Attached files
SECURITIES
AND EXCHANGE COMMISSION
100
F Street NE
Washington,
D.C. 20549
FORM
10-K
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[X]
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Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For the Fiscal Year Ended March 31,
2010
or
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[ ]
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For the transition period from
_______________ to ____________________
Commission
File No. 001-51589
New England
Bancshares
(Exact
name of registrant as specified in its charter)
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Maryland
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04-3693643
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
Number)
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855 Enfield Street, Enfield,
Connecticut
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06082
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(Address
of Principal Executive Offices)
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Zip
Code
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(860)
253-5200
(Registrant’s
telephone number)
Securities
Registered Pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common
Stock, $0.01 par value
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The
NASDAQ Stock Market, LLC
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Securities
Registered Pursuant to Section 12(g) of the
Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES ¨ NO
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES ¨ NO
x
Indicate by check mark whether the
Registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding twelve months (or
for such shorter period that the Registrant was required to file such reports)
and (2) has been subject to such requirements for the past 90
days. YES x NO
¨.
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes
¨ No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. as defined in Rule 12b-2 of the
Exchange Act).
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Large
accelerated filer ¨
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Accelerated
filer ¨
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Non-accelerated
filer ¨
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Smaller
reporting company x
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(Do
not check box if a smaller reporting company)
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Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES ¨ NO
x
As of
June 10, 2010, there were outstanding 6,172,989 shares of the Registrant’s
Common Stock.
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, computed by reference to the last sale price
on June 10, 2010, is $44,083,785.
DOCUMENTS
INCORPORATED BY REFERENCE
Proxy
Statement for the 2010 Annual Meeting of Stockholders of the Registrant (Part
III).
INDEX
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PART
I
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ITEM 1.
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BUSINESS
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1
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ITEM 1A.
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RISK FACTORS
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14
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ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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16
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ITEM 2.
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PROPERTIES
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17
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ITEM 3.
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LEGAL PROCEEDINGS
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18
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ITEM 4.
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[Removed and Reserved]
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18
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PART
II
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ITEM 5.
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MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
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18
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ITEM 6.
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SELECTED FINANCIAL DATA
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19
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ITEM 7.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
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19
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ITEM 7A.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
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41
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ITEM 8.
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CONSOLIDATED FINANCIAL
STATEMENTS
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43
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ITEM 9A(T).
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CONTROLS AND PROCEDURES
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78
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ITEM 9B.
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OTHER INFORMATION
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79
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PART
III
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ITEM 10.
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
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79
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ITEM 11.
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EXECUTIVE COMPENSATION
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80
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ITEM 12.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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80
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ITEM 13.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
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81
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ITEM 14.
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PRINCIPAL ACCOUNTANT FEES AND
SERVICES
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82
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PART
IV
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ITEM 15.
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EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
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SIGNATURES
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83
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This
annual report on Form 10-K contains certain forward-looking statements which are
based on certain assumptions and describe the Company’s future plans, strategies
and expectations. These forward-looking statements may be identified
by the use of such words as “believe,” “expect,” “intend,” “anticipate,”
“estimate,” “project,” or similar expressions. The Company’s ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the
Company’s operations include, but are not limited to, the items described in
“Risk Factors” appearing in Part I, Item 1A of this annual report and changes
in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality and composition of our loan and investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company’s market area and accounting principles and
guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements. The Company does not undertake — and, except as may
be required by applicable law, specifically disclaims any obligation — to
publicly release the result of any revisions that may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
PART
I
ITEM
1. BUSINESS
General
New England
Bancshares, Inc. New
England Bancshares, Inc. (“New England Bancshares,” or the “Company”) is a
Maryland corporation and the bank holding company for New England Bank (the
“Bank”). The principal asset of the Company is its investment in the
Bank.
The
Company was organized in 2005 in connection with the “second-step”
mutual-to-stock conversion of Enfield Mutual Holding Company. For
additional information regarding the second-step conversion, see note 1 to the
notes to consolidated financial statements included in Part II, Item 8 of this
annual report. Reference is made to “New England Bancshares” or the
“Company” for periods both before and after the second-step
conversion.
The
principal asset of the Company is its investment in the Bank.
New England
Bank. The Bank, incorporated in 1999, is a Connecticut chartered
commercial bank headquartered in Enfield, Connecticut. The Bank’s
deposits are insured by the FDIC. The Bank is engaged principally in
the business of attracting deposits from the general public and investing those
deposits primarily in residential real estate loans, commercial real estate
loans, and commercial loans, and to a lesser extent, construction and consumer
loans.
The Bank, formerly named Valley Bank,
was acquired by New England Bancshares in July 2007. Prior to
acquiring the Bank, the Company was the savings and loan holding company for
Enfield Federal Savings and Loan Association (“Enfield Federal”), a federal
savings association. The Company operated Valley Bank and
Enfield Federal as separate subsidiaries until May 2009, when Enfield Federal
was merged with and into Valley Bank, and the combined bank was renamed New
England Bank. The Company has retained the name of each bank at their respective
branches and operates the branches as divisions of New England
Bank. References in the Form 10-K to the Bank shall mean New England
Bank or its predecessors.
On June 8, 2009 the Company acquired
Apple Valley Bank & Trust Company (“Apple Valley”) of Cheshire, Connecticut,
through the merger of Apple Valley into New England Bank. The Company
has retained the name Apple Valley at the acquired branches and operates the
branches as divisions of New England Bank.
1
New
England Bancshares’ Website and Availability of Securities and Exchange
Commission Filings
New England Bancshares’ internet
website is www.nebankct.com. New
England Bancshares makes available free of charge on or through its website its
annual reports on Forms 10-K, quarterly reports on Forms 10-Q, current reports
on Forms 8-K and any amendments to these reports filed or furnished pursuant to
the Securities and Exchange act of 1934, as soon as reasonably practicable after
New England Bancshares electronically files such material with, or furnishes it
to, the Securities and Exchange Commission. Except as specifically
incorporated by reference into this annual report, information on our website is
not a part of this annual report.
Market
Area
The Bank conducts its operations
through its 15 full service banking offices, including its main office and one
additional branch office in Enfield and its branch offices in Bristol, Broad
Brook, Cheshire, East Windsor, Manchester, Ellington, Southington, Suffield,
Terryville, Wallingford and Windsor Locks, Connecticut. Deposits are
gathered from, and lending activities are concentrated primarily in the towns
of, and the communities contiguous to, its branch offices.
According to published statistics,
Hartford County’s 2009 population was approximately 879,800, an increase of
approximately 2.6% from 2000. In 2008, there were approximately
364,700 housing units in Hartford County, an increase of 8.8% from
2000. Median household income for Hartford County in 2008 was
$64,000, compared to approximately $68,300 for Connecticut.
Competition
We face intense competition both in
making loans and attracting deposits. As of June 30, 2009, the most
recent date for which data is available from the FDIC, we held approximately
1.5% of the deposits in Hartford County, where the Bank has 11 out of its 15
branches, which was the 11th
largest share of deposits out of 25 financial institutions in the
county. Central Connecticut has a high concentration of financial
institutions and financial services providers, many of which are branches of
large money centers, super-regional and regional banks which have resulted from
the consolidation of the banking industry in New England. Many of
these competitors have greater resources than we do and may offer products and
services that we do not provide.
Our competition for loans comes from
commercial banks, savings institutions, mortgage banking firms, credit unions,
finance companies, insurance companies and brokerage and investment banking
firms. Our most direct competition for deposits has historically come
from commercial banks, savings banks, savings and loan associations, credit
unions and mutual funds. We face additional competition for deposits
from short-term money market funds and other corporate and government securities
funds and from brokerage firms and insurance companies.
We expect competition to increase in
the future as a result of legislative, regulatory and technological changes and
the continuing trend of consolidation in the financial services
industry. Technological advances, for example, have lowered the
barriers to market entry, allowed banks to expand their geographic reach by
providing services over the Internet and made it possible for non-depository
institutions to offer products and services that traditionally have been
provided by banks. Changes in federal law permit affiliation among
banks, securities firms and insurance companies, which promotes a competitive
environment in the financial services industry. Competition for
deposits and the origination of loans could limit our future
growth.
Lending
Activities
General. The
largest segments of our loan portfolio are residential real estate loans and
commercial real estate loans. The other significant segments of our
loan portfolio are commercial loans, construction loans and consumer
loans. We originate loans for investment purposes.
2
Residential
Loans. At March 31, 2010, residential loans, excluding home
equity loans and lines of credit, totaled $172.8 million or 33.2% of total
loans. At March 31, 2010, 79.5% of our residential loans were
fixed-rate and 20.5% were adjustable-rate.
We originate fixed-rate fully
amortizing loans with maturities ranging between 10 and 30
years. Management establishes the loan interest rates based on market
conditions. We offer mortgage loans that conform to Fannie Mae and
Freddie Mac guidelines, as well as jumbo loans, which presently are loans in
amounts over $417,000.
We also currently offer adjustable-rate
mortgage loans, with an interest rate based on the one-year Constant Maturity
Treasury Bill index. Our adjustable rate mortgage loans adjust
annually either from the outset of the loan or after a three-, five- or ten-year
initial fixed period and with terms of up to 30 years, with the majority of
adjustable rate loans adjusting after a five-year period. Interest
rate adjustments on such loans are generally limited to no more than 2% during
any adjustment period and 6% over the life of the loan.
We underwrite fixed-rate and
variable-rate one- to four-family residential mortgage loans with loan-to-value
ratios of up to 100% and 95%, respectively, provided that a borrower obtains
private mortgage insurance on loans that exceed 80% of the appraised value or
sales price, whichever is less, of the secured property. We also
require that fire, casualty, title, hazard insurance and, if appropriate, flood
insurance be maintained on all properties securing real estate loans made by
us. An independent licensed appraiser generally appraises all
properties.
The Bank previously offered its
full-time employees who satisfy certain criteria and our general underwriting
standards fixed- and adjustable-rate residential mortgage loans with reduced
interest rates 50 basis points below the rates offered to our other
customers. The employee mortgage rate normally ceases upon
termination of employment. Upon termination of the employee mortgage
rate, the interest rate reverts to the contract rate in effect at the time that
the loan was extended. All other terms and conditions contained in
the original mortgage and note continued to remain in
effect. Currently, the Bank does not offer this type of
program. As of March 31, 2010, we had $2.4 million of employee
residential mortgage loans, or 0.47% of net loans.
Home
Equity Loans and Lines of Credit. We offer home equity loans
and home equity lines of credit, both of which are secured by owner-occupied
one- to four-family residences. At March 31, 2010, home equity loans
and equity lines of credit totaled $40.2 million, or 7.7% of total
loans. Additionally, at March 31, 2010, the unadvanced amounts of
home equity lines of credit totaled $13.4 million. Home equity loans
are offered with fixed rates of interest and with terms up to 15
years. Home equity lines of credit are offered with adjustable rates
of interest that are indexed to the prime rate as reported in The Wall Street
Journal. Interest rate adjustments on home equity lines of
credit are limited to a maximum of 18% or 6% above the initial interest rate,
whichever is lower.
The procedures for underwriting home
equity loans and lines of credit include an assessment of the applicant’s
payment history on other debts and ability to meet existing obligations and
payments on the proposed loans. We will offer home equity loans with
maximum combined loan-to-value ratios of 90%, provided that loans in excess of
80% will generally be charged a higher rate of interest. A home
equity line of credit may be drawn down by the borrower for an initial period of
10 years from the date of the loan agreement. During this period, the
borrower has the option of paying, on a monthly basis, either principal and
interest or only interest. If not renewed, the Bank requires the
borrower to pay back the amount outstanding under the line of credit over a term
not to exceed 10 years, beginning at the end of the 10-year
period. After the initial 10-year period, the Bank requires the
borrower to pay back the amount outstanding in full.
Commercial
Real Estate Loans. We originate commercial real estate loans
that are generally secured by properties used for business purposes such as
small office buildings, industrial facilities or retail facilities primarily
located in our primary market area. At March 31, 2010, commercial
real estate loans totaled $205.2 million, or 39.5% of total loans, compared to
27.0% of total loans at March 31, 2007. Our commercial real estate
loans are generally made with terms of up to 25 years. These loans
are offered with interest rates that are fixed or adjust periodically and are
generally indexed to the prime rate as reported in The Wall Street Journal plus
a margin of 100 basis points or the five-year Federal Home Loan Bank (the
“FHLB”) Classic Advance Rate plus a margin of 225 to 325 basis
points. We generally do not make these loans with loan-to-value
ratios exceeding 80%. At March 31, 2010, the largest commercial real
estate loan was a $5.5 million loan, which was secured by a
hotel. This loan was performing according to its terms at March 31,
2010.
3
Construction
Loans. We make construction loans for commercial and
residential development projects. The projects include subdivision,
multi-family, apartment, small industrial, retail and office
buildings. These loans generally have an interest-only phase during
construction, which is usually 12 months, and then convert to permanent
financing. Disbursements of funds are at the sole discretion of the
Bank and are based on the progress of construction. At March 31,
2010, commercial construction loans totaled $18.4 million, or 3.5% of total
loans, and the unadvanced portion of these construction loans totaled $3.1
million. Loans generally can be made with a maximum loan-to-value
ratio of 75% of the appraised value or cost of the project, whichever is
less. At March 31, 2010, the largest commercial loan commitment was
for $4.2 million, all of which was disbursed. The loan was performing
according to its terms at March 31, 2010.
We originate construction loans to
individuals for the construction and acquisition of single-family personal
residences. At March 31, 2010, residential construction loans
amounted to $1.1 million, or 0.2% of total loans, and the unadvanced portion of
these construction loans totaled $312,000. Our residential mortgage
construction loans generally provide for the payment of interest only during the
construction phase, which is usually 12 months. At the end of the
construction phase, the loan converts to a permanent mortgage
loan. Loans generally can be made with a maximum loan-to-value ratio
of 90% of the appraised value or cost of the project, whichever is
less. At March 31, 2010, the largest residential construction loan
commitment was for $417,000, of which $225,000 was disbursed. The
loan was performing according to its terms at March 31, 2010.
Commercial
Loans. At March 31, 2010, we had $74.9 million in commercial
loans, which amounted to 14.4% of total loans. In addition, at such
date, we had $33.2 million of unadvanced commercial lines of
credit. We make commercial business loans primarily in our market
area to a variety of professionals, sole proprietorships and small
businesses. Commercial lending products include term loans, revolving
lines of credit and Small Business Administration guaranteed
loans. Commercial loans and lines of credit are made with either
variable or fixed rates of interest. Variable rates are generally
based on the prime rate as published in The Wall Street Journal, plus
a margin. Fixed-rate business loans are generally indexed to the
two-, five- or ten-year FHLB Amortizing Advance Rate, as corresponds to the term
of the loan, plus a margin. The Company generally does not make
unsecured commercial loans.
When making commercial loans, we
consider the financial statements of the borrower, our lending history with the
borrower, the debt service capabilities of the borrower, the projected cash
flows of the business and the value of the collateral, primarily accounts
receivable, inventory and equipment. Our commercial loans are also
supported by personal guarantees. Depending on the collateral used to
secure the loans, commercial loans are made in amounts of up to 80% of the value
of the collateral securing the loan. At March 31, 2010, our largest
commercial loan was a $2.8 million commercial line of credit secured by
inventory and real estate. The loan was performing according to its
terms at March 31, 2010.
Consumer
Loans. We offer fixed rate loans secured by mobile
homes. These loans have terms up to 25 years and loan to values up to
90% of the home’s value and require that the borrower obtain hazard
insurance. At March 31, 2010, mobile home loans totaled $5.2 million
or 1.0% of total loans and 71.3% of consumer loans. For the fiscal
year ended March 31, 2010, the Company originated $1.3 million of mobile home
loans.
We also offer fixed-rate automobile
loans for new or used vehicles with terms of up to 66 months and loan-to-value
ratios of up to 90% of the lesser of the purchase price or the retail value
shown in the NADA Car Guide. At March 31, 2010, automobile loans
totaled $1.0 million or 0.2% of total loans and 13.7% of consumer
loans.
Other consumer loans at March 31, 2010
amounted to $1.1million, or 0.2% of total loans and 15.0% of consumer
loans. These loans include secured and unsecured personal
loans. Personal loans generally have a fixed-rate, a maximum
borrowing limitation of $10,000 and a maximum term of four
years. Collateral loans are generally secured by a passbook account
or a certificate of deposit.
4
Loan
Underwriting Risks. While we
anticipate that adjustable-rate loans will better offset the adverse effects of
an increase in interest rates as compared to fixed-rate mortgages, the increased
mortgage payments required of adjustable-rate loan borrowers in a rising
interest rate environment could cause an increase in delinquencies and
defaults. The marketability of the underlying property also may be
adversely affected in a high interest rate environment. In addition,
although adjustable-rate mortgage loans help make our asset base more responsive
to changes in interest rates, the extent of this interest sensitivity is limited
by the annual and lifetime interest rate adjustment limits.
Loans secured by multi-family and
commercial real estate generally have larger balances and involve a greater
degree of risk than one- to four-family residential mortgage
loans. Of primary concern in multi-family and commercial real estate
lending is the borrower’s creditworthiness and the feasibility and cash flow
potential of the project. Payments on loans secured by income
properties often depend on successful operation and management of the
properties. As a result, repayment of such loans may be subject to a
greater extent than residential real estate loans to adverse conditions in the
real estate market or the economy. To monitor cash flows on income
properties, we require borrowers and loan guarantors, if any, to provide annual
financial statements on multi-family and commercial real estate
loans. In reaching a decision on whether to make a multi-family and
commercial real estate loan, we consider the net operating income of the
property, the borrower’s expertise, credit history, and profitability and the
value of the underlying property. In addition, with respect to
commercial real estate rental properties, we will also consider the term of the
lease and the quality of the tenants. We have generally required that
the properties securing these real estate loans have debt service coverage
ratios (the ratio of earnings before debt service divided by debt service) of at
least 1.20x. Independent appraisals and environmental surveys are
generally required for commercial real estate loans of $250,000 or
more.
Construction financing is generally
considered to involve a higher degree of risk of loss than long-term financing
on improved, occupied real estate. Risk of loss on a construction
loan depends largely upon the accuracy of the initial estimate of the property’s
value at completion of construction and the estimated cost (including interest)
of construction. During the construction phase, a number of factors
could result in delays and cost overruns. If the estimate of
construction costs proves to be inaccurate, we may be required to advance funds
beyond the amount originally committed to permit completion of the
building. If the estimate of value proves to be inaccurate, we may be
confronted, at or before the maturity of the loan, with a building having a
value which is insufficient to assure full repayment. If we are
forced to foreclose on a building before or at completion due to a default,
there can be no assurance that we will be able to recover all of the unpaid
balance of, and accrued interest on, the loan as well as related foreclosure and
holding costs.
Unlike residential mortgage loans,
which generally are made on the basis of the borrower’s ability to make
repayment from his or her employment or other income, and which are secured by
real property whose value has historically tended to be more easily
ascertainable, commercial loans are of higher risk and typically are made on the
basis of the borrower’s ability to make repayment from the cash flow of the
borrower’s business. As a result, the availability of funds for the
repayment of commercial loans may depend substantially on the success of the
business itself. Further, any collateral securing such loans may
depreciate over time, may be difficult to appraise and may fluctuate in
value.
