Total ................... $ 130 3.64% $ 688 5.00% $ 7,791 5.28% $ 63,212 5.40% $ 71,821 5.38%
======== ======== ======== ======== ========
Deposits. Our primary source of funds is our deposit accounts, which are
comprised of demand deposits, savings accounts and time deposits. These deposits
are provided primarily by individuals and, to a lesser extent, commercial
customers, within our market area. We do not currently use brokered deposits as
a source of funding. Deposits increased $49.1 million for the year ended March
31, 2009 due primarily to an increase in the certificates of deposit category.
The Company has continued to experience disintermediation, as rates on other
types of investments (CDs and money market accounts) have increased
substantially over the past several years resulting in customers moving funds
from the generally lower rates of savings accounts.
30
The following table sets forth the balances of our deposit products at the dates
indicated.
At March 31,
--------------------
2009 2008
-------- ---------
(In thousands)
Non-interest bearing accounts ................... $ 37,483 $ 40,347
NOW and money market accounts ................... 75,137 74,017
Savings accounts ................................ 58,413 55,211
Certificates of deposit ......................... 248,403 200,737
-------- ---------
Total $419,436 $ 370,312
======== =========
The following table indicates the amount of jumbo certificates of deposit
by time remaining until maturity as of March 31, 2009. Jumbo certificates of
deposit require minimum deposits of $100,000.
Weighted
Maturity Period Amount Average Rate
--------------- ------- ------------
(Dollars in thousands)
Three months or less .......................... $15,198 3.26%
Over three through six months ................. 10,931 3.07
Over six through twelve months ................ 28,510 3.17
Over twelve months ............................ 33,250 3.96
-------
Total ...................................... $87,889 3.48%
=======
The following table sets forth the time deposits classified by rates at
the dates indicated.
At March 31,
--------------------------------
2009 2008 2007
-------- --------- ---------
(In thousands)
Certificate accounts:
0.00 to 2.00% ............ $ 18,291 $ 111 $ 756
2.01 to 3.00% ............ 83,462 19,291 6,332
3.01 to 4.00% ............ 87,793 63,448 29,176
4.01 to 5.00% ............ 50,616 88,801 51,130
5.01 to 6.00% ............ 8,241 29,086 2,717
-------- --------- ---------
Total ................. $248,403 $ 200,737 $ 90,111
======== ========= =========
The following table sets forth the amount and maturities of time deposits
classified by rates at March 31, 2009.
Amount Due
-----------------------------------------
Percent of
One Two to Over Total
Less than to Two Three Three Certificate
One Year Years Years Years Total Accounts
--------- --------- ------- ------- --------- -----------
(In thousands)
Certificate accounts:
0 to 2.00% ...................... $ 18,279 $ 12 $ -- $ -- $ 18,291 7.4%
2.01 to 3.00% ...................... 53,293 27,021 3,149 -- 83,463 33.6
3.01 to 4.00% ...................... 50,637 14,568 9,583 13,005 87,793 35.3
4.01 to 5.00% ...................... 22,513 9,522 1,795 16,786 50,616 20.4
5.01 to 6.00% ...................... 269 95 505 7,371 8,240 3.3
--------- --------- ------- ------- --------- -----
Total ........................... $ 144,991 $ 51,218 $15,032 $37,162 $ 248,403 100.0%
========= ========= ======= ======= ========= =====
31
The following table sets forth the deposit activity for the periods indicated.
For the Fiscal Year Ended March 31,
------------------------------------
2009 2008 2007
-------- -------- --------
(In thousands)
Net deposits (withdrawals) ............................... $ 39,113 $ 10,696 $ 8,427
Deposits acquired through merger ......................... -- 168,369 --
Interest credited on deposit accounts (1) ................ 10,011 9,572 4,204
-------- -------- --------
Total increase in deposit accounts ....................... $ 49,124 $188,637 $ 12,631
======== ======== ========
- ----------
(1) Includes amortization of fair value adjustment.
Borrowings. We use advances from the Federal Home Loan Bank to supplement
our supply of funds for loans and investments and to meet deposit withdrawal
requirements.
The following table sets forth certain information regarding our borrowed
funds:
At or For the Years
Ended March 31,
-----------------------------
2009 2008 2007
------- ------- -------
(Dollars in thousands)
Federal Home Loan Bank advances:
Average balance outstanding ............................ $62,888 $47,400 $27,465
Maximum amount outstanding at any month-end
during the period ................................... 67,650 62,221 33,587
Balance outstanding at end of period ................... 66,833 61,928 33,587
Weighted average interest rate during the period ....... 4.35% 4.70% 4.34%
Weighted average interest rate at end of period ........ 4.10% 4.33% 4.50%
Subordinated Debentures. On July 28, 2005, FVB Capital Trust I ("Trust
I"), a Delaware statutory trust formed by First Valley Bancorp, completed the
sale of $4.1 million of 6.42%, 5 Year Fixed-Floating Capital Securities
("Capital Securities"). Trust I also issued common securities to First Valley
Bancorp and used the net proceeds from the offering to purchase a like amount of
6.42% Junior Subordinated Debentures ("Debentures") of First Valley Bancorp.
Debentures are the sole assets of Trust I.
Capital Securities accrue and pay distributions quarterly at an annual
rate of 6.42% for the first 5 years of the stated liquidation amount of $10 per
Capital Security. First Valley Bancorp fully and unconditionally guaranteed all
of the obligations of the Trust, which are now guaranteed by the Company. The
guaranty covers the quarterly distributions and payments on liquidation or
redemption of Capital Securities, but only to the extent that Trust I has funds
necessary to make these payments.
Capital Securities are mandatorily redeemable upon the maturing of
Debentures on August 23, 2035 or upon earlier redemption as provided in the
Indenture. The Company has the right to redeem Debentures, in whole or in part
on or after August 23, 2010 at the liquidation amount plus any accrued but
unpaid interest to the redemption date.
The trust and guaranty provide for the binding of any successors in the
event of a merger, as is the case in the merger of First Valley Bancorp and the
Company. The Company has assumed the obligations of First Valley Bancorp in
regards to the subordinated debentures due to the acquisition of First Valley
Bancorp by the Company.
32
Results of Operations for the Years Ended March 31, 2009 and 2008
Overview.
2009 2008 % Change
--------- --------- --------
(Dollars in thousands)
Net (loss) income .................... $ (1,802) $ 1,215 (248.31)%
Return on average assets ............. (0.33)% 0.27% (222.22)
Return on average equity ............. (2.71)% 1.83% (248.09)
Average equity to average assets ..... 12.27% 15.04% (18.42)
Net income increased due primarily to increases in net interest and
dividend income and noninterest income, partially offset by increases in
noninterest expense, the provision for loan losses and income tax expense. Net
interest income increased primarily as a result of a higher volume of and yield
on interest-earning assets, partially offset by an increase in the cost of
funds.
Net Interest and Dividend Income. Net interest and dividend income totaled
$15.7 million for the year ended March 31, 2009, an increase of $1.9 million or
13.4% compared to the prior fiscal year. This resulted mainly from a $107.4
million increase in average interest-earning assets during the year, partially
offset by a $96.5 million increase in average interest-bearing liabilities. Our
interest rate spread decreased 21 basis points to 2.72% for the year ended March
31, 2009 and net interest margin decreased 35 basis points to 3.18% for the same
time period.
Interest and dividend income increased $2.9 million, or 11.3%, from $26.0
million for fiscal 2008 to $28.9 million for fiscal 2009. Average
interest-earning assets were $506.9 million for fiscal 2009, an increase of
$107.4 million, or 26.9%, compared to $399.5 million for fiscal 2008. The
increase in average interest-earning assets resulted primarily from increases in
the Company's loan and securities portfolios. The yield on interest-earning
assets decreased from 6.57% to 5.79% due primarily to a decline in interest
rates which affected the Company's loan portfolio, the yield on which decreased
60 basis points, and the Company's short-term assets, primarily federal funds
sold, the yield on which decreased 348 basis points.
Interest expense increased $1.1 million, or 8.9%, from $12.1 million for
fiscal 2008 to $13.2 million for fiscal 2009. Average interest-bearing
liabilities grew $96.5 million, or 28.9%, from $333.9 million for fiscal 2008 to
$430.4 million for fiscal 2009 due primarily to increases in deposits and
Federal Home Loan Bank advances. The average rate paid on interest-bearing
liabilities decreased to 3.07% for fiscal 2009 from 3.64% due to the decline in
interest rates on deposits and securities sold under agreements to repurchase.
33
Average Balances and Yields. The following table presents information
regarding average balances of assets and liabilities, as well as the total
dollar amounts of interest income and dividends from average interest-earning
assets and interest expense on average interest-bearing liabilities and the
resulting average yields and costs. The yields and costs for the periods
indicated are derived by dividing income or expense by the average balances of
assets or liabilities, respectively, for the periods presented. For purposes of
this table, average balances have been calculated using the average of month-end
balances and non-accrual loans are included in average balances; however,
accrued interest income has been excluded from these loans.
For the Fiscal Years Ended March 31,
---------------------------------------------------------------------------------------------
2009 2008 2007
----------------------------- ----------------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- ------- -------- -------- -------
(Dollars in thousands)
Assets:
Federal funds sold,
interest-bearing
deposits and marketable
equity securities ............ $ 37,467 $ 268 0.72% $ 20,796 $ 874 4.20% $ 18,710 $ 966 5.16%
Investments in available
for sale securities, other
than mortgage-backed
and mortgage-related
securities (1) ............... 31,553 2,044 6.48 38,451 2,254 5.86 44,283 2,179 4.92
Mortgage-backed and
mortgage-related securities .. 44,276 2,291 5.17 24,087 1,278 5.31 12,549 643 5.13
Federal Home Loan Bank stock .... 3,686 85 2.31 2,859 168 5.88 1,735 95 5.50
Loans, net (2) .................. 389,922 24,640 6.32 313,334 21,674 6.92 175,238 11,483 6.55
-------- -------- -------- -------- -------- --------
Total interest-earning
assets ................. 506,904 29,328 5.79 399,527 26,248 6.57 252,515 15,366 6.09
-------- -------- --------
Noninterest-earning assets ...... 26,617 36,520 11,813
Cash surrender value
of life insurance ............ 9,022 4,338 4,138
-------- -------- --------
Total assets .............. $542,543 $440,385 $268,466
======== ======== ========
Liabilities and Stockholders'
Equity:
Deposits:
Savings accounts ............. $ 56,245 $ 478 0.85% $ 50,820 $ 361 0.71% $ 43,810 $ 266 0.61%
NOW accounts ................. 11,444 55 0.48 10,470 91 0.87 7,564 32 0.42
Money market accounts ........ 61,896 1,299 2.10 47,081 1,660 3.52 19,021 651 3.42
Certificate accounts ......... 221,772 8,230 3.71 166,563 7,434 4.46 86,174 3,255 3.78
-------- -------- -------- -------- -------- --------
Total deposits ............ 351,357 10,062 2.86 274,934 9,546 3.47 156,569 4,204 2.68
Federal Home Loan Bank
advances and subordinated
debentures ................... 66,785 3,004 4.50 47,400 2,234 4.71 27,721 1,204 4.34
Advanced payments by borrowers
for taxes and insurance ...... 1,006 14 1.39 890 12 1.35 846 10 1.22
Securities sold under
agreements to repurchase ..... 11,245 146 1.30 10,678 356 3.33 9,335 376 4.03
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities ............ 430,393 13,226 3.07 333,902 12,148 3.64 194,471 5,794 2.98
-------- -------- --------
Demand deposits ................. 38,042 31,177 15,294
Other liabilities ............... 7,559 9,083 1,741
-------- -------- --------
Total liabilities ......... 475,994 374,162 211,506
Stockholders' Equity ............ 66,549 66,223 56,960
-------- -------- --------
Total liabilities
and stockholders'
equity ................. $542,543 $440,385 $268,466
======== ======== ========
Net interest income/net
interest rate spread (3) ..... $ 16,102 2.72% $ 14,100 2.93% $ 9,572 3.11%
======== ======= ======== ======= ======== =======
Net interest margin (4) ......... 3.18% 3.53% 3.79%
======= ======= =======
Ratio of interest-earning
assets to interest-bearing
liabilities .................. 117.78% 119.65% 129.85%
======== ======== ========
- ----------
(1) Reported on a tax equivalent basis, using a 34% tax rate.
(2) Amount is net of deferred loan origination costs, undisbursed proceeds of
construction loans in process, allowance for loan losses and includes
non-accruing loans. We record interest income on non-accruing loans on a
cash basis. Loan fees are included in interest income.
(3) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
34
Rate/Volume Analysis. The following table sets forth the effects of
changing rates and volumes on our net interest income. The rate column shows the
effects attributable to changes in rate (changes in rate multiplied by prior
volume). The volume column shows the effects attributable to changes in volume
(changes in volume multiplied by prior rate). The net column represents the sum
of the prior columns. For purposes of this table, changes attributable to
changes in both rate and volume that cannot be segregated have been allocated
proportionately based on the changes due to rate and the changes due to volume.
Fiscal Year Ended Fiscal Year Ended
March 31, 2009 March 31, 2008
Compared to Compared to
Fiscal Year Ended Fiscal Year Ended
March 31, 2008 March 31, 2007
-------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------- --------------------
Rate Volume Net Volume Rate Net
-------- -------- -------- -------- -------- --------
(In thousands)
Interest-earning assets:
Federal funds sold, interest-bearing
deposits and marketable
equity securities ......................... $ (1,014) $ 408 $ (606) $ (230) $ 138 $ (92)
Investments in available-for-sale
securities, other than
mortgage-backed and
mortgage-related securities ............... 229 (439) (210) 241 (166) 75
Mortgage-backed and mortgage-related
securities ................................ (27) 1,040 1,013 23 612 635
Federal Home Loan Bank stock ................. (158) 75 (83) 7 66 73
Loans, net (1) ............................... (1,552) 4,518 2,966 672 9,519 10,191
-------- -------- -------- -------- -------- --------
Total interest-earning assets ............. (2,522) 5,602 3,080 713 10,169 10,882
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Savings accounts ............................. 77 40 117 48 47 95
NOW accounts ................................. (45) 9 (36) 43 16 59
Money market accounts ........................ (775) 414 (361) 21 988 1,009
Certificate accounts ......................... (801) 1,597 796 681 3,498 4,179
Federal Home Loan Bank advances
and subordinated debentures ............... (90) 860 770 110 920 1,030
Advanced payments by borrowers
for taxes and insurance ................... -- 2 2 1 1 2
Securities sold under agreements
to repurchase ............................. (230) 20 (210) (122) 102 (20)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities ........ (1,864) 2,942 1,078 782 5,572 6,354
-------- -------- -------- -------- -------- --------
Increase in net interest income ................. $ (658) $ 2,660 $ 2,002 $ (69) $ 4,597 $ 4,528
======== ======== ======== ======== ======== ========
- ----------
(1) Amount is net of deferred loan origination costs, undisbursed proceeds of
construction loans in process, allowance for loan losses and includes
non-accruing loans. We record interest income on non-accruing loans. We
record interest income on non-accruing loans on a cash basis. Loan fees
are included in interest income.
Provision for Loan Losses. The provision for loan losses are charges to
earnings to bring the total allowance for losses to a level considered by
management as adequate to provide for estimated losses inherent in the loan
portfolio. The size of the provision for each year is dependent upon many
factors, including loan growth, net charge-offs, changes in the composition of
the loan portfolio, delinquencies, management's assessment of loan portfolio
quality, the value of collateral and general economic factors.
We recorded a $2.9 million and $307,000 provision for loan losses in the
years ended March 31, 2009 and 2008, respectively. The increase in the provision
was caused primarily by the $10.8 million increase in nonperforming loans and
the $44.0 million, or 11.7%, increase in total loans.
35
Although management utilizes its best judgment in providing for losses,
there can be no assurance that we will not have to change its provisions for
loan losses in subsequent periods. Management will continue to monitor the
allowance for loan losses and make additional provisions to the allowance as
appropriate.
An analysis of the changes in the allowance for loan losses,
non-performing loans and classified loans is presented under "--Risk
Management--Analysis of Non-Performing and Classified Assets" and "--Risk
Management--Analysis and Determination of the Allowance for Loan Losses."
Noninterest (Charges) Income. The following table shows the components of
noninterest (charges) income and the percentage changes from 2009 to 2008.
