UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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.
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(Exact name of small business issuer as specified in its charter)
Maryland 04-3693643
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
855 Enfield Street, Enfield, Connecticut 06082
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(Address of principal executive offices) (Zip Code)
(860) 253-5200
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(Issuer's telephone number)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant 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 6,390,843 shares of common stock, par value $0.01 per share,
outstanding as of November 10, 2009.
NEW ENGLAND BANCSHARES, INC.
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2009 (Unaudited)
and March 31, 2009...................................................... 1
Condensed Consolidated Statements of Income for the
Three and Six Months Ended September 30, 2009 and 2008 (Unaudited)...... 2
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended September 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.............. 21
Item 4T. Controls and Procedures................................................. 22
PART II: OTHER INFORMATION
Item 1.. Legal Proceedings....................................................... 23
Item 1A. Risk Factors............................................................ 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............. 25
Item 3. Defaults Upon Senior Securities......................................... 25
Item 4. Submission of Matters to a Vote of Security Holders..................... 25
Item 5. Other Information....................................................... 25
Item 6. Exhibits................................................................ 26
SIGNATURES ........................................................................ 26
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
----------------------
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(Dollars in thousands)
September 30, March 31,
2009 2009
----------- -----------
ASSETS (Unaudited)
Cash and due from banks ............................................... $ 7,848 $ 7,872
Interest-bearing demand deposits with other banks ..................... 56,700 33,554
Money market mutual funds ............................................. 36 7
--------- -----------
Total cash and cash equivalents .................................. 64,584 41,433
Interest-bearing time deposits with other banks ....................... 1,599 99
Investments in available-for-sale securities, at fair value ........... 64,377 71,821
Federal Home Loan Bank stock, at cost ................................. 4,396 3,896
Loans, net of allowance for loan losses of $4,145 as of
September 30, 2009 and $6,458 as of March 31, 2009 ....... 490,141 413,566
Premises and equipment, net ........................................... 7,586 5,990
Other real estate owned ............................................... 922 141
Accrued interest receivable ........................................... 2,570 2,321
Deferred income taxes, net ............................................ 5,026 3,769
Cash surrender value of life insurance ................................ 9,394 9,211
Identifiable intangible assets ........................................ 1,927 2,165
Goodwill .............................................................. 16,629 14,701
Other assets .......................................................... 3,091 2,551
--------- -----------
Total assets ..................................................... $ 672,242 $ 571,664
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing .............................................. $ 48,335 $ 37,483
Interest-bearing ................................................. 470,572 381,953
--------- -----------
Total deposits ................................................ 518,907 419,436
Advanced payments by borrowers for taxes and insurance ................ 998 953
Federal Home Loan Bank advances ....................................... 61,226 66,833
Subordinated debentures ............................................... 3,906 3,901
Securities sold under agreements to repurchase ........................ 15,270 12,069
Other liabilities ..................................................... 4,142 4,518
--------- -----------
Total liabilities ................................................ 604,449 507,710
--------- -----------
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 September 30, 2009
and 6,420,891 shares issued at March 31, 2009 ............... 69 64
Paid-in capital ................................................... 59,790 56,551
Retained earnings ................................................... 16,215 16,329
Unearned ESOP shares, 249,291 shares at September 30, 2009 and
March 31, 2009 ........................................... (2,190) (2,190)
Treasury stock, 546,931 shares at September 30, 2009 and 536,931
shares at March 31, 2009 ................................. (5,803) (5,742)
Unearned shares, stock-based incentive plans, 57,259 shares at
September 30, 2009 and March 31, 2009 .................... (591) (659)
Accumulated other comprehensive income (loss) ....................... 303 (399)
--------- -----------
Total stockholders' equity ....................................... 67,793 63,954
--------- -----------
Total liabilities and stockholders' equity ....................... $ 672,242 $ 571,664
========= ===========
1
The accompanying notes are an integral part of these condensed consolidated
financial statements.