Consumer loans may entail greater risk
than do residential mortgage loans, particularly in the case of consumer loans
that are unsecured or secured by assets that depreciate rapidly. In
such cases, repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment for the outstanding loan and the remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In addition, consumer loan collections depend on the
borrower’s continuing financial stability, and therefore are more likely to be
adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount which can be recovered on such loans.
Loan
Originations, Purchases and Sales. Our mortgage
lending activities are conducted by our salaried loan
representatives. We underwrite all loans that we originate under our
loan policies and procedures, which model those of Fannie Mae and Freddie
Mac. We originate both adjustable-rate and fixed-rate mortgage
loans. Our ability to originate fixed- or adjustable-rate loans is
dependent upon the relative customer demand for such loans, which is affected by
the current and expected future level of interest rates.
5
We generally retain most of the loans
that we originate for our portfolio; however, we will sell participation
interests to local financial institutions, primarily on the portion of loans
that exceed our borrowing limits. The sales occur at time of
origination; therefore no loans have been classified as
held-for-sale. We sold $2.0 million of participation interests in
fiscal 2009 and none in fiscal 2010. In fiscal 2007, the Bank
commenced selling long-term, fixed rate residential loans to the Federal Home
Loan Bank (the “FHLB”) to assist with managing our interest rate risk and
increasing our net interest margin. Loans are sold with servicing
retained and the loans have recourse to the Company on a formula
basis. The Bank sold $1.7 million of these loans in fiscal 2009 and
none in fiscal 2010. The Bank originates and sells one- to
four-family residential loans to several mortgage brokers and mortgage
bankers. One such arrangement requires the Bank to repurchase any
loans which become delinquent within four months after the date of sale; no such
repurchases have been required. The Bank sold $5.4 million of these
loans in fiscal 2009 and none in fiscal 2010.
We purchase participation interests
from other community-based financial institutions, primarily commercial real
estate loans, commercial construction loans, commercial loans and residential
loans. Such loans totaled $78.6 million and $49.9 million at March
31, 2010 and 2009, respectively. We perform our own underwriting
analysis on each of our participation interests before purchasing such loans and
therefore believe there is no greater risk of default on these
obligations. However, in a purchased participation loan, we do not
service the loan and thus are subject to the policies and practices of the lead
lender with regard to monitoring delinquencies, pursuing collections and
instituting foreclosure proceedings. We are permitted to review all
of the documentation relating to any loan in which we participate, including any
annual financial statements provided by a borrower. Additionally, we
receive periodic updates on the loan from the lead lender. We have
not historically purchased any whole loans. However, we would
entertain doing so if a loan was presented to us that met our underwriting
criteria and fit within our interest rate strategy.
Loan
Approval Procedures and Authority. Our
lending policies and loan approval limits are recommended by senior management,
reviewed by the Executive Credit Committee of the Board of Directors and
approved by the Bank’s Board of Directors. The Executive Credit
Committee consists of 5 independent directors of the Bank’s Board of Directors
and the Chief Executive Officer and President of the Company. One of
the independent directors serves as the Chairman of the
Committee. The Chief Loan Officer and the Market President of the
Bank and the Senior Risk Officer of the Company also serve as non-voting members
of the committee. Each individual’s lending authority limit is based
on his or her experience and capability and reviewed annually by the Bank’s
board. Loan approvals consist of at least 2 management signatures
with the higher lending authority determining the level of
approval. Any extension of credit that exceeds management’s authority
requires the approval of the Bank’s Credit Committee. The Bank’s
Credit Committee can approve extensions of credit in amounts up to $1.5
million. Extensions of credit greater than $1.5 million must be
approved by the Executive Credit Committee. Any extensions of credit
which would exceed $4.5 million for the Company also require the approval of the
Bank’s Board of Directors. Notwithstanding individual and joint
lending authority, board approval is required for any request involving any
compromise of indebtedness, such as the forgiveness of unpaid principal, accrued
interest, accumulated fees, or acceptance of collateral or other assets in lieu
of payment.
Loan
Commitments. We
issue commitments for fixed-rate and adjustable-rate mortgage loans, and
commercial loans conditioned upon the occurrence of certain
events. Commitments to originate mortgage loans are legally binding
agreements to lend to our customers.
Investment
Activities
The Board of Directors of the Bank
reviews and approves the investment policy annually. The Board of
Directors is responsible for establishing policies for conducting investment
activities, including the establishment of risk limits. The Board of
Directors reviews the investment portfolio and reviews investment transactions
on a monthly basis and is responsible for ensuring that the day-to-day
management of the investment portfolio is conducted by qualified
individuals. The Board of the Bank has directed the Bank to implement
investment policies based on the Board’s established guidelines as reflected in
the respective written investment policies, and other established guidelines,
including those set periodically by the Asset/Liability Management
Committees. The Bank’s management presents the
Asset/Liability Management Committee with potential investment strategies and
investment portfolio performance reports, on a quarterly basis.
6
The investment portfolio is primarily
viewed as a source of liquidity. Our policy is to invest funds in
assets with varying maturities that will result in the best possible yield while
maintaining the safety of the principal invested and assists in managing
interest rate risk. The investment portfolio management policy is
designed to:
|
|
1.
|
enhance
profitability by maintaining an acceptable spread over the cost of
funds;
|
|
|
2.
|
absorb
funds when loan demand is low and infuse funds into loans when loan demand
is high;
|
|
|
3.
|
provide
both the regulatory and the operational liquidity necessary to conduct our
daily business activities;
|
|
|
4.
|
provide
a degree of low-risk, quality assets to the balance
sheet;
|
|
|
5.
|
provide
a medium for the implementation of certain interest rate risk management
measures intended to establish and maintain an appropriate balance between
the sensitivity to changes in interest rates of: (i) interest
income from loans and investments, and (ii) interest expense from deposits
and borrowings;
|
|
|
6.
|
have
collateral available for pledging
requirements;
|
|
|
7.
|
generate
a favorable return on investments without undue compromise of other
objectives; and
|
|
|
8.
|
evaluate
and take advantage of opportunities to generate tax-exempt income when
appropriate.
|
In determining our investment
strategies, we consider the interest rate sensitivity, yield, credit risk
factors, maturity and amortization schedules, collateral value and other
characteristics of the securities to be held. We also consider the
secondary market for the sale of assets and the ratings of debt instruments in
which it invests and the financial condition of the obligors issuing such
instruments.
We have authority to invest in various
types of assets, including U.S. Treasury obligations, securities of various
federal agencies, mortgage-backed securities, certain certificates of deposit of
insured financial institutions, overnight and short-term loans to other banks,
and corporate debt instruments. We primarily invest in: U.S. agency
obligations; collateralized mortgage obligations and mortgage-backed securities;
and municipal obligations. With respect to municipal obligations, our
investment policy provides that all municipal issues must be rated investment
grade or higher to qualify for its portfolio. If any such municipal
issues in our investment portfolio are subsequently downgraded below the minimum
requirements, it is our general policy to liquidate the investment.
Deposit
Activities and Other Sources of Funds
General. Deposits
and loan repayments are the major sources of our funds for lending and other
investment purposes. Loan repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and money market
conditions.
Deposit
Accounts. Substantially
all of our depositors are residents of the State of
Connecticut. Deposits are attracted from within our market area
through the offering of a broad selection of deposit instruments, including non
interest-bearing demand accounts (such as checking accounts), interest-bearing
demand accounts (such as NOW and money market accounts), passbook and savings
accounts, and certificates of deposit. At March 31, 2010, core
deposits, which consist of savings, demand, NOW and money market accounts,
comprised 44.6% of our deposits. We do not currently utilize brokered
funds. Deposit account terms vary according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. In determining the terms of our deposit
accounts, we consider the rates offered by our competition, our liquidity needs,
profitability to us, matching deposit and loan products and customer preferences
and concerns. We generally review our deposit mix and pricing
weekly. Our current strategy is to offer competitive rates, but not
to be the market leader.
7
In addition to accounts for
individuals, we also offer deposit accounts designed for the businesses
operating in our market area. Our business banking deposit products
and services include a non-interest-bearing commercial checking account, a NOW
account for sole proprietors and a commercial cash management account for larger
businesses. We have sought to increase our commercial deposits
through the offering of these products, particularly to our commercial
borrowers.
Borrowings. We
utilize advances from the Federal Home Loan Bank of Boston and securities sold
under agreements to repurchase to supplement our supply of investable funds and
to meet deposit withdrawal requirements. The Federal Home Loan Bank
functions as a central reserve bank providing credit for member financial
institutions. As a member, the Bank is required to own capital stock
in the Federal Home Loan Bank and is authorized to apply for advances on the
security of such stock and certain of our mortgage loans, provided certain
standards related to creditworthiness have been met. Advances are
made under several different programs, each having its own interest rate and
range of maturities. Depending on the program, limitations on the
amount of advances are based either on a fixed percentage of an institution’s
net worth or on the Federal Home Loan Bank’s assessment of the institution’s
creditworthiness. Under its current credit policies, the Federal Home
Loan Bank generally limits advances to 25% of a member’s assets, and short-term
borrowings of less than one year may not exceed 10% of the institution’s assets.
The Federal Home Loan Bank determines specific lines of credit for each member
institution.
Securities sold under agreements to
repurchase are customer deposits that are invested overnight in U.S. government
or U.S. government agency securities. The customers, predominantly
commercial customers, set a predetermined balance and deposits in excess of that
amount are transferred into the repurchase account from each customer’s checking
account. The next banking day, the funds are recredited to their individual
checking account along with interest earned at market rates. These
types of accounts are often referred to as sweep accounts.
Financial
Services
In 2006 the Bank started offering
full-time access to advisory and investment services to consumers and businesses
on retirement planning, individual investment portfolios, and strategic asset
management. The services provided by the Bank through Riverside
Investment Services include mutual funds, life insurance, tax and estate
planning, and investment portfolio analysis. The Bank has a
broker/dealer relationship with Linsco/Private Ledger. For the period
ended March 31, 2009 the Bank recorded income of $341,000 from such
services. The Bank sold Riverside Investment Services during fiscal
2010 for $175,000.
Personnel
As of March 31, 2010, we had 115
full-time employees and 26 part-time employees, none of whom is represented by a
collective bargaining unit. We believe our relationship with our employees is
good.
REGULATION
AND SUPERVISION
General
As a bank holding company, New England
Bancshares is required by federal law to file reports with and otherwise comply
with, the rules and regulations, of the Federal Reserve. New England
Bank, as a state commercial bank, is subject to extensive regulation,
examination and supervision by the Connecticut Department of Banking, as its
primary state regulator, and the FDIC, as its deposit insurer. New
England Bank is a member of the Federal Home Loan Bank System. New
England Bank must file reports with the Connecticut Department of Banking and
the FDIC concerning its activities and financial condition in addition to
obtaining regulatory approvals before entering into certain transactions such as
mergers with, or acquisitions of, other savings institutions. The
Connecticut Department of Banking and the FDIC conduct periodic examinations to
test the Bank’s safety and soundness and compliance with various regulatory
requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes. Any change in such regulatory
requirements and policies, whether by the Connecticut Department of Banking, the
FDIC, the Federal Reserve Board or the United States Congress, could have a
material adverse impact on New England Bancshares, New England Bank and their
operations.
8
Certain of the applicable regulatory
requirements are referred to below. This description of statutory
provisions and regulations applicable to savings institutions and their holding
companies does not purport to be a complete description of such statutes and
regulations and their effect on New England Bancshares and New England Bank and
is qualified in its entirety by reference to the actual statutes and regulations
involved.
Federal
and State Banking Regulation
Business
Activities. The activities of New England Bank, a state
commercial bank, are governed by the Connecticut Department of Banking and the
FDIC, which regulate, among other things, the scope of the business of a bank,
the investments a bank must maintain, the nature and amount of collateral for
certain loans a bank makes, the establishment of branches and the activities of
a bank with respect to mergers and acquisitions.
Loans-to-One-Borrower
Limitations. As a Connecticut chartered commercial bank, New
England Bank is generally subject to the same limits on loans to one borrower as
a national bank. With specified exceptions, the Bank’s total loans or
extensions of credit to a single borrower cannot exceed 15% of its unimpaired
capital and surplus. The Bank may lend additional amounts up to 10%
of its unimpaired capital and surplus, if the loans or extensions of credit are
fully-secured by readily-marketable collateral. At March 31, 2010,
the Bank’s loans-to-one borrower limitation was $7.8 million and the largest
aggregate outstanding balance of loans to one borrower was $7.0
million.
Capital
Requirements. The FDIC has issued regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks,
such as New England Bank. Under the regulations, a bank generally is
deemed to be (i) “well-capitalized” if it has a Total Risk-Based Capital Ratio
of 10.0% or more, a Tier I Risk-Based Capital Ratio of 6.0% or more, a Leverage
Ratio of 5.0% or more and is not subject to any written capital order or
directive; (ii) “adequately capitalized” if it has a Total Risk-Based Capital
Ratio of 8.0% or more, a Tier I Risk-Based Capital Ratio of 4.0% or more, and a
Leverage Ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of “well-capitalized;” (iii) “undercapitalized” if it has a
Total Risk-Based Capital Ratio that is less than 8.0%, a Tier I Risk-Based
Capital Ratio that is less than 4.0% or a Leverage Ratio that is less than 4.0%
(3.0% under certain circumstances); (iv) “significantly undercapitalized” if it
has a Total Risk-Based Capital Ratio that is less than 6.0%, a Tier I Risk-Based
Capital Ratio that is less than 3.0% or a Leverage Ratio that is less than 3.0%,
and (v) “critically undercapitalized” if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%. If an institution becomes
undercapitalized, it would become subject to significant additional oversight
and regulation.
9
The
following table presents the Bank’s capital position at March 31,
2010.
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For
Capital
|
|||||||||||||
|
Actual
|
Adequacy Purposes
|
||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||
|
(Dollar
amounts in thousands)
|
|||||||||||||
|
Total
Capital (to Risk Weighted Assets)
|
$ | 52,148 | 11.14 | % | $ | 37,442 |
>8.0%
|
||||||
|
Tier
1 Capital (to Risk Weighted Assets)
|
47,523 | 10.15 | 18,721 |
>4.0
|
|||||||||
|
Tier
1 Capital (to Average Assets)
|
47,523 | 7.34 | 25,912 |
>4.0
|
|||||||||
Prompt Corrective
Action. Federal law requires each federal banking agency to take prompt
corrective action to resolve the problems of insured depository institutions,
including but not limited to those that fall below one or more prescribed
minimum capital ratios. An institution that, based upon its capital
levels, is classified as “well capitalized,” “adequately capitalized” or
“undercapitalized” may be treated as though it were in the next lower capital
category if the appropriate federal banking agency, after notice and opportunity
for hearing, determines that an unsafe or unsound condition or an unsafe or
unsound practice warrants such treatment. At each successive lower capital
category, an insured depository institution is subject to more
restrictions. The federal banking agencies, however, may not treat an
institution as “critically undercapitalized” unless its capital ratio actually
warrants such treatment.
In addition to restrictions and
sanctions imposed under the prompt corrective action provisions, commercial
banking organizations may be subject to potential enforcement actions by the
federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease and desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository institution),
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted.
Standards for
Safety and Soundness. Federal law requires each federal
banking agency to prescribe for depository institutions under its jurisdiction
standards relating to, among other things: internal controls; information
systems and audit systems; loan documentation; credit underwriting; interest
rate risk; asset growth; compensation; fees and benefits; and such other
operational and managerial standards as the agency deems
appropriate. The federal banking agencies have promulgated
regulations and Interagency Guidelines Establishing Standards for Safety and
Soundness (the “Guidelines”) to implement these safety and soundness
standards. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
Guidelines address internal controls and information systems; internal audit
system; credit underwriting; loan documentation; interest rate risk exposure;
asset quality; earnings and compensation; and fees and benefits. If
the appropriate federal banking agency determines that an institution fails to
meet any standards prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard set by the FDIC.
Limitation on
Capital Distributions. State and federal statutory and
regulatory limitations apply to New England Bank’s payment of dividends to
shareholders. The prior approval of the Connecticut Department of Banking is
required if the total of all dividends declared by a bank in any calendar year
exceeds the bank’s net profits, as defined, for that year combined with its
retained net profits for the preceding two calendar years. The payment of
dividends by New England Bank may also be affected by other factors, such as the
requirement to maintain adequate capital above regulatory
guidelines.
10
Assessment for
Examinations. The Bank’s operations are subject to examination
by the FDIC and the State of Connecticut Department of Banking. The
assessments paid by New England Bank for such examinations for the year ended
March 31, 2010 totaled $32,000.
Enforcement. New
England Bank is subject to the federal regulations promulgated pursuant to the
Financial Institutions Supervisory Act to prevent banks from engaging in unsafe
and unsound practices, as well as various other federal and state laws and
consumer protection laws.
Insurance of
Deposit Accounts. New England Bank’s
deposits are insured up to applicable limits by the FDIC. Under the FDIC’s
risk-based assessment system, insured institutions are assigned to one of four
risk categories based on supervisory evaluations, regulatory capital levels and
certain other risk factors. An institutions is assigned an assessment rate from
7 to 77.5 basis points based upon the risk category to which it is
assigned.
In 2009,
the FDIC imposed a special emergency assessment on all insured institutions in
order to cover losses to the Deposit Insurance Fund resulting from bank
failures. New England Bank recorded an expense of $313,000 during the
quarter ended June 30, 2009, to reflect the special assessment. In
addition, in lieu of further special assessments, the FDIC required all insured
depository institutions to prepay on December 30, 2009 their estimated quarterly
risk-based assessments for the fourth quarter of 2009, and for all of 2010,
2011, and 2012. Estimated assessments for the fourth quarter of
2009 and for all of 2010 were based upon the assessment rate in effect on
September 30, 2009, with 3 basis points added for the 2011 and 2012 assessment
rates. In addition, a 5% annual growth in the assessment base was
assumed. Prepaid assessments are to be applied against the actual
quarterly assessments until exhausted, and may not be applied to any special
assessments that may occur in the future. Any unused prepayments will
be returned to the institution on June 30, 2013. On December 30,
2009, New England Bank prepaid approximately $3.3 million in estimated
assessment fees. Because the prepaid assessments represent the
prepayment of future expense, they do not affect New England Bank’s capital (the
prepaid asset will have a risk-weighting of 0%) or tax obligations.
Insurance
of deposits may be terminated by the FDIC upon a finding that an institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC. We do not currently know of any practice,
condition or violation that may lead to termination of our deposit
insurance.
Transactions with
Related Parties. New England Bank’s authority to engage in
transactions with its affiliates is governed by the Federal Reserve Act and
implementing regulations. The Federal Reserve Act limits the extent
to which a bank or its subsidiaries may engage in “covered transactions” with
any one affiliate to an amount equal to 10% of such bank’s capital stock and
retained earnings, and limits all such transactions with all affiliates to an
amount equal to 20% of such capital stock and retained earnings. Any
covered transaction with an affiliate, such as the making of loans, purchase of
assets, issuance of guarantees and other similar types of transactions, must be
on terms that are substantially the same, or at least as favorable to the bank,
as those that would be provided to a non-affiliate.