2009 2008 % Change
------- ------- --------
(In thousands)
Service charges on deposit accounts ............................... $ 1,024 $ 886 15.6%
Gain (loss) on sales and calls of securities, net ........ ........ 189 (93) 303.2
Gain on sale of loans ............................................. 72 53 35.8
Increase in cash surrender value of life insurance policies ....... 359 154 133.1
Impairment loss on securities ..................................... (2,741) -- --
Other income ...................................................... 547 338 61.8
------- -------
Total .......................................................... $ (550) $ 1,338 (141.1)%
======= =======
The decrease in noninterest income was due to the investment securities
other-than-temporary-impaired write down of $2.7 million recorded during fiscal
year 2009.
Noninterest Expense. The following table shows the components of
noninterest expense and the percentage changes from fiscal 2009 to fiscal 2008.
2009 2008 % Change
------- ------- --------
(In thousands)
Salaries and employee benefits .............. $ 7,752 $ 6,966 11.3%
Occupancy and equipment expenses ............ 2,966 2,653 11.8
Advertising and promotion ................... 295 229 28.8
Professional fees ........................... 741 534 38.8
Data processing expense ..................... 502 450 11.6
FDIC insurance assessments .................. 322 119 170.6
Stationery and supplies ..................... 190 165 15.2
Amortization of identifiable
intangible assets ........................ 506 387 30.7
Other expense ............................... 1,683 1,446 16.4
------- -------
Total .................................... $14,957 $12,949 15.5
======= =======
Efficiency ratio (1) ........................ 98.6% 85.2%
- ----------
(1) Computed as noninterest expense divided by the sum of net interest and
dividend income and other income.
The increase in noninterest expense was due primarily to fiscal 2008
including only nine months of expense for Valley Bank. Which was acquired in
July 2007, compared to twelve months of expense for fiscal 2009.
Income Taxes. The Company recorded a $916,000 income tax benefit for the
year ended March 31, 2009 compared to income tax expense of $728,000 in the
previous year. The tax benefit for the current year was due to the pre-tax loss
of $2.7 million. The effective tax rate for the year ended March 31, 2008 was
37.4%.
36
Risk Management
Overview. Managing risk is an essential part of successfully managing a
financial institution. Our most prominent risk exposures are credit risk,
interest rate risk and market risk. Credit risk is the risk of not collecting
the interest and/or the principal balance of a loan or investment when it is
due. Interest rate risk is the potential reduction of interest income as a
result of changes in interest rates. Market risk arises from fluctuations in
interest rates that may result in changes in the values of financial
instruments, such as available-for-sale securities that are accounted for on a
mark-to-market basis. Other risks that we encounter are operational risks,
liquidity risks and reputation risk. Operational risks include risks related to
fraud, regulatory compliance, processing errors, technology and disaster
recovery. Liquidity risk is the possible inability to fund obligations to
depositors, lenders or borrowers. Reputation risk is the risk that negative
publicity or press, whether true or not, could cause a decline in our customer
base or revenue.
Credit Risk Management. Our strategy for credit risk management focuses on
having well-defined credit policies and uniform underwriting criteria and
providing prompt attention to potential problem loans.
When a borrower fails to make a required loan payment, we take a number of
steps to have the borrower cure the delinquency and restore the loan to current
status. We make initial contact with the borrower when the loan becomes 15 days
past due. If payment is not received by the 30th day of delinquency, additional
letters and phone calls generally are made. Typically, when the loan becomes 60
days past due, we send a letter notifying the borrower that we may commence
legal proceedings if the loan is not paid in full within 30 days. Generally,
loan workout arrangements are made with the borrower at this time; however, if
an arrangement cannot be structured before the loan becomes 90 days past due, we
will send a formal demand letter and, once the time period specified in that
letter expires, commence legal proceedings against any real property that
secures the loan or attempt to repossess any business assets or personal
property that secures the loan. If a foreclosure action is instituted and the
loan is not brought current, paid in full or refinanced before the foreclosure
sale, the real property securing the loan generally is sold at foreclosure.
Management informs the Boards of Directors monthly of the amount of loans
delinquent more than 90 days, all loans in foreclosure and all foreclosed and
repossessed property that we own.
Analysis of Non-performing and Classified Assets. We consider repossessed
assets and loans that are 90 days or more past due to be non-performing assets.
When a loan becomes 90 days delinquent, the loan is placed on non-accrual status
at which time the accrual of interest ceases and an allowance for any
uncollectible accrued interest is established and charged against operations.
Typically, payments received on a non-accrual loan are applied to the
outstanding principal and interest as determined at the time of collection of
the loan.
Real estate that we acquire as a result of foreclosure or by deed-in-lieu
of foreclosure is classified as foreclosed real estate until it is sold. When
property is acquired, it is recorded at the lower of the recorded investment in
the loan or at fair value. Thereafter, we carry foreclosed real estate at fair
value, net of estimated selling costs. Holding costs and declines in fair value
after acquisition of the property result in charges against income.
Non-performing assets totaled $12.1 million, or 2.11% of total assets, at
March 31, 2009, which was an increase of $10.9 million from March 31, 2008. As a
result, nonperforming loans as a percentage of loans increased from 0.31% at
March 31, 2008 to 2.84% at March 31, 2009. At March 31, 2009 the Company had one
residential property classified as other real estate owned with a balance of
$141,000; there were no properties classified as other real estate owned at
March 31, 2008. At March 31, 2009, non-accrual loans consisted of fourteen
residential real estate loans, ten commercial loans, eight commercial real
estate loans, three consumer loans and two construction loans, compared to six
residential real estate loans, one construction loan, one consumer loan and one
commercial loan at March 31, 2008.
37
The following table provides information with respect to our
non-performing assets at the dates indicated. We did not have any troubled debt
restructurings at the dates presented.
At March 31,
--------------------------------------------------
2009 2008 2007 2006 2005
------- ------- ------- ------- ------
(Dollars in thousands)
Non-accruing loans:
Mortgage loans:
Residential loans ........................... $ 1,905 $ 737 $ 824 $ 331 $ 464
Commercial real estate ...................... 3,918 -- -- -- --
Construction loans .......................... 439 398
------- ------- ------- ------- ------
Total mortgage loans ..................... 6,262 1,135 824 331 464
Consumer loans ................................. 28 22 -- -- --
Commercial loans ............................... 5,636 10 -- 269 --
------- ------- ------- ------- ------
Total nonaccrual loans ................ 11,926 1,167 824 600 464
Other real estate owned ........................... 141 -- -- -- --
------- ------- ------- ------- ------
Total nonperforming assets ............ $12,067 $ 1,167 $ 824 $ 600 $ 464
======= ======= ======= ======= ======
Impaired loans .................................... $10,135 $ 398 $ -- $ -- $ --
Accruing loans 90 days or more past due ........... 15 8 -- -- --
Allowance for loan losses as a percent
of loans (1) ................................... 1.54% 1.08% 0.94% 1.09% 1.07%
Allowance for loan losses as a percent
of nonperforming loans (2) ..................... 54.15% 346.70% 227.55% 272.67% 309.70%
Nonperforming loans as a percent of
loans (1)(2) ................................... 2.84% 0.31% 0.41% 0.40% 0.35%
Nonperforming assets as a percent of
total assets ................................... 2.11% 0.23% 0.29% 0.23% 0.22%
- ----------
(1) Loans are presented before allowance for loan losses.
(2) Non-performing loans consist of all loans 90 days or more past due and
other loans which have been identified as presenting uncertainty with
respect to the full collection of interest or principal.
Other than as disclosed in the above table, there were no other loans at
March 31, 2009 that management has serious doubts about the ability of the
borrowers to comply with the present repayment terms.
Interest income that would have been recorded for the year ended March 31,
2009 had non-accruing loans been current according to their original terms
amounted to $358,000, none of which was recognized in interest income.
Banking regulations require us to review and classify our assets on a
regular basis. In addition, the Office of Thrift Supervision and FDIC have the
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. "Substandard assets" must have one or more defined weaknesses
and are characterized by the distinct possibility that we will sustain some loss
if the deficiencies are not corrected. "Doubtful assets" have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable and there is a high possibility of loss. An
asset classified "loss" is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. The
regulations also provide for a "special mention" category, described as assets
that do not currently expose us to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving our close attention. When we classify an asset as substandard or
doubtful, we establish a specific allowance for loan losses. If we classify an
asset as loss, we charge off an amount equal to 100% of the portion of the asset
classified as loss.
38
The following table shows the aggregate amounts of our classified assets
at the dates indicated.
At March 31,
-----------------
2009 2008
------- -------
(In thousands)
Special mention assets ............ $26,882 $23,598
Substandard assets ................ 16,161 7,890
Doubtful assets ................... 1,872 --
Loss assets ....................... 234 --
------- -------
Total classified assets ........ $45,149 $31,488
======= =======
----------
Classified assets at March 31, 2009 included twenty loans totaling $10.0
million that were considered non-performing. Classified assets at March 31, 2008
included nine loans totaling $1.2 million that were considered non-performing.
Classified assets increased $13.7 million to $45.1 million at March 31,
2009 and were 10.7% and 8.4% of total loans at March 31, 2009 and 2008,
respectively. The increase was caused primarily by the deterioration in the
local economy as evidenced by the increase in unemployment.
Delinquencies. The following table provides information about
delinquencies in our loan portfolio at the dates indicated.
At March 31, 2009 At March 31, 2008 At March 31, 2007
------------------------------------ ------------------------------------ -----------------------------------
30-89 Days 90 Days or More 30-89 Days 90 Days or More 30-89 Days 90 Days or More
------------------------------------ ------------------------------------ -----------------------------------
Number Principal Number Principal Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans
------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
(Dollars in Thousands)
Mortgage loans:
Residential
loans ........ 16 $ 2,240 6 $ 793 7 $ 784 1 $ 57 30 $ 3,403 -- $ --
Commercial
real
estate ....... 2 177 4 1,838 3 315 -- -- -- -- -- --
Construction
loans ........ -- -- 2 399 1 183 1 398 -- -- -- --
------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
Total
mortgage
loans ..... 18 2,417 12 3,030 11 1,282 2 455 30 3,403 -- --
Consumer loans .... 8 96 2 16 1 -- -- -- 3 12 -- --
Commercial loans .. 7 345 7 2,457 8 204 -- -- -- -- -- --
------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
Total ........ 33 $ 2,858 21 $ 5,503 20 $ 1,486 2 $ 455 33 $ 3,415 -- $ --
====== ========= ====== ========= ====== ========= ====== ========= ====== ========= ====== =========
Delinquent
loans to
loans (1) ...... 0.68% 1.31% 0.40% 0.12% 1.70% --%
- ----------
(1) Loans are presented before the allowance for loan losses and net of
deferred loan origination fees.
Analysis and Determination of the Allowance for Loan Losses. We maintain
an allowance for loan losses to absorb probable losses inherent in the existing
portfolio. When a loan, or portion thereof, is considered uncollectible, it is
charged against the allowance. Recoveries of amounts previously charged-off are
added to the allowance when collected. The adequacy of the allowance for loan
losses is evaluated on a regular basis by management. Based on management's
judgment, the allowance for loan losses covers all known losses and inherent
losses in the loan portfolio.
Our 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.
Specific Allowances for Identified Problem Loans. We establish an
allowance on identified problem loans based on factors including, but not
limited to: (1) the borrower's ability to repay the loan; (2) the type and value
of the collateral; (3) the strength of our collateral position; and (4) the
borrower's repayment history.
General Valuation Allowance on the Remainder of the Portfolio. We also
establish a general allowance by applying loss factors to the remainder of the
loan portfolio to capture the inherent losses associated with the lending
activity. This general valuation allowance is determined by segregating the
loans by loan category and assigning
39
loss factors to each category. The loss factors are determined based on our
historical loss experience, delinquency trends and management's evaluation of
the collectability of the loan portfolio. Based on management's judgment, we may
adjust the loss factors due to: (1) changes in lending policies and procedures;
(2) changes in existing general economic and business conditions affecting our
primary market area; (3) credit quality trends; (4) collateral value; (5) loan
volumes and concentrations; (6) seasoning of the loan portfolio; (7) recent loss
experience in particular segments of the portfolio; (8) duration of the current
business cycle; and (9) bank regulatory examination results. Loss factors are
reevaluated quarterly to ensure their relevance in the current real estate
environment.
The Office of Thrift Supervision, as an integral part of its examination
process, periodically reviews our loan and foreclosed real estate portfolios and
the related allowance for loan losses and valuation allowance for foreclosed
real estate. The Office of Thrift Supervision may require the Association to
increase the allowance for loan losses or the valuation allowance for foreclosed
real estate based on their judgments of information available to them at the
time of their examination, thereby adversely affecting our results of
operations. Similarly, the Connecticut Department of Banking and the Federal
Deposit Insurance Corporation periodically reviews the Bank's loan and
foreclosed loan portfolio and related allowance for loan losses and valuation
allowance for foreclosed real estate, and may require an increase to the Bank's
allowance for loan losses or the valuation allowance for foreclosed real estate.
At March 31, 2009, our allowance for loan losses represented 1.54% of
total loans and 54.15% of non-performing loans. The allowance for loan losses
increased $2.4 million from March 31, 2008 to March 31, 2009 due to a provision
for loan losses of $2.9 million, offset by net charge-offs of $517,000. The
provision for loan losses for the year ended March 31, 2009 reflected the
deterioration in the local economy as well as continued growth of the loan
portfolio, particularly the increase in commercial real estate and commercial
loans, which carry higher risks of default than one-to four-family residential
real estate loans and an increase in non-accrual loans and classified assets.
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated.
At March 31,
------------------------------------------------------------------------------------------------------
2009 2008 2007 2006 2005
------------------ ------------------- ------------------- ------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ---------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
Mortgage loans:
Residential
loans ........... $ 837 37.69% $ 819 42.09% $ 508 59.96% $ 483 63.07% $ 428 66.42%
Commercial
real estate ..... 1,842 38.76 1,944 36.82 1,033 26.97 1,002 27.04 637 20.54
Construction
loans ........... 143 3.69 258 5.60 156 4.38 84 5.63 235 8.15
Consumer loans ...... 68 1.55 53 1.67 6 1.34 12 0.67 20 0.81
Commercial loans .... 3,568 18.31 972 13.82 172 7.35 55 3.59 117 4.08
------ ---------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
Total allowance
for loan
losses ........ $6,458 100.00% $4,046 100.00% $1,875 100.00% $1,636 100.00% $1,437 100.00%
====== ========== ====== =========== ====== =========== ====== =========== ====== ===========
Although we believe that we use the best information available to
establish the allowance for loan losses, future adjustments to the allowance for
loan losses may be necessary and results of operations could be adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while we believe we have established our
allowance for loan losses in conformity with generally accepted accounting
principles, there can be no assurance that regulators, in reviewing our loan
portfolio, will not request us to increase our allowance for loan losses. In
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing allowance
for loan losses is adequate or that increases will not be necessary should the
quality of any loan deteriorate as a result of the factors discussed above. Any
material increase in the allowance for loan losses may adversely affect our
financial condition and results of operations.
40
Analysis of Loan Loss Experience. The following table sets forth an
analysis of the allowance for loan losses for the periods indicated. Where
specific loan loss allowances have been established, any difference between the
loss allowance and the amount of loss realized has been charged or credited to
current income.
At or For the Fiscal Year
Ended March 31,
---------------------------------------------------
2009 2008 2007 2006 2005
------- ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of period .................... $ 4,046 $ 1,875 $ 1,636 $ 1,437 $ 1,301
Provision for loan losses ......................... 2,929 307 242 210 131
Charge-offs:
Residential loans .............................. 127 24 -- -- 83
Construction loans ............................. -- 58 -- -- --
Consumer loans ................................. 36 34 5 17 16
Commercial loans ............................... 354 15 -- -- --
------- ------- ------- ------- -------
Total charge-offs ........................... 517 131 5 17 99
------- ------- ------- ------- -------
Recoveries:
Residential loans .............................. -- -- -- -- 80
Consumer loans ................................. -- 3 2 6 2
Commercial loans ............................... -- 11 -- -- 22
------- ------- ------- ------- -------
Total Recoveries ............................ -- 14 2 6 104
------- ------- ------- ------- -------
Net charge-offs (recoveries) ...................... 517 117 3 11 (5)
------- ------- ------- ------- -------
Allowance obtained through merger ................. -- 1,981 -- -- --
------- ------- ------- ------- -------
Balance at end of period .......................... $ 6,458 $ 4,046 $ 1,875 $ 1,636 $ 1,437
======= ======= ======= ======= =======
Ratio of net charge-offs during the
period to average loans outstanding
during the period .............................. 0.13% 0.04% ---% 0.01% ---%
Allowance for loan losses as a percent
of loans (1) ................................... 1.54% 1.08% 0.94% 1.09% 1.07%
Allowance for loan losses as a percent of
nonperforming loans (2) ........................ 54.15% 346.70% 227.55% 272.67% 309.70%
- ----------
(1) Loans are presented before allowance for loan losses.
