UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 Number 0-51589
NEW ENGLAND BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Maryland 04-3693643
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
855 Enfield Street, Enfield, Connecticut 06082
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(Address of principal executive offices) (Zip Code)
(860) 253-5200
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(Issuer's telephone number)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant 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
(ss.232.405 of this chapter) 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 whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. (See definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act).
Large accelerated____ filer Accelerated filer____ Non-accelerated filer
Smaller Reporting Company |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The Issuer had 6,391,156 shares of common stock, par value $0.01 per
share, outstanding as of August 10, 2009.
NEW ENGLAND BANCSHARES, INC.
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2009 (Unaudited)
and March 31, 2009 ................................................ 1
Condensed Consolidated Statements of Income for the
Three Months Ended June 30, 2009 and 2008 (Unaudited) ............. 2
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 2009 and 2008 (Unaudited) ............. 3
Notes to Condensed Consolidated Financial Statements (Unaudited) .. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .........................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........19
Item 4T. Controls and Procedures ...........................................20
PART II: OTHER INFORMATION
Item 1... Legal Proceedings .................................................21
Item 1A Risk Factors ........................................................21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .......23
Item 3. Defaults Upon Senior Securities ...................................23
Item 4. Submission of Matters to a Vote of Security Holders ...............23
Item 5. Other Information .................................................23
Item 6. Exhibits ..........................................................24
SIGNATURES ..................................................................24
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(Dollars in thousands)
June 30, March 31,
2009 2009
----------- ---------
ASSETS (Unaudited)
Cash and due from banks .................................................. $ 10,974 $ 7,872
Interest-bearing demand deposits with other banks ........................ 57,249 33,554
Money market mutual funds ................................................ 86 7
--------- ---------
Total cash and cash equivalents .................................... 68,309 41,433
Interest-bearing time deposits with other banks .......................... 1,599 99
Investments in available-for-sale securities, at fair value .............. 62,714 71,821
Federal Home Loan Bank stock, at cost .................................... 4,396 3,896
Loans, net of allowance for loan losses of $6,452 as of June 30, 2009
and $6,458 as of March 31, 2009 ............................. 489,076 413,566
Premises and equipment, net .............................................. 7,809 5,990
Other real estate owned .................................................. 1,087 141
Accrued interest receivable .............................................. 2,520 2,321
Deferred income taxes, net ............................................... 5,600 3,769
Cash surrender value of life insurance ................................... 9,295 9,211
Identifiable intangible assets ........................................... 2,042 2,165
Goodwill ................................................................. 16,384 14,701
Other assets ............................................................. 4,063 2,551
--------- ---------
Total assets ....................................................... $ 674,894 $ 571,664
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing ................................................. $ 48,954 $ 37,483
Interest-bearing .................................................... 465,262 381,953
--------- ---------
Total deposits .................................................. 514,216 419,436
Advanced payments by borrowers for taxes and insurance ................... 2,132 953
Federal Home Loan Bank advances .......................................... 66,033 66,833
Subordinated debentures .................................................. 3,904 3,901
Securities sold under agreements to repurchase ........................... 17,180 12,069
Other liabilities ........................................................ 4,706 4,518
--------- ---------
Total liabilities .................................................. 608,171 507,710
========= =========
Stockholders' Equity:
Preferred stock, par value $.01 per share: 1,000,000 shares
authorized;none issued .............................................. -- --
Common stock, par value $.01 per share: 19,000,000 shares authorized;
6,938,087 shares issued at June 30, 2009 and 6,420,891
shares issued at March 31, 2009 ............................. 69 64
Paid-in capital ..................................................... 59,758 56,551
Retained earnings ................................................... 16,036 16,329
Unearned ESOP shares, 249,291 shares at June 30, 2009 and
March 31, 2009 ............................................ (2,190) (2,190)
Treasury stock, 546,931 shares at June 30, 2009 and 536,931
shares at March 31, 2009 .................................. (5,803) (5,742)
Unearned shares, stock-based plans, 57,259 shares at June 30,
2009 and March 31, 2009 ................................... (625) (659)
Accumulated other comprehensive loss ................................ (522) (399)
--------- ---------
Total stockholders' equity ....................................... 66,723 63,954
--------- ---------
Total liabilities and stockholders' equity ....................... $ 674,894 $ 571,664
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
June 30,
2009 2008
Interest and dividend income:
Interest on loans ............................................. $ 6,507 $ 6,102
Interest and dividends on securities:
Taxable .................................................... 672 743
Tax-exempt ................................................. 155 169
Interest on federal funds sold, interest-bearing deposits and
dividends on money market mutual funds ....................... 46 175
------- -------
Total interest and dividend income ......................... 7,380 7,189
------- -------
Interest expense:
Interest on deposits .......................................... 2,692 2,524
Interest on advanced payments by borrowers for
taxes and insurance ..................................... 4 4
Interest on Federal Home Loan Bank advances ................... 689 679
Interest on subordinated debentures ........................... 68 68
Interest on securities sold under agreements to repurchase .... 44 37
------- -------
Total interest expense ..................................... 3,497 3,312
------- -------
Net interest and dividend income ........................... 3,883 3,877
Provision for loan losses ........................................... 680 148
------- -------
Net interest and dividend income after provision for loan
losses ................................................... 3,203 3,729
------- -------
Noninterest income:
Service charges on deposit accounts ........................... 254 269
Gain on securities, net ....................................... 59 8
Gain on sale of loans ......................................... 5 12
Increase in cash surrender value of life insurance policies 84 84
Impairment loss on securities (includes total losses of $251,
net of $234 recognized in other comprehensive loss, pretax) (17) --
Other income .................................................. 302 94
------- -------
Total noninterest income ................................... 687 467
------- -------
Noninterest expense:
Salaries and employee benefits ................................ 1,858 1,915