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
2009 2008 2009 2008
------- ------- -------- -----------
Interest and dividend income:
Interest on loans .................................... $ 7,365 $ 6,130 $ 13,873 $ 12,232
Interest and dividends on securities:
Taxable ........................................... 641 819 1,313 1,562
Tax-exempt 143 201 299 370
Interest on federal funds sold, interest-bearing
deposits and dividends on money market mutual funds
and FHLB stock .................................... 155 124 200 299
------- ------- -------- -----------
Total interest and dividend income ................ 8,304 7,274 15,685 14,463
------- ------- -------- -----------
Interest expense:
Interest on deposits ................................. 2,835 2,543 5,527 5,067
Interest on advanced payments by borrowers for
taxes and insurance ............................ 3 3 7 7
Interest on Federal Home Loan Bank advances .......... 681 669 1,370 1,348
Interest on subordinated debentures .................. 68 68 137 136
Interest on securities sold under agreements to
repurchase ......................................... 52 36 96 73
------- ------- -------- -----------
Total interest expense ............................ 3,639 3,319 7,137 6,631
------- ------- -------- -----------
Net interest and dividend income .................. 4,665 3,955 8,548 7,832
Provision for loan losses .................................. 704 159 1,384 307
------- ------- -------- -----------
Net interest and dividend income after provision
for loan losses ................................. 3,961 3,796 7,164 7,525
------- ------- -------- -----------
Noninterest income (charge):
Service charges on deposit accounts .................. 345 276 599 545
Gain on securities, net .............................. 40 4 99 12
Gain on sale of loans ................................ 3 18 8 30
Increase in cash surrender value of life insurance
policies ........................................... 99 91 183 175
Impairment loss on securities (includes total losses
of $222, net of $170 recognized in other
comprehensive loss, pretax) ....................... (24) (2,473) (41) (2,473)
Other income ......................................... 148 90 449 184
------- ------- -------- -----------
Total noninterest income (charge) ................. 611 (1,994) 1,297 (1,527)
------- ------- -------- -----------
Noninterest expense:
Salaries and employee benefits ....................... 1,927 1,925 3,785 3,840
Occupancy and equipment expense ...................... 836 742 1,554 1,454
Advertising and promotion ............................ 28 81 66 174
Professional fees .................................... 212 123 510 247
Data processing expense .............................. 183 128 333 237
FDIC insurance ....................................... 205 51 745 89
Stationery and supplies .............................. 98 44 133 80
Amortization of identifiable intangible assets ....... 115 126 238 260
Other expense ........................................ 583 398 1,116 781
Total noninterest expense ......................... 4,187 3,618 8,480 7,162
------- ------- -------- -----------
Income (loss) before income taxes ................. 385 (1,816) (19) (1,164)
------- ------- -------- -----------
Income tax expense (benefit) ............................... 84 178 (139) 378
------- ------- -------- -----------
Net income (loss) ................................. $ 301 $(1,994) $ 120 $ (1,542)
======= ======= ======== ===========
Earnings (loss) per share:
Basic .......................................... $ 0.05 $ (0.35) $ 0.02 $ (0.27)
Diluted ........................................ 0.05 (0.35) 0.02 (0.27)
Dividends per share ..................................... 0.02 0.04 0.04 0.07
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended
September 30,
2009 2008
-------- ---------
Cash flows from operating activities:
Net income (loss) ......................................... $ 120 $ (1,542)
Adjustments to reconcile net income (loss) to net cash
provided by
operating activities:
Net amortization of fair value adjustments .......... 26 7
Accretion of securities, net ........................ (55) (30)
Gain on securities, net ............................. (99) (12)
Writedown of available-for-sale securities .......... 41 2,473
Provision for loan losses ........................... 1,384 307
Gain on sale of loans, net .......................... (8) (30)
Change in deferred loan origination costs, net.. .... (61) (104)
Depreciation and amortization ....................... 464 448
Increase in accrued interest receivable ............. (10) (137)
Deferred income tax expense (benefit) ............... 269 (369)
Increase in cash surrender value of life insurance
policies ........................................... (183) (175)
Increase in prepaid expenses and other assets ....... (468) (309)
Amortization of identifiable intangible assets.. .... 238 260
(Decrease) increase in accrued expenses and other
liabilities ........................................ (64) 349
Compensation cost for stock option plan ............. 63 63
Compensation cost for stock-based incentive plan .... 68 69
------- --------
Net cash provided by operating activities ................. 1,725 1,268
------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities .......... (19,303) (22,395)
Proceeds from sales of available-for-sale
securities ......................................... 13,199 916
Proceeds from maturities of available-for-sale
securities Purchases of Federal Home Loan Bank
stock .............................................. (35) (117)
Purchases of interest-bearing time deposits with .... (1,500) --
other banks ........................................ 17,094 5,860
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 .......................... -- 594
Proceeds from sale of other real estate owned ....... 402 --
Loan originations and principal collections, net .... (1,344) (21,613)
Purchases of loans .................................. (17,256) --
Loans sold .......................................... -- 4,105
Investments in life insurance policies .............. -- (5)
Capital expenditures - premises and equipment ....... (174) (135)
------- --------
Net cash provided by (used in) investing activities . 1,372 (32,790)
------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
(continued)
Six Months Ended
September 30,
2009 2008
-------- ------
Cash flows from financing activities:
Net increase in demand, NOW, MMDA and savings
accounts ........................................... 23,693 2,470
Net (decrease) increase in time deposits ............ (602) 21,805
Net decrease in advanced payments by borrowers for
taxes and insurance ................................ (335) (109)
Proceeds from Federal Home Loan Bank long-term
advances ........................................... -- 4,000
Principal payments on Federal Home Loan Bank
long-term advances ................................. (5,608) (2,279)
Net increase in securities sold under agreement to
repurchase ......................................... 3,201 1,846
Purchase of treasury stock .......................... (61) (1,495)
Exercise of stock options ........................... -- 140
Payments of cash dividends on common stock .......... (234) (422)
-------- --------
Net cash provided by financing activities ....................... 20,054 25,956
-------- --------
Net increase (decrease) in cash and cash equivalents ............ 23,151 (5,566)
Cash and cash equivalents at beginning of period ................ 41,433 36,239
-------- --------
Cash and cash equivalents at end of period ...................... $ 64,584 $ 30,673
======== ========
Supplemental disclosures:
Interest paid ....................................... $ 7,081 $ 6,650
Income taxes (received) paid ........................ (109) 739
Decrease in due to broker ........................... 715 651
Decrease in due from broker ......................... -- 709
Loan transferred to other real estate owned ......... 923 --
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 ............................. 260 --
Accrued interest receivable ......................... 239 --
Deferred income taxes, net .......................... 1,968 --
Other assets ........................................ 77 --
-------- --------
Total assets acquired ......................................... -- 81,347
-------- --------
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 ............................................. 4,184 --
Acquisition costs ............................................... 6,112 --
-------- --------
Goodwill ........................................................ $ 1,928 $ --
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 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 September 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 presented
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 the Company's Form 10-K for the year ended
March 31, 2009.