(2) Non-performing loans consist of all loans 90 days or more past due and
other loans which have been identified by the Company as presenting
uncertainty with respect to the collectibility of interest or principal.
During the fiscal year ended March 31, 2008, we acquired $2.0 million of
allowance for loan losses in connection with the acquisition of First Valley
Bancorp. The loans acquired in the merger were primarily commercial real estate
loans, residential loans and commercial loans, which had a face value of $141.1
million and a fair value of $141.0 million. In determining the fair value of the
loans, we used a discounted cash flow method utilizing the current loan rate as
of the date of the consummation of the merger. The amount of the allowance for
loan losses that was attributable to these loans was calculated based on the
collectibility of the loans, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions.
Liquidity Management. Liquidity is the ability to meet current and future
financial obligations of a short-term nature. Our primary sources of funds
consist of deposit inflows, loan repayments, maturities and sales of investment
securities, borrowings from the Federal Home Loan Bank of Boston and securities
sold under agreements to repurchase. While maturities and scheduled amortization
of loans and securities are predictable sources of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition.
We regularly adjust our investments in liquid assets based upon our
assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields
available on interest-earning deposits and securities and (4) the objectives of
our asset/liability management program. Excess liquid assets are invested
generally in money market mutual funds, federal funds sold and short- and
intermediate-term agency and municipal securities.
41
Our most liquid assets are cash and cash equivalents and interest-bearing
deposits. The levels of these assets are dependent on our operating, financing,
lending and investing activities during any given period. At March 31, 2009,
cash and cash equivalents totaled $41.4 million. Securities classified as
available for sale, which provide additional sources of liquidity, totaled $71.8
million at March 31, 2009. In addition, at March 31, 2009, we had the ability to
borrow approximately $7.8 million from the Federal Home Loan Bank of Boston. On
that date, we had $66.8 million outstanding.
At March 31, 2009, we had $54.1 million in loan commitments outstanding,
which included $8.4 million in undisbursed construction loans and $34.9 million
in unused lines of credit. Certificates of deposit due within one year of March
31, 2009 totaled $145.0 million, or 34.6% of total deposits. If these maturing
deposits do not remain with us, we will be required to seek other sources of
funds, including other certificates of deposit and lines of credit. Depending on
market conditions, we may be required to pay higher rates on such deposits or
other borrowings than we currently pay on the certificates of deposit due on or
before March 31, 2010. We believe, however, based on past experience, that a
significant portion of our certificates of deposit will remain with us. We have
the ability to attract and retain deposits by adjusting the interest rates
offered.
The following table presents our contractual obligations at March 31,
2009.
Payments Due by Period
-----------------------------------------------------------
Less than One to Three to More than
Total One Year Three Years Five Years Five Years
------- --------- ----------- ---------- ----------
(In thousands)
Long-Term Debt Obligations (1) ... $66,859 $11,979 $42,135 $4,104 $ 8,641
Operating Lease Obligations ...... 13,085 816 1,696 1,638 8,935
------- ------- ------- ------ -------
Total ......................... $79,944 $12,795 $43,831 $5,742 $17,576
======= ======= ======= ====== =======
- ----------
(1) Consists of Federal Home Loan Bank advances.
Our primary investing activities are the origination and purchase of loans
and the purchase of securities. Our primary financing activities consist of
activity in deposit accounts, Federal Home Loan Bank advances and securities
sold under agreements to repurchase. Deposit flows are affected by the overall
level of interest rates, the interest rates and products offered by us and our
local competitors and other factors. We generally manage the pricing of our
deposits to be competitive and to increase core deposits and commercial banking
relationships. Occasionally, we offer promotional rates on certain deposit
products to attract certain deposit products.
The following table presents our primary investing and financing
activities during the periods indicated.
Years Ended March 31,
----------------------------------
2009 2008 2007
--------- --------- ---------
(In thousands)
Investing activities:
Loan originations ................. $ 86,965 $ 81,867 $ 74,604
Loan participations purchased ..... 13,828 5,860 18,268
Securities purchased .............. 35,918 40,285 17,827
Financing activities:
Increase in deposits .............. $ 49,124 $ 188,637 $ 12,631
Increase in FHLB advances ......... 4,905 28,341 11,945
Increase (decrease) in
securities sold
under agreements to
repurchase ..................... 3,514 (622) 1,852
Capital Management. The Association and Bank each manage their capital to
maintain strong protection for depositors and creditors and are subject to
various regulatory capital requirements. The risk-based capital guidelines
include both a definition of capital and a framework for calculating
risk-weighted assets by assigning balance sheet assets and off-balance sheet
items to broad risk categories. At March 31, 2009, each of the
42
Association and Bank exceeded all of their regulatory capital requirements. They
are considered "well capitalized" under regulatory guidelines. See Item 1.
Description of Business and note 15 of the notes to the consolidated financial
statements.
Off-Balance Sheet Arrangements. In the normal course of operations, we
engage in a variety of financial transactions that, in accordance with generally
accepted accounting principles, are not recorded in our financial statements.
These transactions involve, to varying degrees, elements of credit, interest
rate and liquidity risk. Such transactions are used primarily to manage
customers' requests for funding and take the form of loan commitments and lines
of credit. A presentation of our outstanding loan commitments and unused lines
of credit at March 31, 2009 and their effect on our liquidity is presented at
note 20 of the notes to the consolidated financial statements included in this
annual report and under "--Risk Management--Liquidity Management."
For the year ended March 31, 2009, we did not engage in any
off-balance-sheet transactions reasonably likely to have a material effect on
our financial condition, results of operations or cash flows.
Impact of Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (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, 2007. The Company's adoption of
FIN 48 did not have a material impact on its 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 Issue 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. The Company 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 adoption of the new issue did not have a material impact on the
Company's financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
(SFAS 157). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles (GAAP) and
expands disclosures about fair value measurements. The FASB's FSP FAS 157-2,
"Effective Date of FASB Statement No. 157", defers until April 1, 2009, the
application of SFAS 157 to nonfinancial assets and nonfinancial liabilities not
recognized or disclosed at least annually at fair value. This includes
nonfinancial assets and nonfinancial liabilities initially measured at fair
value in a business combination or other new basis event, but not measured at
fair value in subsequent periods. The Company adopted this statement on April 1,
2008. See Note 18 - Fair Value Measurements for additional information.
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, at specified election
dates, to choose to measure certain financial instruments at fair value that are
not currently required to be measured at fair value. The fair value option is
applied on an instrument-by-instrument basis, is irrevocable and can only be
applied to an entire instrument and not to specified risks, specific cash flows,
or portions of that instrument. Unrealized gains and losses on items for which
the fair value option has been elected will be reported in earnings at each
subsequent reporting date and upfront fees and costs related to those items will
be recognized in earnings as incurred and not deferred. SFAS No. 159 is
effective in fiscal years beginning after November 15, 2007 and may not be
applied retrospectively. The adoption of the new standard did not have a
material impact on the Company's financial position, results of operations or
cash flows.
43
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements and Amendment of ARB No. 51 ("SFAS No.
160"). The new pronouncement requires all entities to report noncontrolling
(minority) interests in subsidiaries as a component of stockholders' equity.
SFAS No. 160 will be effective for fiscal years beginning after December 15,
2008. Early adoption is prohibited. Management does not anticipate that this
statement will have a material impact on the Company's financial condition and
results of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "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 February 2008, the FASB issued FSP FAS 140-3, "Accounting for Transfers
of Financial Assets and Repurchase Financing Transactions." This FSP provides
guidance on how the transferor and transferee should separately account for a
transfer of a financial asset and a related repurchase financing if certain
criteria are met. This guidance will be effective April 1, 2009. The adoption of
this new FSP is not expected to have a material effect on the Company's results
of operations or financial position.
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.
In April 2008, the FASB issued FSP FAS 142-3, "Determination of the Useful
Life of Intangible Assets." This FSP provides guidance as to factors considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS 142, "Goodwill and Other Intangible
Assets." This guidance will be effective April 1, 2009. The adoption is not
expected to have a material effect on the Company's results of operations or
financial position.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles." This standard formalizes minor changes in
prioritizing accounting principles used in the preparation of financial
statements that are presented in conformity with GAAP. This standard became
effective November 15, 2008.
In April 2009, the FASB issued FASB Staff Position 157-4, "Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP
FAS 157-4). FSP FAS 157-4 provides additional guidance for estimating fair value
measurements in accordance with FASB Statement No. 157, "Fair Value
Measurements," when the volume and level of activity for the asset or liability
have significantly decreased. FSP FAS 157-4 is effective for interim and annual
reporting periods ending after June 15, 2009 with early adoption permitted for
periods ending after March 15, 2009. The Company elected to early adopt this FSP
effective January 1, 2009 and the adoption did not have a material impact on the
Company's financial condition and results of operations.
44
In April 2009, the FASB issued FASB Staff Position 107-1 and Accounting
Principles Board Opinion 28-1, "Interim Disclosures About Fair Value of
Financial Instruments" (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 amends FASB
Statement No. 107, "Disclosures About Fair Value of Financial Instruments," to
require entities to disclose the methods and significant assumptions used to
estimate the fair value of financial instruments in both interim and annual
financial statements. APB 28-1 amends APB Opinion No. 28, "Interim Financial
Reporting" to require those disclosures in summarized financial information at
interim reporting periods. FSP FAS 107-1 and APB 28-1 are effective for interim
and annual periods ending after June 15, 2009 with early adoption permitted for
periods ending after March 15, 2009. An entity may early adopt this FSP only if
it also elects to early adopt FSP FAS 157-4. The Company is currently evaluating
the impact of the adoption of this FSP on its financial condition and results of
operations.
In April 2009, the FASB issued FASB Staff Position 115-2 and 124-2,
"Recognition and Presentation of Other-Than-Temporary Impairments" (FSP FAS
115-2 and FAS 124-2). FSP FAS 115-2 and FAS 124-2 amends the
other-than-temporary impairment (OTTI) guidance for debt securities to make the
guidance more operational and to improve the presentation and disclosure of OTTI
on debt and equity securities in the financial statements. This FSP does not
amend existing recognition and measurement guidance related to OTTI of equity
securities. FSP FAS 115-2 and FAS 124-2 are effective for interim and annual
reporting periods after June 15, 2009 with early adoption permitted for periods
ending after March 15, 2009. The Company elected to early adopt this FSP
effective January 1, 2009, resulting in a reduction in OTTI charges recorded in
earnings of $206,000, pre-tax, during the year ended March 31, 2009. See Note 3
- - Investments in Available-for-Sale Securities for expanded disclosures related
to this FSP.
Effect of Inflation and Changing Prices
The financial statements and related financial data presented in this
annual report have been prepared in accordance with generally accepted
accounting principles in the United States, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. The primary impact of inflation on our operations is reflected in
increased operating costs. Unlike most industrial companies, virtually all the
assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the prices
of goods and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 each 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.
45
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.
46
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors
New England Bancshares, Inc.
Enfield, Connecticut
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
We have audited the consolidated balance sheets of New England Bancshares, Inc.
and Subsidiaries as of March 31, 2009 and 2008, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of New
England Bancshares, Inc. and Subsidiaries as of March 31, 2009 and 2008, and the
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ SHATSWELL, MacLEOD & COMPANY, P.C.
--------------------------------------
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
June 11, 2009
47
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
March 31, 2009 and 2008
-----------------------
(Dollars In Thousands, Except Per Share Amounts)
------------------------------------------------
2009 2008
--------- ---------
ASSETS
- ------
Cash and due from banks $ 7,872 $ 9,115
Interest-bearing demand deposits with other banks 33,554 160
Federal funds sold -- 21,591
Money market mutual funds 7 5,373
--------- ---------
Total cash and cash equivalents 41,433 36,239
Interest-bearing time deposits with other banks 99 693
Investments in available-for-sale securities (at fair value) 71,821 63,544
Federal Home Loan Bank stock, at cost 3,896 3,571
Loans, net of the allowance for loan losses of $6,458 as of
March 31, 2009 and $4,046 as of March 31, 2008 413,566 371,769
Premises and equipment, net 5,990 6,678
Other real estate owned 141 --
Accrued interest receivable 2,321 2,165
Deferred income taxes, net 3,769 1,140
Cash surrender value of life insurance 9,211 8,847
Identifiable intangible assets 2,165 2,671
Goodwill 14,701 14,701
Other assets 2,551 6,161
--------- ---------
Total assets $ 571,664 $ 518,179
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest-bearing $ 37,483 $ 40,347
Interest-bearing 381,953 329,965
--------- ---------
Total deposits 419,436 370,312
Advanced payments by borrowers for taxes and insurance 953 909
Federal Home Loan Bank advances 66,833 61,928
Subordinated debentures 3,901 3,893
Securities sold under agreements to repurchase 12,069 8,555
Other liabilities 4,518 3,845
--------- ---------
Total liabilities 507,710 449,442
--------- ---------
Stockholders' equity:
Common stock, par value $.01 per share; 19,000,000 shares
authorized; 6,420,891 shares issued as of March 31, 2009 and 2008 64 64
Paid-in capital 56,551 56,412
Retained earnings 16,329 19,055
Unearned ESOP shares, 249,291 shares as of March 31, 2009 and
283,183 shares as of March 31, 2008 (2,190) (2,428)
Unearned shares, stock-based incentive plans, 57,259 shares
as of March 31, 2009 and 67,898 as of March 31, 2008 (659) (796)
Treasury stock, 536,931 shares as of March 31, 2009 and 322,399 shares
as of March 31, 2008 (5,742) (3,772)
Accumulated other comprehensive (loss) income (399) 202
--------- ---------
Total stockholders' equity 63,954 68,737
--------- ---------
Total liabilities and stockholders' equity $ 571,664 $ 518,179
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
48
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
For the Years Ended March 31, 2009 and 2008
-------------------------------------------
(Dollars In Thousands, Except Per Share Amounts)
------------------------------------------------
2009 2008
-------- --------
Interest and dividend income:
Interest and fees on loans $ 24,640 $ 21,674
Interest on debt securities:
Taxable 3,204 2,830
Tax-exempt 747 463
Dividends on Federal Home Loan Bank stock 85 168
Interest on federal funds sold, interest-bearing deposits and dividends
on marketable equity securities 268 874
-------- --------
Total interest and dividend income 28,944 26,009
-------- --------
Interest expense:
Interest on deposits 10,062 9,546
Interest on advanced payments by borrowers for taxes and insurance 14 12
Interest on Federal Home Loan Bank advances 2,731 2,039
Interest on subordinated debentures 273 195
Interest on securities sold under agreements to repurchase 146 356
-------- --------
Total interest expense 13,226 12,148
-------- --------
Net interest and dividend income 15,718 13,861
Provision for loan losses 2,929 307
-------- --------
Net interest and dividend income after provision for loan losses 12,789 13,554
-------- --------
Noninterest (charges) income:
Service charges on deposit accounts 1,024 886
Gain (loss) on sales and calls of securities, net 189 (93)
Gain on sale of loans 72 53
Increase in cash surrender value of life insurance policies 359 154
Impairment loss on securities (includes total losses of $2,947, net of $206
recognized in other comprehensive loss, pretax) (2,741) --
Other income 547 338
-------- --------
Total noninterest (charges) income (550) 1,338
-------- --------
Noninterest expense:
Salaries and employee benefits 7,752 6,966
Occupancy and equipment expense 2,966 2,653
Advertising and promotion 295 229
Professional fees 741 534
Data processing expense 502 450
FDIC insurance assessment 322 119
Stationery and supplies 190 165
Amortization of identifiable intangible assets 506 387
Other expense 1,683 1,446
-------- --------
Total noninterest expense 14,957 12,949
-------- --------
(Loss) income before income taxes (2,718) 1,943
Income tax (benefit) expense (916) 728
-------- --------
Net (loss) income $ (1,802) $ 1,215
======== ========
(Loss) earnings per share:
Basic $ (0.32) $ 0.22
======== ========
Diluted $ (0.32) $ 0.21
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
49
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
For the Years Ended March 31, 2009 and 2008
-------------------------------------------
(Dollars In Thousands, Except Per Share Amounts)
------------------------------------------------
Unearned
Shares
Stock- Accumulated
Unearned Based Other
Common Paid-in Retained ESOP Incentive Treasury Comprehensive
Stock Capital Earnings Shares Plans Stock (Loss) Income Total
------ ------- -------- -------- --------- -------- ------------- --------
Balance, March 31, 2007 $ 53 $42,742 $ 18,521 $ (2,666) $ (1,026) $ -- $ (358) $ 57,266
Issuance of stock for merger 11 13,230 -- -- -- -- -- 13,241
Issuance of stock for option exercise -- 40 -- -- -- -- -- 40
ESOP shares released -- 179 -- 238 -- -- -- 417
Compensation cost for stock-based incentive
plans -- 221 -- -- 230 -- -- 451
Dividends paid ($0.12 per share) -- -- (681) -- -- -- -- (681)
Treasury stock purchases -- -- -- -- -- (3,772) -- (3,772)
Comprehensive income:
Net income -- -- 1,215 -- -- -- -- --
Other comprehensive income, net of tax effect -- -- -- -- -- -- 560 --
Comprehensive income -- -- -- -- -- -- -- 1,775
------ ------- -------- -------- -------- -------- ------ --------
Balance, March 31, 2008 64 56,412 19,055 (2,428) (796) (3,772) 202 68,737
Issuance of stock for option exercise -- (95) -- -- -- 234 -- 139
ESOP shares released -- 106 -- 238 -- -- -- 344
Compensation cost for stock-based incentive
plans -- 128 -- -- 137 -- -- 265
Dividends paid ($0.15 per share) -- -- (850) -- -- -- -- (850)
Treasury stock purchases -- -- -- -- -- (2,204) -- (2,204)
Cumulative effect adjustment of a change in
accounting principle - adoption of EITF 06-4 -- -- (74) -- -- -- -- (74)
Comprehensive loss:
Net loss -- -- (1,802) -- -- -- -- --
Other comprehensive loss, net of tax effect -- -- -- -- -- -- (601) --
Comprehensive loss -- -- -- -- -- -- -- (2,403)
------ ------- -------- -------- -------- -------- ------ --------
Balance, March 31, 2009 $ 64 $56,551 $ 16,329 $ (2,190) $ (659) $ (5,742) $ (399) $ 63,954
====== ======= ======== ======== ======== ======== ====== ========
The accompanying notes are an integral part of these consolidated financial
statements.