The Sarbanes-Oxley Act generally
prohibits loans by the Company to its executive officers and
directors. However, that act contains a specific exception for loans
by New England Bank to its executive officers and directors in compliance with
federal banking laws. Under such laws, New England Bank’s authority
to extend credit to executive officers, directors and 10% stockholders
(“insiders”), as well as entities such persons control, is
limited. Among other things, these provisions require that extensions
of credit to insiders be made on terms that are substantially the same as, and
follow credit underwriting procedures that are not less stringent than those
prevailing for comparable transactions with unaffiliated persons and that do not
involve more than the normal risk of repayment or present other unfavorable
features. There is an exception for loans made pursuant to a benefit
or compensation program that is widely available to all employees of the
institution and does not give preference to insiders. There are also
certain limitations on the amount of credit extended to insiders, individually
and in the aggregate, which limits are based, in part, on the amount of New
England Bank’s capital. In addition, extensions of credit in excess
of certain limits must be approved by New England Bank’s board of
directors.
11
Community
Reinvestment Act. Under the Community Reinvestment Act
(“CRA”), as implemented by FDIC regulations, New England Bank has a continuing
and affirmative obligation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for New England
Bank, nor does it limit their discretion to develop the types of products and
services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the FDIC, in connection
with their examination of New England Bank to assess New England Bank’s record
of meeting the credit needs of its community and to take the record into account
in its evaluation of certain applications by New England Bank. The
CRA also requires all institutions to make public disclosure of their CRA
ratings. New England Bank received a “Satisfactory” CRA rating in
their most recent examination.
Federal Home Loan
Bank System. New England Bank is a member of the Federal Home
Loan Bank of Boston, which is one of the 12 regional Federal Home Loan Banks
making up the Federal Home Loan Bank System. Each Federal Home Loan Bank
provides a central credit facility primarily for its member
institutions. The Bank is required to acquire and hold shares of
capital stock in that Federal Home Loan Bank. As of March 31, 2010,
New England Bank was in compliance with this requirement with investments in the
capital stock of the Federal Home Loan Bank of Boston of $4.4
million.
The Federal Home Loan Banks have been
required to provide funds for the resolution of insolvent thrifts and to
contribute funds for affordable housing programs. These requirements
could reduce the amount of earnings that the Federal Home Loan Banks can pay as
dividends to their members and could also result in the Federal Home Loan Banks
imposing a higher rate of interest on advances to their members. If
dividends were reduced, or interest on future Federal Home Loan Bank advances
increased, the Bank’s net interest income would be affected.
Federal
Reserve System
Under Federal Reserve Board
regulations, New England Bank is required to maintain noninterest-earning
reserves against its transaction accounts. The Federal Reserve Board
regulations generally require that reserves of 3% must be maintained against
aggregate transaction accounts of $48.3 million or less, subject to adjustment
by the Federal Reserve Board, and reserves of 10%, subject to adjustment by the
Federal Reserve Board, against that portion of total transaction accounts in
excess of $48.3 million. The first $7.8 million of otherwise
reservable balances, subject to adjustment by the Federal Reserve Board, are
exempted from the reserve requirements. New England Bank is in
compliance with these requirements.
Holding
Company Regulation
New
England Bancshares is subject to examination, regulation, and periodic reporting
under the Bank Holding Company Act of 1956, as amended, as administered by the
Federal Reserve Board. New England Bancshares is required to obtain
the prior approval of the Federal Reserve Board to acquire all, or substantially
all, of the assets of any bank or bank holding company. Prior Federal Reserve
Board approval would be required for New England Bancshares to acquire direct or
indirect ownership or control of any voting securities of any bank or bank
holding company if, after such acquisition, it would, directly or indirectly,
own or control more than 5% of any class of voting shares of the bank or bank
holding company. In addition to the approval of the Federal Reserve Board,
before any bank acquisition can be completed, prior approval may also be
required to be obtained from other agencies having supervisory jurisdiction over
the bank to be acquired.
A bank holding company is generally
prohibited from engaging in, or acquiring, direct or indirect control of more
than 5% of the voting securities of any company engaged in non-banking
activities. One of the principal exceptions to this prohibition is for
activities found by the Federal Reserve Board to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Some of the principal activities that the Federal Reserve Board has determined
by regulation to be so closely related to banking are: (i) making or servicing
loans; (ii) performing certain data processing services; (iii) providing
discount brokerage services; (iv) acting as fiduciary, investment or financial
advisor; (v) leasing personal or real property; (vi) making investments in
corporations or projects designed primarily to promote community welfare; and
(vii) acquiring a savings and loan association.
12
The Gramm-Leach-Bliley Act of 1999
authorizes a bank holding company that meets specified conditions, including
being “well capitalized” and “well managed,” to opt to become a “financial
holding company” and thereby engage in a broader array of financial activities
than previously permitted. Such activities can include insurance underwriting
and investment banking.
New England Bancshares is subject to
the Federal Reserve Board’s capital adequacy guidelines for bank holding
companies (on a consolidated basis).
A bank holding company is generally
required to give the Federal Reserve Board prior written notice of any purchase
or redemption of then outstanding equity securities if the gross consideration
for the purchase or redemption, when combined with the net consideration paid
for all such purchases or redemptions during the preceding 12 months, is equal
to 10% or more of the company’s consolidated net worth. The Federal Reserve
Board may disapprove such a purchase or redemption if it determines that the
proposal would constitute an unsafe and unsound practice, or would violate any
law, regulation, Federal Reserve Board order or directive, or any condition
imposed by, or written agreement with, the Federal Reserve Board. The Federal
Reserve Board has adopted an exception to this approval requirement for
well-capitalized bank holding companies that meet certain other
conditions.
The Federal Reserve Board has issued a
policy statement regarding the payment of dividends by bank holding companies.
In general, the Federal Reserve Board’s policies provide that dividends should
be paid only out of current earnings and only if the prospective rate of
earnings retention by the bank holding company appears consistent with the
organization’s capital needs, asset quality and overall financial condition. The
Federal Reserve Board’s policies also require that a bank holding company serve
as a source of financial strength to its subsidiary banks by standing ready to
use available resources to provide adequate capital funds to those banks during
periods of financial stress or adversity and by maintaining the financial
flexibility and capital-raising capacity to obtain additional resources for
assisting its subsidiary banks where necessary. Under the prompt corrective
action laws, the ability of a bank holding company to pay dividends may be
restricted if a subsidiary bank becomes undercapitalized. These regulatory
policies can affect the ability of New England Bancshares to pay dividends or
otherwise engage in capital distributions.
Under the Federal Deposit Insurance
Act, depository institutions are liable to the FDIC for losses suffered or
anticipated by the Federal Deposit Insurance Corporation in connection with the
default of a commonly controlled depository institution or any assistance
provided by the FDIC to such an institution in danger of default.
New England Bancshares and New England
Bank are affected by the monetary and fiscal policies of various agencies of the
United States Government, including the Federal Reserve System. In view of
changing conditions in the national economy and in the money markets, it is
impossible for management to accurately predict future changes in monetary
policy or the effect of such changes on the business or financial condition of
New England Bancshares or New England Bank.
The status of New England Bancshares as
a registered bank holding company under the Bank Holding Company Act will not
exempt it from certain federal and state laws and regulations applicable to
corporations generally, including, without limitation, certain provisions of the
federal securities laws.
FEDERAL
AND STATE TAXATION
Federal
Taxation
General. New
England Bancshares and New England Bank report their consolidated taxable income
on a fiscal year basis ending March 31, using the accrual method of accounting
and are subject to federal income taxation in the same manner as other
corporations. The following discussion of tax matters is intended
only as a summary and does not purport to be a comprehensive description of the
tax rules applicable to New England Bancshares and New England
Bank. The Company is currently under audit by the Internal Revenue
Service.
13
Distributions. To
the extent that the Company makes “non-dividend distributions” to stockholders,
such distributions will be considered to result in distributions from its
unrecaptured tax bad debt reserve as of December 31, 1987 (the “base year
reserve”), to the extent thereof and then from the Company’s supplemental
reserve for losses on loans, and an amount based on the amount distributed will
be included in the Company’s income. Non-dividend distributions
include distributions in excess of the Company’s current and accumulated
earnings and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. Dividends paid out of the Company’s
current or accumulated earnings and profits will not be included in the
Company’s income.
The amount of additional income created
from a non-dividend distribution is equal to the lesser of the base year reserve
and supplemental reserve for losses on loans or an amount that, when reduced by
the tax attributable to the income, is equal to the amount of the
distribution. Thus, in some situations, approximately one and
one-half times the non-dividend distribution would be includable in gross income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate. The Company does not intend to pay dividends that would result
in the recapture of any portion of the bad debt reserves.
Corporate
Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income at a rate of 20%. Only 90% of alternative
minimum taxable income can be offset by alternative minimum tax net operating
loss carryovers of which the Company currently has none. Alternative minimum
taxable income is also adjusted by determining the tax treatment of certain
items in a manner that negates the deferral of income resulting from the regular
tax treatment of those items. Alternative minimum tax is due when it
exceeds the regular income tax. The Company has not had a liability
for a tax on alternative minimum taxable income during the past five
years.
Elimination of
Dividends. New England Bancshares may exclude from its income
100% of dividends received from New England Bank as a member of the same
affiliated group of corporations.
State
Taxation
New England Bancshares and New England
Bank file Connecticut income tax returns on a consolidated
basis. Generally, the income of financial institutions in
Connecticut, which is calculated based on federal taxable income, subject to
certain adjustments, is subject to Connecticut tax. The Company is
not currently under audit with respect to its Connecticut income tax returns and
its state tax returns have not been audited for the past five
years.
ITEM
1A. RISK
FACTORS
Our
increased emphasis on commercial and construction lending may expose us to
increased lending risks.
At March 31, 2010, our loan portfolio
consisted of $205.2 million, or 39.5% of commercial real estate loans, $19.5
million, or 3.7% of construction loans and $74.9 million, or 14.4% of commercial
business loans. We intend to increase our emphasis on these types of
loans. These types of loans generally expose a lender to greater risk
of non-payment and loss than residential mortgage loans because repayment of the
loans often depends on the successful operation of the property, the income
stream of the borrowers and, for construction loans, the accuracy of the
estimate of the property’s value at completion of construction and the estimated
cost of construction. Such loans typically involve larger loan
balances to single borrowers or groups of related borrowers compared to
residential mortgage loans. Commercial business loans expose us to
additional risks since they typically are made on the basis of the borrower’s
ability to make repayments from the cash flow of the borrower’s business and are
secured by non-real estate collateral that may depreciate over
time. In addition, since such loans generally entail greater risk
than residential mortgage loans, we may need to increase our allowance for loan
losses in the future to account for the likely increase in probable incurred
credit losses associated with the growth of such loans. Also, many of
our commercial and construction borrowers have more than one loan outstanding
with us. Consequently, an adverse development with respect to one
loan or one credit relationship can expose us to a significantly greater risk of
loss compared to an adverse development with respect to a one- to four-family
residential mortgage loan.
14
Changes
in interest rates could have an impact on earnings.
The
Company’s earnings and financial condition are dependent to a large degree upon
net interest income, which is the difference between interest earned from loans
and investments, and interest paid on deposits and borrowings. The financial
services industry has been experiencing a narrowing of interest rate spreads,
the difference between interest rates earned on loans and investments and the
interest rates paid on deposits and borrowings. This situation could
adversely affect the Company’s earnings and financial condition. While the
Company cannot predict or control changes in interest rates, the Company has
policies and procedures to manage the risks associated with changes in market
interest rates.
Changes in interest rates also affect
the value of our interest-earning assets, and in particular our securities
portfolio. Generally, the value of fixed-rate securities fluctuates
inversely with changes in interest rates. Unrealized gains and losses
on securities available for sale are reported as a separate component of equity,
net of tax. Decreases in the fair value of securities available for
sale resulting from increases in interest rates could have an adverse effect on
stockholders’ equity.
Strong
competition within our market area could hurt our profits and slow
growth.
We face intense competition both in
making loans and attracting deposits. This competition has made it
more difficult for us to make new loans and has occasionally forced us to offer
higher deposit rates. Price competition for loans and deposits might
result in us earning less on our loans and paying more on our deposits, which
reduces net interest income. As of June 30, 2009, we held 1.5% of the
deposits in Hartford County, which was the 11th
largest market share of deposits out of the 25 financial institutions in the
county. Some of the institutions with which we compete have
substantially greater resources and lending limits than we have and may offer
services that we do not provide. We expect competition to increase in
the future as a result of legislative, regulatory and technological changes and
the continuing trend of consolidation in the financial services
industry. Our profitability depends upon our continued ability to
compete successfully in our market area.
If
we do not achieve profitability on our new branches, they may negatively impact
our earnings.
The Bank opened its Farmington Avenue
branch office in March 2007 and its Southington branch office in January
2007. Numerous factors contribute to the performance of a new branch,
such as a suitable location, qualified personnel and an effective marketing
strategy. Additionally, it takes time for a new branch to generate
significant deposits and make sufficient loans to produce enough income to
offset expenses, some of which, like salaries and occupancy expense, are
relatively fixed costs. We expect that it may take a period of time
before the new branch offices can become profitable. During this
period, operating these new branch offices may negatively impact our net
income.
A
prolonged downturn in the Connecticut economy or real estate values could hurt
our profits.
Nearly all of our real estate loans are
secured by real estate in Connecticut. We are operating in a
challenging and uncertain economic environment, both nationally and locally, as
the U.S. economy entered a recession in early 2008. The continued
declines in real estate values and home sales volumes along with greater
financial stress on borrowers due to the uncertain economic environment and
rising unemployment could have an adverse effect on our borrowers or their
customers, which could adversely affect our financial condition and results of
operations. Decreases in real estate values could adversely affect
the value of property used as collateral for our loans. Continued
economic uncertainty may also have a negative effect on the ability of our
borrowers to make timely repayments of their loans, which could result in
increased loan delinquencies, problem assets and foreclosures. If
poor economic conditions result in decreased demand for the Company’s products
and services our financial condition and results of operations could be
adversely affected.
15
We
operate in a highly regulated environment and we may be adversely affected by
changes in laws and regulations.
New England Bank is subject to
extensive regulation, supervision and examination by the Connecticut Department
of Banking, the Bank’s chartering authority, and by the FDIC, as insurer of its
deposits. New England Bancshares is subject to regulation and
supervision by the Federal Reserve Board, as well as the Connecticut Department
of Banking. Such regulation and supervision govern the activities in
which an institution and its holding company may engage, and are intended
primarily for the protection of the insurance fund and for the depositors and
borrowers of New England Bank. The regulation and supervision by the
Connecticut Department of Banking, Federal Reserve Board and the FDIC are not
intended to protect the interests of investors in New England Bancshares common
stock. Regulatory authorities have extensive discretion in their
supervisory and enforcement activities, including the imposition of restrictions
on our operations, the classification of our assets and determination of the
level of our allowance for loan losses. Any change in such regulation
and oversight, whether in the form of regulatory policy, regulations,
legislation or supervisory action, may have a material impact on our
operations.
ITEM
1B. UNRESOLVED
STAFF COMMENTS
Not applicable.
16
ITEM
2. PROPERTIES
The Company currently conducts its
business through fifteen full-service banking offices and two administrative
offices. The net book value of the Company’s properties or leasehold
improvements was $6.9 million at March 31, 2010.
|
Location
|
Leased
or
Owned
|
Original
Year
Leased
or
Acquired
|
Date
of
Lease
Expiration
|
|||
|
Executive/Branch
Office:
|
||||||
|
855
Enfield Street, Enfield,
Connecticut
|
Leased
|
2006
|
2031
|
|||
|
Operations
Center:
|
||||||
|
45
North Main Street, Bristol, Connecticut
|
Leased
|
2006
|
2017(1)
|
|||
|
Branch
Offices:
|
||||||
|
Four
Riverside Avenue, Bristol, Connecticut
|
Leased
|
1999
|
2014
(2)
|
|||
|
888
Farmington Avenue, Bristol, Connecticut
|
Owned
|
2004
|
—
|
|||
|
124
Main Street, Broad Brook, Connecticut
|
Owned
|
2003
|
—
|
|||
|
286
Maple Avenue, Cheshire, Connecticut
|
Leased
|
2001
|
2011(3)
|
|||
|
One
Shoham Road, East Windsor, Connecticut
|
Leased
|
2005
|
2015(4)
|
|||
|
287
Somers Road, Ellington, Connecticut
|
Owned
|
2005
|
—
|
|||
|
268
Hazard Avenue, Enfield, Connecticut
|
Owned
|
1962
|
—
|
|||
|
23
Main Street, Manchester, Connecticut
|
Owned
|
2002
|
—
|
|||
|
98
Main Street, Southington, Connecticut
|
Leased
|
2006
|
2028
(5)
|
|||
|
158
North Main Street, Southington, Connecticut
|
Owned
|
2007
|
—
|
|||
|
112
Mountain Road, Suffield, Connecticut
|
Leased
|
1988
|
2010
|
|||
|
Eight
South Main Street, Terryville, Connecticut
|
Leased
|
2002
|
2012
(6)
|
|||
|
670
North Colony Road, Wallingford, Connecticut
|
Leased
|
2006
|
2016
(1)
|
|||
|
20
Main Street, Windsor Locks, Connecticut
|
Leased
|
2002
|
2012(7)
|
(1) We
have an option to renew this lease for two additional five-year
terms.
(2) We
have an option to renew this lease for three additional five-year
terms
(3) We
have an option to renew this lease for two additional ten-year
terms.
(4) We
have an option to renew this lease for two additional seven-year
terms.
(5) We
have an option to terminate this lease in 2018.
(6) We
have an option to renew this lease for one additional ten-year
term.
(7) We
have an option to renew this lease for one additional five-year
term.
17
ITEM
3. LEGAL
PROCEEDINGS
Periodically, there have been various
claims and lawsuits involving the Company and the Bank, such as claims to
enforce liens, condemnation proceedings on properties in which the Bank holds
security interests, claims involving the making and servicing of real property
loans and other issues incident to the Bank's business. In the opinion of
management, after consultation with the Company’s legal counsel, no such pending
claims or lawsuits are expected to have a material adverse effect on the
financial condition or operations of the Company, taken as a
whole. The Company is not a party to any material pending legal
proceedings.