Occupancy and equipment expense ............................... 718 712
Advertising and promotion ..................................... 38 93
Professional fees ............................................. 298 124
Data processing expense ....................................... 150 109
FDIC insurance assessment ..................................... 540 38
Stationery and supplies ....................................... 35 36
Amortization of identifiable intangible assets ................ 123 134
Other expense ................................................. 533 383
------- -------
Total noninterest expense .................................. 4,293 3,544
------- -------
(Loss) income before income taxes .......................... (403) 652
Income tax (benefit) expense ........................................ (222) 200
------- -------
Net (loss) income .......................................... $ (181) $ 452
======= =======
(Loss) earnings per share:
Basic ................................................... $ (0.03) $ 0.08
Diluted ................................................. $ (0.03) $ 0.08
Dividends per share .............................................. $ 0.02 $ 0.03
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended
June 30,
2009 2008
----------- ---------
Cash flows from operating activities:
Net (loss) income ...................................................... $ (181) $ 452
Adjustments to reconcile net (loss) income to net cash provided by (used
in)operating activities:
Net amortization of fair value adjustments ....................... 2 5
Accretion of securities, net ..................................... (30) (13)
Gain on sales and calls of investments, net ...................... (59) (8)
Writedown of available-for-sale securities ....................... 17 --
Provision for loan losses ........................................ 680 148
Gain on sale of loans, net ....................................... (5) (12)
Change in deferred loan origination costs, net ................... (13) (55)
Depreciation and amortization .................................... 217 221
Decrease (increase) in accrued interest receivable ............... 40 (201)
Deferred income tax expense (benefit) ............................ 219 (236)
Increase in cash surrender value of life insurance policies ...... (84) (83)
Increase in prepaid expenses and other assets .................... (1,430) (1,990)
Amortization of identifiable intangible assets ................... 123 134
Increase in accrued expenses and other liabilities ............... 500 41
Compensation cost for stock option plan .......................... 31 32
Compensation cost for stock-based incentive plan ................. 34 35
-------- --------
Net cash provided by (used in) operating activities .................... 61 (1,530)
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities ....................... (7,527) (19,534)
Proceeds from sales of available-for-sale securities ............. 6,176 709
Proceeds from maturities of available-for-sale securities ........ 12,614 3,923
Purchases of Federal Home Loan Bank stock ........................ (35) --
Purchases of interest-bearing time deposits with other banks ..... (1,500) --
Cash and cash equivalents acquired from Apple Valley Bank & Trust,
net of cash paid to shareholders ............................... 10,289 --
Proceeds from maturities of interest bearing time deposits with
other banks .................................................... -- 396
Loan originations and principal collections, net ................. 878 (11,925)
Purchases of loans ............................................... (17,256) --
Loans sold ....................................................... -- 3,039
Investments in life insurance policies ........................... -- (5)
Capital expenditures - premises and equipment .................... (160) (71)
-------- --------
Net cash provided by (used in) investing activities .............. 3,479 (23,468)
-------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
(continued)
Three Months Ended
June 30,
2009 2008
------------ ------------
Cash flows from financing activities:
Net increase in demand, NOW, MMDA and savings accounts ........ 13,046 7,459
Net increase in time deposits ................................. 5,354 13,827
Net increase in advanced payments by borrowers for taxes and
insurance .................................................. 799 776
Principal payments on Federal Home Loan Bank long-term advances (801) (782)
Net increase in securities sold under agreement to repurchase . 5,111 32
Purchase of treasury stock .................................... (61) (1,240)
Exercise of stock options ..................................... -- 140
Payments of cash dividends on common stock .................... (112) (183)
-------- --------
Net cash provided by financing activities ................................. 23,336 20,029
-------- --------
Net increase (decrease) in cash and cash equivalents ...................... 26,876 (4,969)
Cash and cash equivalents at beginning of period .......................... 41,433 36,239
-------- --------
Cash and cash equivalents at end of period ................................ $ 68,309 $ 31,270
======== ========
Supplemental disclosures:
Interest paid ................................................. 3,391 3,371
Income taxes paid ............................................. 241 312
Decrease in due to broker ..................................... 715 653
Decrease in due from broker ................................... -- 714
Loan transferred to other real estate owned ................... 441 --
Acquisition of Apple Valley Bank & Trust:
Assets acquired
Cash and cash equivalents ..................................... 13,220 $ --
Investments in available-for-sale securities .................. 3,004 --
Federal Home Loan Bank stock, at cost ......................... 465 --
Loans, net of allowance for loan losses ....................... 60,233 --
Premises and equipment, net ................................... 1,881 --
Other real estate owned ....................................... 505 --
Accrued interest receivable ................................... 239 --
Deferred income taxes, net .................................... 1,968 --
Other assets .................................................. 77 --
-------- --------
Total assets acquired ................................................... 81,592 --
-------- --------
Liabilities assumed
Deposits ...................................................... 76,380 --
Advanced payments by borrowers for taxes and insurance ........ 380 --
Other liabilities ............................................. 403 --
-------- --------
Total liabilities assumed ............................................... 77,163 --
-------- --------
Net assets acquired ....................................................... 4,429 --
Acquisition costs ......................................................... 6,112 --
-------- --------
Goodwill .................................................................. 1,683 $ --
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
NEW ENGLAND BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 - Organization
New England Bancshares, Inc. New England Bancshares, Inc. (the "Company")
is a Maryland corporation which was organized in December 2005 to be the holding
company parent of Enfield Federal Savings and Loan Association ("Enfield
Federal"), following the completion of the "second-step" mutual-to-stock
conversion of Enfield Mutual Holding Company. As a part of the second-step
conversion, the Company sold 3,075,855 shares resulting in net proceeds of $27.2
million, of which $12.2 million was retained as capital by the Company and $15.0
million was infused as capital into Enfield Federal. 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 Valley Bank, Bristol, Connecticut,
through a merger with Valley Bank's holding company, First Valley Bancorp. 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. As a result
of the acquisition of Valley Bank, the Company became the holding company for
both Enfield Federal, a federal savings bank, and Valley Bank, a Connecticut
chartered commercial bank.