The condensed consolidated balance sheet as of March 31, 2009 was derived
from the Company's audited financial statements, 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 for the three
and six months ended September 30, 2008 as the Company reported net losses.
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 Six Months Ended
September 30, September 30,
----------------------- -----------------------
(In thousands, except per share data) 2009 2008 2009 2008
----- --------- ------- --------
Net income (loss) $ 301 $ (1,994) 120 $(1,542)
Weighted average common shares
outstanding for computation of basic
EPS
6,087 5,644 5,893 5,676
Effect of dilutive stock options and
stock awards
46 -- 52 --
------- --------- ------- -------
Weighted average common shares for
computation of diluted EPS 6,133 5,644 5,945 5,676
------- --------- ------- -------
Earnings (loss) per share:
Basic $ 0.05 $ (0.35) $ 0.02 $ (0.27)
Diluted $ 0.05 $ (0.35) $ 0.02 $ (0.27)
- ------------------------------------------------------------------------------------------
NOTE 4 - Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board ("FASB") issued an
update to Accounting Standard Codification 105-10, "Generally Accepted
Accounting Principles." This standard establishes the FASB Accounting Standard
Codification ("Codification" or "ASC") as the source of authoritative U.S. GAAP
recognized by the FASB for nongovernmental entities. The Codification is
effective for interim and annual periods ending after September 15, 2009. The
Codification is a reorganization of existing U.S. GAAP and does not change
existing U.S. GAAP. The Company adopted this standard during the third quarter
of 2009. The adoption had no impact on the Company's financial position or
results of operations.
In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of
Financial Assets", and SFAS No. 167, "Amendments to FASB Interpretation No.
46(R)." These standards are effective for the first interim reporting period of
2010. SFAS No. 166 amends the guidance in ASC 860 to eliminate the concept of a
qualifying special-purpose entity ("QSPE") and changes some of the requirements
for derecognizing financial assets. SFAS No. 167 amends the consolidation
guidance in ASC 810-10. Specifically, the amendments will (a) eliminate the
exemption for QSPEs from the new guidance, (b) shift the determination of which
enterprise should consolidate a variable interest entity ("VIE") to a current
control approach, such that an entity that has both the power to make decisions
and right to receive benefits or absorb losses that could potentially be
significant, will consolidate a VIE, and (c) change when it is necessary to
reassess who should consolidate a VIE. The Company is evaluating the impact that
these standards will have on its financial statements.
In August 2009, the FASB issued Accounting Standards Update ("ASU")
2009-05, "Measuring Liabilities at Fair Value," which updates ASC 820-10, "Fair
Value Measurements and Disclosures." The updated guidance clarifies that the
fair value of a liability can be measured in relation to the quoted price of the
liability when it trades as an asset in an active market, without adjusting the
price for restrictions that prevent the sale of the liability. This guidance is
effective beginning April 1, 2009. The Company does not expect that the guidance
will change its valuation techniques for measuring liabilities at fair value.
In May 2009, the FASB updated ASC 855, "Subsequent Events." ASC 855
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. The Company adopted this guidance during the second
quarter of 2009. In accordance with the update, the Company
7
evaluates subsequent events through the date its financial statements are
issued. The adoption of this guidance did not have an impact on the Company's
financial position or results of operations.