50
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Years Ended March 31, 2009 and 2008
-------------------------------------------
(In Thousands)
--------------
2009 2008
-------- --------
Cash flows from operating activities:
Net (loss) income $ (1,802) $ 1,215
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Net amortization (accretion) of fair value adjustments 8 (44)
Accretion of securities, net (62) (68)
(Gain) loss on sales and calls of securities, net (189) 93
Writedown of available-for-sale securities 11 --
Writedown of other securities, included in other assets 2,730 --
Provision for loan losses 2,929 307
Change in deferred loan origination fees (195) (146)
Gain on sale of loans, net (20) (53)
Depreciation and amortization 888 788
Disposal of property and equipment -- 2
Increase in accrued interest receivable (153) (8)
Deferred income tax benefit (2,247) (149)
Increase in cash surrender value life insurance policies (359) (154)
Decrease (increase) in prepaid expenses and other assets 144 (135)
Amortization of identifiable intangible assets 506 387
Increase in accrued expenses and other liabilities 550 166
Compensation cost for stock-based incentive plan 265 451
ESOP shares released 344 417
-------- --------
Net cash provided by operating activities 3,348 3,069
-------- --------
Cash flows from investing activities:
Proceeds from maturities of interest-bearing time deposits with other banks 594 1,184
Purchases of available-for-sale securities (35,918) (41,457)
Proceeds from sales of available-for-sale securities 10,474 20,851
Proceeds from maturities of available-for-sale securities 17,184 26,489
Purchases of Federal Home Loan Bank stock (325) (990)
Cash and cash equivalents acquired from First Valley Bancorp, net of expenses
and cash paid to shareholders -- 6,589
Loan originations and principal collections, net (34,517) (33,748)
Purchases of loans (13,828) (5,860)
Loans sold 3,704 7,011
Recoveries of loans previously charged off -- 14
Proceeds from other real estate owned -- 198
Capital expenditures (208) (300)
Proceeds from sales/disposals of fixed assets 30 7
Investment in life insurance policies (5) (4,505)
Redemption of life insurance policies -- 130
-------- --------
Net cash used in investing activities (52,815) (24,387)
-------- --------
51
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Years Ended March 31, 2009 and 2008
-------------------------------------------
(In Thousands)
--------------
(continued)
2009 2008
--------- ---------
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts 1,458 11,031
Net increase in time deposits 47,666 9,297
Net increase (decrease) in advanced payments by borrowers for taxes and insurance 44 (79)
Proceeds from Federal Home Loan Bank long-term advances 11,000 30,500
Principal payments on Federal Home Loan Bank long-term advances (6,106) (6,797)
Net increase (decrease) in securities sold under agreements to repurchase 3,514 (622)
Purchase of treasury stock (2,204) (3,772)
Proceeds from exercise of stock options 139 40
Payments of cash dividends on common stock (850) (681)
--------- ---------
Net cash provided by financing activities 54,661 38,917
--------- ---------
Net increase in cash and cash equivalents 5,194 17,599
Cash and cash equivalents at beginning of year 36,239 18,640
--------- ---------
Cash and cash equivalents at end of year $ 41,433 $ 36,239
========= =========
Supplemental disclosures:
Interest paid $ 13,169 $ 12,115
Income taxes paid 1,126 1,555
Reclass from securities to other assets -- 3,524
Increase in due to broker 62 653
(Decrease) increase in due from broker (714) 714
Loans transferred to other real estate owned 141 198
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 -- 837
Deferred income taxes, net -- 216
Other assets -- 733
Identifiable intangible assets -- 2,459
--------- ---------
Total assets acquired -- 190,495
--------- ---------
Liabilities assumed:
Deposits -- 168,369
Advanced payments by borrowers for taxes and insurance -- 192
Federal Home Loan Bank advances -- 4,623
Subordinated debentures -- 3,888
Other liabilities -- 1,369
--------- ---------
Total liabilities assumed -- 178,441
--------- ---------
Net assets acquired -- 12,054
Acquisition costs -- 25,665
--------- ---------
Goodwill $ -- $ 13,611
The accompanying notes are an integral part of these consolidated financial
statements.
52
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
For the Years Ended March 31, 2009 and 2008
-------------------------------------------
NOTE 1 - NATURE OF OPERATIONS
- -----------------------------
On September 7, 2005, NEBS Bancshares, Inc. (the "Company") was incorporated
under Maryland law to facilitate the conversion of Enfield Federal Savings and
Loan Association (the "Association") from the mutual holding company form of
organization to the stock form of organization (the "second-step conversion").
As a result of the second-step conversion, NEBS Bancshares, Inc. became the
holding company for the Association and was immediately renamed New England
Bancshares, Inc. A total of 3,075,855 shares of common stock were sold in the
stock offering at the price of $10.00 per share. In addition, a total of
2,270,728 shares were issued to the minority shareholders of the former New
England Bancshares at an exchange ratio of 2.3683. Total shares outstanding
after the stock offering and the exchange totaled 5,346,583 shares. The
second-step conversion was accounted for as a change in corporate form with no
resulting change in the historical basis of the former New England Bancshares'
assets, liabilities and equity. Direct offering costs totaling $1.1 million were
deducted from the proceeds of the shares sold in the offering. Net proceeds of
$27.2 million were raised in the stock offering, excluding $2.5 million which
was loaned by the Company to a trust for the Employee Stock Ownership Plan
(ESOP) enabling it to purchase 246,068 shares of common stock in the stock
offering. In addition, as part of the second-step conversion and dissolution of
Enfield Federal Mutual Holding Company, the former mutual holding company parent
of the Company, and the former New England Bancshares, the Association received
$901,000 of cash previously held by these entities.
As a result of the second-step conversion, all share and per share amounts have
been restated giving retroactive recognition to the second-step exchange ratio
of 2.3683. Options granted under the Company's 2003 Stock-Based Incentive Plan
and common shares held by the Association's ESOP and shares of restricted stock
before the second-step conversion were also exchanged using the conversion ratio
of 2.3683.
On July 12, 2007 the Company acquired First Valley Bancorp, Inc., Bristol,
Connecticut. First Valley Bancorp was the holding company for Valley Bank (the
"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.
On January 5, 2009, New England Bancshares announced that it intends to merge
the Association with and into its wholly-owned Connecticut commercial banking
subsidiary, Valley Bank, and will rename the combined bank "New England Bank."
The company will retain the name of each bank at their respective branches and
operate the branches as a division of New England Bank. The subsidiary merger is
designed to improve the efficiencies of the company by eliminating the
additional regulatory and administrative costs of maintaining two separately
chartered banking subsidiaries with essentially the same products, services and
operations. The consolidation will allow the company to reduce its operating
expenses while maintaining the financial products and services offered by both
banks. The combined structure will also assist the combined bank in offering a
higher level of customer service.
On January 14, 2009, New England Bancshares, the parent company for Valley Bank
and the Association, announced that Valley Bank and The Apple Valley Bank &
Trust Company ("Apple Valley"), entered into an Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which Apple Valley will merge with and into
Valley Bank, with Valley Bank as the surviving entity (the "Merger"). As
previously announced, prior to completion of the Merger with Apple Valley, New
England Bancshares intends to merge Enfield Federal with and into Valley Bank
and rename the resulting subsidiary institution "New England Bank."
Consequently, as a result of the Merger, New England Bancshares will be the
holding company for one Connecticut commercial bank, New England Bank. Under the
terms of the Merger Agreement, shareholders of Apple Valley will be entitled to
elect to receive either one (1) share of New England Bancshares common stock or
$8.50 in cash for each share of Apple Valley common stock, subject to an
aggregate allocation of 60% stock and 40% cash. The merger was completed on June
8, 2009.
53
The Association is a federally chartered stock savings and loan association
which was incorporated in 1916 and is headquartered in Enfield, Connecticut. The
Association operates its business from eight banking offices located in
Connecticut. The Association is engaged principally in the business of
attracting deposits from the general public and investing those deposits in
residential and commercial real estate loans, and in consumer, construction,
commercial and small business loans. 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. The Bank operates from four locations in
Connecticut.
NOTE 2 - ACCOUNTING POLICIES
- ----------------------------
The accounting and reporting policies of the Company and its subsidiaries
conform to accounting principles generally accepted in the United States of
America and predominant practices within the banking industry. The consolidated
financial statements of the Company were prepared using the accrual basis of
accounting. The significant accounting policies of the Company are summarized
below to assist the reader in better understanding the consolidated financial
statements and other data contained herein.
USE OF ESTIMATES:
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in the consolidation.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash items, due from banks, interest bearing demand deposits
with other banks, federal funds sold and money market mutual funds. Cash
and due from banks as of March 31, 2009 and 2008 includes $491,000 and
$434,000, respectively, which is subject to withdrawals and usage
restrictions to satisfy the reserve requirements of the Federal Reserve
Bank for Enfield Federal Savings and Loan Association.
SECURITIES:
Investments in debt securities are adjusted for amortization of premiums
and accretion of discounts computed so as to approximate the interest
method. Gains or losses on sales of investment securities are computed on
a specific identification basis.
The Company classifies debt and equity securities with readily
determinable fair values into one of two categories: available-for-sale or
held-to-maturity. In general, securities may be classified as
held-to-maturity only if the Company has the positive intent and ability
to hold them to maturity. All other securities must be classified as
available-for-sale.
-- Available-for-sale securities are carried at fair value on the
consolidated balance sheets. Unrealized holding gains and
losses are not included in earnings but are reported as a net
amount (less expected tax) in a separate component of
stockholders' equity until realized.
-- Held-to-maturity securities are measured at amortized cost in
the consolidated balance sheets. Unrealized holding gains and
losses are not included in earnings or in a separate component
of capital. They are merely disclosed in the notes to the
consolidated financial statements.
54
Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses.
On December 8, 2008, the Federal Home Loan Bank of Boston announced a
moratorium on the repurchase of excess stock held by its members. The
moratorium will remain in effect indefinitely.
LOANS:
Loans receivable that management has the intent and ability to hold until
maturity or payoff, are reported at their outstanding principal balances
adjusted for amounts due to borrowers on unadvanced loans, any
charge-offs, the allowance for loan losses and any deferred fees or costs
on originated loans, or unamortized premiums or discounts on purchased
loans.
Interest on loans is recognized on a simple interest basis.
Loan origination, commitment fees and certain direct origination costs are
deferred and the net amount amortized as an adjustment of the related
loan's yield by the interest method. Deferred amounts are recognized for
fixed rate loans over the contractual life of the related loans. If the
loan's stated interest rate varies with changes in an index or rate, the
effective yield used by the Association for amortization is the index or
rate that is in effect at the inception of the loan. Home equity line
deferred fees are recognized using the straight-line method over the
period the home equity line is active, assuming that borrowings are
outstanding for the maximum term provided in the contract.
Residential real estate loans are generally placed on nonaccrual when
reaching 90 days past due or in process of foreclosure. All closed-end
consumer loans 90 days or more past due and any equity line in the process
of foreclosure are placed on nonaccrual status. Secured consumer loans are
written down to realizable value and unsecured consumer loans are
charged-off upon reaching 120 or 180 days past due depending on the type
of loan. Commercial real estate loans and commercial business loans and
leases which are 90 days or more past due are generally placed on
nonaccrual status, unless secured by sufficient cash or other assets
immediately convertible to cash. When a loan has been placed on nonaccrual
status, previously accrued and uncollected interest is reversed against
interest on loans. A loan can be returned to accrual status when
collectibility of principal is reasonably assured and the loan has
performed for a period of time, generally six months.
Cash receipts of interest income on impaired loans are credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan if the total of such
credits reduces the carrying amount of the loan to an amount less than the
collateral value. Some or all of the cash receipts of interest income on
impaired loans is recognized as interest income if the remaining net
carrying amount of the loan is deemed to be fully collectible. When
recognition of interest income on an impaired loan on a cash basis is
appropriate, the amount of income that is recognized is limited to that
which would have been accrued on the net carrying amount of the loan at
the contractual interest rate. Any cash interest payments received in
excess of the limit and not applied to reduce the net carrying amount of
the loan are recorded as recoveries of charge-offs until the charge-offs
are fully recovered.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
composition and size of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, the estimated value of any
underlying collateral and prevailing economic conditions. This evaluation
is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
55
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and
the probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and
construction loans by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer and residential loans for impairment
disclosures.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Cost and related allowances for depreciation and
amortization of premises and equipment retired or otherwise disposed of
are removed from the respective accounts with any gain or loss included in
income or expense. Depreciation and amortization are calculated
principally on the straight-line method over the estimated useful lives of
the assets. Estimated lives are 10 to 50 years for buildings and premises
and 3 to 20 years for furniture, fixtures and equipment. Expenditures for
replacements or major improvements are capitalized; expenditures for
normal maintenance and repairs are charged to expense as incurred.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through foreclosure
and properties classified as in-substance foreclosures in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 15, "Accounting
by Debtors and Creditors for Troubled Debt Restructuring." These
properties are carried at the lower of cost or estimated fair value less
estimated costs to sell. Any writedown from cost to estimated fair value
required at the time of foreclosure or classification as in-substance
foreclosure is charged to the allowance for loan losses. Expenses incurred
in connection with maintaining these assets, subsequent writedowns and
gains or losses recognized upon sale, are included in other expense.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," the Company classifies loans as in-substance repossessed or
foreclosed if the Company receives physical possession of the debtor's
assets regardless of whether formal foreclosure proceedings take place.
INCOME TAXES:
The Company recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for
the temporary differences between the accounting basis and the tax basis
of the Company's assets and liabilities at enacted tax rates expected to
be in effect when the amounts related to such temporary differences are
realized or settled.
EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN:
In connection with its Executive Supplemental Retirement Plan, the Company
established a Rabbi Trust to assist in the administration of the plan. The
accounts of the Rabbi Trust are consolidated in the Company's financial
statements. Any available-for-sale securities held by the Rabbi Trust are
accounted for in accordance with SFAS No. 115. Until the plan benefits are
paid, creditors may make claims against the trust's assets if the Company
becomes insolvent.
56
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 no
anti-dilutive shares at March 31, 2009 as the Company reported a net loss,
and 121,963 anti-dilutive shares at March 31, 2008. 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.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the Company disclose the estimated fair value for its
financial instruments. Fair value methods and assumptions used by the
Company in estimating its fair value disclosures are as follows:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
Interest-bearing time deposits with other banks: Fair values of
interest-bearing time deposits with other banks are estimated using
discounted cash flow analyses based on current rates for similar types of
deposits.
Securities (including mortgage-backed securities): Fair values for
securities are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, passbook savings and money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Advanced payments by borrowers for taxes and insurance: The carrying
amounts of advance payments by borrowers for taxes and insurance
approximate their fair values.
Federal Home Loan Bank advances: The fair value of Federal Home Loan Bank
advances was determined by discounting the anticipated future cash
payments by using the rates currently available to the Company for debt
with similar terms and remaining maturities.