ITEM
4. [Removed
and Reserved]
PART
II
|
ITEM
5.
|
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
Beginning on December 28, 2005, the
Company’s common stock was quoted on the NASDAQ Global Market under the symbol
“NEBS.” Before that date, the Company’s common stock was quoted on
the OTC Bulletin Board under the symbol “NEBS.” According to the
records of its transfer agent, the Company had approximately 1,466 stockholders
of record as of June 10, 2010. This number does not reflect
stockholders who hold their shares in “street name.” The following
table sets forth the high and low bid information for the Company’s common stock
for each of the fiscal quarters in the two-year period ended March 31,
2010.
|
High
|
Low
|
Dividends
|
||||||||||
|
Fiscal
2010:
|
||||||||||||
|
Fourth
Quarter
|
$ | 7.74 | $ | 4.36 | $ | 0.02 | ||||||
|
Third
Quarter
|
6.49 | 4.25 | 0.02 | |||||||||
|
Second
Quarter
|
6.80 | 5.10 | 0.02 | |||||||||
|
First
Quarter
|
6.50 | 5.50 | 0.02 | |||||||||
|
Fiscal
2009:
|
||||||||||||
|
Fourth
Quarter
|
$ | 8.50 | $ | 5.70 | $ | 0.04 | ||||||
|
Third
Quarter
|
10.00 | 7.97 | 0.04 | |||||||||
|
Second
Quarter
|
10.25 | 8.75 | 0.04 | |||||||||
|
First
Quarter
|
11.25 | 10.25 | 0.03 | |||||||||
The
Company repurchased 18,200 shares of its common stock in the quarter ended March
31, 2010 as follows:
|
Total
number of shares
|
Maximum
number
|
|||||||||||||||
|
For
the three
|
Average
|
purchased
as part
|
of
shares that may
|
|||||||||||||
|
months
ended
|
Total
shares
|
price
paid
|
of
publicly announced
|
yet
be purchased under
|
||||||||||||
|
March
31, 2010
|
repurchased
|
per
share
|
plan
or program
|
the
plan or program
|
||||||||||||
|
January
1-31
|
1,400 | $ | 5.70 | 246,400 | 58,524 | |||||||||||
|
February
1-28
|
10,600 | 5.69 | 257,000 | 47,924 | ||||||||||||
|
March
1-31
|
6,200 | 6.74 | 263,200 | 41,724 | ||||||||||||
|
Total
|
18,200 | $ | 6.05 | |||||||||||||
These
repurchases of stock were pursuant to the Company’s stock repurchase program
that was authorized on May 12, 2008 to repurchase 304,924 shares, or 5% of the
Company's then outstanding shares. The repurchases were made on the
open market and through privately negotiated transactions.
18
ITEM
6. SELECTED
FINANCIAL DATA
|
|
Not
completed due to Registrant's status as a smaller reporting
company.
|
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
|
The objective of this section is to
help understand our views on our results of operations and financial
condition. You should read this discussion in conjunction with the
consolidated financial statements and notes to the consolidated financial
statements that appear under Part II, Item 8 of this annual report.
Overview
Income. Our primary source of
pre-tax income is net interest and dividend income. Net interest and
dividend income is the difference between interest and dividend income, which is
the income that we earn on our loans and investments, and interest expense,
which is the interest that we pay on our deposits and borrowings. To
a much lesser extent, we also recognize pre-tax income from service charge
income – mostly from service charges on deposit accounts, from the increase in
cash surrender value of our bank-owned life insurance and from the sale of
securities and loans.
Allowance
for Loan Losses. The
allowance for loan losses is a valuation allowance for probable losses inherent
in the loan portfolio. We evaluate the need to establish allowances
against losses on loans on a monthly basis. When additional
allowances are necessary, a provision for loan losses is charged to
earnings.
Expenses.
The expenses we incur in operating our business consist of salaries and employee
benefits expenses, occupancy and equipment expenses, advertising and promotion
expenses, professional fees, data processing expense, FDIC insurance assessment,
stationery and supplies expense, amortization of identifiable intangible assets
and other miscellaneous expenses.
Salaries and employee benefits expenses
consist primarily of the salaries and wages paid to our employees, payroll taxes
and expenses for health insurance, retirement plans and other employee
benefits. It also includes expenses related to our employee stock
ownership plan and restricted stock awards granted under our stock-based
incentive plan. Expense for the employee stock ownership plan is
based on the average market value of the shares committed to be
released. An equal number of shares are released each year over terms
of the two loans from New England Bancshares that were used to fund the employee
stock ownership plan’s purchase of shares in the stock offering in both the
mutual holding company reorganization and the second-step
conversion. Expense for shares of restricted stock awards is based on
the fair market value of the shares on the date of
grant. Compensation and related expenses is recognized on a
straight-line basis over the vesting period. We began expensing stock
options in fiscal 2007 and are included in salaries and employee benefits
expenses and the consolidated statements of income.
Occupancy and equipment expenses, which
are the fixed and variable costs of land, building and equipment, consist
primarily of lease payments, real estate taxes, depreciation charges, furniture
and equipment expenses, maintenance and costs of
utilities. Depreciation of premises and equipment is computed using
the straight-line method based on the useful lives of the related assets, which
range from ten to 50 years for buildings and premises and three to 20 years for
furniture, fixtures and equipment. Leasehold improvements are
amortized over the shorter of the useful life of the asset or term of the
lease.
Advertising and promotion expenses
include expenses for print advertisements, promotions and premium
items.
Professional fees primarily include
fees paid to our independent auditors, our attorneys, our internal auditor and
any consultants we employ, such as to review our loan or investment
portfolios.
Data processing expenses include fees
paid to our third-party data processing service and ATM
expense.
19
FDIC insurance assessment consist of
deposit insurance premiums paid to the FDIC.
Stationery and supplies expense
consists of expenses for office supplies.
Amortization of identifiable intangible
assets consists of the amortization, on a straight-line basis over a ten-year
period, of the $886,000 core deposit intangible that was incurred in connection
with the acquisition of Windsor Locks Community Bank, FSL in December 2003 and
on a sum-of-years digits basis over a ten year period, of the $2.5 million core
deposit intangible that was incurred in conjunction with the Company’s
acquisition of First Valley Bancorp, Inc.
Other expenses include charitable
contributions, regulatory assessments, telephone, insurance and other
miscellaneous operating expenses.
Critical
Accounting Policies
We consider accounting policies
involving significant judgments and assumptions by management that have, or
could have, a material impact on the carrying value of certain assets or income
to be critical accounting policies. We consider accounting policies
relating to the allowance for loan losses and goodwill and other intangibles to
be critical accounting policies.
Allowance
for Loan Losses. The allowance for loan losses is the amount
estimated by management as necessary to cover losses inherent in the loan
portfolio at the balance sheet date. The allowance is established
through the provision for loan losses, which is charged to
income. Determining the amount of the allowance for loan losses
necessarily involves a high degree of judgment. Among the material
estimates required to establish the allowance are: loss exposure at
default; the amount and timing of future cash flows on impacted loans; the value
of collateral; and determination of loss factors to be applied to the various
elements of the portfolio. All of these estimates are susceptible to
significant change.
Management reviews the level of the
allowance on a monthly basis and establishes the provision for loan losses based
on an evaluation of the portfolio, past loss experience, economic conditions and
business conditions affecting our primary market area, credit quality trends,
collateral value, loan volumes and concentrations, seasoning of the loan
portfolio, the duration of the current business cycle, bank regulatory
examination results and other factors related to the collectability of the loan
portfolio. Although we believe that we use the best information
available to establish the allowance for loan losses, future additions to the
allowance may be necessary if certain future events occur that cause actual
results to differ from the assumptions used in making the
evaluation. For example, a downturn in the local economy could cause
increases in non-performing loans. Additionally, a decline in real
estate values could cause some of our loans to become inadequately
collateralized. In either case, this may require us to increase our
provisions for loan losses, which would negatively impact
earnings. Further, the FDIC and State of Connecticut Department of
Banking, as an integral part of their examination processes, review the Bank’s
allowance for loan losses. Such agencies may require us to recognize
adjustments to the allowance based on its judgments about information available
to it at the time of its examination. An increase to the allowance
required to be made by an agency would negatively impact our
earnings. Additionally, a large loss could deplete the allowance and
require increased provisions to replenish the allowance, which would negatively
affect earnings. See notes 2 and 4 to the notes to consolidated
financial statements included in Part II, Item 8 of this annual
report.
Goodwill
and Other Intangibles. We record all assets and liabilities
acquired in purchase acquisitions, including goodwill and other intangibles, at
fair value as required by Statement of Financial Accounting Standards No.
141. Goodwill is subject, at a minimum, to annual tests for
impairment. Other intangible assets are amortized over their
estimated useful lives using straight-line and accelerated methods, and are
subject to impairment if events or circumstances indicate a possible inability
to realize the carrying amount. The initial goodwill and other
intangibles recorded, and subsequent impairment analysis, requires us to make
subjective judgments concerning estimates of how the acquired assets will
perform in the future. Events and factors that may significantly
affect the estimates include, among others, customer attrition, changes in
revenue grown trends, specific industry conditions and changes in
competition.
20
Operating
Strategy
Our mission is to operate and further
expand a profitable community-oriented financial institution. We plan
to achieve this by executing our strategy of:
|
|
·
|
pursuing
opportunities to increase commercial real estate lending in our market
area;
|
|
|
·
|
continuing
to emphasize the origination of one- to four-family residential real
estate loans;
|
|
|
·
|
expanding
our delivery system through a combination of increased uses of technology
and additional branch facilities;
|
|
|
·
|
aggressively
attracting core deposits;
|
|
|
·
|
managing
our net interest margin and net interest spread by having a greater
percentage of our assets in loans, especially higher-yielding loans, which
generally have a higher yield than securities;
and
|
|
|
·
|
managing
interest rate risk by emphasizing the origination of adjustable-rate or
shorter duration loans.
|
Pursue opportunities to increase
commercial real estate lending in our market area
Commercial real estate loans provide us
with the opportunity to earn more income because they tend to have higher
interest rates than residential mortgage loans. In addition, these
loans are beneficial for interest rate risk management because they typically
have shorter terms and adjustable interest rates. Commercial real
estate loans increased $42.4 million and $24.3 million for the years ended March
31, 2010 and 2009, respectively, and at March 31, 2010 comprised approximately
39.5% of total loans. There are many commercial properties located in
our market area, and we may pursue the larger lending relationships associated
with these opportunities, while continuing to originate any such loans in
accordance with what we believe are our conservative underwriting
guidelines. We have added expertise in our commercial loan department
in recent years. Additionally, we may employ additional commercial
lenders in the future to help increase our multi-family and commercial
lending.
However, these types of loans generally
expose a lender to greater risk of non-payment and loss than one- to four-family
residential mortgage loans because repayment of the loans often depends on the
successful operation of the property and the income stream of the
borrowers. Such loans typically involve larger loan balances to
single borrowers or groups of related borrowers compared to one- to four-family
residential mortgage loans. In addition, since such loans generally
entail greater risk than one- to four-family residential mortgage loans, we may
need to increase our allowance for loan losses in the future to account for the
likely increase in probable incurred credit losses associated with the growth of
such loans. Also, many of our commercial borrowers have more than one
loan outstanding with us. Consequently, an adverse development with
respect to one loan or one credit relationship can expose us to a significantly
greater risk of loss compared to an adverse development with respect to a one-
to four-family residential mortgage loan.
Expand
our delivery system through a combination of increased uses of technology and
additional branch
facilities
We intend to expand the ways in which
we reach and serve our customers. We implemented internet banking in
fiscal 2003, which allows our customers to access their accounts and pay bills
online. In fiscal 2006, we introduced an enhancement to our website
to enable customers to obtain loan information to apply for a residential or
commercial loan online. Additionally, in fiscal 2008 we introduced
remote deposit capture, a product which allows commercial customers to deposit
checks from their office with the use of a scanner; thereby eliminating the need
to physically visit an office to make a deposit. Also, we opened new
branch offices in East Windsor, Connecticut in October 2005, Ellington,
Connecticut in April 2006, our Farmington Avenue, Bristol branch office in March
2007 and our Southington branch office in January 2007. We intend to
pursue expansion in our market area in the future, whether through de novo
branching or acquisition. However, we have not entered into any
binding commitments regarding our expansion plans.
21
Aggressively attract core
deposits
Core deposits (accounts other than
certificates of deposit) comprised 44.6% of our total deposits at March 31,
2010. We value core deposits because they represent longer-term
customer relationships and a lower cost of funding compared to certificates of
deposit. We aggressively seek core deposits through competitive
pricing and targeted advertising. In addition, we offer business
checking accounts for our commercial customers. We also hope to
increase core deposits by pursuing expansion inside and outside of our market
area through de novo branching.
Manage net interest margin and net
interest spread by having a greater percentage of our assets in loans,
especially higher-yielding loans, which generally have a higher yield than
securities
We intend to continue to manage our net
interest margin and net interest spread by seeking to increase lending levels
and by originating higher-yielding loans. Loans secured by
multi-family and commercial real estate and commercial business loans are
generally larger and involve a greater degree of risk than one-to four-family
residential mortgage loans. Consequently, multi-family and commercial
real estate and commercial business loans typically have higher yields, which
increase our net interest margin and net interest spread. In
addition, we have started, and expect to continue, to sell one- to four-family
mortgage loans in an effort to increase yields on the overall loan
portfolio.
Manage interest rate risk by
emphasizing the origination of adjustable-rate and shorter duration
loans
We manage our interest rate sensitivity
to minimize the adverse effects of changes in the interest rate
environment. Deposit accounts typically react more quickly to changes
in market interest rates than longer-term loans because of the shorter
maturities of deposits. As a result, sharp increases in interest
rates may adversely affect our earnings while decreases in interest rates may
beneficially affect our earnings. To reduce the potential volatility
of our earnings, we have sought to: (1) improve the match between asset and
liability maturities and rates, while maintaining an acceptable interest rate
spread; and (2) decrease the maturities of our assets, in part by the
origination of adjustable-rate and shorter-term loans. To this end,
we may sell some of our long term fixed rate residential mortgage
loans.
Balance
Sheet Analysis
Loans. We originate real estate
loans secured by residential real estate, commercial real estate and
construction loans, which are secured by residential and commercial real
estate. At March 31, 2010, real estate loans totaled $437.7 million,
or 84.2% of total loans, compared to $336.6 million, or 80.1%, of total
loans at March 31, 2009.
Commercial real estate loans totaled
$205.2 million at March 31, 2010, which represented 46.9% of real estate loans
and 39.5% of total loans, compared to $162.8 million at March 31, 2009, which
represented 48.4% of real estate loans and 38.8% of total
loans. Commercial real estate loans increased $42.4 million, or
26.1%, for the year ended March 31, 2010 primarily due to the Apple Valley
merger and the Company focusing on this type of lending.
Residential real estate loans totaled
$213.0 million at March 31, 2010, which represented 48.7% of real estate loans
and 41.0% of total loans compared to $158.3 million at March 31, 2009, which
represented 47.0% of real estate loans and 37.7% of total
loans. Residential real estate loans increased $54.7 million for the
year ended March 31, 2010.
22
We originate construction loans secured
by residential and commercial real estate. This portfolio totaled
$19.5 million at March 31, 2010, which represented 3.7% of total loans, compared
to $15.5 million at March 31, 2009, which represented 3.7% of total
loans. Construction loans increased $4.0 million, or 25.5%, for the
year ended March 31, 2010 primarily due to the Apple Valley merger.
We also originate commercial business
loans secured by business assets other than real estate, such as business
equipment, inventory and accounts receivable and letters of
credit. Commercial business loans totaled $74.9 million at March 31,
2010, which represented 14.4% of total loans, compared to $76.9 million at March
31, 2009, which represented 18.3% of total loans. Commercial business
loans decreased $2.0 million, or 2.6% for the year ended March 31, 2010
primarily due to charge-offs and paydowns.
We originate a variety of consumer
loans, including loans secured by mobile homes, automobiles and passbook or
certificate accounts. Consumer loans totaled $7.3 million and
represented 1.4% of total loans at March 31, 2010, and $6.5 million at March 31,
2009 which represented 1.6% of total loans.
23
The following table sets forth the
composition of our loan portfolio at the dates indicated.
|
At
March 31,
|
||||||||||||||||||||||||||||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||||||||||||
|
Amount
|
Percent
Of
Total
|
Amount
|
Percent
Of
Total
|
Amount
|
Percent
Of
Total
|
Amount
|
Percent
Of
Total
|
Amount
|
Percent
Of
Total
|
|||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Mortgage
loans:
|
||||||||||||||||||||||||||||||||||||||||
|
Residential
(1)
|
$ | 213,034 | 40.97 | % | $ | 158,319 | 37.69 | % | $ | 158,268 | 42.09 | % | $ | 120,199 | 59.96 | % | $ | 94,682 | 63.07 | % | ||||||||||||||||||||
|
Commercial
real estate
|
205,244 | 39.48 | 162,809 | 38.76 | 138,477 | 36.82 | 54,057 | 26.97 | 40,596 | 27.04 | ||||||||||||||||||||||||||||||
|
Construction
loans
|
19,450 | 3.74 | 15,498 | 3.69 | 21,043 | 5.60 | 8,774 | 4.38 | 8,459 | 5.63 | ||||||||||||||||||||||||||||||
|
Total
mortgage loans
|
437,728 | 84.19 | 336,626 | 80.14 | 317,788 | 84.51 | 183,030 | 91.31 | 143,737 | 95.74 | ||||||||||||||||||||||||||||||
|
Consumer
loans
|
7,293 | 1.40 | 6,491 | 1.55 | 6,292 | 1.67 | 2,692 | 1.34 | 1,005 | 0.67 | ||||||||||||||||||||||||||||||
|
Commercial
loans
|
74,918 | 14.41 | 76,935 | 18.31 | 51,958 | 13.82 | 14,733 | 7.35 | 5,384 | 3.59 | ||||||||||||||||||||||||||||||
|
Total
loans
|
519,939 | 100.00 | % | 420,052 | 100.00 | % | 376,038 | 100.00 | % | 200,455 | 100.00 | % | 150,126 | 100.00 | % | |||||||||||||||||||||||||
|
Deferred
loan origination fees, net
|
190 | (28 | ) | (223 | ) | (133 | ) | (377 | ) | |||||||||||||||||||||||||||||||
|
Allowance
for loan losses
|
(4,625 | ) | (6,458 | ) | (4,046 | ) | (1,875 | ) | (1,636 | ) | ||||||||||||||||||||||||||||||
|
Total
loans, net
|
$ | 515,504 | $ | 413,566 | $ | 371,769 | $ | 198,447 | $ | 148,113 | ||||||||||||||||||||||||||||||
|
|
(1)
|
Includes
$40.2 million, $33.1 million, $31.9 million, $17.6 million and $13.9
million of home equity loans and lines of credit at March 31, 2010, 2009,
2008, 2007 and 2006,
respectively.
|
|
|
24
The following table sets forth certain
information at March 31, 2010 regarding the dollar amount of principal
repayments becoming due during the periods indicated. The table does
not include any estimate of prepayments that significantly shorten the average
life of our loans and may cause our actual repayment experience to differ from
that shown below. Demand loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or
less.
| Resi- dential |
Commercial
Real
Estate
|
Construction
|
Consumer
|
Commercial
|
Total
Loans
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Amounts
due in:
|
||||||||||||||||||||||||
|
One
year or
less
|
$ | 1,397 | $ | 6,064 | $ | 16,881 | $ | 435 | $ | 23,064 | $ | 47,841 | ||||||||||||
|
More
than one year to three years
|
1,794 | 2,292 | 2,128 | 918 | 12,737 | 19,869 | ||||||||||||||||||
|
More
than three years to five years
|
5,957 | 8,755 | --- | 678 | 18,613 | 34,003 | ||||||||||||||||||
|
More
than five years to ten years
|
27,851 | 29,693 | --- | 151 | 14,684 | 72,379 | ||||||||||||||||||
|
More
than ten years to fifteen years
|
23,290 | 35,382 | --- | 1,961 | 1,632 | 62,265 | ||||||||||||||||||
|
More
than fifteen
years
|
152,745 | 123,058 | 441 | 3,150 | 4,188 | 283,582 | ||||||||||||||||||
|
Total
amount
due
|
$ | 213,034 | $ | 205,244 | $ | 19,450 | $ | 7,293 | $ | 74,918 | $ | 519,939 | ||||||||||||
The following table sets forth the
dollar amount of all loans at March 31, 2010 that are due after March 31, 2011
and have either fixed interest rates or floating or adjustable interest
rates. The amounts shown below exclude applicable loans in process,
unearned interest on consumer loans and deferred loan fees.