On May 1, 2009, the Company merged Enfield Federal with and into Valley
Bank, and renamed the surviving Connecticut chartered commercial bank "New
England Bank", (the "Subsidiary Merger"). The Company retained the name of each
bank at their respective branches and operates the branches as divisions of New
England Bank (the "Bank"). The Subsidiary Merger was 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.
On June 8, 2009 the Company acquired Apple Valley Bank & Trust Company
("Apple Valley Bank") of Cheshire, Connecticut, through the merger of Apple
Valley Bank with and into New England Bank. Under the terms of the merger,
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
5
60% stock and 40% cash. The Company retained the name of Apple Valley Bank at
the acquired branches and operates the branches as a division of the Bank.
New England Bank. The Bank, incorporated in 2009, is a Connecticut state
chartered commercial bank headquartered in Enfield, Connecticut. The Bank is
engaged principally in the business of attracting deposits from the general
public and investing those deposits primarily in residential and commercial real
estate loans, and to a lesser extent, in consumer, construction, commercial and
small business loans. At June 30, 2009, the Bank operated from fifteen locations
in Connecticut. Unless otherwise specified, references to the "Bank" in this
quarterly report on Form 10-Q shall include Valley Bank, Enfield Federal and
Apple Valley Bank prior to the Subsidiary Merger and the merger with Apple
Valley Bank.
NOTE 2 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial statements and the
instructions to Form 10-Q, and accordingly do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, the accompanying unaudited consolidated financial statements reflect
all adjustments necessary, consisting of only normal recurring accruals, to
present fairly the financial position, results of operations and cash flows of
the Company for the periods presented. In preparing the interim financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ
significantly from those estimates. The interim results of operations are not
necessarily indicative of the operating results to be expected for the year
ending March 31, 2010 or any interim period.
While management believes that the disclosures presented are adequate so
as not to make the information misleading, it is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes included in New England Bancshares' Form 10-K for the year
ended March 31, 2009.
The condensed consolidated balance sheet as of March 31, 2009 was derived
from the audited financial statements of New England Bancshares, Inc., but does
not include all the disclosures required by accounting principles generally
accepted in the United States of America.
NOTE 3 - Earnings Per Share (EPS)
Basic EPS is computed by dividing income available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. The Company had no anti-dilutive shares at June 30, 2009
as the Company reported a net loss, and 125,563 anti-dilutive shares for the
three months ended June 30, 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 Bank's employee stock
ownership plan are not included in the weighted-average number of common shares
outstanding for purposes of calculating both basic and diluted EPS.
6
Quarter Ended
June 30,
-----------------------------
(In thousands, except per share data) 2009 2008
-------------- ----------
Net (loss) income .................... $ (181) $ 452
Weighted average common shares
outstanding for computation of basic
EPS ................................ 5,740 5,708
Effect of dilutive stock options and
stock awards ....................... -- 124
Weighted average common shares for
computation of diluted EPS ......... 5,740 5,832
(Loss) earnings per share:
Basic .............................. $ (0.03) $ 0.08
Diluted ............................ $ (0.03) $ 0.08
NOTE 4 - Recent Accounting Pronouncements
"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 7 - 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
7
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.
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 adoption of the new standard did not have a material
impact on the Company's financial position, results of operations or cash flows.
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
the new standard did not have a material impact on the Company's financial
position, results of operations or cash flows.
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
adoption of the new standard did not have a material impact on the Company's
financial position, results of operations or cash flows.
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
8
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 of the new standard did
not have a material impact on the Company's financial position, results of
operations or cash flows.
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.
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 and $28,000, pre-tax, during the year ended March 31, 2009
and the three months ended June 30, 2009, respectively. See Note 6 -
Other-Than-Temporary Impairment Losses for expanded disclosures related to this
FSP.
NOTE 5 - Stock-Based Incentive Plan
At June 30, 2009, the Company maintained a stock-based incentive plan and
an equity incentive plan. The Company currently accounts for the plans under the
recognition and
9
measurement principles of Statement of Financial Accounting Standards (SFAS) No.
123, (amended 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R required the
Company to recognize the cost resulting from all share-based payment
transactions in the consolidated financial statements as of the beginning of the
first annual reporting period that began after December 15, 2005. For the three
months ended June 30, 2009 and 2008, compensation cost for the Company's stock
plans was measured at the grant date based on the value of the award and was
recognized over the service period, which was the vesting period. The
compensation cost that has been charged against income in the three months ended
June 30, 2009 and 2008 for the granting of stock options under the plans was
$31,000 and $32,000, respectively. During the three months ended June 30, 2009,
the Company did not grant any stock options.