Securities sold under agreements to repurchase: The carrying amount
reported on the consolidated balance sheet for securities sold under
agreements to repurchase maturing within ninety days approximate its fair
value. Fair values of other securities sold under agreements to repurchase
are estimated using discounted cash flow analyses based on the current
rates for similar types of borrowing arrangements.
Subordinated debentures: Fair values of subordinated debentures are
estimated using discounted cash flow analyses, using interest rates
currently being offered for debentures with similar terms.
Due to or from broker: The carrying amount of due to or from broker
approximates its fair value.
57
Off-balance sheet instruments: The fair value of commitments to originate
loans is estimated using the fees currently charged to enter similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties. For fixed-rate loan
commitments and the unadvanced portion of loans, fair value also considers
the difference between current levels of interest rates and the committed
rates. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them
or otherwise settle the obligation with the counterparties at the
reporting date.
STOCK-BASED COMPENSATION:
At March 31, 2009, the Company has two stock-based incentive plans which
are described more fully in Note 13. The Company accounts for the plans
under SFAS No. 123(R) "Share-Based Payment." During the year ended March
31, 2009 and 2008, $128,000 and $221,000, respectively in stock-based
employee compensation was recognized.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2006, the Financial Accounting Standards Board (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, 2007. The Company's adoption of FIN 48 did not have a
material impact on its 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 Issue 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. The Company 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 adoption of the new issue did not have a material impact
on the Company's financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
(SFAS 157). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles (GAAP)
and expands disclosures about fair value measurements. The FASB's FSP FAS
157-2, "Effective Date of FASB Statement No. 157", defers until April 1,
2009, the application of SFAS 157 to nonfinancial assets and nonfinancial
liabilities not recognized or disclosed at least annually at fair value.
This includes nonfinancial assets and nonfinancial liabilities initially
measured at fair value in a business combination or other new basis event,
but not measured at fair value in subsequent periods. The Company adopted
this statement on April 1, 2008. See Note 18 - Fair Value Measurements for
additional information.
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, at
specified election dates, to choose to measure certain financial
instruments at fair value that are not currently required to be measured
at fair value. The fair value option is applied on an
instrument-by-instrument basis, is irrevocable and can only be applied to
an entire instrument and not to specified risks, specific cash flows, or
portions of that instrument. Unrealized gains and losses on items for
which the fair value option has been elected will be reported in earnings
at each subsequent reporting date and upfront fees and costs related to
those items will be recognized in earnings as incurred and not deferred.
SFAS No. 159 is effective in fiscal years beginning after November 15,
2007 and may not be applied retrospectively. The adoption of the new
standard did not have a material impact on the Company's financial
position, results of operations or cash flows.
58
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements and Amendment of ARB No. 51 ("SFAS
No. 160"). The new pronouncement requires all entities to report
noncontrolling (minority) interests in subsidiaries as a component of
stockholders' equity. SFAS No. 160 will be effective for fiscal years
beginning after December 15, 2008. Early adoption is prohibited.
Management does not anticipate that this statement will have a material
impact on the Company's financial condition and results of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "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 February 2008, the FASB issued FSP FAS 140-3, "Accounting for Transfers
of Financial Assets and Repurchase Financing Transactions." This FSP
provides guidance on how the transferor and transferee should separately
account for a transfer of a financial asset and a related repurchase
financing if certain criteria are met. This guidance will be effective
April 1, 2009. The adoption of this new FSP is not expected to have a
material effect on the Company's results of operations or financial
position.
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.
In April 2008, the FASB issued FSP FAS 142-3, "Determination of the Useful
Life of Intangible Assets." This FSP provides guidance as to factors
considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS 142,
"Goodwill and Other Intangible Assets." This guidance will be effective
April 1, 2009. The adoption is not expected to have a material effect on
the Company's results of operations or financial position.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles." This standard formalizes minor changes in
prioritizing accounting principles used in the preparation of financial
statements that are presented in conformity with GAAP. This standard
became effective November 15, 2008.
In April 2009, the FASB issued FASB Staff Position 157-4, "Determining
Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly" (FSP FAS 157-4). FSP FAS 157-4 provides additional
guidance for estimating fair value measurements in accordance with FASB
Statement No. 157, "Fair Value Measurements," when the volume and level of
activity for the asset or liability have significantly decreased. FSP FAS
157-4 is effective for interim and annual reporting periods ending after
June 15, 2009 with early adoption permitted for periods ending after March
15, 2009. The Company elected to early adopt this FSP effective January 1,
2009 and the adoption did not have a material impact on the Company's
financial condition and results of operations.
59
In April 2009, the FASB issued FASB Staff Position 107-1 and Accounting
Principles Board Opinion 28-1, "Interim Disclosures About Fair Value of
Financial Instruments" (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 amends
FASB Statement No. 107, "Disclosures About Fair Value of Financial
Instruments," to require entities to disclose the methods and significant
assumptions used to estimate the fair value of financial instruments in
both interim and annual financial statements. APB 28-1 amends APB Opinion
No. 28, "Interim Financial Reporting" to require those disclosures in
summarized financial information at interim reporting periods. FSP FAS
107-1 and APB 28-1 are effective for interim and annual periods ending
after June 15, 2009 with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4. The Company is currently evaluating the
impact of the adoption of this FSP on its financial condition and results
of operations.
In April 2009, the FASB issued FASB Staff Position 115-2 and 124-2,
"Recognition and Presentation of Other-Than-Temporary Impairments" (FSP
FAS 115-2 and FAS 124-2). FSP FAS 115-2 and FAS 124-2 amends the
other-than-temporary impairment (OTTI) guidance for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of OTTI on debt and equity securities in the financial
statements. This FSP does not amend existing recognition and measurement
guidance related to OTTI of equity securities. FSP FAS 115-2 and FAS 124-2
are effective for interim and annual reporting periods after June 15, 2009
with early adoption permitted for periods ending after March 15, 2009. The
Company elected to early adopt this FSP effective January 1, 2009,
resulting in a reduction in OTTI charges recorded in earnings of $206,000,
pre-tax, during the year ended March 31, 2009. See Note 3 - Investments in
Available-for-Sale Securities for expanded disclosures related to this
FSP.
ADVERTISING COSTS:
It is the Company's policy to expense advertising costs as incurred.
Advertising and promotion expense is shown as a separate line item in the
consolidated Statements of Income.
60
NOTE 3 - INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES
- -----------------------------------------------------
Debt securities have been classified in the consolidated balance sheets
according to management's intent. The amortized cost of securities and their
approximate fair values are as follows as of March 31:
Amortized Gross Gross
Cost Unrealized Unrealized Fair
Basis Gains Losses Value
--------- ---------- ---------- --------
(In Thousands)
March 31, 2009:
Debt securities issued by the U.S. Treasury
and other U.S. government corporations and
agencies $ 11,930 $ 183 $ 45 $ 12,068
Debt securities issued by states of the United
States and political subdivisions of the states 16,917 45 1,250 15,712
Mortgage-backed securities 43,618 1,129 706 44,041
Marketable equity securities 7 -- -- 7
--------- -------- ------- --------
72,472 1,357 2,001 71,828
Money market mutual funds included in
cash and cash equivalents (7) -- -- (7)
--------- -------- ------- --------
$ 72,465 $ 1,357 $ 2,001 $ 71,821
========= ======= ======= ========
March 31, 2008:
Debt securities issued by the U.S. Treasury
and other U.S. government corporations and
agencies $ 11,426 $ 76 $ 1 $ 11,501
Debt securities issued by states of the United
States and political subdivisions of the states 12,719 122 337 12,504
Corporate debt securities 65 1 -- 66
Mortgage-backed securities 38,982 654 163 39,473
Marketable equity securities 5,373 -- -- 5,373
--------- -------- ------- --------
68,565 853 501 68,917
Money market mutual funds included in
cash and cash equivalents (5,373) -- -- (5,373)
--------- -------- ------- --------
$ 63,192 $ 853 $ 501 $ 63,544
========= ======= ======= ========
Mortgage-backed securities are insured or issued by Ginnie Mae, Freddie Mac and
Fannie Mae or private issuers, substantially all of which are backed by
fixed-rate mortgages.
The scheduled maturities of available-for-sale debt securities were as follows
as of March 31, 2009:
Fair
Value
--------------
(In Thousands)
Due after one year through five years $ 652
Due after five years through ten years 6,761
Due after ten years 20,367
Mortgage-backed securities 44,041
--------
$ 71,821
========
61
Proceeds from sales of available-for-sale securities for the year ended March
31, 2009 were $10.5 million. Gross realized gains on those sales amounted to
$153,000 and $3,000 of gross realized losses were recognized. Proceeds from
sales of available-for-sale securities for the year ended March 31, 2008 were
$20.9 million. Gross realized gains on those sales amounted to $138,000 and
$242,000 of gross realized losses were recognized. The tax expense (benefit)
applicable to these net realized gains (losses) in the years ended March 31,
2009 and 2008 amounted to $58,000 and $(21,000), respectively.
As of March 31, 2009 and 2008, securities with carrying amounts of $18.0 million
and $8.9 million, respectively, were pledged to secure securities sold under
agreements to repurchase. As of March 31, 2009 and 2008 securities with carrying
values of $1.5 million and $1.9 million, respectively, were pledged as
collateral to secure municipal deposits.
The aggregate fair value and unrealized losses of securities, including debt
securities for which a portion of other-than-temporary impairment has been
recognized in other comprehensive income, that have been in a continuous
unrealized-loss position for less than twelve months and for twelve months or
more, and are not other than temporarily impaired, are as follows:
Less than 12 Months 12 Months or Longer Total
--------------------- ------------------- -------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
--------- ---------- ------- ---------- ------- ----------
(In Thousands)
March 31, 2009:
Debt securities issued by the U.S. Treasury
and other U.S. government corporations
and agencies $ 593 $ 45 $ -- $ -- $ 593 $ 45
Debt securities issued by states of the
United States and political subdivisions
of the states 11,312 999 1,527 251 12,839 1,250
Mortgage-backed securities 2,721 56 4,675 650 7,396 706
------- ------ ------- ---- ------- -------
Total temporarily impaired securities $14,626 $1,100 $ 6,202 $901 $20,828 $ 2,001
======= ====== ======= ==== ======= =======
March 31, 2008:
Debt securities issued by the U.S. Treasury
and other U.S. government corporations
and agencies $ 949 $ 1 $ -- $ -- $ 949 $ 1
Debt securities issued by states of the
United States and political subdivisions
of the states 5,907 217 649 120 6,556 337
Mortgage-backed securities 2,844 77 3,163 86 6,007 163
------- ------ ------- ---- ------- -------
Total temporarily impaired securities $ 9,700 $ 295 $ 3,812 $206 $13,512 $ 501
======= ====== ======= ==== ======= =======
Management has assessed the securities which are classified as
available-for-sale and in an unrealized loss position at March 31, 2009 and
determined the decline in fair value below amortized cost to be temporary. In
making this determination management considered the period of time the
securities were in a loss position, the percentage decline in comparison to the
securities' amortized cost, the financial condition of the issuer and the
Company's ability and intent to hold these securities until their fair value
recovers to their amortized cost. Management believes the decline in fair value
is primarily related to the current interest rate environment and market
inefficiencies and not to the credit deterioration of the individual issuer.
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis and more frequently when economic or market conditions warrant
such evaluation. The investment securities portfolio is generally evaluated for
other-than-temporary impairment under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," as amended for FSP FAS 115-2 and FAS
124-2. However, certain purchased beneficial interests, including non-agency
mortgage-backed securities and pooled trust preferred securities are evaluated
using FSP EITF 99-20-1, "Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests that Continue to be Held
by a Transferor in Securitized Financial Assets."
62
As discussed in Note 2 the Company elected to early adopt the provisions of FSP
FAS 115-2 and FAS 124-2 for the year ended March 31, 2009, which was applied to
existing and new debt securities held by the Company as of January 1, 2009. For
those debt securities for which the fair value of the security is less than its
amortized cost and the Company does not intend to sell such security and it is
more likely than not that it will not be required to sell such security prior to
the recovery of its amortized cost basis less any credit losses, FSP FAS 115-2
and FAS 124-2 requires that the credit component of the other-than-temporary
impairment losses be recognized in earnings while the noncredit component is
recognized in other comprehensive loss, net of related taxes. Had the Company
not adopted FSP FAS 115-2 and FAS 124-2, the Company would have recognized an
additional $206,000, pre-tax, in other-than-temporary impairment losses through
earnings during the year ended March 31, 2009.
The following table summarizes other-than-temporary impairment losses on
securities for the year ended March 31, 2009:
Non-Agency
Auction Rate Mortgage-Backed
Securities Securities Total
------------ --------------- ------
(In Thousands)
Total other-than-temporary impairment losses $2,730 $217 $2,947
Less: unrealized other-than-temporary losses
recognized in other comprehensive loss (1) -- 206 206
------ ---- ------
Net impairment losses recognized in earnings (2) $2,730 $ 11 $2,741
====== ==== ======
(1) Represents the noncredit component of the other-than-temporary impairment
on the securities.
(2) Represents the credit component of the other-than-temporary impairment on
securities.
Activity related to the credit component recognized in earnings on debt
securities held by the Company for which a portion of other-than-temporary
impairment was recognized in other comprehensive loss for the year ended March
31, 2009 is as follows:
Total
--------------
(In Thousands)
Balance, April 1, 2008 $ --
Additions for the credit component on debt securities
in which other-than-temporary impairment was
not previously recognized 11
----
Balance, March 31, 2009 $ 11
====
63
For the year ended March 31, 2009, securities with other-than-temporary
impairment losses related to credit that were recognized in earnings consisted
of auction rate preferred securities ("ARPS") and non-agency mortgage-backed
securities. In accordance with FSP FAS 115-2 and FAS 124-2, the Company
estimated the portion of loss attributable to credit using a discounted cash
flow model. The ARPS are securities issued by trusts with assets consisting of
Fannie Mae and Freddie Mac preferred securities and corporate preferred
securities. While these securities have a maturity date, the Company classifies
them as equity securities instead of debt securities; and as such all
other-than-temporary impairment losses are recognized in earnings. These
securities are classified as other assets on the balance sheet due to their
limited market. Significant inputs for the non-agency mortgage-backed securities
included the estimated cash flows of the underlying collateral based on key
assumptions, such as default rate, loss severity and prepayment rate.
Assumptions used can vary widely from loan to loan, and are influenced by such
factors as loan interest rate, geographical location of the borrower, borrower
characteristics and collateral type. The present value of the expected cash
flows were compared to the Company's holdings to determine the credit-related
impairment loss. Based on the expected cash flows derived from the model, the
Company expects to recover the remaining unrealized losses on non-agency
mortgage-backed securities. Significant assumptions used in the valuation of
non-agency mortgage-backed securities were as follows as of March 31, 2009:
Range
Weighted -----------------
Average Minimum Maximum
-------- ------- -------
Prepayment rates 10.1% 6.0% 17.0%
Default rates 4.7 1.6 18.7
Loss severity 32.1 16.1 43.5
NOTE 4 - LOANS
- --------------
Loans consisted of the following as of March 31:
2009 2008
--------- ---------
(In Thousands)
Mortgage loans:
Residential $ 158,319 $ 158,268
Commercial 162,809 138,477
Construction 15,498 21,043
--------- ---------
Total mortgage loans 336,626 317,788
Consumer loans 6,491 6,292
Commercial loans 76,935 51,958
--------- ---------
420,052 376,038
Deferred loan origination fees, net (28) (223)
Allowance for loan losses (6,458) (4,046)
--------- ---------
Loans, net $ 413,566 $ 371,769
========= =========
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Association and
the Bank during the year ended March 31, 2009. Total loans to such persons and
their companies amounted to $5.7 million as of March 31, 2009. During the year
ended March 31, 2009, principal payments totaled $412,000 and principal advances
amounted to $1.1 million.