|
Due
After March 31, 2011
|
||||||||||||
|
Fixed
Rates
|
Floating
or
Adjustable
Rates
|
Total | ||||||||||
|
(In
thousands)
|
||||||||||||
|
Mortgage
loans:
|
||||||||||||
|
Residential
loans
|
$ | 168,852 | $ | 42,785 | $ | 211,637 | ||||||
|
Commercial
real estate
|
39,440 | 159,740 | 199,180 | |||||||||
|
Construction
loans
|
227 | 2,342 | 2,569 | |||||||||
|
Total
mortgage loans
|
208,519 | 204,867 | 413,386 | |||||||||
|
Consumer
loans
|
6,461 | 397 | 6,858 | |||||||||
|
Commercial
loans
|
33,958 | 17,896 | 51,854 | |||||||||
|
Total
loans
|
$ | 248,938 | $ | 223,160 | $ | 472,098 | ||||||
25
The following table shows loan
activity during the periods indicated.
|
For
the Fiscal Year Ended March 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Beginning
balance, loans, net
|
$ | 413,566 | $ | 371,769 | $ | 198,447 | ||||||
|
Originations:
|
||||||||||||
|
Mortgage
loans:
|
||||||||||||
|
Residential
loans
|
18,877 | 19,734 | 27,978 | |||||||||
|
Commercial
real estate
|
32,216 | 29,947 | 29,735 | |||||||||
|
Construction
loans
|
4,195 | 2,220 | 6,691 | |||||||||
|
Total
mortgage loans
|
55,288 | 51,901 | 64,404 | |||||||||
|
Consumer
loans
|
2,609 | 2,503 | 3,262 | |||||||||
|
Commercial
loans
|
15,711 | 32,561 | 14,201 | |||||||||
|
Total
loan originations
|
73,608 | 86,965 | 81,867 | |||||||||
|
Loans
sold
|
--- | (3,684 | ) | (6,958 | ) | |||||||
|
Loan
participations purchased
|
51,236 | 13,828 | 5,860 | |||||||||
|
Loans
acquired in merger
|
60,233 | --- | 141,041 | |||||||||
|
Deduct:
|
||||||||||||
|
Principal
loan repayments and other, net
|
(78,257 | ) | (54,795 | ) | (48,371 | ) | ||||||
|
Loan
charge-offs, net of recoveries
|
(4,882 | ) | (517 | ) | (117 | ) | ||||||
|
Ending
balance, loans, net
|
$ | 515,504 | $ | 413,566 | $ | 371,769 | ||||||
Available-for-Sale Securities. Our securities portfolio
consists primarily of U.S. government and agency securities, mortgage-backed
securities, marketable equity securities, municipal securities and, to a lesser
extent, corporate debt securities. Although corporate debt securities
and municipal securities generally have greater credit risk than U.S. Treasury
and government securities, they generally have higher yields than government
securities of similar duration. Available-for-sale securities
decreased $7.8 million, or 10.9%, in the year ended March 31, 2010 due to
decreases in all investment categories. The majority of our
mortgage-backed securities were issued by Ginnie Mae, Fannie Mae or Freddie
Mac.
The following table sets forth the
carrying values and fair values of our securities portfolio at the dates
indicated.
|
At
March 31,
|
||||||||||||||||||||||||
|
2010
|
2009
|
2008
|
||||||||||||||||||||||
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Investments
in available-for-sale securities:
|
||||||||||||||||||||||||
|
U.S.
government and federal agencies
|
$ | 8,833 | $ | 8,956 | $ | 11,930 | $ | 12,068 | $ | 11,426 | $ | 11,501 | ||||||||||||
|
Municipal
securities
|
15,670 | 15,273 | 16,917 | 15,712 | 12,719 | 12,504 | ||||||||||||||||||
|
Corporate
debt securities
|
--- | --- | --- | --- | 65 | 66 | ||||||||||||||||||
|
Mortgage-backed
securities
|
38,988 | 39,750 | 43,618 | 44,041 | 38,982 | 39,473 | ||||||||||||||||||
|
Marketable
equity securities
|
--- | --- | 7 | 7 | 5,373 | 5,373 | ||||||||||||||||||
|
Total
|
63,491 | 63,979 | 72,472 | 71,828 | 68,565 | 68,917 | ||||||||||||||||||
|
Money
market mutual funds included in cash
and
cash equivalents
|
--- | --- | (7 | ) | (7 | ) | (5,373 | ) | (5,373 | ) | ||||||||||||||
|
Total
|
$ | 63,491 | $ | 63,979 | $ | 72,465 | $ | 71,821 | $ | 63,192 | $ | 63,544 | ||||||||||||
26
The
following table sets forth our available-for-sale securities:
|
At
and For the Fiscal Year Ended March 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Mortgage-related
securities:
|
||||||||||||
|
Mortgage-related securities,
beginning of period (1)
|
$ | 44,041 | $ | 39,473 | $ | 11,941 | ||||||
|
Acquired in
merger
|
2,412 | --- | 11,589 | |||||||||
|
Purchases
|
7,996 | 13,251 | 22,533 | |||||||||
|
Sales
|
(470 | ) | (753 | ) | (2,438 | ) | ||||||
|
Repayments and
prepayments
|
(14,603 | ) | (7,607 | ) | (4,705 | ) | ||||||
|
Increase (decrease) in net
premium
|
75 | (32 | ) | (27 | ) | |||||||
|
Increase (decrease) in net
unrealized gain
|
299 | (291 | ) | 580 | ||||||||
|
Net (decrease) increase in
mortgage-related securities
|
(4,291 | ) | 4,568 | 27,532 | ||||||||
|
Mortgage-related securities,
end of period (1)
|
$ | 39,750 | $ | 44,041 | $ | 39,473 | ||||||
|
Investment
securities:
|
||||||||||||
|
Investment securities,
beginning of period (1)
|
$ | 27,780 | $ | 24,071 | $ | 37,528 | ||||||
|
Acquired in
merger
|
592 | --- | 11,059 | |||||||||
|
Purchases
|
31,757 | 22,732 | 19,575 | |||||||||
|
Sales
|
(22,445 | ) | (8,824 | ) | (19,215 | ) | ||||||
|
Maturities
|
(14,953 | ) | (9,636 | ) | (21,785 | ) | ||||||
|
Increase in net
premium
|
43 | 94 | 96 | |||||||||
|
Reclass from securities to
other assets
|
--- | --- | (3,524 | ) | ||||||||
|
Reclass from other assets to
securities
|
671 | --- | --- | |||||||||
|
Increase (decrease) in net
unrealized gain
|
784 | (657 | ) | 337 | ||||||||
|
Net (decrease) increase in
investment securities
|
(3,551 | ) | 3,709 | (13,457 | ) | |||||||
|
Investment securities, end of
period (1)
|
$ | 24,229 | $ | 27,780 | $ | 24,071 | ||||||
________________________
(1) At
fair value
The following table sets forth the
maturities and weighted average yields of securities at March 31,
2010. Weighted average yields are presented on a tax-equivalent
basis.
|
Within
One Year
|
One
To Five Years
|
Five
To Ten Years
|
After
Ten Years
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
|||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||||||||||||||||||||||
|
U.S.
Government and Federal
agencies
|
$ | 16 | 4.56 | % | $ | --- | --- | % | $ | 2,321 | 2.84 | % | $ | 6,619 | 4.74 | % | $ | 8,956 | 4.24 | % | ||||||||||||||||||||
|
Municipal
securities
|
--- | --- | 481 | 4.22 | 2,602 | 5.53 | 12,190 | 6.35 | 15,273 | 6.15 | ||||||||||||||||||||||||||||||
|
Mortgage-backed
securities
|
193 | 3.73 | 57 | 5.37 | 847 | 4.58 | 38,653 | 4.39 | 39,750 | 4.39 | ||||||||||||||||||||||||||||||
|
Total
|
$ | 209 | 3.79 | % | $ | 538 | 4.35 | % | $ | 5,770 | 4.31 | % | $ | 57,462 | 4.84 | % | $ | 63,979 | 4.79 | % | ||||||||||||||||||||
Deposits. Our primary
source of funds is our deposit accounts, which are comprised of demand
deposits, savings
accounts and time deposits. These deposits are provided primarily by
individuals and, to a lesser extent, commercial customers, within our market
area. We do not currently use brokered deposits as a source of
funding. Deposits increased $98.1 million for the year ended March
31, 2010 due to increases in every deposit category. The Company has
continued to experience disintermediation, as rates on other types of
investments (CDs and money market accounts) have increased substantially over
the past several years resulting in customers moving funds from the generally
lower rates of savings accounts. Deposits increased $98.1
million, or 23.4%, due primarily to the deposits assumed from the acquisition of
Apple Valley Bank and Trust and the focus of the Company on core
deposits.
27
The
following table sets forth the balances of our deposit products at the dates
indicated.
|
At
March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
(In
thousands)
|
||||||||
|
Non-interest
bearing accounts
|
$ | 53,091 | $ | 37,483 | ||||
|
NOW
and money market accounts
|
105,732 | 75,137 | ||||||
|
Savings
accounts
|
72,249 | 58,413 | ||||||
|
Certificates
of deposit
|
286,500 | 248,403 | ||||||
|
Total
|
$ | 517,572 | $ | 419,436 | ||||
The following table indicates the
amount of jumbo certificates of deposit by time remaining until maturity as of
March 31, 2010. Jumbo certificates of deposit require minimum
deposits of $100,000.
|
Maturity
Period
|
Amount
|
Weighted
Average
Rate
|
||||||
|
(Dollars
in thousands)
|
||||||||
|
Three
months or
less
|
$ | 15,934 | 2.68 | % | ||||
|
Over
three through six
months
|
14,397 | 2.47 | ||||||
|
Over
six through twelve
months
|
19,094 | 2.09 | ||||||
|
Over
twelve
months
|
46,417 | 3.59 | ||||||
|
Total
|
$ | 95,842 | 2.97 | % | ||||
The following table sets forth the
time deposits classified by rates at the dates indicated.
|
At
March 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Certificate
accounts:
|
||||||||||||
|
0.00
to 2.00%
|
$ | 101,981 | $ | 18,291 | $ | 111 | ||||||
|
2.01
to 3.00%
|
49,484 | 83,462 | 19,291 | |||||||||
|
3.01
to 4.00%
|
88,608 | 87,793 | 63,448 | |||||||||
|
4.01
to 5.00%
|
38,040 | 50,616 | 88,801 | |||||||||
|
5.01
to 6.00%
|
8,134 | 8,241 | 29,086 | |||||||||
|
Fair
value adjustment
|
253 | --- | --- | |||||||||
|
Total
|
$ | 286,500 | $ | 248,403 | $ | 200,737 | ||||||
The following table sets forth the
amount and maturities of time deposits classified by rates at March 31,
2010.
|
Amount
Due
|
||||||||||||||||||||||||
|
Less
than
One
Year
|
One
to
Two
Years
|
Two
to
Three
Years
|
Over
Three
Years
|
Total
|
Percent
of
Total
Certificate
Accounts
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Certificate
accounts:
|
||||||||||||||||||||||||
|
0 to 2.00%
|
$ | 86,584 | $ | 15,380 | $ | 17 | $ | --- | $ | 101,981 | 35.6 | % | ||||||||||||
|
2.01
to 3.00%
|
27,574 | 15,282 | 4,698 | 1,930 | 49,484 | 17.3 | ||||||||||||||||||
|
3.01
to 4.00%
|
32,920 | 13,963 | 11,403 | 30,322 | 88,608 | 30.9 | ||||||||||||||||||
|
4.01
to 5.00%
|
13,576 | 4,968 | 5,324 | 14,172 | 38,040 | 13.3 | ||||||||||||||||||
|
5.01
to 6.00%
|
100 | 527 | 1,942 | 5,565 | 8,134 | 2.8 | ||||||||||||||||||
|
Fair
value adjustment
|
253 | --- | --- | --- | 253 | 0.1 | ||||||||||||||||||
|
Total
|
$ | 161,007 | $ | 50,120 | $ | 23,384 | $ | 51,989 | $ | 286,500 | 100.0 | % | ||||||||||||
28
The
following table sets forth the deposit activity for the periods
indicated.
|
For
the Fiscal Year Ended March 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Net
deposits
(withdrawals)
|
$ | 11,219 | $ | 39,113 | $ | 10,696 | ||||||
|
Deposits
acquired through
merger
|
76,380 | --- | 168,369 | |||||||||
|
Interest
credited on deposit accounts (1)
|
10,537 | 10,011 | 9,572 | |||||||||
|
Total
increase in deposit
accounts
|
$ | 98,136 | $ | 49,124 | $ | 188,637 | ||||||
________________________
|
|
(1)
|
Includes
amortization of fair value
adjustment.
|
Borrowings. We use advances from the
Federal Home Loan Bank to supplement our supply of funds for loans and
investments and to meet deposit withdrawal requirements.
The following table sets forth certain
information regarding our borrowed funds:
|
At
or For the Years
Ended
March 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Federal
Home Loan Bank advances:
|
||||||||||||
|
Average
balance outstanding
|
$ | 61,837 | $ | 62,888 | $ | 47,400 | ||||||
|
Maximum
amount outstanding at any month-end du
ring the
period
|
66,566 | 67,650 | 62,221 | |||||||||
|
Balance
outstanding at end of period
|
56,860 | 66,833 | 61,928 | |||||||||
|
Weighted
average interest rate during the period
|
4.19 | % | 4.35 | % | 4.70 | % | ||||||
|
Weighted
average interest rate at end of period
|
4.05 | % | 4.10 | % | 4.33 | % | ||||||
Subordinated
Debentures. On July 28, 2005, FVB
Capital Trust I (“Trust I”), a Delaware statutory trust formed by First Valley
Bancorp, completed the sale of $4.1 million of 6.42%, 5 Year Fixed-Floating
Capital Securities (“Capital Securities”). Trust I also issued common
securities to First Valley Bancorp and used the net proceeds from the offering
to purchase a like amount of 6.42% Junior Subordinated Debentures (“Debentures”)
of First Valley Bancorp. Debentures are the sole assets of Trust
I.
Capital
Securities accrue and pay distributions quarterly at an annual rate of 6.42% for
the first 5 years of the stated liquidation amount of $10 per Capital
Security. With the quarterly interest period beginning August 23,
2010 the quarterly interest rate will adjust based on the calculation of the
LIBOR 3 month rate plus 1.90%. First Valley Bancorp fully and
unconditionally guaranteed all of the obligations of the Trust, which are now
guaranteed by the Company. The guaranty covers the quarterly
distributions and payments on liquidation or redemption of Capital Securities,
but only to the extent that Trust I has funds necessary to make these
payments.
Capital
Securities are mandatorily redeemable upon the maturing of Debentures on August
23, 2035 or upon earlier redemption as provided in the Indenture. The
Company has the right to redeem Debentures, in whole or in part on or after
August 23, 2010 at the liquidation amount plus any accrued but unpaid interest
to the redemption date.
The trust and guaranty provide for the
binding of any successors in the event of a merger, as is the case in the merger
of First Valley Bancorp and the Company. The Company has assumed the
obligations of First Valley Bancorp in regards to the subordinated debentures
due to the acquisition of First Valley Bancorp by the Company.
29
Results
of Operations for the Years Ended March 31, 2010 and 2009
Overview.
|
2010
|
2009
|
%
Change
|
||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Net
income (loss)
|
$ | 1,676 | $ | (1,802 | ) | 193.01 | % | |||||
|
Return
on average assets
|
0.25 | % | (0.33 | )% | 175.76 | |||||||
|
Return
on average equity
|
2.51 | % | (2.71 | )% | 192.62 | |||||||
|
Average
equity to average assets
|
10.14 | % | 12.27 | % | (17.36 | ) | ||||||
Net income increased due primarily to
increases in net interest and dividend income and noninterest income, partially
offset by increases in noninterest expense, the provision for loan losses and
income tax expense. Net interest income increased primarily as a
result of a higher volume of interest-earning assets and a decrease in the cost
of funds, partially offset by a decrease in the yield on interest-earning assets
and a higher volume of interest-bearing liabilities.
Net
Interest and Dividend Income. Net
interest and dividend income totaled $18.8 million for the year ended March 31,
2010, an increase of $3.1 million or 19.8% compared to the prior fiscal
year. This resulted mainly from a $98.1 million increase in average
interest-earning assets during the year and a 17 basis point increase in our
interest rate spread to 2.89%, partially offset by a $109.1 million increase in
average interest-bearing liabilities. Our net interest margin
decreased 2 basis points to 3.16% for fiscal 2010.
Interest and dividend income increased
$3.4 million, or 11.8%, from $28.9 million for fiscal 2009 to $32.4 million for
fiscal 2010. Average interest-earning assets were $605.0 million for
fiscal 2010, an increase of $98.1 million, or 19.3%, compared to $506.9 million
for fiscal 2009. The increase in average interest-earning assets
resulted primarily from increases in loans and federal funds sold,
interest-bearing deposits and marketable equity securities. The yield
on interest-earning assets decreased from 5.79% to 5.40% due primarily to a
decline in interest rates which affected our loan portfolio, the
yield on which decreased 32 basis points. The yield on our short-term
assets, primarily federal funds sold, also decreased 16 basis
points.
Interest expense increased $315,000, or
2.4%, from $13.2 million for fiscal 2009 to $13.5 million for fiscal
2010. Average interest-bearing liabilities grew $109.1 million, or
25.3%, from $430.4 million for fiscal 2009 to $539.5 million for fiscal 2010 due
primarily to increases in deposits and securities sold under agreements to
repurchase. The average rate paid on interest-bearing liabilities
decreased to 2.51% for fiscal 2010 from 3.07% due to the decline in interest
rates on deposits and securities sold under agreements to
repurchase.