In April 2009, the FASB updated ASC 320-10, "Investments - Debt and Equity
Securities." The guidance amends the other-than-temporary impairment ("OTTI")
guidance for debt securities. If the fair value of a debt security is less than
its amortized cost basis at the measurement date, the updated guidance requires
the Company to determine whether it has the intent to sell the debt security or
whether it is more likely than not it will be required to sell the debt security
before the recovery of its amortized cost basis. If either condition is met, an
entity must recognize full impairment. For all other debt securities that are
considered other-than-temporarily impaired and do not meet either condition, the
guidance requires that the credit loss portion of impairment be recognized in
earnings and the temporary impairment related to all other factors be recorded
in other comprehensive income. In addition, the guidance requires additional
disclosures regarding impairments on debt and equity securities. The Company
adopted this guidance effective April 1, 2009. The adoption of this guidance did
not have an impact on the Company's financial position or results of operations.
In April 2009, the FASB updated ASC 820-10, "Fair Value Measurements and
Disclosures," to provide guidance on 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. This issuance provides guidance
on estimating fair value when there has been a significant decrease in the
volume and level of activity for the asset or liability and for identifying
transactions that may not be orderly. The guidance requires entities to disclose
the inputs and valuation techniques used to measure fair value and to discuss
changes in valuation techniques and related inputs, if any, in both interim and
annual periods. The Company adopted this guidance during 2008 and the adoption
did not have a material impact on the Company's financial position and results
of operations. The enhanced disclosures related to this guidance are included in
Note 8, "Fair Value Measurements," to the consolidated Financial Statements.
In April 2009, the FASB updated ASC 825-10 "Financial Instruments." This
update amends the fair value disclosure guidance in ASC 825-10-50 and requires
an entity to disclose the fair value of its financial instruments in interim
reporting periods as well as in annual financial statements. The methods and
significant assumptions used to estimate the fair value of financial instruments
and any changes in methods and assumptions used during the reporting period are
also required to be disclosed both on an interim and annual basis. The Company
adopted this guidance during 2009. The required disclosures have been included
in Note 8, "Fair Value Measurements," to the consolidated Financial Statements.
In June 2008, the FASB updated ASC 260-10, "Earnings Per Share." The
guidance concludes that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents are participating
securities that should be included in the earnings allocation in computing
earnings per share under the two-class method. The guidance is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those years. All prior period earnings per share data
presented must be adjusted retrospectively. The adoption of this update,
effective April 1, 2009, did not have a material impact on the Company's
financial position, results of operations, and earnings per share.
In March 2008, the FASB updated ASC 815, "Derivatives and Hedging." This
guidance 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
8
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 ASC 815 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. This
guidance encourages, but does not require, comparative disclosures for earlier
periods at initial adoption. The adoption of this guidance did not have a
material impact on its financial condition and results of operations.
In February 2008, the FASB updated ASC 860, "Transfers and Servicing."
This guidance clarifies 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 became effective April 1, 2009. The
adoption of this guidance did not have a material effect on the Company's
results of operations or financial position.
In December 2007, the FASB updated ASC 810-10, "Consolidation", which
provides new accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest should be reported as a component of equity in the
consolidated financial statements. This guidance also required expanded
disclosures that identify and distinguish between the interests of the parent's
owners and the interests of the noncontrolling owners of an entity. The adoption
of this guidance did not have a material impact on the Company's results of
operations or financial position.
In December 2007, the FASB updated ASC 805, "Business Combinations." The
updated guidance will significantly change the accounting for business
combinations. Under ASC 805, 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. ASC 805 applies prospectively to business combinations
for which the acquisition date is on or after April 1, 2009. The adoption of
this statement did not have a material impact on the Company's financial
condition and results of operations.
NOTE 5 - Stock-Based Incentive Plan
At September 30, 2009, the Company maintained a stock-based incentive plan
and an equity incentive plan. For the six months ended September 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 six months ended September 30, 2009 and 2008 for the
granting of stock options under the plans was $63,000 and $63,000, respectively.
During the six months ended September 30, 2009, the Company granted 5,000 stock
options.
The compensation cost that has been charged against income for the
granting of restricted stock awards under the plan for the six months ended
September 30, 2009 and 2008 was $68,000 and $69,000, respectively.
9
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 September 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 $ 932 $ 80 $5,663 $ 439 $ 6,595 $ 519
Debt securities issued by the U.S. Treasury
and other U.S. government corporations
and agencies 1,233 22 -- -- 1,233 22
Mortgage-backed securities 1,749 32 3,251 611 5,000 643
------- -------- ------ ------- -------- ------
Total temporarily impaired securities $ 3,914 $ 134 $8,914 $ 1,050 $12,828 $1,184
======= ======== ====== ======= ======== ======
Management has assessed the securities which are classified as
available-for-sale and in an unrealized loss position at September 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 ASC 320-10,
"Investments - Debt and Equity Securities." However, certain purchased
beneficial interests, including non-agency mortgage-backed securities and pooled
trust preferred securities are evaluated using ASC 325-40, "Beneficial Interests
in Securitized Financial Assets."