Changes in the allowance for loan losses were as follows for the years ended
March 31:
2009 2008
------- -------
(In Thousands)
Balance at beginning of period $ 4,046 $ 1,875
Acquired in merger -- 1,981
Provision for loan losses 2,929 307
Recoveries of loans previously charged off -- 14
Loans charged off (517) (131)
------- -------
Balance at end of period $ 6,458 $ 4,046
======= =======
64
The following table sets forth information regarding nonaccrual loans and
accruing loans 90 days or more overdue as of March 31:
2009 2008
-------- -------
(In Thousands)
Total nonaccrual loans $ 11,926 $ 1,167
======== =======
Accruing loans which are 90 days or more overdue $ 15 $ 8
======== =======
Information about loans that met the definition of an impaired loan in Statement
of Financial Accounting Standards No. 114 was as follows as of March 31:
2009 2008
------------------------ ------------------------
Recorded Related Recorded Related
Investment Allowance Investment Allowance
In Impaired For Credit In Impaired For Credit
Loans Losses Loans Losses
----------- ---------- ----------- ----------
(In Thousands)
Loans for which there is a related allowance for credit losses $ 6,241 $ 2,645 $ -- $ --
Loans for which there is no related allowance for credit losses 3,894 -- 398 --
----------- ---------- ----------- ----------
Totals $ 10,135 $ 2,645 $ 398 $ --
=========== ========== =========== ==========
Average recorded investment in impaired loans during the
year ended March 31 $ 4,206 $ 80
=========== ===========
Related amount of interest income recognized during the time,
in the year ended March 31 that the loans were impaired
Total recognized $ 38 $ --
=========== ===========
Amount recognized using a cash-basis method
of accounting $ 38 $ --
=========== ===========
NOTE 5 - PREMISES AND EQUIPMENT, NET
- ------------------------------------
The following is a summary of premises and equipment as of March 31:
2009 2008
------- -------
(In Thousands)
Land $ 834 $ 834
Buildings and building improvements 2,667 2,650
Furniture, fixtures and equipment 2,843 2,854
Leasehold improvements 2,490 2,453
------- -------
8,834 8,791
Accumulated depreciation and amortization (2,844) (2,113)
------- -------
$ 5,990 $ 6,678
======= =======
65
NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS
- ---------------------------------------------
The changes in the carrying amounts of goodwill and other intangibles for the
years ended March 31, 2009 and 2008 were as follows:
Core Deposit
Goodwill Intangibles
-------- ------------
(In Thousands)
Balance, March 31, 2007 $ 1,090 $ 599
Additional due to merger 13,611 2,459
Amortization expense --- (387)
-------- -------
Balance, March 31, 2008 14,701 2,671
Amortization expense --- (506)
-------- -------
Balance, March 31, 2009 $ 14,701 $ 2,165
======== =======
Estimated annual amortization expense of identifiable intangible assets is as
follows:
(In Thousands)
Years Ended March 31,
2010 $ 463
2011 418
2012 373
2013 329
2014 254
Thereafter 328
-------
Total $ 2,165
=======
A summary of acquired identifiable intangible assets is as follows as of March
31, 2009:
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------ ------------
(In Thousands)
Core deposit intangibles $ 3,345 $ (1,180) $ 2,165
There was no impairment recorded in fiscal years 2009 and 2008 based on
valuations at March 31, 2009 and 2008.
NOTE 7 - DEPOSITS
- -----------------
The aggregate amount of time deposit accounts in denominations of $100,000 or
more was $87.9 million and $68.9 million as of March 31, 2009 and 2008,
respectively. Certain transaction accounts are fully insured and all other
deposits are insured up to $250,000.
For time deposits as of March 31, 2009, the scheduled maturities for each of the
following five years ended March 31, are:
(In Thousands)
2010 $ 144,991
2011 51,218
2012 15,032
2013 9,698
2014 27,464
---------
Total $ 248,403
=========
66
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
- ----------------------------------------
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(the "FHLB").
Maturities of advances from the FHLB for the years ending after March 31, 2009
are summarized as follows:
(In Thousands)
2010 $ 11,979
2011 31,992
2012 10,143
2013 2,472
2014 1,632
Thereafter 8,641
Fair value adjustment (26)
--------
$ 66,833
========
Amortizing advances are being repaid in equal monthly payments and are being
amortized from the date of the advance to the maturity date on a direct
reduction basis. As of March 31, 2009, the Company has two advances which the
FHLB has the option of calling as of the put date, and quarterly thereafter:
Amount Maturity Date Put Date Interest Rate
-------------- ----------------- -------------- -------------
(In Thousands)
$ 5,000 August 1, 2016 August 3, 2009 4.89%
2,000 September 2, 2014 June 1, 2009 3.89
Borrowings from the FHLB are secured by a blanket lien on qualified collateral,
consisting primarily of loans with first mortgages secured by one-to four-family
properties and other qualified assets.
At March 31, 2009, the interest rates on FHLB advances ranged from 2.03% to
5.21%. At March 31, 2009, the weighted average interest rate on FHLB advances
was 4.10%.
NOTE 9 - SUBORDINATED DEBENTURES
- --------------------------------
On July 28, 2005, FVB Capital Trust I ("Trust I"), a Delaware statutory trust
formed by First Valley Bancorp, completed the sale of $4.1 million of 6.42%, 5
Year Fixed-Floating Capital Securities ("Capital Securities"). Trust I also
issued common securities to First Valley Bancorp and used the net proceeds from
the offering to purchase a like amount of 6.42% Junior Subordinated Debentures
("Debentures") of First Valley Bancorp. Debentures are the sole assets of Trust
I.
Capital Securities accrue and pay distributions quarterly at an annual rate of
6.42% for the first 5 years of the stated liquidation amount of $10 per Capital
Security. First Valley Bancorp fully and unconditionally guaranteed all of the
obligations of the Trust, which are now guaranteed by the Company. The guaranty
covers the quarterly distributions and payments on liquidation or redemption of
Capital Securities, but only to the extent that Trust I has funds necessary to
make these payments.
Capital Securities are mandatorily redeemable upon the maturing of Debentures on
August 23, 2035 or upon earlier redemption as provided in the Indenture. The
Company has the right to redeem Debentures, in whole or in part on or after
August 23, 2010 at the liquidation amount plus any accrued but unpaid interest
to the redemption date.
The trust and guaranty provide for the binding of any successors in the event of
a merger, as is the case in the merger of First Valley Bancorp and the Company.
The Company has assumed the obligations of First Valley Bancorp in regards to
the subordinated debentures due to the acquisition of First Valley Bancorp by
the Company.
67
NOTE 10 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
- --------------------------------------------------------
The securities sold under agreements to repurchase as of March 31, 2009 are
securities sold, primarily on a short-term basis, by the Company that have been
accounted for not as sales but as borrowings. The securities consisted of U.S.
Agencies and mortgage-backed securities. The securities were held in the
Company's safekeeping account under the control of the Company and pledged to
the purchasers of the securities. The purchasers have agreed to sell to the
Company substantially identical securities at the maturity of the agreements.
NOTE 11 - INCOME TAXES
- ----------------------
The components of income tax (benefit) expense are as follows for the years
ended March 31:
2009 2008
------- ------
(In Thousands)
Current:
Federal $ 1,093 $ 763
State 238 214
Benefit of operating loss carryforward -- (100)
------- ------
1,331 877
------- ------
Deferred:
Federal (2,180) (217)
State (440) 7
Change in valuation allowance 373 61
------- ------
(2,247) (149)
------- ------
Total income tax (benefit) expense $ (916) $ 728
======= ======
The reasons for the differences between the statutory federal income tax rate
and the effective tax rates are summarized as follows for the years ended March
31:
2009 2008
------- ------
Federal income tax at statutory rate (34.0)% 34.0%
Increase (decrease) in tax resulting from:
Nontaxable interest income (10.3) (8.0)
Nontaxable life insurance income (4.6) (2.7)
Excess book basis of Employee Stock Ownership Plan 2.7 3.9
Other adjustments 3.7 2.9
Change in valuation allowance 13.7 3.2
State tax, net of federal tax benefit (4.9) 4.1
------- ------
Effective tax rates (33.7)% 37.4%
======= ======
68
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of March 31:
2009 2008
------- -------
(In Thousands)
Deferred tax assets:
Excess of allowance for loan losses over tax bad debt reserve $ 2,496 $ 1,552
Deferred loan origination fees 11 87
Net unrealized holding loss on available-for-sale securities 250 --
Write-down of investment securities 1,068 --
Deferred compensation 826 664
FASB Statement No. 158 adjustment 3 8
Capital loss carryforward 61 61
Other 360 66
------- -------
Gross deferred tax assets 5,075 2,438
Valuation allowance (434) (61)
------- -------
Gross deferred tax assets, net of valuation allowance 4,641 2,377
------- -------
Deferred tax liabilities:
Premises and equipment, principally due to differences in depreciation (13) (60)
Net mark-to-market adjustments (854) (1,035)
Net unrealized holding gain on available-for-sale securities -- (137)
Other (5) (5)
------- -------
Gross deferred tax liabilities (872) (1,237)
------- -------
Net deferred tax asset $ 3,769 $ 1,140
======= =======
Based on the Company's historical and current pretax earnings and anticipated
results of future operations, management believes the existing net deductible
temporary differences will reverse during periods in which the Company will
generate sufficient net taxable income, and that it is more likely than not that
the Company will realize the net deferred tax assets existing as of March 31,
2009.
Legislation was enacted in 1996 to repeal most of Section 593 of the Internal
Revenue Code pertaining to how a qualified savings institution calculates its
bad debt deduction for federal income tax purposes. This repeal eliminated the
percentage-of-taxable-income method to compute the tax bad debt deduction. Under
the legislation, the recapture of the pre-1988 tax bad debt reserves has been
suspended and would occur only under very limited circumstances. Therefore, a
deferred tax liability has not been provided for this temporary difference. The
Company's pre-1988 tax bad debt reserves, which are not expected to be
recaptured, amount to $3.3 million. The potential tax liability on the pre-1988
reserves for which no deferred income taxes have been provided is approximately
$1.3 million as of March 31, 2009.
NOTE 12 - BENEFIT PLANS
- -----------------------
The Association has a non-contributory defined benefit trusteed pension plan
through the Financial Institutions Retirement Fund covering all eligible
employees. The Association contributed $86,000 and $70,000 to the plan during
the years ended March 31, 2009 and 2008, respectively. The Association's plan is
part of a multi-employer plan for which detail as to the Association's relative
position is not readily determinable. Effective January 1, 2006, the Association
excluded from membership in the plan those employees hired on or after January
1, 2006. Effective February 1, 2007, the Association ceased benefit accruals
under the plan.
The Association established the Enfield Federal Savings and Loan Association
Director Fee Continuation Plan (the "Plan") to provide the directors serving on
the board as of the date of the plan's implementation with a retirement income
supplement. The plan has six directors. Participant-directors are entitled to an
annual benefit, as of their Retirement Date, equal to $1,000 for each full year
of service as a director from June 1, 1995, plus $250 for each full year of
service as a director prior to June 1, 1995, with a maximum benefit of $6,000
per year payable in ten annual installments.
69
The following table sets forth information about the Plan as of March 31:
2009 2008
------ ------
(In Thousands)
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 156 $ 190
Service cost 4 4
Interest cost 9 9
Benefits paid (12) (47)
------ ------
Benefit obligation at end of year 157 156
Plan assets -- --
------ ------
Funded status $ (157) $ (156)
====== ======
Amounts recognized in or removed from accumulated other comprehensive loss,
before tax effect, consist of the following as of March 31:
2009 2008
------ ------
(In Thousands)
Unrecognized net loss $ 5 $ 10
Unrecognized prior service cost 3 11
------ ------
$ 8 $ 21
====== ======
The accumulated benefit obligation for the Plan was $157,000 and $156,000 at
March 31, 2009 and 2008, respectively.
2009 2008
------ ------
(In Thousands)
Components of net periodic cost:
Service cost $ 4 $ 4
Interest cost 9 9
Unrecognized net loss 5 --
Unrecognized prior service cost recognized 8 --
------ ------
Net periodic pension cost 26 13
------ ------
Other changes in benefit obligations recognized in other
comprehensive loss:
Unrecognized net loss (5) --
Prior service cost (8) --
------ ------
Total recognized in other comprehensive loss (13) --
------ ------
Total recognized in net periodic pension cost and
other comprehensive loss $ 13 $ 13
====== ======
The estimated unrecognized loss and prior service cost that will be accreted
into accumulated other comprehensive loss from net periodic benefit cost over
the year ended March 31, 2010 is $2,000 and $4,000, respectively.
The discount rate used in determining the projected benefit obligation and net
periodic benefit cost was 6.0% for the years ended March 31, 2009 and 2008.
Estimated future benefit payments are as follows for the years ended March 31:
(In Thousands)
2010 $ 18
2011 18
2012 18
2013 18
2014 18
2015-2019 90
70
The Association sponsors a 401(k) Plan whereby the Association matches 50% of
the first 6% of employee contributions. During the years ended March 31, 2009
and 2008, the Association contributed $127,000 and $105,000, respectively, under
this plan.
The Association has an Executive Supplemental Retirement Plan Agreement and a
Life Insurance Endorsement Method Split Dollar Plan Agreement for the benefit of
the President of the Association. The plan provides the President with an annual
retirement benefit equal to approximately $173,000 over a period of 240 months.
Following the initial 240 month period, certain additional amounts may be
payable to the President until his death based on the performance of the life
insurance policies that the Association has acquired as an informal funding
source for its obligation to the President. The income recorded on the life
insurance policies amounted to $359,000 and $154,000 for the years ended March
31, 2009 and 2008, respectively. A periodic amount is being expensed and accrued
to a liability reserve account during the President's active employment so that
the full present value of the promised benefit will be expensed at his
retirement. The expense of this plan to the Association for the years ended
March 31, 2009 and 2008 was $275,000 and $269,000, respectively. The cumulative
liability for this plan is reflected in other liabilities on the consolidated
balance sheets as of March 31, 2009 and 2008 in the amounts of $1.3 million and
$1.0 million, respectively.
The Association formed a Rabbi Trust for the Executive Supplemental Retirement
Plan. The Trust's assets consist of split dollar life insurance policies. The
cash surrender values of the policies are reflected as an asset on the
consolidated balance sheets. As of March 31, 2009 and 2008, total assets in the
Rabbi Trust were $4.3 million and $4.2 million, respectively.
The Association adopted the Enfield Federal Savings and Loan Association
Supplemental Executive Retirement Plan (SERP), effective June 4, 2002. The SERP
provides restorative payments to executives designated by the Board of Directors
who are prevented by certain provisions of the Internal Revenue Code from
receiving the full benefits contemplated by other benefit plans. The Board of
Directors has designated the President to participate in the Plan. The expense
of this plan to the Association for the years ending March 31, 2009 and 2008 is
$8,000 and $10,000, respectively.
The Company and the Association each entered into an employment agreement with
its President. The employment agreements provide for the continued payment of
specified compensation and benefits for specified periods. The agreements also
provide for termination of the executive for cause (as defined in the
agreements) at any time. The employment agreements provide for the payment,
under certain circumstances, of amounts upon termination following a "change in
control" as defined in the agreements. The agreements also provide for certain
payments in the event of the officer's termination for other than cause and in
the case of voluntary termination.
The Association maintains change in control agreements with several employees.
The agreements are renewable annually. The agreements provide that if
involuntary termination or, under certain circumstances, voluntary termination
follows a change in control of the Association, the employee would be entitled
to receive a severance payment equal to a multiple of his "base amount," as
defined under the Internal Revenue Code. The Association would also continue
and/or pay for life, health and disability coverage for a period of time
following termination.
In 2009, the Company adopted EITF Issue 06-4 and recognized a liability for the
Company's future postretirement benefit obligations under the President's
endorsement split-dollar life insurance arrangement. The Company recognized this
change in accounting principles as a cumulative effect adjustment to retained
earnings of $74,000. The total liability for the arrangements included in other
liabilities was $87,000 at March 31, 2009. The expense recognized under this
arrangement was $13,000 for fiscal 2009.
NOTE 13 - STOCK COMPENSATION PLANS
- ----------------------------------
In 2003, the Company adopted the New England Bancshares, Inc. 2003 Stock-Based
Incentive Plan (the "2003 Plan") which includes grants of options to purchase
Company stock and awards of Company stock. The number of shares of common stock
reserved for grants and awards under the 2003 Plan is 473,660, consisting of
338,327 shares for stock options and 135,333 shares for stock awards. All
employees and outside directors of the Company are eligible to participate in
the 2003 Plan.
In 2006, the Company adopted the New England Bancshares, Inc. 2006 Equity
Incentive Plan (the "2006 Plan") which includes grants of options to purchase
Company stock and awards of Company stock. The number of shares of common
71
stock reserved for grants and awards under the 2006 Plan is 274,878, consisting
of 196,342 shares for stock options and 78,536 shares for stock awards.
The 2003 and 2006 Plans define the stock option exercise price as the fair
market value of the Company stock at the date of the grant. The Company
determines the term during which a participant may exercise a stock option, but
in no event may a participant exercise a stock option more than ten years from
the date of grant. The stock options vest in installments over five years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for stock option grants in the year ended March 31, 2009 and
2008.