30
Average
Balances and Yields. The
following table presents information regarding average balances of assets and
liabilities, as well as the total dollar amounts of interest income and
dividends from average interest-earning assets and interest expense on average
interest-bearing liabilities and the resulting average yields and
costs. The yields and costs for the periods indicated are derived by
dividing income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. For purposes of this table,
average balances have been calculated using the average of month-end balances
and non-accrual loans are included in average balances; however, accrued
interest income has been excluded from these loans.
|
For
the Fiscal Years Ended March 31,
|
||||||||||||||||||||||||||||||||||||
|
2010
|
2009
|
2008
|
||||||||||||||||||||||||||||||||||
|
Average
Balance
|
Interest
|
Average
Yield/
Rate
|
Average
Balance
|
Interest
|
Average
Yield/
Rate
|
Average
Balance
|
Interest
|
Average
Yield/
Rate
|
||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||||||||||||||
|
Federal
funds sold, interest-bearing
deposits
and marketable
equity
securities
|
$ | 53,122 | $ | 295 | 0.56 | % | $ | 37,467 | $ | 268 | 0.72 | % | $ | 20,796 | $ | 874 | 4.20 | % | ||||||||||||||||||
|
Investments
in available for sale
securities,
other than mortgage-backed
and
mortgage-related securities (1)
|
24,909 | 1,483 | 5.95 | 31,553 | 2,044 | 6.48 | 38,451 | 2,254 | 5.86 | |||||||||||||||||||||||||||
|
Mortgage-backed
and mortgage-related
securities
|
41,798 | 2,037 | 4.87 | 44,276 | 2,291 | 5.17 | 24,087 | 1,278 | 5.31 | |||||||||||||||||||||||||||
|
Federal
Home Loan Bank stock
|
4,322 | --- | --- | 3,686 | 85 | 2.31 | 2,859 | 168 | 5.88 | |||||||||||||||||||||||||||
|
Loans,
net (2)
|
480,813 | 28,867 | 6.00 | 389,922 | 24,640 | 6.32 | 313,334 | 21,674 | 6.92 | |||||||||||||||||||||||||||
|
Total
interest-earning assets
|
604,964 | 32,682 | 5.40 | 506,904 | 29,328 | 5.79 | 399,527 | 26,248 | 6.57 | |||||||||||||||||||||||||||
|
Noninterest-earning
assets
|
45,491 | 26,617 | 36,520 | |||||||||||||||||||||||||||||||||
|
Cash
surrender value of life insurance
|
9,392 | 9,022 | 4,338 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 659,847 | $ | 542,543 | $ | 440,385 | ||||||||||||||||||||||||||||||
|
Liabilities
and Stockholders’ Equity:
|
||||||||||||||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||||||||||||||
|
Savings
accounts
|
$ | 69,297 | $ | 683 | 0.99 | % | $ | 56,245 | $ | 478 | 0.85 | % | $ | 50,820 | $ | 361 | 0.71 | % | ||||||||||||||||||
|
NOW
accounts 11,444
|
16,342 | 63 | 0.39 | 11,444 | 55 | 0.48 | 10,470 | 91 | 0.87 | |||||||||||||||||||||||||||
|
Money
market accounts
|
83,112 | 1,282 | 1.54 | 61,896 | 1,299 | 2.10 | 47,081 | 1,660 | 3.52 | |||||||||||||||||||||||||||
|
Certificate
accounts 22
|
285,163 | 8,467 | 2.97 | 221,772 | 8,230 | 3.71 | 166,563 | 7,434 | 4.46 | |||||||||||||||||||||||||||
|
Total
deposits
|
453,914 | 10,495 | 2.31 | 351,357 | 10,062 | 2.86 | 274,934 | 9,546 | 3.47 | |||||||||||||||||||||||||||
|
Federal
Home Loan Bank advances and
subordinated
debentures……………………
|
65,743 | 2,841 | 4.32 | 66,785 | 3,004 | 4.50 | 47,400 | 2,234 | 4.71 | |||||||||||||||||||||||||||
|
Advanced
payments by borrowers for taxes and
insurance
|
1,209 | 15 | 1.24 | 1,006 | 14 | 1.39 | 890 | 12 | 1.35 | |||||||||||||||||||||||||||
|
Securities
sold under agreements to repurchase
|
18,593 | 190 | 1.02 | 11,245 | 146 | 1.30 | 10,678 | 356 | 3.33 | |||||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
539,459 | 13,541 | 2.51 | 430,393 | 13,226 | 3.07 | 333,902 | 12,148 | 3.64 | |||||||||||||||||||||||||||
|
Demand
deposits
|
45,569 | 38,042 | 31,177 | |||||||||||||||||||||||||||||||||
|
Other
liabilities
|
7,915 | 7,559 | 9,083 | |||||||||||||||||||||||||||||||||
|
Total
liabilities
|
592,943 | 475,994 | 374,162 | |||||||||||||||||||||||||||||||||
|
Stockholders’
Equity
|
66,904 | 66,549 | 66,223 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and stockholders’ equity
|
$ | 659,847 | $ | 542,543 | $ | 440,385 | ||||||||||||||||||||||||||||||
|
Net
interest income/net interest rate spread (3)
|
$ | 19,141 | 2.89 | % | $ | 16,102 | 2.72 | % | $ | 14,100 | 2.93 | % | ||||||||||||||||||||||||
|
Net
interest margin (4)
|
3.16 | % | 3.18 | % | 3.53 | % | ||||||||||||||||||||||||||||||
|
Ratio
of interest-earning assets
to
interest-bearing liabilities
|
112.14 | % | 117.78 | % | 119.65 | % | ||||||||||||||||||||||||||||||
________________________
|
(1)
|
Reported
on a tax equivalent basis, using a 34% tax
rate.
|
|
(2)
|
Amount
is net of deferred loan origination costs, undisbursed proceeds of
construction loans in process, allowance for loan losses and includes
non-accruing loans. We record interest income on non-accruing
loans on a cash basis. Loan fees are included in interest
income.
|
|
(3)
|
Net
interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
|
|
(4)
|
Net
interest margin represents net interest income as a percentage of average
interest-earning assets.
|
31
Rate/Volume
Analysis. The
following table sets forth the effects of changing rates and volumes on our net
interest income. The rate column shows the effects attributable to
changes in rate (changes in rate multiplied by prior volume). The
volume column shows the effects attributable to changes in volume (changes in
volume multiplied by prior rate). The net column represents the sum
of the prior columns. For purposes of this table, changes
attributable to changes in both rate and volume that cannot be segregated have
been allocated proportionately based on the changes due to rate and the changes
due to volume.
|
Fiscal
Year Ended
March
31, 2010
Compared
to
Fiscal
Year Ended
March
31, 2009
|
Fiscal
Year Ended
March
31, 2009
Compared
to
Fiscal
Year Ended
March
31, 2008
|
|||||||||||||||||||||||
|
Increase
(Decrease)
Due
to
|
Increase
(Decrease)
Due
to
|
|||||||||||||||||||||||
|
Rate
|
Volume
|
Net
|
Volume
|
Rate
|
Net
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Interest-earning
assets:
|
||||||||||||||||||||||||
|
Federal
funds sold, interest-bearing
deposits
and marketable equity securities
|
$ | (31 | ) | $ | 58 | $ | 27 | $ | (1,014 | ) | $ | 408 | $ | (606 | ) | |||||||||
|
Investments
in available-for-sale securities,
other
than mortgage-backed and
mortgage-related
securities
|
(144 | ) | (417 | ) | (561 | ) | 229 | (439 | ) | (210 | ) | |||||||||||||
|
Mortgage-backed
and mortgage-related
securities
|
(130 | ) | (124 | ) | (254 | ) | (27 | ) | 1,040 | 1,013 | ||||||||||||||
|
Federal
Home Loan Bank
stock
|
(100 | ) | 15 | (85 | ) | (158 | ) | 75 | (83 | ) | ||||||||||||||
|
Loans,
net (1)
|
(1,152 | ) | 5,379 | 4,227 | (1,552 | ) | 4,518 | 2,966 | ||||||||||||||||
|
Total
interest-earning
assets
|
(1,557 | ) | 4,911 | 3,354 | (2,522 | ) | 5,602 | 3,080 | ||||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||||||
|
Savings
accounts
|
84 | 121 | 205 | 77 | 40 | 117 | ||||||||||||||||||
|
NOW
accounts
|
(6 | ) | 14 | 8 | (45 | ) | 9 | (36 | ) | |||||||||||||||
|
Money
market
accounts
|
56 | (73 | ) | (17 | ) | (775 | ) | 414 | (361 | ) | ||||||||||||||
|
Certificate
accounts
|
(552 | ) | 789 | 237 | (801 | ) | 1,597 | 796 | ||||||||||||||||
|
Federal
Home Loan Bank advances and
subordinated
debentures
|
(115 | ) | (48 | ) | (163 | ) | (90 | ) | 860 | 770 | ||||||||||||||
|
Advanced
payments by borrowers for taxes
and
insurance
|
(1 | ) | 2 | 1 | -- | 2 | 2 | |||||||||||||||||
|
Securities
sold under agreements to repurchase
|
(21 | ) | 65 | 44 | (230 | ) | 20 | (210 | ) | |||||||||||||||
|
Total
interest-bearing liabilities
|
(555 | ) | 870 | 315 | (1,864 | ) | 2,942 | 1,078 | ||||||||||||||||
|
Increase
in net interest
income
|
$ | (1,002 | ) | $ | 4,041 | $ | 3,039 | $ | (658 | ) | $ | 2,660 | $ | 2,002 | ||||||||||
______________________________
|
(1)
|
Amount
is net of deferred loan origination costs, undisbursed proceeds of
construction loans in process, allowance for loan losses and includes
non-accruing loans. We record interest income on non-accruing
loans. We record interest income on non-accruing loans on a cash
basis. Loan fees are included in interest
income.
|
Provision
for Loan Losses. The provision for loan losses are charges to
earnings to bring the total allowance for losses to a level considered by
management as adequate to provide for estimated losses inherent in the loan
portfolio. The size of the provision for each year is dependent upon
many factors, including loan growth, net charge-offs, changes in the composition
of the loan portfolio, delinquencies, management’s assessment of loan portfolio
quality, the value of collateral and general economic factors.
We recorded provision for loan losses
of $3.0 million and $2.9 million in the years ended March 31, 2010 and 2009,
respectively. The increase in the provision was caused primarily by
the $4.9 million in charge-offs and the $99.9 million, or 23.8%, increase in
total loans, partially offset by a $2.9 million decrease in non-accrual
loans.
Although management utilizes its best
judgment in providing for losses, there can be no assurance that we will not
have to change its provisions for loan losses in subsequent
periods. Management will continue to monitor the allowance for loan
losses and make additional provisions to the allowance as
appropriate.
32
An analysis of the changes in the
allowance for loan losses, non-performing loans and classified loans is
presented under “—Risk
Management—Analysis of Non-Performing and Classified Assets” and “—Risk Management—Analysis and
Determination of the Allowance for Loan Losses.”
Noninterest
Income (Charges). The following table
shows the components of noninterest (charges) income and the percentage changes
from 2010 to 2009.
|
2010
|
2009
|
%
Change
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Service
charges on deposit accounts
|
$ | 1,211 | $ | 1,024 | 18.3 | % | ||||||
|
Gain
on sales and calls of securities, net
|
871 | 189 | 360.8 | |||||||||
|
Gain
on sale of loans
|
8 | 72 | (88.9 | ) | ||||||||
|
Increase
in cash surrender value of life insurance policies
|
375 | 359 | 4.5 | |||||||||
|
Impairment
loss on securities
|
(52 | ) | (2,741 | ) | 98.1 | |||||||
|
Other
income
|
532 | 547 | (2.7 | ) | ||||||||
|
Total
|
$ | 2,945 | $ | (550 | ) | 635.5 | % | |||||
The increase in noninterest income
was due to the investment securities other-than-temporary-impaired write down of
$2.7 million recorded during fiscal year 2009 and the $682,000 increase in gain
on sales and calls of securities. Approximately $696,000 of the
$871,000 gains on sales and calls of securities were due to gains on the sale of
preferred stock which were converted from auction rate
securities. These auction rate securities were written-down to market
value during fiscal year 2009, which was included in impairment loss on
securities.
Noninterest
Expense. The following table shows the components of
noninterest expense and the percentage changes from fiscal 2010 to fiscal
2009.
|
2010
|
2009
|
%
Change
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Salaries
and employee benefits
|
$ | 7,707 | $ | 7,752 | (0.6 | )% | ||||||
|
Occupancy
and equipment expenses
|
3,216 | 2,966 | 8.4 | |||||||||
|
Advertising
and promotion
|
140 | 295 | (52.5 | ) | ||||||||
|
Professional
fees
|
839 | 741 | 13.2 | |||||||||
|
Data
processing expense
|
666 | 502 | 32.7 | |||||||||
|
FDIC
insurance assessments
|
1,149 | 322 | 256.8 | |||||||||
|
Stationery
and supplies
|
315 | 190 | 65.8 | |||||||||
|
Amortization
of identifiable intangible assets
|
461 | 506 | (8.9 | ) | ||||||||
|
Other
expense
|
2,341 | 1,683 | 39.1 | |||||||||
|
Total
|
$ | 16,834 | $ | 14,957 | 12.5 | |||||||
|
Efficiency
ratio
(1)
|
77.3 | % | 98.6 | % | ||||||||
________________________
|
|
(1)
|
Computed
as noninterest expense divided by the sum of net interest and dividend
income and other income.
|
The increase in noninterest expense was
due primarily to fiscal 2010 including 10 months of expense for Apple Valley
Bank & Trust which was acquired on June 8, 2009. In addition, the
Company recorded substantially higher FDIC insurance assessments and higher REO
expenses and loan collection expenses.
Income
Taxes. The Company recorded income tax expense of $212,000 for
the fiscal year ended March 31, 2010 compared to a $916,000 income tax benefit
in the previous year. The tax benefit for the prior year was due to
the pre-tax loss of $2.7 million.
33
Risk
Management
Overview. Managing
risk is an essential part of successfully managing a financial
institution. Our most prominent risk exposures are credit risk,
interest rate risk and market risk. Credit risk is the risk of not
collecting the interest and/or the principal balance of a loan or investment
when it is due. Interest rate risk is the potential reduction of
interest income as a result of changes in interest rates. Market risk
arises from fluctuations in interest rates that may result in changes in the
values of financial instruments, such as available-for-sale securities that are
accounted for on a mark-to-market basis. Other risks that we
encounter are operational risks, liquidity risks and reputation
risk. Operational risks include risks related to fraud, regulatory
compliance, processing errors, technology and disaster
recovery. Liquidity risk is the possible inability to fund
obligations to depositors, lenders or borrowers. Reputation risk is
the risk that negative publicity or press, whether true or not, could cause a
decline in our customer base or revenue.
Credit
Risk Management. Our
strategy for credit risk management focuses on having well-defined credit
policies and uniform underwriting criteria and providing prompt attention to
potential problem loans.
When a borrower fails to make a
required loan payment, we take a number of steps to have the borrower cure the
delinquency and restore the loan to current status. We make initial
contact with the borrower when the loan becomes 15 days past due. If
payment is not received by the 30th day
of delinquency, additional letters and phone calls generally are
made. Typically, when the loan becomes 60 days past due, we send a
letter notifying the borrower that we may commence legal proceedings if the loan
is not paid in full within 30 days. Generally, loan workout
arrangements are made with the borrower at this time; however, if an arrangement
cannot be structured before the loan becomes 90 days past due, we will send a
formal demand letter and, once the time period specified in that letter expires,
commence legal proceedings against any real property that secures the loan or
attempt to repossess any business assets or personal property that secures the
loan. If a foreclosure action is instituted and the loan is not
brought current, paid in full or refinanced before the foreclosure sale, the
real property securing the loan generally is sold at foreclosure.
Management informs the Boards of
Directors monthly of the amount of loans delinquent more than 90 days, all loans
in foreclosure and all foreclosed and repossessed property that we
own.
Analysis
of Non-performing and Classified Assets. We consider
repossessed assets and loans that are 90 days or more past due to be
non-performing assets. When a loan becomes 90 days delinquent, the
loan is placed on non-accrual status at which time the accrual of interest
ceases and an allowance for any uncollectible accrued interest is established
and charged against operations. Typically, payments received on a
non-accrual loan are applied to the outstanding principal and interest as
determined at the time of collection of the loan.
Real estate that we acquire as a result
of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed
real estate until it is sold. When property is acquired, it is
recorded at the lower of the recorded investment in the loan or at fair
value. Thereafter, we carry foreclosed real estate at fair value, net
of estimated selling costs. Holding costs and declines in fair value
after acquisition of the property result in charges against income.
Non-performing assets totaled $12.0
million, or 1.78% of total assets, at March 31, 2010, which was a decrease of
$53,000 from March 31, 2009. As a result, nonperforming loans as a
percentage of loans decreased from 2.84% at March 31, 2009 to 1.73% at March 31,
2010. At March 31, 2010 we had two residential properties and four
commercial properties classified as other real estate owned totaling $2.8
million. We had one residential property classified as other real
estate owned with a balance of $141,000 at March 31, 2009. At March
31, 2010, non-accrual loans consisted of twenty two residential real estate
loans, twenty one commercial loans, ten commercial real estate loans, seven
consumer loans and one construction loan, compared to fourteen residential real
estate loans, ten commercial loans, eight commercial real estate loans, three
consumer loans and two construction loans at March 31, 2009.
34
The following table provides
information with respect to our non-performing assets at the dates
indicated.
|
At
March 31,
|
||||||||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Non-accruing
loans:
|
||||||||||||||||||||
|
Mortgage
loans:
|
||||||||||||||||||||
|
Residential
loans
|
$ | 3,221 | $ | 1,905 | $ | 737 | $ | 824 | $ | 331 | ||||||||||
|
Commercial
real estate
|
2,303 | 3,918 | --- | --- | --- | |||||||||||||||
|
Construction
loans
|
361 | 439 | 398 | |||||||||||||||||
|
Total
mortgage loans
|
5,885 | 6,262 | 1,135 | 824 | 331 | |||||||||||||||
|
Consumer
loans
|
46 | 28 | 22 | --- | --- | |||||||||||||||
|
Commercial
loans
|
3,064 | 5,636 | 10 | --- | 269 | |||||||||||||||
|
Total
nonaccrual loans
|
8,995 | 11,926 | 1,167 | 824 | 600 | |||||||||||||||
|
Other
real estate owned
|
2,846 | 141 | --- | --- | --- | |||||||||||||||
|
Other
repossessed assets
|
173 | --- | --- | --- | --- | |||||||||||||||
|
Total
nonperforming assets
|
$ | 12,014 | $ | 12,067 | $ | 1,167 | $ | 824 | $ | 600 | ||||||||||
|
Impaired
loans
|
$ | 7,978 | $ | 10,135 | $ | 398 | $ | --- | $ | --- | ||||||||||
|
Accruing
loans 90 days or more past due
|
--- | 15 | 8 | --- | --- | |||||||||||||||
|
Allowance
for loan losses as a percent of loans (1)
|
0.89 | % | 1.54 | % | 1.08 | % | 0.94 | % | 1.09 | % | ||||||||||
|
Allowance
for loan losses as a percent
of
nonperforming loans (2)
|
51.42 | % | 54.15 | % | 346.70 | % | 227.55 | % | 272.67 | % | ||||||||||
|
Nonperforming
loans as a percent of loans (1)(2)
|
1.73 | % | 2.84 | % | 0.31 | % | 0.41 | % | 0.40 | % | ||||||||||
|
Nonperforming
assets as a percent of total assets
|
1.78 | % | 2.11 | % | 0.23 | % | 0.29 | % | 0.23 | % | ||||||||||
_____________________________
|
(1)
|
Loans
are presented before allowance for loan
losses.
|
|
(2)
|
Non-performing
loans consist of all loans 90 days or more past due and other loans which
have been identified as presenting uncertainty with respect to the full
collection of interest or
principal.
|
Other than as disclosed in the above
table, there were no other loans at March 31, 2010 that management has serious
doubts about the ability of the borrowers to comply with the present repayment
terms.
Interest income that would have been
recorded for the year ended March 31, 2010 had non-accruing loans been current
according to their original terms amounted to $390,000, none of which was
recognized in interest income.