The compensation cost that has been charged against income for the
granting of restricted stock awards under the plan for the three months ended
June 30, 2009 and 2008 was $34,000 and $35,000, respectively.
NOTE 6 - Other-Than-Temporary Impairment Losses
The following table summarizes gross unrealized losses and fair value,
aggregated by investment category and length of time the investments have been
in a continuous unrealized loss position, at June 30, 2009:
Less than 12 Months 12 Months or Longer Total
---------------------- -------------------- -------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
(In Thousands)
Debt securities issued by states of the
United States and political subdivisions
of the states $6,467 $349 $ 5,289 $ 794 $11,756 $1,143
Debt securities issued by the U.S. Treasury
and other U.S. government corporations
and agencies 654 36 -- -- 654 36
Mortgage-backed securities 1,181 34 3,894 772 5,075 806
------ ---- -------- ------ ------- ------
Total temporarily impaired securities $8,302 $419 $ 9,183 $ 1,566 $17,485 $1,985
====== ==== ======== ======= ======= ======
Management has assessed the securities which are classified as
available-for-sale and in an unrealized loss position at June 30, 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 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."
10
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.
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 June
30, 2009 is as follows:
Total
(In Thousands)
Balance, April 1, 2009 $ 11
Additions for the credit component on debt securities
in which other-than-temporary impairment was
not previously recognized 17
Balance, June 30, 2009 $ 28
For the quarter ended June 30, 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 June 30, 2009:
Range
Weighted -----------------------------
Average Minimum Maximum
------- ------- -------
Prepayment rates 16.2% 5.7% 31.6%
Default rates 2.7 0.8 9.2
Loss severity 36.4 25.0 59.1
11
NOTE 7 - Goodwill
The change in the carrying amount of goodwill for the three months ended
June 30, 2009 was as follows:
Balance March 31, 2009 $14,701
Merger of Apple Valley Bank 1,683
-------
Balance June 30, 2009 $16,384
=======
The Company has provisionally recognized $1.7 million of goodwill in
conjunction with the merger of Apple Valley Bank. The goodwill was caused by the
total amount of consideration paid to the shareholders of Apple Valley Bank
exceeding the fair value of net assets acquired. The goodwill value at June 30,
2009 is provisional due to the Company awaiting a final appraisal to determine
the fair market value of one of Apple Valley Bank's branch locations, a final
review of deferred taxes, a fair value determination of the two operating leases
and a final appraisal to determine the fair market value of one other real
estate owned property.
NOTE 8 - Fair Value Measurement Disclosures
The following table presents the fair value disclosures of assets and
liabilities in accordance with SFAS 157, "Fair Value Measurements" (SFAS 157)
which became effective for the Company's consolidated financial statements on
April 1, 2008. The fair value hierarchy established by SFAS No. 157 is based on
observable and unobservable inputs participants use to price an asset or
liability. SFAS No. 157 has prioritized these inputs into the following fair
value hierarchy:
Level 1 Inputs - Unadjusted quoted prices in active markets for identical
assets or liabilities that are available at the measurement date.
Level 2 Inputs - Inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly or indirectly.
These might include quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities in markets
that are not active, inputs other than quoted prices that are observable for the
asset or liability (such as interest rates, volatilities, prepayment speeds,
credit risks, etc.) or inputs that are derived principally from or corroborated
by market data by correlation or other means.
Level 3 Inputs - Unobservable inputs for determining the fair value of the
asset or liability and are based on the entity's own assumptions about the
assumptions that market participants would use to price the asset or liability.
12
Assets measured at fair value on a recurring and non-recurring basis at
June 30, 2009 are summarized below. There are no liabilities measured at fair
value.
Fair Value Measurements at Reporting Date Using
-----------------------------------------------
Quoted Prices
In Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
Description June 30, 2009 (Level 1) (Level 2) (Level 3)
- ----------- ------------- --------- --------- ---------
(In Thousands)
Recurring:
Available-for-sale
securities $62,714 $ 2,910 $59,804 $ --
Impaired loans 16,178 -- 16,178 --
Impaired securities included
in other assets 822 -- 822 --
------- ------- ------- --
Total assets $79,714 $ 2,910 $76,804 $ --
======= ======= ======= ====
The following are the carrying amounts and estimated fair values of the
Company's financial assets and liabilities:
June 30, 2009 March 31, 2009
--------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets:
Cash and cash equivalents $ 68,309 $ 68,309 $ 41,433 $ 41,433
Interest-bearing time deposits with other banks 1,599 1,599 99 99
Available-for-sale securities 62,714 62,714 71,821 71,821
Federal Home Loan Bank stock 4,396 4,396 3,896 3,896
Loans, net 489,076 489,427 413,566 415,595
Other investment securities 670 670 670 670
Accrued interest receivable 2,520 2,520 2,321 2,321
Financial liabilities:
Deposits 514,216 516,474 419,436 421,925
Advanced payments by borrowers for taxes and insurance 2,132 2,132 953 953
FHLB advances 66,033 68,819 66,833 69,523
Securities sold under agreements to repurchase 17,180 17,183 12,069 12,071
Subordinated debentures 3,904 1,563 3,901 1,709
Due to broker -- -- 715 715
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations.
The following analysis discusses changes in the financial condition and
results of operations at and for the three months ended June 30, 2009 and 2008,
and should be read in conjunction with the Company's Condensed Consolidated
Financial Statements and the notes thereto, appearing in Part I, Item 1 of this
document.