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, ASC 320-10 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.
10
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 six months ended
September 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 41
-----
Balance, September 30, 2009 $ 52
=====
For the six months ended September 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 ASC 320-10, 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 September 30, 2009:
Range
Weighted ---------------------------
Average Minimum Maximum
------- ------- -------
Prepayment rates 17.6% 7.4% 32.1%
Default rates 3.5 0.3 16.0
Loss severity 36.4 25.0 55.1
NOTE 7 - Goodwill
The change in the carrying amount of goodwill for the six months ended
September 30, 2009 was as follows:
Balance March 31, 2009 $14,701
Merger of Apple Valley Bank 1,928
---------
Balance September 30, 2009 $16,629
=======
The Company has provisionally recognized $1.9 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
11
goodwill value at September 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, and a fair value
determination of the two operating leases. During the quarter the Company
increased goodwill by $245,000 upon final completion of appraisal on a property
classified as other real estate owned.
NOTE 8 - Fair Value Measurement Disclosures
The following table presents the fair value disclosures of assets and
liabilities in accordance with ASC 820-10 which became effective for the
Company's consolidated financial statements on April 1, 2008. The fair value
hierarchy established by this guidance is based on observable and unobservable
inputs participants use to price an asset or liability. ASC 820-10 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.
Assets measured at fair value on a recurring and non-recurring basis at
September 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 September 30, 2009 (Level 1) (Level 2) (Level 3)
- ----------- ------------------ --------- --------- ---------
(In Thousands)
Recurring:
Available-for-sale
securities $64,377 $ 3,374 $61,003 $ --
Impaired loans 11,845 -- 11,845 --
Impaired securities
included in other assets 822 -- 822 --
------- ------- ------- ----
Total assets $77,044 $ 3,374 $73,670 $ --
======= ======= ======= ====
12
The following are the carrying amounts and estimated fair values of the
Company's financial assets and liabilities:
September 30, 2009 March 31, 2009
-------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(In Thousands)
Financial assets:
Cash and cash equivalents $ 64,584 $ 64,584 $ 41,433 $ 41,433
Interest-bearing time deposits with other banks 1,599 1,599 99 99
Available-for-sale securities 64,377 64,377 71,821 71,821
Federal Home Loan Bank stock 4,396 4,396 3,896 3,896
Loans, net 490,141 492,925 413,566 415,595
Other investment securities 670 670 670 670
Accrued interest receivable 2,570 2,570 2,321 2,321
Financial liabilities:
Deposits 518,907 524,098 419,436 421,925
Advanced payments by borrowers for taxes and insurance 998 998 953 953
FHLB advances 61,226 64,303 66,833 69,523
Securities sold under agreements to repurchase 15,270 15,295 12,069 12,071
Subordinated debentures 3,906 1,465 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 and six months ended September 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.
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
13
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 September 30, 2009 and March 31, 2009
Assets
Total assets were $672.2 million at September 30, 2009, an increase of
$100.5 million compared to $571.7 million at March 31, 2009. The increase in
total assets was primarily due to $81.3 million of assets acquired in the Apple
Valley Bank & Trust merger (the "Merger"). Excluding the Apple Valley
transaction, there was a $9.9 million increase in cash and cash equivalents and
a $16.3 million increase in net loans, partially offset by a $10.4 million
decrease in investments available-for-sale. At September 30, 2009, commercial
real estate and commercial loans accounted for 55.6% of the total loan
portfolio.
Allowance for Loan Losses
Management determines the adequacy of the allowance for loan losses on a
regular basis. The determination is based upon management's assessment of the
credit quality and composition of the loan portfolio, previous loss experience,
current economic conditions and their effect on borrowers and the market area in
general, and the performance of individual credits in relation to the contract
terms.
The Company's methodology for assessing the appropriateness of the
allowance for loan losses consists of specific allowances for identified problem
loans and a general valuation allowance on the remainder of the loan portfolio.
Although we determine the amount of each element of the allowance separately,
the entire allowance for loan losses is available for the entire portfolio.
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
14
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.
September 30, 2009 March 31, 2009
------------------ --------------
(Dollars in thousands)
Allowance for loan losses $ 4,145 $ 6,458
Gross loans outstanding 495,021 420,052
Nonaccrual loans:
Residential mortgage loans $ 4,119 $ 1,905
Commercial mortgage loans 4,403 3,918
Construction mortgage loans 450 439
Commercial business loans 3,135 5,636
Consumer loans 52 28
--------- --------
Total nonaccrual loans 12,159 11,926
Other real estate owned 922 141
--------- --------
Total nonperforming assets $ 13,081 $ 12,067
========= ========
Allowance/Loans outstanding 0.84% 1.54%
Allowance/Nonperforming loans 34.09% 54.15%
Allowance/Nonperforming assets 31.69% 53.52%
The $12.2 million balance of nonaccrual loans at September 30, 2009 was
comprised of sixty four loans - twenty three residential real estate loans,
twenty one commercial loans, eleven commercial real estate loans, seven 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 commercial real estate loans, three consumer loans and two
construction loans. Other real estate owned at September 30, 2009 consists of
two commercial real estate loans and one residential loan at March 31, 2009. The
Company acquired $3.4 million of nonaccrual loans and $260,000 of other real
estate owned in the Merger.