Banking regulations require us to
review and classify our assets on a regular basis. In addition, the
Connecticut Department of Banking and FDIC have the authority to identify
problem assets and, if appropriate, require them to be
classified. There are three classifications for problem
assets: substandard, doubtful and loss. “Substandard
assets” must have one or more defined weaknesses and are characterized by the
distinct possibility that we will sustain some loss if the deficiencies are not
corrected. “Doubtful assets” have the weaknesses of substandard
assets with the additional characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable and there is a high possibility of loss. An asset
classified “loss” is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. The
regulations also provide for a “special mention” category, described as assets
that do not currently expose us to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving our close attention. When we classify an asset as
substandard or doubtful, we establish a specific allowance for loan
losses. If we classify an asset as loss, we charge off an amount
equal to 100% of the portion of the asset classified as loss.
35
The following table shows the aggregate
amounts of our classified assets at the dates indicated.
|
At
March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
(In
thousands)
|
||||||||
|
Special
mention assets
|
$ | 13,384 | $ | 26,882 | ||||
|
Substandard
assets
|
15,778 | 16,161 | ||||||
|
Doubtful
assets
|
1,128 | 1,872 | ||||||
|
Loss
assets
|
323 | 234 | ||||||
|
Total
classified assets
|
$ | 30,613 | $ | 45,149 | ||||
Classified assets at March 31, 2010
included fifty five loans totaling $7.8 million that were considered
non-performing. Classified assets at March 31, 2009 included twenty
loans totaling $10.0 million that were considered non-performing.
Classified and special mention assets
decreased $14.5 million to $30.6 million at March 31, 2010 and were 5.9% and
10.7% of total loans at March 31, 2010 and 2009, respectively. The
decrease was caused primarily by the Company’s focus on working with the
borrowers to correct deficiencies with their loans.
Delinquencies.
The following table provides information about delinquencies in our loan
portfolio at the dates indicated.
|
At
March 31, 2010
|
At
March 31, 2009
|
At
March 31, 2008
|
||||||||||||||||||||||||||||||||||||||||||||||
|
30-89
Days
|
90
Days or More(2)
|
30-89
Days
|
90
Days or More(2)
|
30-89
Days
|
90
Days or More(2)
|
|||||||||||||||||||||||||||||||||||||||||||
|
Number
of
Loans
|
Principal
Balance
of
Loans
|
Number
of
Loans
|
Principal
Balance
of
Loans
|
Number
of
Loans
|
Principal
Balance
of
Loans
|
Number
of
Loans
|
Principal
Balance
of
Loans
|
Number
of
Loans
|
Principal
Balance
of
Loans
|
Number
of
Loans
|
Principal
Balance
of
Loans
|
|||||||||||||||||||||||||||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Mortgage
loans:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Residential
loans
|
35 | $ | 5,431 | 17 | $ | 2,688 | 16 | $ | 2,240 | 6 | $ | 793 | 7 | $ | 784 | 1 | $ | 57 | ||||||||||||||||||||||||||||||
|
Commercial
real estate
|
9 | 2,230 | 9 | 1,972 | 2 | 177 | 4 | 1,838 | 3 | 315 | -- | -- | ||||||||||||||||||||||||||||||||||||
|
Construction
loans
|
1 | 445 | 1 | 361 | -- | -- | 2 | 399 | 1 | 183 | 1 | 398 | ||||||||||||||||||||||||||||||||||||
|
Total
mortgage loans
|
45 | 8,106 | 27 | 5,021 | 18 | 2,417 | 12 | 3,030 | 11 | 1,282 | 2 | 455 | ||||||||||||||||||||||||||||||||||||
|
Consumer
loans
|
6 | 51 | 2 | 8 | 8 | 96 | 2 | 16 | 1 | -- | -- | -- | ||||||||||||||||||||||||||||||||||||
|
Commercial
loans
|
12 | 1,959 | 15 | 1,851 | 7 | 345 | 7 | 2,457 | 8 | 204 | -- | -- | ||||||||||||||||||||||||||||||||||||
|
Total
|
63 | $ | 10,116 | 44 | $ | 6,880 | 33 | $ | 2,858 | 21 | $ | 5,503 | 20 | $ | 1,486 | 2 | $ | 455 | ||||||||||||||||||||||||||||||
|
Delinquent
loans to loans (1)
|
1.94 | % | 1.32 | % | 0.68 | % | 1.31 | % | 0.40 | % | 0.12 | % | ||||||||||||||||||||||||||||||||||||
__________________
(1) Loans
are presented before the allowance for loan losses and net of deferred loan
origination fees.
(2) Includes
all non-accrual loans.
Analysis
and Determination of the Allowance for Loan Losses. We
maintain an allowance for loan losses to absorb probable losses inherent in the
existing portfolio. When a loan, or portion thereof, is considered
uncollectible, it is charged against the allowance. Recoveries of
amounts previously charged-off are added to the allowance when
collected. The adequacy of the allowance for loan losses is evaluated
on a regular basis by management. Based on management’s judgment, the
allowance for loan losses covers all known losses and inherent losses in the
loan portfolio.
Our methodology for assessing the
appropriateness of the allowance for loan losses consists of specific allowances
for identified problem loans and a general valuation allowance on the remainder
of the loan portfolio. Although we determine the amount of each
element of the allowance separately, the entire allowance for loan losses is
available for the entire portfolio.
Specific Allowances for Identified
Problem Loans. We establish an allowance on identified problem
loans based on factors including, but not limited to: (1) the
borrower’s ability to repay the loan; (2) the type and value of the collateral;
(3) the strength of our collateral position; and (4) the borrower’s repayment
history.
General Valuation Allowance on the
Remainder of the Portfolio. We also establish a general
allowance by applying loss factors to the remainder of the loan portfolio to
capture the inherent losses associated with the lending
activity. This general valuation allowance is determined by
segregating the loans by loan category and assigning loss factors to each
category. The loss factors are determined based on our historical
loss experience, delinquency trends and management’s evaluation of the
collectability of the loan portfolio. Based on management’s judgment,
we may adjust the loss factors due to: (1) changes in lending policies and
procedures; (2) changes in existing general economic and business conditions
affecting our primary market area; (3) credit quality trends; (4) collateral
value; (5)
36
loan
volumes and concentrations; (6) seasoning of the loan portfolio; (7) recent loss
experience in particular segments of the portfolio; (8) duration of the current
business cycle; and (9) bank regulatory examination results. Loss
factors are reevaluated quarterly to ensure their relevance in the current real
estate environment.
The Connecticut Department of Banking,
as an integral part of its examination process, periodically reviews our loan
and foreclosed real estate portfolios and the related allowance for loan losses
and valuation allowance for foreclosed real estate. They may require
the Bank to increase the allowance for loan losses or the valuation allowance
for foreclosed real estate based on their judgments of information available to
them at the time of their examination, thereby adversely affecting our results
of operations.
At March 31, 2010, our allowance for
loan losses represented 0.89% of total loans and 51.42% of non-performing
loans. The allowance for loan losses decreased $1.8 million from
March 31, 2009 to March 31, 2010 due to net charge-offs of $4.9 million,
partially offset by a provision for loan losses of $3.0 million. The
provision for loan losses for the year ended March 31, 2010 reflected the
deterioration in the local economy as well as continued growth of the loan
portfolio, particularly the increase in commercial real estate and commercial
loans, which carry higher risks of default than one- to four-family
residential real estate loans, partially offset by a decrease in non-accrual
loans and classified assets.
The following table sets forth the
breakdown of the allowance for loan losses by loan category at the dates
indicated.
|
At
March 31,
|
||||||||||||||||||||||||||||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||||||||||||
|
Amount
|
Percent
of
Loans
in
Each
Category
to
Total
Loans
|
Amount
|
Percent
of
Loans
in
Each
Category
to
Total
Loans
|
Amount
|
Percent
of
Loans
in
Each
Category
to
Total
Loans
|
Amount
|
Percent
of
Loans
in
Each
Category
to
Total
Loans
|
Amount
|
Percent
of
Loans
in
Each
Category
to
Total
Loans
|
|||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Mortgage
loans:
|
||||||||||||||||||||||||||||||||||||||||
|
Residential
loans
|
$ | 739 | 40.97 | % | $ | 837 | 37.69 | % | $ | 819 | 42.09 | % | $ | 508 | 59.96 | % | $ | 483 | 63.07 | % | ||||||||||||||||||||
|
Commercial
real estate
|
1,678 | 39.48 | 1,842 | 38.76 | 1,944 | 36.82 | 1,033 | 26.97 | 1,002 | 27.04 | ||||||||||||||||||||||||||||||
|
Construction
loans
|
151 | 3.74 | 143 | 3.69 | 258 | 5.60 | 156 | 4.38 | 84 | 5.63 | ||||||||||||||||||||||||||||||
|
Consumer
loans
|
38 | 1.40 | 68 | 1.55 | 53 | 1.67 | 6 | 1.34 | 12 | 0.67 | ||||||||||||||||||||||||||||||
|
Commercial
loans
|
2,019 | 14.41 | 3,568 | 18.31 | 972 | 13.82 | 172 | 7.35 | 55 | 3.59 | ||||||||||||||||||||||||||||||
|
Total
allowance for loan losses
|
$ | 4,625 | 100.00 | % | $ | 6,458 | 100.00 | % | $ | 4,046 | 100.00 | % | $ | 1,875 | 100.00 | % | $ | 1,636 | 100.00 | % | ||||||||||||||||||||
Although we believe that we use the
best information available to establish the allowance for loan losses, future
adjustments to the allowance for loan losses may be necessary and results of
operations could be adversely affected if circumstances differ substantially
from the assumptions used in making the determinations. Furthermore,
while we believe we have established our allowance for loan losses in conformity
with generally accepted accounting principles, there can be no assurance that
regulators, in reviewing our loan portfolio, will not request us to increase our
allowance for loan losses. In addition, because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that the existing allowance for loan losses is adequate or that
increases will not be necessary should the quality of any loan deteriorate as a
result of the factors discussed above. Any material increase in the
allowance for loan losses may adversely affect our financial condition and
results of operations.
37
Analysis
of Loan Loss Experience. The following table sets forth an
analysis of the allowance for loan losses for the periods
indicated. Where specific loan loss allowances have been established,
any difference between the loss allowance and the amount of loss realized has
been charged or credited to current income.
|
At
or For the Fiscal Year
Ended
March 31,
|
||||||||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Balance
at beginning of period
|
$ | 6,458 | $ | 4,046 | $ | 1,875 | $ | 1,636 | $ | 1,437 | ||||||||||
|
Provision
for loan losses
|
3,049 | 2,929 | 307 | 242 | 210 | |||||||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Residential
loans
|
216 | 127 | 24 | --- | --- | |||||||||||||||
|
Commercial
real estate loans
|
540 | --- | --- | --- | --- | |||||||||||||||
|
Construction
loans
|
--- | --- | 58 | --- | --- | |||||||||||||||
|
Consumer
loans
|
27 | 36 | 34 | 5 | 17 | |||||||||||||||
|
Commercial
loans
|
4,160 | 354 | 15 | --- | --- | |||||||||||||||
|
Total
charge-offs
|
4,943 | 517 | 131 | 5 | 17 | |||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Residential
loans
|
3 | --- | --- | --- | --- | |||||||||||||||
|
Consumer
loans
|
24 | --- | 3 | 2 | 6 | |||||||||||||||
|
Commercial
loans
|
34 | --- | 11 | --- | --- | |||||||||||||||
|
Total
Recoveries
|
61 | --- | 14 | 2 | 6 | |||||||||||||||
|
Net
charge-offs (recoveries)
|
4,882 | 517 | 117 | 3 | 11 | |||||||||||||||
|
Allowance
obtained through merger
|
--- | --- | 1,981 | --- | --- | |||||||||||||||
|
Balance
at end of period
|
$ | 4,625 | $ | 6,458 | $ | 4,046 | $ | 1,875 | $ | 1,636 | ||||||||||
|
Ratio
of net charge-offs during the period to
average
loans outstanding during the period
|
1.03 | % | 0.13 | % | 0.04 | % | --- | % | 0.01 | % | ||||||||||
|
Allowance
for loan losses as a percent of loans (1)
|
0.89 | % | 1.54 | % | 1.08 | % | 0.94 | % | 1.09 | % | ||||||||||
|
Allowance
for loan losses as a percent of
nonperforming
loans (2)
|
51.42 | % | 54.15 | % | 346.70 | % | 227.55 | % | 272.67 | % | ||||||||||
_______________________________
|
(1)
|
Loans
are presented before allowance for loan
losses.
|
|
(2)
|
Non-performing
loans consist of all loans 90 days or more past due and other loans which
we have identified as presenting uncertainty with respect to the
collectibility of interest or
principal.
|
During
the fiscal year ended March 31, 2008, we acquired $2.0 million of allowance for
loan losses in connection with the acquisition of First Valley
Bancorp. The loans acquired in the merger were primarily commercial
real estate loans, residential loans and commercial loans, which had a face
value of $141.1 million and a fair value of $141.0 million. In
determining the fair value of the loans, we used a discounted cash flow method
utilizing the current loan rate as of the date of the consummation of the
merger. The amount of the allowance for loan losses that was
attributable to these loans was calculated based on the collectibility of the
loans, the nature and volume of the loan portfolio, adverse situations that may
affect the borrower’s ability to repay, estimated value of any underlying
collateral and prevailing economic conditions.
During
the fiscal year ended March 31, 2010 we 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.
Liquidity
Management. Liquidity is the ability
to meet current and future financial obligations of a short-term
nature. Our primary sources of funds consist of deposit inflows, loan
repayments, maturities and sales of investment securities, borrowings from the
Federal Home Loan Bank of Boston and securities sold under agreements to
repurchase. While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
We regularly adjust our investments in
liquid assets based upon our assessment of (1) expected loan demand,
(2) expected deposit flows, (3) yields available on interest-earning
deposits and securities and (4) the objectives of our asset/liability management
program. Excess liquid assets are invested generally in money market
mutual funds, federal funds sold and short- and intermediate-term agency and
municipal securities.
38
Our most liquid assets are cash and
cash equivalents and interest-bearing deposits. The levels of these
assets are dependent on our operating, financing, lending and investing
activities during any given period. At March 31, 2010, cash and cash
equivalents totaled $39.0 million. Securities classified as available
for sale, which provide additional sources of liquidity, totaled $64.0 million
at March 31, 2010. In addition, at March 31, 2010, we had the ability
to borrow approximately $20.3 million from the Federal Home Loan Bank of
Boston. On that date, we had $56.9 million outstanding.
At March 31, 2010, we had $75.5 million
in loan commitments outstanding, which included $3.5 million in undisbursed
construction loans and $46.7 million in unused lines of
credit. Certificates of deposit due within one year of March 31, 2010
totaled $161.0 million, or 31.1% of total deposits. If these maturing
deposits do not remain with us, we will be required to seek other sources of
funds, including other certificates of deposit and lines of
credit. Depending on market conditions, we may be required to pay
higher rates on such deposits or other borrowings than we currently pay on the
certificates of deposit due on or before March 31, 2011. We believe,
however, based on past experience, that a significant portion of our
certificates of deposit will remain with us. We have the ability to
attract and retain deposits by adjusting the interest rates
offered.
The following table presents our
contractual obligations at March 31, 2010.
|
Payments
Due by Period
|
||||||||||||||||||||
|
Total
|
Less
than
One
Year
|
One
to
Three
Years
|
Three
to
Five
Years
|
More
than
Five
Years
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Long-Term
Debt Obligations
(1)
|
$ | 56,881 | $ | 31,993 | $ | 13,615 | $ | 5,822 | $ | 5,451 | ||||||||||
|
Operating
Lease Obligations
|
12,551 | 931 | 1,812 | 1,709 | 8,099 | |||||||||||||||
|
Total
|
$ | 69,432 | $ | 32,924 | $ | 15,427 | $ | 7,531 | $ | 13,550 | ||||||||||
__________________
|
(1)
|
Consists
of Federal Home Loan Bank advances and excludes fair value
adjustment.
|
Our primary investing activities are
the origination and purchase of loans and the purchase of
securities. Our primary financing activities consist of activity in
deposit accounts, Federal Home Loan Bank advances and securities sold under
agreements to repurchase. Deposit flows are affected by the overall
level of interest rates, the interest rates and products offered by us and our
local competitors and other factors. We generally manage the pricing
of our deposits to be competitive and to increase core deposits and commercial
banking relationships. Occasionally, we offer promotional rates on
certain deposit products to attract certain deposit products.
The following table presents our
primary investing and financing activities during the periods
indicated.
|
Years
Ended March 31,
|
||||||||||||
|
2010
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Investing
activities:
|
||||||||||||
|
Loan
originations
|
$ | 73,608 | $ | 86,965 | $ | 81,867 | ||||||
|
Loan
participations
purchased
|
51,236 | 13,828 | 5,860 | |||||||||
|
Securities
purchased
|
39,753 | 35,918 | 40,285 | |||||||||
|
Financing
activities:
|
||||||||||||
|
Increase
in
deposits
|
$ | 98,136 | $ | 49,124 | $ | 188,637 | ||||||
|
(Decrease)
increase in FHLB advances
|
(9,973 | ) | 4,905 | 28,341 | ||||||||
|
Increase
(decrease) in securities sold
under
agreements to repurchase
|
11,391 | 3,514 | (622 | ) | ||||||||
Capital
Management. The Bank manages its capital to maintain strong
protection for depositors and creditors and is subject to various regulatory
capital requirements. The risk-based capital guidelines include both
a definition of capital and a framework for calculating risk-weighted assets by
assigning balance sheet assets and off-balance sheet items to broad risk
categories. At March 31, 2010, the Bank exceeded all of their
regulatory capital requirements. The Bank is considered “well
capitalized” under regulatory guidelines. See Item 1. Description of
Business and note 15 of the notes to the consolidated financial
statements.
39
Off-Balance
Sheet Arrangements. In the normal course of operations, we
engage in a variety of financial transactions that, in accordance with generally
accepted accounting principles, are not recorded in our financial statements.
These transactions involve, to varying degrees, elements of credit, interest
rate and liquidity risk. Such transactions are used primarily to
manage customers’ requests for funding and take the form of loan commitments and
lines of credit. A presentation of our outstanding loan commitments
and unused lines of credit at March 31, 2010 and their effect on our liquidity
is presented at note 20 of the notes to the consolidated financial statements
included in this annual report and under “—Risk Management—Liquidity
Management.”
For the year ended March 31, 2010, we
did not engage in any off-balance-sheet transactions reasonably likely to have a
material effect on our financial condition, results of operations or cash
flows.
Impact
of Recent Accounting Pronouncements
In June
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 fiscal year
2011. 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. These
standards are not expected to have a significant impact on the Company’s
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 October 1, 2009. The guidance did not change the
Company’s valuation techniques for measuring liabilities at fair
value.
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 earnings per share.
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 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 its financial condition and results of operations.
40
In March
2010, the FASB issued ASU 2010-11, “Scope Exception Related to Embedded Credit
Derivatives.” The ASU clarifies that certain embedded derivatives,
such as those contained in certain securitizations, CDOs and structured notes,
should be considered embedded credit derivatives subject to potential
bifurcation and separate fair value accounting. The ASU allows any
beneficial interest issued by a securitization vehicle to be accounted for under
the fair value option at transition. At transition, the Company may
elect to reclassify various debt securities (on an instrument-by-instrument
basis) from held-to-maturity (HTM) or available-for-sale (AFS) to
trading. The new rules are effective July 1, 2010. The
Company is currently analyzing the impact of the changes to determine the
population of instruments that may be reclassified to trading upon
adoption.