13
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. By identifying these
forward-looking statements for you in this manner, we are alerting you to the
possibility that our actual results and financial condition may differ, possibly
materially, from the anticipated results and financial condition indicated in
these forward-looking statements. Important factors that could cause our actual
results and financial condition to differ from those indicated in the
forward-looking statements include, among others, those discussed under "Risk
Factors" in Part I, Item 1A of the Company's Annual Report on Form 10-K and Part
II, Item 1A of this Report on Form 10-Q, as well as the following factors:
interest rates, general economic conditions, legislation and regulations,
monetary and fiscal policies of the U.S. government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area,
accounting principles and guidelines, and our ability to recognize enhancements
related to our acquisition within expected time frames. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements.
Except as required by applicable law and regulation, the Company does not
undertake - and specifically disclaims any obligation - to publicly release the
result of any revisions that may be made to any forward-looking statements to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
Comparison of Financial Condition at June 30, 2009 and March 31, 2009
Assets
Total assets were $674.9 million at June 30, 2009, an increase of $103.2
million compared to $571.7 million at March 31, 2009. The increase in total
assets was primarily due to $81.6 million of assets acquired in the Apple Valley
Bank & Trust merger (the "Merger"). Excluding the Apple Value transaction, there
was a $13.7 million increase in cash and cash equivalents and a $15.3 million
increase in net loans, partially offset by a $12.1 million decrease in
investments available-for-sale. At June 30, 2009, commercial real estate and
commercial loans accounted for 55.5% of the total loan portfolio.
Allowance for Loan Losses
Management determines the adequacy of the allowance for loan losses on a
regular basis. The determination is based upon management's assessment of the
credit quality and composition of the loan portfolio, previous loss experience,
current economic conditions and their effect on borrowers and the market area in
general, and the performance of individual credits in relation to the contract
terms.
14
The Company's methodology for assessing the appropriateness of the
allowance for loan losses consists of specific allowances for identified problem
loans and a general valuation allowance on the remainder of the loan portfolio.
Although we determine the amount of each element of the allowance separately,
the entire allowance for loan losses is available for the entire portfolio.
There have been no significant changes in the Company's methodology for
evaluating the allowance for loan losses from that discussed in the section
captioned "Critical Accounting Policies -- Loan Loss Allowance" in Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's Annual Report on Form 10-K.
Provisions for loan losses are charges to earnings to bring the total
allowance for loan losses to a level considered by management as adequate to
provide for estimated loan losses based on management's evaluation of the
collectibility of the loan portfolio. While management believes that, based on
information currently available, the Company's allowance for loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurances can be given that the Company's level of allowance for loan losses
will be sufficient to cover actual loan losses incurred by the Company or that
future adjustments to the allowance for loan losses will not be necessary if
economic and other conditions differ substantially from the economic and other
conditions used by management to determine the current level of the allowance
for loan losses. In addition, regulators as an integral part of its examination
process, periodically review the Company's allowance for loan losses and may
require the Company to provide additions to the allowance based upon judgments
different from management.
The following table indicates our nonperforming assets and the
relationship between the allowance for loan losses, total loans outstanding and
nonperforming loans at the dates indicated.
June 30, 2009 March 31, 2009
------------- --------------
(Dollars in thousands)
Allowance for loan losses $ 6,452 $ 6,458
Gross loans outstanding 496,366 420,052
Nonaccrual loans:
Residential mortgage loans $ 3,163 $ 1,905
Commercial mortgage loans 4,812 3,918
Construction mortgage loans 440 439
Commercial business loans 5,647 5,636
Consumer loans 69 28
-------- --------
Total nonaccrual loans 14,131 11,926
Other real estate owned 1,087 141
-------- --------
Total nonperforming assets $ 15,218 $ 12,067
======== ========
Allowance/Loans outstanding 1.30% 1.54%
Allowance/Nonperforming loans 45.66% 54.15%
Allowance/Nonperforming assets 42.40% 53.52%
The $15.2 million balance of nonaccrual loans at June 30, 2009 was
comprised of fifty six loans - nineteen residential real estate loans, sixteen
commercial loans, eleven commercial real estate loans, eight consumer loans and
two construction loans. The thirty seven nonaccrual loans at March 31, 2009 were
comprised of fourteen residential real estate loans, ten commercial loans, eight
15
commercial real estate loans, three consumer loans and two construction loans.
Other real estate owned at June 30, 2009 consists of two commercial real estate
loans and one residential loan, and one residential loan at March 31, 2009. The
Company acquired $3.4 million of nonaccrual loans and $505,000 of other real
estate owned in the Merger.
Liabilities
Total liabilities were $608.2 million at June 30, 2009, an increase of
$100.5 million compared to $507.7 million at March 31, 2009. The increase in
total liabilities was caused primarily by the $77.2 million of liabilities
assumed in conjunction with the Merger. Excluding the Apple Valley transaction,
there was an $18.4 million increase in total deposits and a $5.1 million
increase in securities sold under agreements to repurchase. At June 30, 2009,
deposits are comprised of savings accounts totaling $70.4 million, money market
deposit accounts totaling $81.2 million, demand and NOW accounts totaling $66.2
million, and certificates of deposits totaling $296.4 million. Since March 31,
2005, the Company has experienced a shift in deposits as customers with
generally lower-yielding savings accounts invest those funds in generally
higher-yielding money market accounts and certificates of deposit.
Stockholders' Equity
Total stockholders' equity increased $2.8 million to $66.7 million at June
30, 2009 from $64.0 million at March 31, 2009. The increase was primarily caused
by the $3.1 million of stock issued in the Merger, partially offset by the net
loss of $181,000, a $123,000 increase in the accumulated other comprehensive
loss, and $61,000 of treasury stock purchases.