The allowance for loan losses as a percentage of gross loans outstanding
decreased from 1.54% at March 31, 2009 to 0.84% at September 30, 2009. The
decrease was caused primarily by the $3.7 million in charge-offs during the six
months ended September 30, 2009. In addition, during the six months ended
September 30, 2009 the Company acquired Apple Valley's $60.2 million in net
loans. In accordance with FASB Statement No. 141(R), the allowance for loan
losses of Apple Valley was not consolidated into New England Bank's allowance
for loan losses. Instead, individual loan book values were reduced by the
estimated credit loss associated with the allowance for loan losses. If the
$872,000 of credit losses on Apple Valley loans was consolidated into New
England Bank's allowance, the ratio of allowance for loan losses to gross loans
outstanding would have been 1.01% at September 30, 2009. During the period loans
written-off as uncollectible were $3.7 million, of which $3.0 million was
related to one borrower with collateral consisting of real estate, accounts
receivable, inventory and fixed assets.
15
Liabilities
Total liabilities were $604.4 million at September 30, 2009, an increase
of $96.7 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 a $23.1 million increase in total deposits and a $3.2 million increase
in securities sold under agreements to repurchase, partially offset by a $5.6
million decrease in Federal Home Loan Bank advances. At September 30, 2009,
deposits are comprised of savings accounts totaling $71.0 million, money market
deposit accounts totaling $90.8 million, demand and NOW accounts totaling $66.6
million, and certificates of deposits totaling $290.5 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 $3.8 million to $67.8 million at
September 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, the $702,000
increase in accumulated other comprehensive income and net income of $120,000,
partially offset by the $61,000 of treasury stock purchases.
Comparison of Operating Results for the Three Months Ended September 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 September 30, 2009, the Company reported net
income of $301,000, compared to a net loss of $2.0 million for the year ago
period. Basic and diluted income per share for the quarter ended September 30,
2009 were $0.05 each compared to basic and diluted loss per share of $0.35 each
for the quarter ended September 30, 2008. During the three months ended
September 30, 2008, the Company recorded a $2.5 million other than temporary
impairment charge on its auction rate security portfolio.
16
Net Interest and Dividend Income
Net interest and dividend income for the three months ended September 30,
2009 and 2008 totaled $4.7 million and $4.0 million, respectively. The increase
for the quarter was primarily due to an increase in average interest-earning
assets of $143.0 million and a 50 basis point decrease in the rate paid on
average interest-bearing liabilities, partially offset by a $141.7 million
increase in average interest-bearing liabilities and a 75 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 2.98% for
the quarter ended September 30, 2008 to 2.74% for the quarter ended September
30, 2009. The Company's net interest margin for the quarter ended September 30,
2009 was 3.00% compared to 3.38% in the year earlier period.
Interest and dividend income amounted to $8.3 million and $7.3 million for
the three months ended September 30, 2009 and 2008, respectively. Average
interest-earning assets were $626.8 million for the quarter ended September 30,
2009, an increase of $143.8 million, or 29.8%, compared to $483.0 million for
the quarter ended September 30, 2008. The increase in average interest-earning
assets was caused primarily by a $113.3 million increase in average net loans.
The yield earned on average interest-earning assets decreased to 5.30% for the
three months ended September 30, 2009 from 6.05% for the three months ended
September 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 0.95% for the quarter ended
September 30, 2009 compared to 1.99% 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 $64.6 million for the quarter ended September 30, 2009 compared to
$19.4 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 $3.6 million, an increase of
$320,000, or 9.6%, from the amount reported in the same quarter last year.
Average interest-bearing liabilities grew $141.7 million during the quarter
ended September 30, 2009 from $421.2 million to $562.9 million primarily due to
a $124.0 million increase in average total deposits and a $8.5 million increase
in average repurchase agreements. The average rate paid on interest-bearing
liabilities decreased to 2.57% for the quarter ended September 30, 2009 from
3.07% 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 3.71% for the quarter ended September 30, 2008 to 2.96% for the
current year quarter as market rates have decreased for this type of deposit.
Provision for Loan Losses
The provision for loan losses for the quarters ended September 30, 2009
and 2008 were $704,000 and $159,000, respectively. The additions to the
allowance for loan losses reflected continued growth in the loan portfolio,
increase in nonaccrual loans and higher charge-offs.