2009 2008
-------- --------
Dividend yield 1.58% 0.89%
Expected life 10 years 10 years
Expected volatility 18.0% 13.0%
Risk-free interest rate 3.18% 4.65%
A summary of the status of the Plans as of March 31, 2009 and 2008 and changes
during the years then ended is presented below:
2009 2008
-------------------------- ---------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
------- ---------------- -------- ----------------
Outstanding at beginning of year 349,997 $ 8.84 356,778 $ 8.55
Granted 4,000 9.08 15,000 13.29
Exercised (20,181) 6.90 (5,683) 6.99
Forfeited (400) 12.84 (16,098) 7.04
------- --------
Outstanding at end of year 333,416 $ 8.96 349,997 $8.84
======= ========
Options exercisable at year-end 246,521 236,233
Weighted-average fair value of options
granted during the year $ 2.30 $ 4.20
The following table summarizes information about stock options outstanding as of
March 31, 2009:
Options Outstanding Options Exercisable
- --------------------------------------------------- --------------------------------
Number Weighted-Average Number
Outstanding Remaining Weighted-Average Exercisable Weighted-Average
as of 3/31/09 Contractual Life Exercise Price as of 3/31/09 Exercise Price
- ------------- ---------------- ---------------- ------------- ----------------
180,752 3.9 years $ 6.40 180,752 $ 6.40
25,101 5.1 years 8.17 18,944 8.17
2,000 6.9 years 10.81 1,200 10.81
106,563 7.4 years 12.84 42,625 12.84
15,000 8.1 years 13.29 3,000 13.29
2,000 9.4 years 9.90 --- ---
2,000 9.8 years 8.25 --- ---
------- -------
333,416 5.4 years $ 8.96 246,521 $ 7.75
======= =======
Under the 2003 and 2006 Plans, common stock of the Company may be granted at no
cost to employees and outside directors of the Company. Plan participants are
entitled to cash dividends and to vote such shares. Such shares vest in five
equal annual installments. Upon issuance of shares of restricted stock under the
Plans, unearned compensation equivalent to the market value at the date of grant
is charged to the capital accounts and subsequently amortized to expense over
the five-year vesting period. In February 2003, 86,251 shares were awarded under
the 2003 Plan and in September 2006, 53,189 shares were awarded under the 2006
Plan. The awards vest in installments over five years. The compensation cost
that has been charged against income for the granting of stock awards under the
plan was $137,000 and $230,000 for the years ended March 31, 2009 and 2008,
respectively.
72
Upon a change in control as defined in the 2003 and 2006 Plans, options held by
participants will become immediately exercisable and shall remain exercisable
until the expiration of the term of the option, regardless of whether the
participant is employed or in service with the Company; and all stock awards
held by a participant will immediately vest and further restrictions lapse.
As of March 31, 2009, there was $275,000 of unrecognized compensation cost
related to unvested stock options granted under the Plans. That cost is expected
to be recognized over a weighted-average period of 2.6 years.
NOTE 14 - EMPLOYEE STOCK OWNERSHIP PLAN
- ---------------------------------------
On June 4, 2002, the date the mutual holding company reorganization was
consummated, the Association implemented the Enfield Federal Savings and Loan
Association Employee Stock Ownership Plan (the "ESOP") effective as of January
1, 2002. On June 4, 2002, the ESOP purchased 73,795 shares of the common stock
of the Company (174,768 as adjusted for the 2.3683 share exchange). To fund the
purchases, the ESOP borrowed $738,000 from the Company. The borrowing is
currently at an interest rate of 4.75% and is to be repaid in equal annual
installments through December 31, 2011. In fiscal 2006, the ESOP purchased
246,068 shares of common stock in the second-step conversion with a $2.5 million
loan from the Company, which has a 15 year term at an interest rate of 7.25%.
Dividends paid on unreleased shares are used to reduce the principal balance of
the loan. The collateral for the borrowing is the common stock of the Company
purchased by the ESOP. Contributions by the Association to the ESOP are
discretionary; however, the Association intends to make annual contributions to
the ESOP in an aggregate amount at least equal to the principal and interest
requirements on the debt. The shares of stock of the Company are held in a
suspense account until released for allocation among participants. The shares
will be released annually from the suspense account and the released shares will
be allocated among the participants on the basis of the participant's
compensation for the year of allocation compared to all other participants. As
any shares are released from collateral, the Company reports compensation
expense equal to the current market price of the shares and the shares will be
outstanding for earnings-per-share purposes. The shares not released are
reported as unearned ESOP shares in the capital accounts section of the balance
sheet. ESOP expense for the years ended March 31, 2009 and 2008 was $308,000 and
$399,000, respectively.
The ESOP shares as of March 31 were as follows:
2009 2008
---------- ----------
Allocated shares 141,166 117,936
Unreleased shares 249,291 283,183
---------- ----------
Total ESOP shares 390,457 401,119
========== ==========
Fair value of unreleased shares $1,500,732 $3,185,809
========== ==========
NOTE 15 - REGULATORY MATTERS
- ----------------------------
The Company, as a Federal Reserve multi-bank holding company with assets greater
than $500 million, is subject to capital requirements administered by the
Federal Reserve. The Association and Bank (collectively "Subsidiaries") are
subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company's and
the Subsidiaries' financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and the
Subsidiaries must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Subsidiaries to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), of Core capital (as defined)
to adjusted tangible assets (as defined), Tangible capital (as defined) to
Tangible assets (as defined) and Tier 1 capital (as defined in the regulations)
to
73
average assets (as defined). Management believes, as of March 31, 2009 and 2008,
that the Company and the Subsidiaries meet all capital adequacy requirements to
which they are subject.
The Company's actual capital amounts and ratios are also presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ------ ------ -----
(Dollar amounts in thousands)
As of March 31, 2009:
Total Capital (to Risk Weighted Assets) $52,435 13.28% $31,576 >= 8.0% N/A N/A
Tier 1 Capital (to Risk Weighted Assets) 47,481 12.03 15,788 >= 4.0 N/A N/A
Tier 1 Capital (to Average Assets) 47,481 8.78 21,623 >= 4.0 N/A N/A
As of March 31, 2009, the most recent notification from the Office of Thrift
Supervision categorized the Association as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Association must maintain minimum total risk-based, Tier 1 risk-based, Core
and Tangible capital ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed the
Association's category.
The Association's actual capital amounts and ratios are also presented in the
table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ------ ------- -------
(Dollar Amounts in Thousands)
As of March 31, 2009:
Total Capital (to Risk Weighted Assets) $26,756 12.19% $17,564 >= 8.0% $21,956 >= 10.0%
Tangible Capital (to Tangible Assets) 24,502 7.52 4,887 >= 1.5 N/A N/A
Core Capital (to Adjusted Tangible Assets) 24,502 7.52 13,031 >= 4.0 16,289 >= 5.0
Tier 1 Capital (to Risk Weighted Assets) 24,502 11.16 N/A N/A 13,173 >= 6.0
As of March 31, 2008:
Total Capital (to Risk Weighted Assets) $27,376 14.13% $15,504 >= 8.0% $19,381 >= 10.0%
Tangible Capital (to Tangible Assets) 25,300 8.80 4,313 >= 1.5 N/A N/A
Core Capital (to Adjusted Tangible Assets) 25,300 8.80 11,502 >= 4.0 14,378 >= 5.0
Tier 1 Capital (to Risk Weighted Assets) 25,300 13.05 N/A N/A 11,628 >= 6.0
The Association will not be able to declare or pay a cash dividend on, or
repurchase any of its common stock, if the effect thereof would cause the
regulatory capital of the Association to be reduced below the amount required
under OTS rules and regulations.
As of March 31, 2009, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
74
The Bank's actual capital amounts and ratios are also presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ------ ------- -------
(Dollar amounts in thousands)
As of March 31, 2009:
Total Capital (to Risk Weighted Assets) $22,882 11.56% $15,841 >= 8.0% $19,802 >= 10.0%
Tier 1 Capital (to Risk Weighted Assets) 20,385 10.29 7,921 >= 4.0 11,881 >= 6.0
Tier 1 Capital (to Average Assets) 20,385 8.98 9,076 >= 4.0 11,345 >= 5.0
As of March 31, 2008:
Total Capital (to Risk Weighted Assets) $26,256 14.33% $14,658 >= 8.0% $18,322 >= 10.0%
Tier 1 Capital (to Risk Weighted Assets) 24,286 13.25 7,329 >= 4.0 10,993 >= 6.0
Tier 1 Capital (to Average Assets) 24,286 11.56 8,402 >= 4.0 10,502 >= 5.0
NOTE 16 - (LOSS) EARNINGS PER SHARE (EPS)
- -----------------------------------------
Reconciliation of the numerators and denominators of the basic and diluted per
share computations for net (loss) income are as follows:
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- ---------
(In Thousands)
Year ended March 31, 2009
Basic EPS
Net loss and loss available to common stockholders $(1,802) 5,646,911 $(0.32)
Effect of dilutive securities options -- --
------- ---------
Diluted EPS
Income available to common stockholders and
assumed conversions $(1,802) 5,646,911 $(0.32)
======= =========
Year ended March 31, 2008
Basic EPS
Net income and income available to common stockholders $ 1,215 5,620,196 $ 0.22
Effect of dilutive securities options -- 160,153
------- ---------
Diluted EPS
Income available to common stockholders and
assumed conversions $ 1,215 5,780,349 $ 0.21
======= =========
75
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES
- ------------------------------------------------
The Company is obligated under non-cancelable operating leases for banking
premises and equipment expiring between fiscal year 2011 and 2031. The total
minimum rental due in future periods under these existing agreements is as
follows as of March 31, 2009:
Year Ended March 31 (In Thousands)
-------------------
2010 $ 816
2011 827
2012 869
2013 832
2014 806
Thereafter 8,935
---------
Total minimum lease payments $ 13,085
=========
Certain leases contain provisions for escalation of minimum lease payments
contingent upon increases in real estate taxes and percentage increases in the
consumer price index. Certain leases contain options to extend for periods from
one to five years. The total rental expense amounted to $895,000 and $788,000
for the years ended March 31, 2009 and 2008, respectively.
NOTE 18 - FAIR VALUE MEASUREMENTS
- ---------------------------------
Effective April 1, 2008, the Company adopted Statement of Financial Accounting
Standards No. 157 ("SFAS 157"), Fair Value Measurements, which provides a
framework for measuring fair value under generally accepted accounting
principles.
The Company also adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No.
115. SFAS No. 159 allows an entity the irrevocable option to elect fair value
for the initial and subsequent measurement for certain financial assets and
liabilities on a contract-by-contract basis. The Company did not elect fair
value treatment for any financial assets or liabilities upon adoption.
In accordance with SFAS 157, the Company groups its financial assets and
financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value.
Level 1 - Valuations for assets and liabilities traded in active exchange
markets, such as the New York Stock Exchange. Level 1 also includes U.S.
Treasury, other U.S. Government and agency mortgage-backed securities that are
traded by dealers or brokers in active markets. Valuations are obtained from
readily available pricing sources for market transactions involving identical
assets or liabilities.
Level 2 - Valuations for assets and liabilities traded in less active dealer or
broker markets. Valuations are obtained from third party pricing services for
identical or comparable assets or liabilities.
Level 3 - Valuations for assets and liabilities that are derived from other
methodologies, including option pricing models, discounted cash flow models and
similar techniques, are not based on market exchange, dealer, or broker traded
transactions. Level 3 valuations incorporate certain assumptions and projections
in determining the fair value assigned to such assets and liabilities.
A financial instrument's level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value measurement.
A description of the valuation methodologies used for instruments measured at
fair value, as well as the general classification of such instruments pursuant
to the valuation hierarchy, is set forth below. These valuation methodologies
were applied to all of the Company's financial assets and financial liabilities
carried at fair value for March 31, 2009.
76
The Company's cash instruments are generally classified within level 1 or level
2 of the fair value hierarchy because they are valued using quoted market
prices, broker or dealer quotations, or alternative pricing sources with
reasonable levels of price transparency.
The Company's investment in mortgage-backed securities and other debt securities
available-for-sale is generally classified within level 2 of the fair value
hierarchy. For these securities, we obtain fair value measurements from
independent pricing services. The fair value measurements consider observable
data that may include dealer quotes, market spreads, cash flows, the U.S.
treasury yield curve, trading levels, market consensus prepayment speeds, credit
information and the instrument's terms and conditions.
Level 3 is for positions that are not traded in active markets or are subject to
transfer restrictions, valuations are adjusted to reflect illiquidity and/or
non-transferability, and such adjustments are generally based on available
market evidence. In the absence of such evidence, management's best estimate is
used. Subsequent to inception, management only changes level 3 inputs and
assumptions when corroborated by evidence such as transactions in similar
instruments, completed or pending third-party transactions in the underlying
investment or comparable entities, subsequent rounds of financing,
recapitalization and other transactions across the capital structure, offerings
in the equity or debt markets, and changes in financial ratios or cash flows.
The Company's impaired loans are reported at the fair value of the underlying
collateral if repayment is expected solely from the collateral. Collateral
values are estimated using level 2 inputs based upon appraisals of similar
properties obtained from a third party.
The following summarizes assets measured at fair value for the period ending
March 31, 2009.
ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS
Fair Value Measurements at Reporting Date Using:
---------------------------------------------------------------------
Quoted Prices in Significant Significant
Active Markets for Other Observable Unobservable
Identical Assets Inputs Inputs
March 31, 2009 Level 1 Level 2 Level 3
-------------- ------------------ ---------------- ------------
(In Thousands)
Securities available-for-sale $ 71,821 $ 1,473 $ 70,348 $ --
Impaired securities included
in other assets 670 -- 670 --
Impaired loans 3,596 -- 3,596 --
---------- --------- --------- --------
Totals $ 76,087 $ 1,473 $ 74,614 $ --
========== ========= ========= ========
77
The following are carrying amounts and estimated fair values of the Company's
financial assets and liabilities as of March 31:
2009 2008
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- --------- ----------
(In Thousands)
Financial assets:
Cash and cash equivalents $ 41,433 $ 41,433 $ 36,239 $ 36,239
Interest-bearing time deposits with other banks 99 99 693 693
Available-for-sale securities 71,821 71,821 63,544 63,544
Federal Home Loan Bank stock 3,896 3,896 3,571 3,571
Loans, net 413,566 415,595 371,769 375,982
Other investment securities 670 670 3,400 3,400
Accrued interest receivable 2,321 2,321 2,165 2,165
Due from broker -- -- 714 714
Financial liabilities:
Deposits 419,436 421,925 370,312 372,478
Advanced payments by borrowers for taxes and insurance 953 953 909 909
FHLB advances 66,833 69,523 61,928 63,953
Securities sold under agreements to repurchase 12,069 12,071 8,555 8,558
Subordinated debentures 3,901 1,709 3,893 3,094
Due to broker 715 715 653 653
The carrying amounts of financial instruments shown in the above tables are
included in the consolidated balance sheets under the indicated captions except
for other investments, due from broker and due to broker which are included in
other assets and other liabilities. Accounting policies related to financial
instruments are described in Note 2.
NOTE 19 - OTHER COMPREHENSIVE (LOSS) INCOME
- -------------------------------------------
Other comprehensive (loss) income for the years ended March 31, 2009 and 2008
are as follows:
March 31, 2009
---------------------------------
Before Tax Tax Net of Tax
Amount Effects Amount
---------- ------- ----------
(In Thousands)
Net unrealized holding losses on available-for-sale securities $ (807) $ 314 $ (493)
Reclassification adjustment for realized gains in net income (189) 73 (116)
Other comprehensive benefit - director fee continuation plan 13 (5) 8
------ ------- ------
Total $ (983) $ 382 $ (601)
====== ======= ======
March 31, 2008
---------------------------------
Before Tax Tax Net of Tax
Amount Effects Amount
---------- ------- ----------
(In Thousands)
Net unrealized holding gains on available-for-sale securities $ 824 $ (321) $ 503
Reclassification adjustment for realized losses in net income 93 (36) 57
------ ------ ------
Total $ 917 $ (357) $ 560
====== ====== ======
78
Accumulated other comprehensive (loss) income consists of the following as of
March 31:
2009 2008
------- ------
(In thousands)
Net unrealized holding (losses) gains on available-for-sale
securities, net of taxes (1) $ (394) $ 215
Unrecognized director fee plan benefits, net of tax (5) (13)
------- ------
Total $ (399) $ 202
======= ======
(1) The March 31, 2009 ending balance includes $206,000 of unrealized losses in
which other-than-temporary impairment has been recognized.