Comparison of Operating Results for the Three Months Ended June 30, 2009 and
2008
General
The Company's results of operations depend primarily on net interest and
dividend income, which is the difference between the interest and dividend
income earned on its interest-earning assets, such as loans and securities, and
the interest expense on its interest-bearing liabilities, such as deposits and
borrowings. The Company also generates noninterest income, primarily from fees
and service charges. Gains on sales of securities and increases in cash
surrender value of life insurance policies are additional sources of noninterest
income. The Company's noninterest expense primarily consists of employee
compensation and benefits, occupancy and equipment expense, advertising and
promotion, data processing, professional fees and other operating expense.
Net Income
For the three months ended June 30, 2009, the Company reported a net loss
of $181,000, compared to net income of $452,000 for the year ago period. Basic
and diluted loss per share for the quarter ended June 30, 2009 were $0.03 each
compared to basic and diluted income per share of $0.08 each for the quarter
ended June 30, 2008. During the three months ended June 30, 2009, the Company
recorded a $340,000 FDIC special assessment, $220,000 of merger related expenses
and a $175,000 gain on sale of the Riverside Investments, the Bank's investment
management division.
16
Net Interest and Dividend Income
Net interest and dividend income for the three months ended June 30, 2009
and 2008 totaled $3.9 million. The increase for the quarter was primarily due to
an increase in average interest-earning assets of $77.3 million and a 34 basis
point decrease in the rate paid on average interest-bearing liabilities,
partially offset by an $85.0 million increase in average interest-bearing
liabilities and a 71 basis point decrease in the yield on average
interest-earning assets. The changes to the yield on average interest-earning
assets and the rate paid on average interest-bearing liabilities caused the
Company's interest rate spread to decrease from 2.91% for the quarter ended June
30, 2008 to 2.53% for the quarter ended June 30, 2009. The Company's net
interest margin for the quarter ended June 30, 2009 was 2.84% compared to 3.36%
in the year earlier period.
Interest and dividend income amounted to $7.4 million and $7.2 million for
the three months ended June 30, 2009 and 2008, respectively. Average
interest-earning assets were $554.0 million for the quarter ended June 30, 2009,
an increase of $77.2 million, or 16.2%, compared to $476.8 million for the
quarter ended June 30, 2008. The increase in average interest-earning assets was
caused primarily by a $57.6 million increase in average net loans. The yield
earned on average interest-earning assets decreased to 5.34% for the three
months ended June 30, 2009 from 6.05% for the three months ended June 30, 2008,
due primarily to the lower yields on loans, federal funds sold and FHLB stock.
The largest yield declines were comprised of federal funds sold and other
interest income, which decreased to 0.34% for the quarter ended June 30, 2009
compared to 2.05% in the year ago period. The negative effect of these decreases
on the Company's net interest margin and spread was increased because the
average balance for federal funds sold and other interest income increased to
$53.8 million for the quarter ended June 30, 2009 compared to $26.9 million for
the year ago quarter. On December 8, 2008, the Federal Home Loan Bank of Boston
announced a moratorium on dividends and the repurchase of excess stock held by
its members. The moratorium will remain in effect indefinitely.
Interest expense for the quarter was $3.5 million, an increase of
$185,000, or 5.6%, from the amount reported in the same quarter last year.
Average interest-bearing liabilities grew $85.0 million during the quarter ended
June 30, 2009 from $408.7 million to $493.7 million primarily due to a $73.6
million increase in average total deposits and a $6.4 million increase in
average repurchase agreements. The average rate paid on interest-bearing
liabilities decreased to 2.81% for the quarter ended June 30, 2009 from 3.15%
for the year ago period, due primarily to the decrease in rates paid on
certificates of deposit, money market deposit accounts and securities sold under
agreements to repurchase. The average rate paid on certificates of deposit
decreased from 4.34% for the quarter ended June 30, 2008 to 3.35% for the
current year quarter as market rates have decreased for this type of deposit.
Provision for Loan Losses
The provisions for loan losses for the quarters ended June 30, 2009 and
2008 were $680,000 and $148,000, respectively. The additions to the allowance
for loan losses reflected continued growth in the loan portfolio and the
increase in nonaccrual loans.
Noninterest Income
For the quarters ended June 30, 2009 and 2008, noninterest income was
$687,000 and $467,000, respectively. Affecting noninterest income for the three
months ended June 30, 2009 was a $175,000 gain on sale of Riverside Investments.
Excluding the $175,000 gain, noninterest
17
income increased $45,000, or 9.6%. The adjusted increase was caused by a $33,000
increase in other income and a $51,000 increase in gains on securities,
partially offset by a $15,000 decrease in service charges on deposit accounts
and a $17,000 impairment loss on securities.
Noninterest Expense
Noninterest expense for the quarter ended June 30, 2009 was $4.3 million,
an increase of $749,000, or 21.1%, from $3.5 million in the quarter ended June
30, 2008. The increase was caused by a $502,000 increase in FDIC insurance
assessment, a $150,000 increase in other expenses and a $41,000 increase in data
processing expense. The increase in other expenses was caused primarily by
$220,000 of merger related expenses.
Provision for Income Taxes
The company recorded an income tax benefit of $222,000 in the quarter
ended June 30, 2009 compared to income tax expense of $200,000 in the year ago
quarter.