17
Noninterest Income (Charge)
For the quarter ended September 30, 2009 noninterest income was $611,000
compared to a noninterest charge of $2.0 million for the quarter ended September
30, 2008. Affecting noninterest income for the three months ended September 30,
2008 was a $2.5 million other than temporary impairment charge. The Company had
a $1.7 million charge on auction rate preferred securities issued by trusts with
assets consisting solely of Fannie Mae and Freddie Mac preferred stock, which
had a book value of $1.8 million at June 30, 2008. In addition, the Company
recorded an $810,000 charge related to three pass-through auction rate
securities issued by trusts with assets consisting solely of corporate preferred
stock, which had a book value at June 30, 2008 of $1.6 million. Service charges
on deposit accounts increased $69,000, gains on securities increased $36,000 and
other income increased $58,000.
Noninterest Expense
Noninterest expense for the quarter ended September 30, 2009 was $4.2
million, an increase of $569,000, or 15.7%, from $3.6 million in the quarter
ended September 30, 2008. The increase was caused by a $185,000 increase in
other expense, a $154,000 increase in FDIC insurance, a $94,000 increase in
occupancy and equipment expense, an $89,000 increase in professional fees and a
$55,000 increase in data processing fees.
Provision for Income Taxes
The company recorded income tax expense of $84,000 and $178,000 for the
quarters ended September 30, 2009 and 2008, respectively.
Comparison of Operating Results for the Six Months Ended September 30,
2009 and 2008
Net Income
For the six months ended September 30, 2009, the Company reported net
income of $120,000, compared to a net loss of $1.5 million for the year ago
period. Basic and diluted income per share for the six months ended September
30, 2009 were $0.02 each compared to basic and diluted loss per share of $0.27
each for the six months ended September 30, 2008. During the six months ended
September 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 operating
assets of Riverside Investments, the Bank's investment management division.
During the six months ended September 30, 2008, the Company recorded a $2.5
million other than temporary impairment charge on its auction rate security
portfolio.
Net Interest and Dividend Income
Net interest and dividend income for the six months ended September 30,
2009 and 2008 totaled $8.5 million and $7.8 million, respectively. The increase
for the period was primarily due to an increase in average interest-earning
assets of $111.8 million and a 44 basis point decrease in the rate paid on
average interest-bearing liabilities, partially offset by a $113.4 million
increase in average interest-bearing liabilities and a 79 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 2.98% for
the six months ended September 30, 2008 to 2.64% for the six months ended
September
18
30, 2009. The Company's net interest margin for the six months ended September
30, 2009 was 2.92% compared to 3.40% in the year earlier period.
Interest and dividend income amounted to $15.7 million and $14.5 million
for the six months ended September 30, 2009 and 2008, respectively. Average
interest-earning assets were $590.4 million for the six months ended September
30, 2009; an increase of $111.8 million, or 23.4%, compared to $478.6 million
for the six months ended September 30, 2008. The increase in average
interest-earning assets was caused primarily by a $85.5 million increase in
average net loans. The yield earned on average interest-earning assets decreased
to 5.32% for the six months ended September 30, 2009 from 6.11% for the six
months ended September 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 0.67% for the
six months ended September 30, 2009 compared to 2.04% 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 $59.2 million for the six months ended
September 30, 2009 compared to $23.1 million for the year ago quarter.
Interest expense for the six months ended September 30, 2009 was $7.1
million, an increase of $506,000, or 7.6%, from the amount reported in the same
quarter last year. Average interest-bearing liabilities grew $113.4 million
during the six months ended September 30, 2009 to $590.4 million primarily due
to a $96.8 million increase in average total deposits and a $7.5 million
increase in average repurchase agreements. The average rate paid on
interest-bearing liabilities decreased to 2.68% for the six months ended
September 30, 2009 from 3.12% 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 3.84% for the six months ended September
30, 2008 to 3.14% for the current year period as market rates have decreased for
this type of deposit.
Provision for Loan Losses
The provision for loan losses for the six months ended September 30, 2009
and 2008 were $1.4 million and $307,000, respectively. The additions to the
allowance for loan losses reflected continued growth in the loan portfolio and
increases in nonaccrual loans and charge-offs.
Noninterest Income (Charge)
For the six months ended September 30, 2009 noninterest income was $1.3
million, compared to a noninterest charge of $1.5 million for the prior year
period. Affecting noninterest income for the six months ended September 30, 2008
was an other-than-temporary charge of $2.5 million explained above. Service
charges on deposit accounts increased $54,000, gain on securities increased
$87,000 and other income increased $265,000.