NOTE 20 - OFF-BALANCE SHEET ACTIVITIES
- --------------------------------------
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to originate loans, standby letters of
credit and unadvanced funds on loans. The instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheets. The contract amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amounts of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies, but may
include secured interests in mortgages, accounts receivable, inventory,
property, plant and equipment and income-producing properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. As of March 31, 2009 and 2008, the
maximum potential amount of the Company's obligation was $1.7 million and $2.0
million, respectively, for financial and standby letters of credit. The
Company's outstanding letters of credit generally have a term of less than one
year. If a letter of credit is drawn upon, the Company may seek recourse through
the customer's underlying line of credit. If the customer's line of credit is
also in default, the Company may take possession of the collateral, if any,
securing the line of credit.
79
The notional amounts of financial instrument liabilities with off-balance sheet
credit risk are as follows as of March 31:
2009 2008
------- -------
(In Thousands)
Commitments to originate loans $ 6,116 $ 8,305
Standby letters of credit 1,692 2,012
Unadvanced portions of loans:
Construction 8,414 9,233
Home equity 8,757 8,088
Commercial lines of credit 26,181 19,473
Overdraft protection lines 2,986 2,997
------- -------
$54,146 $50,108
======= =======
There is no material difference between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.
NOTE 21 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
- ---------------------------------------------------------
Most of the Company's business activity is with customers located within
Connecticut. There are no concentrations of credit to borrowers that have
similar economic characteristics. The majority of the Company's loan portfolio
is comprised of loans collateralized by real estate located in the state of
Connecticut.
NOTE 22 - RECLASSIFICATION
- --------------------------
Certain amounts in the prior year have been reclassified to be consistent with
the current year's statement presentation.
80
NOTE 23 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
- --------------------------------------------------
The following financial statements are for the Company (Parent Company Only) and
should be read in conjunction with the consolidated financial statements of the
Company.
NEW ENGLAND BANCSHARES, INC.
----------------------------
(Parent Company Only)
Balance Sheets
--------------
(In Thousands)
March 31,
--------------------
ASSETS 2009 2008
- ------ -------- --------
Cash on deposit with Enfield Federal Savings and Loan Association $ 2,093 $ 1,762
Investment in subsidiaries 61,353 67,197
Loans to ESOP 2,406 2,593
Accrued interest receivable 83 46
Other assets 1,618 1,100
Due from subsidiary 479 109
-------- --------
Total assets $68,032 $ 72,807
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Other liabilities $ 74 $ 70
Subordinated debentures 3,901 3,893
Deferred tax liability 103 107
Stockholders' equity 63,954 68,737
-------- --------
Total liabilities and stockholders' equity $ 68,032 $ 72,807
======== ========
Statements of Income
--------------------
(In Thousands)
For the Years Ended
March 31,
--------------------
2009 2008
-------- --------
Dividend from subsidiaries $ 4,000 $ 19,000
Interest income 213 432
-------- --------
Total interest and dividend income 4,213 19,432
Interest expense 273 195
-------- --------
Net interest and dividend income 3,940 19,237
Other expense 452 263
-------- --------
Income before income tax benefit and equity in
undistributed net loss of subsidiaries 3,488 18,974
Income tax benefit (118) (9)
-------- --------
Income before equity in undistributed net loss of subsidiaries 3,606 18,983
Equity in undistributed net loss of subsidiaries (5,408) (17,768)
-------- --------
Net (loss) income $ (1,802) $ 1,215
======== ========
81
NEW ENGLAND BANCSHARES, INC.
----------------------------
(Parent Company Only)
Statements of Cash Flows
------------------------
(In Thousands)
For the Years Ended
March 31,
--------------------
2009 2008
-------- --------
Cash flows from operating activities:
Net (loss) income $ (1,802) $ 1,215
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Amortization of fair value adjustments 8 5
(Increase) decrease in accrued interest receivable (37) 2
Decrease in due from subsidiaries -- 898
Increase in other assets (518) (741)
Decrease in other liabilities -- (101)
Undistributed net loss of subsidiaries 5,408 17,768
-------- --------
Net cash provided by operating activities 3,059 19,046
-------- --------
Cash flows from investing activities:
Investment in subsidiaries -- (12,000)
Cash issued in acquisition -- (12,424)
Principal payments received on loans to ESOP 187 177
-------- --------
Net cash provided by (used in) investing activities 187 (24,247)
-------- --------
Cash flows from financing activities:
Purchase of treasury stock (2,204) (3,772)
Exercise of stock options 139 40
Payment of cash dividends on common stock (850) (681)
-------- --------
Net cash used in financing activities (2,915) (4,413)
-------- --------
Net increase (decrease) in cash and cash equivalents 331 (9,614)
Cash and cash equivalents at beginning of year 1,762 11,376
-------- --------
Cash and cash equivalents at end of year $ 2,093 $ 1,762
======== ========
82
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
(a) The Company's management, including the Company's principal
executive officer and principal financial officer, have evaluated the
effectiveness of the Company's "disclosure controls and procedures," as such
term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act
of 1934, as amended, (the "Exchange Act"). Based upon their evaluation, the
principal executive officer and principal financial officer concluded that, as
of the end of the period covered by this report, the Company's disclosure
controls and procedures were effective for the purpose of ensuring that the
information required to be disclosed in the reports that the Company files or
submits under the Exchange Act with the Securities and Exchange Commission (the
"SEC") (1) is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and (2) is accumulated and
communicated to the Company's management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
required disclosure.
(b) Management's report on internal control over financial reporting.
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting.
The Company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of
America. The Company's internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the
United States of America, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control
over financial reporting as of March 31, 2009, based on the framework set forth
by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control--Integrated Framework. Based on that assessment, management
concluded that, as of March 31, 2009, the Company's internal control over
financial reporting was effective based on the criteria established in Internal
Control--Integrated Framework.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only management's
report in this annual report.
(c) There has been no change in the Company's internal control over
financial reporting during the Company's fourth quarter of fiscal 2009 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control financial reporting,
83
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
The information relating to the directors of the Company is incorporated
herein by reference to the sections captioned "Corporate Governance--Committees
of the Board of Directors" and "Proposal 1 - Election of Directors" in the
Company's Proxy Statement for the 2009 Annual Meeting of Stockholders.
Executive Officers
Certain executive officers of the Association and Bank also serve as
executive officers of the Company. The day-to-day management duties of the
executive officers of the Company, Association and Bank relate primarily to
their duties as to the Association and Bank. The executive officers are elected
annually and hold office until their successors have been elected and qualified
or until they are removed or replaced. The executive officers of the Company
currently are as follows:
Name Age(1) Position(s)
- ----- ------ ---------------------------------------------------------
David J. O'Connor 62 Chief Executive Officer and Director of New England
Bancshares and Chief Executive Officer, President and
Director of Enfield Federal
Michael J. Marcucci 47 Executive Vice President and Chief Risk Officer
Scott D. Nogles 39 Executive Vice President and Chief Financial Officer
of New England Bancshares and Enfield Federal
Executive Vice President and Chief Loan Officer of Enfield
John F. Parda 60 Federal
- ----------
(1) As of March 31, 2009.
David J. O'Connor. Mr. O'Connor has been the Chief Executive Officer,
President and Director of Enfield Federal since 1999 and of New England
Bancshares since 2002. Mr. O'Connor also served as the Company's and Enfield
Federal's Chief Financial Officer from 1999 to April 2004. Mr. O'Connor has over
30 years of banking experience in New England. Before joining Enfield Federal,
he was the Executive Vice President, Treasurer and Chief Financial Officer of
The Berlin City Bank, a community bank in New Hampshire.
Michael J. Marcucci. Mr. Marcucci joined New England Bancshares in 2008 as
Executive Vice President and Chief Risk Officer. Before joining New England
Bancshares, he was Senior Vice President of Credit Administration at Webster
Bank from 2003 to 2008.
Scott D. Nogles. Mr. Nogles joined New England Bancshares and Enfield
Federal in 2004 as Senior Vice President and Chief Financial Officer. He was
named Executive Vice President and Chief Financial Officer in 2008. Before
joining Enfield Federal, he was Vice President and Chief Financial Officer of
Luzerne National Bank in Luzerne, Pennsylvania from 2003 to 2004. Mr. Nogles has
an MBA from the University of Connecticut.
John F. Parda. Mr. Parda joined Enfield Federal in 1999 as Vice President
and Senior Loan Officer. He was named Senior Vice President and Senior Loan
Officer in 2001and Executive Vice President and Senior Loan Officer in 2008. Mr.
Parda has over 30 years of diversified banking experience with Connecticut
financial institutions. Before joining Enfield Federal, he was a Vice President
and Commercial Loan Officer with the former First International Bank, now a
subsidiary of UPS Capital, a lender specializing in government guaranteed loans.
84
Compliance with Section 16(a) of the Exchange Act
Reference is made to the cover page of this report and to the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement for the 2009 Annual Meeting of Stockholders.
Disclosure of Code of Ethics and Business Conduct
For information concerning the Company's code of ethics, the information
contained under the section captioned "Corporate Governance--Code of Ethics and
Business Conduct" in the Company's Proxy Statement for the 2009 Annual Meeting
of Stockholders is incorporated by reference. A copy of the code of ethics and
business conduct is available, without charge, upon written request to Nancy L.
Grady, Corporate Secretary, New England Bancshares, Inc., 855 Enfield Street,
Enfield, Connecticut 06082.
Corporate Governance
For information regarding the audit committee and its composition and the
audit committee financial expert, the section captioned "Corporate Governance -
Committees of the Board of Directors - Audit Committee" in the Company's Proxy
Statement for the 2009 Annual Meeting of Stockholders is incorporated by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation is incorporated herein by
reference to the sections captioned "Corporate Governance - Directors'
Compensation" and "Executive Compensation" in the Company's Proxy Statement for
the 2009 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Stock Ownership" in the
Company's Proxy Statement for the 2009 Annual Meeting of
Stockholders.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Stock Ownership" in the
Company's Proxy Statement for the 2009 Annual Meeting of
Stockholders.
(c) Changes in Control
Management of New England Bancshares knows of no arrangements,
including any pledge by any person of securities of New England
Bancshares, the operation of which may at a subsequent date result
in a change in control of the registrant.
(d) Equity Compensation Plan Information
85
The following table provides information as of March 31, 2009 for
compensation plans under which equity securities may be issued.
- ---------------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
Number of Securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
Plan category warrants and rights rights reflected in column (a))
(a) (b) (c)
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 333,416 $8.96 190,389
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Total 333,416 $8.96 190,389
- ---------------------------------------------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Certain Relationships and Related Transactions
For information regarding certain relationships and related transactions,
the section captioned "Transactions with Related Persons" in the Company's Proxy
Statement for the 2009 Annual Meeting of Stockholders is incorporated by
reference.
Corporate Governance
For information regarding director independence, the section captioned
"Proposal 1 - Election of Directors" in the Company's Proxy Statement for the
2009 Annual Meeting of Stockholders is incorporated by reference.
86
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information relating to the Company's principal accountant fees and
services is incorporated herein by reference to the section captioned "Proposal
2--Ratification of Independent Auditors" in the Company's Proxy Statement for
the 2009 Annual Meeting of Stockholders.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
2.1 Agreement and Plan of Merger, dated November 21, 2006, by and among,
New England Bancshares, Inc., New England Bancshares Acquisition,
Inc. and First Valley Bancorp, Inc. (1)
2.2 Agreement and Plan of Merger by and among New England Bancshares,
Inc., Valley Bank and The Apple Valley Bank & Trust Company, dated
as of January 14, 2009. (2)
3.1 Articles of Incorporation of New England Bancshares, Inc. 3)
3.2 Bylaws of New England Bancshares, Inc. (3)
4.0 Specimen stock certificate of New England Bancshares, Inc. (3)
10.1 Form of Enfield Federal Savings and Loan Association Employee Stock
Ownership Plan and Trust(4)
10.2 Employment Agreement by and between Enfield Federal Savings and Loan
Association and David J. O'Connor (5)
10.3 Amended and Restated Employment Agreement by and among Enfield
Federal Savings and Loan Association and David J. O'Connor.
10.4 Employment Agreement by and between New England Bancshares, Inc. and
David J. O'Connor (5)
10.5 Amended and Restated Employment Agreement by and among New England
Bancshares, Inc. and David J. O'Connor.
10.6 Form of Enfield Federal Savings and Loan Association Employee
Severance Compensation Plan(4)
10.7 Enfield Federal Savings and Loan Association Employee Savings &
Profit-Sharing Plan and Adoption Agreement (4)
10.8 Enfield Federal Savings and Loan Association Executive Supplemental
Retirement Plan, as amended and restated (6)
10.9 Form of Enfield Federal Savings and Loan Association Supplemental
Executive Retirement Plan(4)
10.10 Form of Enfield Federal Savings and Loan Association Director Fee
Continuation Plan (4)
10.11 Split Dollar Arrangement with David J. O'Connor (4)
10.12 New England Bancshares, Inc. 2003 Stock-Based Incentive Plan, as
amended and restated (8)
10.13 Change in Control Agreement by and among Enfield Federal Savings and
Loan Association, New England Bancshares, Inc. and John F. Parda, as
amended and restated (9)
10.14 First Amendment to Amended and Restated Change in Control Agreement
by and among Enfield Federal Savings and Loan Association and John
Parda.
10.15 Change in Control Agreement by and among Enfield Federal Savings and
Loan Association, New England Bancshares, Inc. and Scott D. Nogles,
as amended and restated (9)
10.16 First Amendment to Amended and Restated Change in Control Agreement
by and among Enfield Federal Savings and Loan Association and Scott
D. Nogles.
10.17 One Year Change in Control Agreement by and between Enfield Federal
Savings and Loan Association and Michael J. Marcucci.
10.18 First Amendment to Two Year Change in Control Agreement by and among
Valley Bank and Anthony M. Mattioli.
10.19 Lease agreement with Troiano Professional Center, LLC (7)
23.1 Consent of Shatswell, MacLeod & Company, P.C.
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 exhibits to
the Current Report on Form 8-K filed on November 28, 2006.
(2) Incorporated by reference into this document from the exhibits to
the Current Report on Form 8-K filed on January 16, 2009.
87
(3) Incorporated by reference into this document from the Company's Form
SB-2, Registration Statement filed under the Securities Act of 1933,
Registration No. 333-128277.
(4) Incorporated by reference into this document from the Company's Form
SB-2, Registration Statement filed under the Securities Act of 1933,
Registration No. 333-82856.
(5) Incorporated herein by reference into this document from the
exhibits to the Quarterly Report on Form 10-QSB for the quarter
ended December 31, 2005.
(6) Incorporated by reference into this document from the exhibits to
the Annual Report on Form 10-K for the year ended March 31, 2006.
(7) Incorporated by reference into this document from the exhibits to
the Annual Report on Form 10-K for the year ended March 31, 2005.
(8) Incorporated by reference from the Proxy Statement for the 2003
Special Meeting of Stockholders.
(9) Incorporated by reference into this document from the exhibits to
the Annual Report on Form 10-K for the year ended March 31, 2007.
88
SIGNATURES
In accordance with Section 13 or 15(d) 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.
Date: June 26, 2009 By: /s/ David J. O'Connor
------------------------------------
David J. O'Connor
Chief Executive Officer
and Director
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant in the capacities and on the
dates indicated.
/s/ David J. O'Connor /s/ Scott D. Nogles
- -------------------------------------- --------------------------------------
David J. O'Connor, Chief Executive Scott D. Nogles, Executive Vice
Officer and Director (principal President and Chief Financial
executive officer) Officer (principal financial and
accounting officer)
Date: June 26, 2009 Date: June 26, 2009
/s/ Thomas O. Barnes /s/ Lucien P. Bolduc
- -------------------------------------- --------------------------------------
Thomas O. Barnes, Director Lucien P. Bolduc, Director
Date: June 26, 2009 Date: June 26, 2009
/s/ Edmund D. Donovan /s/ Peter T. Dow
- -------------------------------------- --------------------------------------
Edmund D. Donovan, Director Peter T. Dow, Chairman of the Board
Date: June 26, 2009 Date: June 26, 2009
/s/ William C. Leary, Esq. /s/ Myron J. Marek
- -------------------------------------- --------------------------------------
William C. Leary, Director Myron J. Marek, Director
Date: June 26, 2009 Date: June 26, 2009
/s/ Dorothy K. McCarty /s/ Richard M. Tatoian, Esq.
- -------------------------------------- --------------------------------------
Dorothy K. McCarty, Director Richard M. Tatoian, Esq., Director
Date: June 26, 2009 Date: June 26, 2009
/s/ David J. Preleski, Esq. /s/ Richard K. Stevens
- -------------------------------------- --------------------------------------
David J. Preleski, Director Richard K. Stevens, Director
Date: June 26, 2009 Date: June 26, 2009
89