Liquidity and Capital Resources
The term liquidity refers to the ability of the Company to meet current
and future short-term financial obligations. The Company further defines
liquidity as the ability to generate adequate amounts of cash to fund loan
originations, deposit withdrawals and operating expenses. Liquidity management
is both a daily and long-term function of business management. The Bank's
primary sources of liquidity are deposits, scheduled amortization and
prepayments of loan principal and mortgage-related securities, funds provided by
operations and borrowings. The Bank can borrow funds from the Federal Home Loan
Bank based on eligible collateral of loans and securities. The Bank had Federal
Home Loan Bank borrowings as of June 30, 2009 of $66.0 million, with unused
borrowing capacity of $9.2 million.
The Company's primary investing activities are the origination of loans
and the purchase of mortgage and investment securities. During the three months
ended June 30, 2009 the Company had principal paydowns, net of originated loans,
of approximately $878,000 and during the three months ended June 30, 2008 the
Company originated loans, net of principal paydowns, of approximately $11.9
million. Purchases of investment securities totaled $7.5 million and $19.5
million for the three months ended June 30, 2009 and 2008, respectively.
Loan repayment and maturing investment securities are a relatively
predictable source of funds. However, deposit flows, calls of investment
securities and prepayments of loans and mortgage-backed securities are strongly
influenced by interest rates, general and local economic conditions and
competition in the marketplace. These factors reduce the predictability of the
timing of these sources of funds. Total deposits were $514.2 million at June 30,
2009, a $94.8 million increase from the $419.4 million balance at March 31,
2009.
At June 30, 2009, the Company had outstanding commitments to originate
$13.2 million of loans, and available home equity and unadvanced lines of credit
and construction loans of approximately $50.3 million. In addition, the Company
had $1.8 million of commercial letters of credit. Management of the Bank
anticipates that the Bank will have sufficient funds to meet its current loan
commitments. Retail certificates of deposit scheduled to mature in one year or
less totaled $177.8 million, or 34.6% of total deposits at June 30, 2009. The
Company relies on competitive rates, customer service and long-standing
relationships with customers to retain
18
deposits. Based on the Company's experience with deposit retention and current
retention strategies, management believes that, although it is not possible to
predict future terms and conditions upon renewal, a significant portion of such
deposits will remain with the Company.
Management believes, as of June 30, 2009, that the Company and the Bank
meet all capital adequacy requirements to which they are subject.
(dollars in thousands)
New England Bancshares, Inc.
----------------------------
Required Amount Ratio
-------- ------- ------
Tier 1 Capital 4% $52,724 8.97%
Total Risk-Based Capital 8% $58,493 12.69%
Tier 1 Risk-Based Capital 4% $52,724 11.44%
The Bank's actual capital amounts and ratios as of June 30, 2009 are
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)
Total Capital (to Risk Weighted Assets) $52,348 11.40% $36,744 > 8.0% $45,930 > 10.0%
Tier 1 Capital (to Risk Weighted Assets) 46,598 10.15 18,372 > 4.0 27,558 > 6.0
Tier 1 Capital (to Average Assets) 46,598 7.95 24,189 > 4.0 30,236 > 5.0
Management is not aware of any known trends, events or uncertainties that
will have or are reasonably likely to have a material effect on the Company's or
the Bank's liquidity, capital or operations, nor is management aware of any
current recommendations by regulatory authorities which, if implemented, would
have a material effect on the Company's or New England Bank's liquidity, capital
or operations.
Off-Balance Sheet Arrangements
In addition to the normal course of operations, the Bank engages in a
variety of financial transactions that, in accordance with generally accepted
accounting principals, are not recorded in its financial statements. These
transactions involve, to varying degrees, elements of credit, interest rate and
liquidity risk. Such transactions are used primarily to manage customers'
requests for funding and take the form of loan commitments, lines of credit and
letters of credit.
For the three months ended June 30, 2009, the Bank did not engage in
off-balance sheet transactions reasonably likely to have a material effect on
our financial condition, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk Management
The Bank manages the interest rate sensitivity of its interest-bearing
liabilities and interest-earning assets in an effort to minimize the adverse
effects of changes in the interest rate
19
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 its earnings, the Bank has
sought to improve the match between asset and liability maturities and rates,
while maintaining an acceptable interest rate spread. Also, the Bank attempts to
manage its interest rate risk through: its 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 Bank has
commenced a program of selling long-term, fixed-rate one- to four-family
residential loans in the secondary market. The Bank currently does not
participate in hedging programs, interest rate swaps or other activities
involving the use of off-balance sheet derivative financial instruments.
The Bank has a Asset/Liability Committees, which includes members of both
the board of directors and management, to communicate, coordinate and control
all aspects involving asset/liability management. The committees establishes and
monitors the volume, maturities, pricing and mix of assets and funding sources
with the objective of managing assets and funding sources to provide results
that are consistent with liquidity, growth, risk limits and profitability goals.
Net Interest Income Simulation Analysis
The Bank analyzes its 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 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
Committee. 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
Committee 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 Bank's interest rate
risk exposure at a particular point in time. The Bank continually reviews the
potential effect changes in interest rates could have on the repayment of rate
sensitive assets and funding requirements of rate sensitive liabilities.
Item 4T. Controls and Procedures.
The Company's management, including the Company's principal executive
officer and principal financial officer, have evaluated the effectiveness of the
Company's "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) promulgated under the Securities
20
Exchange Act of 1934, as amended, (the "Exchange Act"). Based upon their
evaluation, the principal executive officer and principal financial officer
concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were effective for the purpose of
ensuring that the information required to be disclosed in the reports that the
Company files or submits under the Exchange Act with the Securities and Exchange
Commission (the "SEC") (1) is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and (2) is
accumulated and communicated to the Company's management, including its
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
There has been no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter that has
materially affected or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
Item 1A. Risk Factors.