Noninterest Expense
Noninterest expense for the six months ended September 30, 2009 was $8.5
million, an increase of $1.3 million, or 18.4%, from $7.2 million in the six
months ended September 30, 2008. The increase was caused by a $656,000 increase
in FDIC insurance assessment, a $335,000 increase in other expenses, a $263,000
increase in professional fees, a $100,000 increase in occupancy and equipment
expense and a $96,000 increase in data processing expense. Included in
19
other expenses for the six months ended September 30, 2009 was $220,000 of
merger related expenses.
Provision for Income Taxes
The company recorded an income tax benefit of $139,000 in the six months
ended September 30, 2009 compared to income tax expense of $378,000 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 September 30, 2009 of $61.2 million, with unused
borrowing capacity of $14.1 million.
The Company's primary investing activities are the origination of loans
and the purchase of mortgage and investment securities. During the six months
ended September 30, 2009 and 2008 the Company originated loans, net of principal
paydowns, of approximately $1.3 million and $21.6 million, respectively.
Purchases of investment securities totaled $19.3 million and $22.4 million for
the six months ended September 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 $518.9 million at
September 30, 2009, a $99.5 million increase from the $419.4 million balance at
March 31, 2009.
At September 30, 2009, the Company had outstanding commitments to
originate $10.3 million of loans, and available home equity and unadvanced lines
of credit and construction loans of approximately $49.4 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 $178.2 million, or 34.4% of total deposits at September 30,
2009. The Company relies on competitive rates, customer service and
long-standing relationships with customers to retain deposits. Based on the
Company's experience with deposit retention and current retention strategies,
management believes that, although it is not possible to predict future terms
and conditions upon renewal, a significant portion of such deposits will remain
with the Company.
20
Management believes, as of September 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% $52,841 8.03%
Total Risk-Based Capital 8% $56,986 12.59%
Tier 1 Risk-Based Capital 4% $56,986 11.67%
The Bank's actual capital amounts and ratios as of September 30, 2009
are presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Provisions Actual Adequacy Purposes Action Provisions
--------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollar amounts in thousands)
Total Capital (to Risk Weighted Assets) $50,928 11.27% $36,143 > 8.0% $45,179 > 10.0%
Tier 1 Capital (to Risk Weighted Assets) 46,783 10.35 18,072 > 4.0 27,108 > 6.0
Tier 1 Capital (to Average Assets) 46,783 7.15 26,912 > 4.0 33,640 > 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 the Bank's liquidity, capital or
operations.
Off-Balance Sheet Arrangements
In 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 six months ended September 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 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
21
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 an 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 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
22
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 change 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 factors 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. 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.
On September 29, 2009, the FDIC issued a proposed rule pursuant to which
all insured depository institutions would be required to prepay their estimated
assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012.
Under the proposed rule, this pre-payment would be due on December 30, 2009.
Under the proposed rule, the assessment rate for the fourth quarter of 2009 and
for 2010 would be based on each institution's total base assessment rate for the
third quarter of 2009, modified to assume that the assessment rate in effect at
September 30, 2009 has been in effect for the entire third quarter, and the
assessment rate for 2011 and 2012 would be
23
equal to the modified third quarter assessment rate plus an additional 3 basis
points. In addition, each institution's base assessment rate for each period
would be calculated using its third quarter assessment base, adjusted quarterly
for an estimated 5% annual growth rate in the assessment base through the end of
2012. If the proposed rule is passed, we would be required to make a payment of
approximately $3.3 million to the FDIC on December 30, 2009, and to record the
payment as a prepaid expense, which will be amortized to expense over three
years.
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.
24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
-----------------------------------------------------------
The Company did not repurchased any shares of its common stock in the
quarter ended September 30, 2009.
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. There were 60,524 shares that may
yet be repurchased under the program as of September 30, 2009. 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.
---------------------------------------------------
The Annual Meeting of the Stockholders of the Company was held on August
13, 2009. The results of the vote were as follows:
1. The following individuals were elected as directors, each for a
three-year term:
VOTES FOR VOTES WITHHELD
--------- --------------
Lucien P. Bolduc 4,643,362 471,167
Edmund D. Donovan 4,624,214 490,315
Myron J. Marek 4,567,584 546,945
Kathryn C. Reinhard 4,555,759 558,770
2. The appointment of Shatswell & MacLeod & Company, P.C. as
independent auditors of New England Bancshares, Inc. for the fiscal
year ended March 31, 2008 was ratified by the stockholders by the
following vote:
FOR AGAINST ABSTAIN
--- ------- -------
4,970,328 86,103 58,098
Item 5. Other Information.
-----------------
None.
25
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: November 13, 2009 By:/s/ Scott D. Nogles
---------------------- ---------------------------------
Scott D. Nogles
Chief Financial Officer
(principal financial officer)
Dated: November 13, 2009 By:/s/ David J. O'Connor
---------------------- ---------------------------------
David J. O'Connor
Chief Executive Officer
26