The following risk factors represent material updates and additions to the
risk factors previously disclosed in the Company's Annual Report on Form 10-K
for the year ended March 31, 2009 ("Form 10-K"). The risk factor below should be
read in conjunction with the risk factors and other information disclosed in our
Form 10-K. The risks described below and in our Form 10-K are not the only risks
facing the Company. Additional risks not presently known to the Company, or that
we currently deem immaterial, may also adversely affect the Company's business,
financial condition or results of operations.
Any future FDIC special assessments or increases in insurance premiums will
adversely impact the Company's earnings.
On May 22, 2009, the FDIC adopted a final rule levying a five basis point
special assessment on each insured depository institution's assets minus Tier 1
capital as of June 30, 2009. The special assessment is payable on September 30,
2009. The Company recorded an expense of $311,000 during the quarter ended June
30, 2009, to reflect the special assessment. The final rule permits the FDIC's
Board of Directors to levy up to two additional special assessments of up to
five basis points each during 2009 if the FDIC estimates that the Deposit
Insurance Fund reserve ratio will fall to a level that the FDIC's Board of
Directors believes would adversely affect public confidence or to a level that
will be close to or below zero. The FDIC has publicly announced that it is
probable that it will levy an additional special assessment of up to five basis
points later in 2009, the amount and timing of which are currently uncertain.
Any further special assessments that the FDIC levies will be recorded as an
expense during the appropriate period. In addition, the FDIC materially
increased the general assessment rate and, therefore, the Company's FDIC general
insurance premium expense will increase substantially compared to prior periods.
21
The current economic downturn coupled with turmoil and uncertainty in the
financial markets may adversely impact our earnings and our ability to
successfully execute our business plan.
The current economic downturn may adversely impact the financial condition
of the households and businesses comprising our loan customers. Such a
deteriorating financial condition could arise from loss of employment or
business revenue exacerbated by a reduction in the value of real estate
collateralizing our customers' loans. As a consequence, we may experience an
increase in nonperforming loans which will negatively impact earnings through
reduced collections of interest income coupled with possible increases in the
provision for loan losses and associated charge offs. Additionally, our ability
to originate new loans in accordance with our business plan goals and objectives
may be diminished as a result of these same factors.
Moreover, the general level of uncertainty in the marketplace -
particularly concerning counterparty risk - has greatly diminished the sources
of funding readily available to many large financial institutions. Consequently,
such institutions are placing greater emphasis on their retail deposit channel
to attract funding thereby placing upward pressure on retail deposit rates in
the marketplace. As a result, despite the recent reduction in overall market
interest rates, our cost of deposits may remain stable or increase while our
yield on earning assets is reduced. This condition would reduce our net interest
spread and margin and our earnings in future periods.
Our inability to successfully integrate the operations of Apple Valley
Bank & Trust Company could hurt our earnings.
Our acquisition of Apple Valley Bank & Trust Company ("Apple Valley Bank")
involves the integration of banks that have previously operated independently.
The difficulties of combining the operations of the banks include:
o integrating personnel with diverse business backgrounds;
o combining different corporate cultures; and
o retaining key employees.
The process of integrating operations could cause an interruption of, or
loss of momentum in, the activities of the business and the loss of key
personnel. The integration of the banks will require the experience and
expertise of certain key employees of Apple Valley Bank who are expected to be
retained by us. We may not be successful in retaining these employees for the
time period necessary to successfully integrate Apple Valley Bank's operations
with those of ours. The diversion of management's attention and any delays or
difficulties encountered in connection with the merger and the integration of
the banks' operations could have an adverse effect on our business and results
of operation following the merger.
22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The Company repurchased 10,000 shares of its common stock in the quarter
ended June 30, 2009 as follows:
Maximum
Total Number of
Number of Shares that
Shares May Yet Be
Purchased as Purchased
Average Part of Publicly Under the
For the three months ended Total shares price paid Announced Plans Plans or
June 30, 2009 repurchased per share or Programs Programs
- ------------------------------------------------------------------------------------------------------------------
April -- $ -- -- 70,524
May 10,000 6.05 10,000 60,524
June -- -- -- 60,524
------ ----- ------ ------
Total 10,000 $6.05 10,000 60,524
====== ======= ====== ======
(1) On May 12, 2008, the Board of Directors approved a stock repurchase program,
which authorized the repurchase of up to 304,924 shares of the Company's
outstanding shares of common stock. Stock repurchases will be made from time to
time and may be effected through open market purchases, block trades and in
privately negotiated transactions.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
23
Item 6. Exhibits.
3.1 Articles of Incorporation of New England Bancshares, Inc. (1)
3.2 Bylaws of New England Bancshares, Inc. ((2))
4.1 Specimen stock certificate of New England Bancshares, Inc.((2))
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
_____________________________
(1) Incorporated by reference into this document from the
Registration Statement on Form SB-2 (No. 333-128277) as filed
on September 13, 2005.
((2)) Incorporated by reference into this document from Exhibit 3.1
to the Form 8-K as filed with the Securities and Exchange
Commission on October 11, 2007.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NEW ENGLAND BANCSHARES, INC.
Dated: August 13, 2009 By:/s/ Scott D. Nogles
- ---------------------- ------------------------------
Scott D. Nogles
Chief Financial Officer
(principal financial officer)
Dated: August 13, 2009 By:/s/ David J. O'Connor
- ---------------------- ------------------------------
David J. O'Connor
Chief Executive Officer
24