In
January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair
Value Measurements.” The ASU requires disclosing the amounts of
significant transfers in and out of Level 1 and 2 of the fair value hierarchy
and describing the reasons for the transfers. The disclosures are
effective for reporting periods beginning after December 15,
2009. The Company adopted ASU 2010-06 as of April 1,
2010. The required disclosures are included in Note
18. Additionally, disclosures of the gross purchases, sales,
issuances and settlements activity in the Level 3 of the fair value measurement
hierarchy will be required for fiscal years beginning after December 15,
2010.
Effect
of Inflation and Changing Prices
The financial statements and related
financial data presented in this annual report have been prepared in accordance
with generally accepted accounting principles in the United States, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The primary impact of
inflation on our operations is reflected in increased operating
costs. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution’s performance than do general levels of
inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and
services.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest
Rate Risk Management. The 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 the Bank’s earnings while decreases in interest rates may
beneficially affect their earnings. To reduce the potential
volatility of their 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
Committee, which includes members of both the board of directors and management,
to communicate, coordinate and control all aspects involving asset/liability
management. The committee 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.
41
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
management’s 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’s board of directors and management continually review
the potential effect changes in interest rates could have on the repayment of
rate sensitive assets and funding requirements of rate sensitive
liabilities.
42
ITEM
8. CONSOLIDATED
FINANCIAL STATEMENTS
The Board
of Directors
New
England Bancshares, Inc.
Enfield,
Connecticut
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
We have
audited the consolidated balance sheets of New England Bancshares, Inc. and
Subsidiaries as of March 31, 2010 and 2009, and the related consolidated
statements of income, changes in stockholders’ equity and cash flows for the
years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of New England
Bancshares, Inc. and Subsidiaries as of March 31, 2010 and 2009, and the results
of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of
America.
SHATSWELL,
MacLEOD & COMPANY, P.C.
West
Peabody, Massachusetts
June 10,
2010
43
NEW ENGLAND BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS
March 31, 2010 and
2009
(Dollars In Thousands, Except
Per Share Amounts)
|
ASSETS
|
2010
|
2009
|
||||||
|
Cash
and due from banks
|
$ | 9,984 | $ | 7,872 | ||||
|
Interest-bearing
demand deposits with other banks
|
28,998 | 33,554 | ||||||
|
Money
market mutual funds
|
--- | 7 | ||||||
|
Total
cash and cash equivalents
|
38,982 | 41,433 | ||||||
|
Interest-bearing
time deposits with other banks
|
99 | 99 | ||||||
|
Investments
in available-for-sale securities (at fair value)
|
63,979 | 71,821 | ||||||
|
Federal
Home Loan Bank stock, at cost
|
4,396 | 3,896 | ||||||
|
Loans,
net of the allowance for loan losses of $4,625 as of
|
||||||||
|
March
31, 2010 and $6,458 as of March 31, 2009
|
515,504 | 413,566 | ||||||
|
Premises
and equipment, net
|
6,916 | 5,990 | ||||||
|
Other
real estate owned
|
2,846 | 141 | ||||||
|
Accrued
interest receivable
|
2,768 | 2,321 | ||||||
|
Deferred
income taxes, net
|
4,296 | 3,769 | ||||||
|
Cash
surrender value of life insurance
|
9,586 | 9,211 | ||||||
|
Identifiable
intangible assets
|
1,704 | 2,165 | ||||||
|
Goodwill
|
16,783 | 14,701 | ||||||
|
Other
assets
|
7,200 | 2,551 | ||||||
|
Total
assets
|
$ | 675,059 | $ | 571,664 | ||||
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
||||||||
|
Deposits:
|
||||||||
|
Noninterest-bearing
|
$ | 53,091 | $ | 37,483 | ||||
|
Interest-bearing
|
464,481 | 381,953 | ||||||
|
Total
deposits
|
517,572 | 419,436 | ||||||
|
Advanced
payments by borrowers for taxes and insurance
|
1,171 | 953 | ||||||
|
Federal
Home Loan Bank advances
|
56,860 | 66,833 | ||||||
|
Subordinated
debentures
|
3,910 | 3,901 | ||||||
|
Securities
sold under agreements to repurchase
|
23,460 | 12,069 | ||||||
|
Other
liabilities
|
4,179 | 4,518 | ||||||
|
Total
liabilities
|
607,152 | 507,710 | ||||||
|
Stockholders’
equity:
|
||||||||
|
Common
stock, par value $.01 per share; 19,000,000 shares
|
||||||||
|
authorized;
6,938,087 shares issued as of March 31, 2010 and
|
||||||||
|
6,420,891
shares issued at March 31, 2009
|
69 | 64 | ||||||
|
Paid-in
capital
|
59,786 | 56,551 | ||||||
|
Retained
earnings
|
17,530 | 16,329 | ||||||
|
Unearned
ESOP shares, 215,399 shares as of March 31, 2010 and
|
||||||||
|
249,291
shares as of March 31, 2009
|
(1,952 | ) | (2,190 | ) | ||||
|
Unearned
shares, stock-based incentive plans, 46,621 shares
|
||||||||
|
as
of March 31, 2010 and 57,259 as of March 31, 2009
|
(522 | ) | (659 | ) | ||||
|
Treasury
stock, 763,798 shares as of March 31, 2010 and 536,931
shares
|
||||||||
|
as
of March 31, 2009
|
(7,302 | ) | (5,742 | ) | ||||
|
Accumulated
other comprehensive income (loss)
|
298 | (399 | ) | |||||
|
Total
stockholders’ equity
|
67,907 | 63,954 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 675,059 | $ | 571,664 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
44
NEW ENGLAND BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
INCOME
For the Years Ended March
31, 2010 and 2009
(Dollars In Thousands,
Except Per Share Amounts)
|
|
2010
|
2009
|
||||||
|
Interest
and dividend income:
|
||||||||
|
Interest
and fees on loans
|
$ | 28,867 | $ | 24,640 | ||||
|
Interest
on debt securities:
|
||||||||
|
Taxable
|
2,634 | 3,204 | ||||||
|
Tax-exempt
|
571 | 747 | ||||||
|
Interest
on federal funds sold, interest-bearing deposits and
dividends
|
295 | 353 | ||||||
|
Total
interest and dividend income
|
32,367 | 28,944 | ||||||
|
Interest
expense:
|
||||||||
|
Interest
on deposits
|
10,495 | 10,062 | ||||||
|
Interest
on advanced payments by borrowers for taxes and insurance
|
15 | 14 | ||||||
|
Interest
on Federal Home Loan Bank advances
|
2,568 | 2,731 | ||||||
|
Interest
on subordinated debentures
|
273 | 273 | ||||||
|
Interest
on securities sold under agreements to repurchase
|
190 | 146 | ||||||
|
Total
interest expense
|
13,541 | 13,226 | ||||||
|
Net
interest and dividend income
|
18,826 | 15,718 | ||||||
|
Provision
for loan losses
|
3,049 | 2,929 | ||||||
|
Net
interest and dividend income after provision for loan
losses
|
15,777 | 12,789 | ||||||
|
Noninterest
income (charges):
|
||||||||
|
Service
charges on deposit accounts
|
1,211 | 1,024 | ||||||
|
Gain
on sales and calls of securities, net
|
871 | 189 | ||||||
|
Gain
on sales of loans
|
8 | 72 | ||||||
|
Increase
in cash surrender value of life insurance policies
|
375 | 359 | ||||||
|
Impairment
loss on securities (includes total losses of $52 and $2,947,
net
|
||||||||
|
of
$0 and $206 recognized in other comprehensive income (loss),
pretax)
|
(52 | ) | (2,741 | ) | ||||
|
Other
income
|
532 | 547 | ||||||
|
Total
noninterest income (charges)
|
2,945 | (550 | ) | |||||
|
Noninterest
expense:
|
||||||||
|
Salaries
and employee benefits
|
7,707 | 7,752 | ||||||
|
Occupancy
and equipment expense
|
3,216 | 2,966 | ||||||
|
Advertising
and promotion
|
140 | 295 | ||||||
|
Professional
fees
|
839 | 741 | ||||||
|
Data
processing expense
|
666 | 502 | ||||||
|
FDIC
insurance assessment
|
1,149 | 322 | ||||||
|
Stationery
and supplies
|
315 | 190 | ||||||
|
Amortization
of identifiable intangible assets
|
461 | 506 | ||||||
|
Other
expense
|
2,341 | 1,683 | ||||||
|
Total
noninterest expense
|
16,834 | 14,957 | ||||||
|
Income
(loss) before income taxes
|
1,888 | (2,718 | ) | |||||
|
Income
tax expense (benefit)
|
212 | (916 | ) | |||||
|
Net
income (loss)
|
$ | 1,676 | $ | (1,802 | ) | |||
|
Earnings
(loss) per share:
|
||||||||
|
Basic
|
$ | 0.28 | $ | (0.32 | ) | |||
|
Diluted
|
$ | 0.28 | $ | (0.32 | ) | |||
The
accompanying notes are an integral part of these consolidated financial
statements.
45
NEW ENGLAND BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended March
31, 2010 and 2009
(Dollars In Thousands,
Except Per Share Amounts)
|
Unearned
|
||||||||||||||||||||||||||||||||
|
Shares
|
||||||||||||||||||||||||||||||||
|
Stock-
|
Accumulated
|
|||||||||||||||||||||||||||||||
|
Unearned
|
Based
|
Other
|
||||||||||||||||||||||||||||||
|
Common
|
Paid-in
|
Retained
|
ESOP
|
Incentive
|
Treasury
|
Comprehensive
|
||||||||||||||||||||||||||
|
Stock
|
Capital
|
Earnings
|
Shares
|
Plans
|
Stock
|
(Loss)
Income
|
Total
|
|||||||||||||||||||||||||
|
Balance,
March 31, 2008
|
$ | 64 | $ | 56,412 | $ | 19,055 | $ | (2,428 | ) | $ | (796 | ) | $ | (3,772 | ) | $ | 202 | $ | 68,737 | |||||||||||||
|
Issuance
of stock for option exercise
|
-- | (95 | ) | -- | -- | -- | 234 | -- | 139 | |||||||||||||||||||||||
|
ESOP
shares released
|
-- | 106 | -- | 238 | -- | -- | -- | 344 | ||||||||||||||||||||||||
|
Compensation
cost for stock-based incentive plans
|
-- | 128 | -- | -- | 137 | -- | -- | 265 | ||||||||||||||||||||||||
|
Dividends
paid ($0.15 per share)
|
-- | -- | (850 | ) | -- | -- | -- | -- | (850 | ) | ||||||||||||||||||||||
|
Treasury
stock purchases
|
-- | -- | -- | -- | -- | (2,204 | ) | -- | (2,204 | ) | ||||||||||||||||||||||
|
Cumulative
effect adjustment of a change in accounting
principle
– adoption of ASC 715-60
|
-- | -- | (74 | ) | -- | -- | -- | -- | (74 | ) | ||||||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||
|
Net
loss
|
-- | -- | (1,802 | ) | -- | -- | -- | -- | -- | |||||||||||||||||||||||
|
Other
comprehensive loss, net of tax effect
|
-- | -- | -- | -- | -- | -- | (601 | ) | -- | |||||||||||||||||||||||
|
Comprehensive
loss
|
-- | -- | -- | -- | -- | -- | -- | (2,403 | ) | |||||||||||||||||||||||
|
Balance,
March 31, 2009
|
64 | 56,551 | 16,329 | (2,190 | ) | (659 | ) | (5,742 | ) | (399 | ) | 63,954 | ||||||||||||||||||||
|
Issuance
of stock for merger
|
5 | 3,175 | -- | -- | -- | -- | -- | 3,180 | ||||||||||||||||||||||||
|
ESOP
shares released
|
-- | (35 | ) | -- | 238 | -- | -- | -- | 203 | |||||||||||||||||||||||
|
Compensation
cost for stock-based incentive plans
|
-- | 95 | -- | -- | 137 | -- | -- | 232 | ||||||||||||||||||||||||
|
Dividends
paid ($0.08 per share)
|
-- | -- | (475 | ) | -- | -- | -- | -- | (475 | ) | ||||||||||||||||||||||
|
Treasury
stock purchases
|
-- | -- | -- | -- | -- | (1,560 | ) | -- | (1,560 | ) | ||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
-- | -- | 1,676 | -- | -- | -- | -- | -- | ||||||||||||||||||||||||
|
Other
comprehensive income, net of tax effect
|
-- | -- | -- | -- | -- | -- | 697 | -- | ||||||||||||||||||||||||
|
Comprehensive
income
|
-- | -- | -- | -- | -- | -- | -- | 2,373 | ||||||||||||||||||||||||
|
Balance,
March 31, 2010
|
$ | 69 | $ | 59,786 | $ | 17,530 | $ | (1,952 | ) | $ | (522 | ) | $ | (7,302 | ) | $ | 298 | $ | 67,907 | |||||||||||||
The accompanying notes are an integral
part of these consolidated financial statements.
46
NEW ENGLAND BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CASH FLOWS
For the Years Ended March
31, 2010 and 2009
(In
Thousands)
|
|
2010
|
2009
|
||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income (loss)
|
$ | 1,676 | $ | (1,802 | ) | |||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||
|
Net
(accretion) amortization of fair value adjustments
|
(672 | ) | 8 | |||||
|
Accretion
of securities, net
|
(120 | ) | (62 | ) | ||||
|
Gain
on sales and calls of securities, net
|
(871 | ) | (189 | ) | ||||
|
Writedown
of available-for-sale securities
|
52 | 11 | ||||||
|
Writedown
of other securities, included in other assets
|
--- | 2,730 | ||||||
|
Provision
for loan losses
|
3,049 | 2,929 | ||||||
|
Change
in deferred loan origination fees
|
(82 | ) | (195 | ) | ||||
|
Gain
on sales of loans, net
|
(8 | ) | (20 | ) | ||||
|
Writedown
of other real estate owned
|
88 | --- | ||||||
|
Gain
on sale of other real estate owned
|
(34 | ) | --- | |||||
|
Depreciation
and amortization
|
942 | 888 | ||||||
|
Increase
in accrued interest receivable
|
(208 | ) | (153 | ) | ||||
|
Deferred
income tax expense (benefit)
|
1,241 | (2,247 | ) | |||||
|
Increase
in cash surrender value life insurance policies
|
(375 | ) | (359 | ) | ||||
|
(Increase)
decrease in prepaid expenses and other assets
|
(5,228 | ) | 144 | |||||
|
Amortization
of identifiable intangible assets
|
461 | 506 | ||||||
|
(Decrease)
increase in accrued expenses and other liabilities
|
(131 | ) | 550 | |||||
|
Compensation
cost for stock-based incentive plan
|
232 | 265 | ||||||
|
ESOP
shares released
|
194 | 344 | ||||||
|
Net
cash provided by operating activities
|
206 | 3,348 | ||||||
|
Cash
flows from investing activities:
|
||||||||
|
Proceeds
from maturities of interest-bearing time deposits with other
banks
|
--- | 594 | ||||||
|
Purchases
of available-for-sale securities
|
(40,468 | ) | (35,918 | ) | ||||
|
Proceeds
from sales of available-for-sale securities
|
23,785 | 10,474 | ||||||
|
Proceeds
from maturities of available-for-sale securities
|
29,556 | 17,184 | ||||||
|
Purchases
of Federal Home Loan Bank stock
|
(35 | ) | (325 | ) | ||||
|
Cash
and cash equivalents acquired from Apple Valley Bank, net of cash
paid
|
||||||||
|
to
shareholders
|
10,288 | --- | ||||||
|
Loan
originations and principal collections, net
|
3,556 | (34,517 | ) | |||||
|
Purchases
of loans
|
(51,236 | ) | (13,828 | ) | ||||
|
Loans
sold
|
--- | 3,704 | ||||||
|
Recoveries
of loans previously charged off
|
61 | --- | ||||||
|
Proceeds
from sales of other real estate owned
|
688 | --- | ||||||
|
Capital
expenditures of other real estate owned
|
(9 | ) | --- | |||||
|
Capital
expenditures
|
(288 | ) | (208 | ) | ||||
|
Proceeds
from sales/disposals of fixed assets
|
18 | 30 | ||||||
|
Investment
in life insurance policies
|
--- | (5 | ) | |||||
|
Net
cash used in investing activities
|
(24,084 | ) | (52,815 | ) | ||||
47
NEW ENGLAND BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CASH FLOWS
For the Years Ended March
31, 2010 and 2009
(In
Thousands)
(continued)
|
|
2010
|
2009
|
||||||
|
Cash
flows from financing activities:
|
||||||||
|
Net
increase in demand deposits, NOW and savings accounts
|
26,357 | 1,458 | ||||||
|
Net
(decrease) increase in time deposits
|
(4,146 | ) | 47,666 | |||||
|
Net
(decrease) increase in advanced payments by borrowers for taxes and
insurance
|
(162 | ) | 44 | |||||
|
Proceeds
from Federal Home Loan Bank long-term advances
|
2,000 | 11,000 | ||||||
|
Principal
payments on Federal Home Loan Bank long-term advances
|
(11,978 | ) | (6,106 | ) | ||||
|
Net
increase in securities sold under agreements to repurchase
|
11,391 | 3,514 | ||||||
|
Purchase
of treasury stock
|
(1,560 | ) | (2,204 | ) | ||||
|
Proceeds
from exercise of stock options
|
--- | 139 | ||||||
|
Payments
of cash dividends on common stock
|
(475 | ) | (850 | ) | ||||
|
Net
cash provided by financing activities
|
21,427 | 54,661 | ||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(2,451 | ) | 5,194 | |||||
|
Cash
and cash equivalents at beginning of year
|
41,433 | 36,239 | ||||||
|
Cash
and cash equivalents at end of year
|
$ | 38,982 | $ | 41,433 | ||||
|
Supplemental
disclosures:
|
||||||||
|
Interest
paid
|
$ | 13,437 | $ | 13,169 | ||||
|
Income
taxes (received) paid
|
(749 | ) | 1,126 | |||||
|
Reclass
from other assets to available-for-sale securities
|
671 | --- | ||||||
|
(Decrease)
increase in due to broker
|
(715 | ) | 62 | |||||
|
Decrease
in due from broker
|
--- | (714 | ) | |||||
|
Loans
transferred to other real estate owned
|
3,178 | 141 | ||||||
|
Acquisition
of Apple Valley Bank and 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
|
1,598 | --- | ||||||
|
Other
real estate owned
|
260 | --- | ||||||
|
Accrued
interest receivable
|
239 | --- | ||||||
|
Deferred
income taxes, net
|
2,209 | --- | ||||||
|
Other
assets
|
92 | --- | ||||||
|
Total
assets acquired
|
81,320 | --- | ||||||
|
Liabilities
assumed:
|
||||||||
|
Deposits
|
76,380 | --- | ||||||
|
Advanced
payments by borrowers for taxes and insurance
|
380 | --- | ||||||
|
Other
liabilities
|
530 | --- | ||||||
|
Total
liabilities assumed
|
77,290 | --- | ||||||
|
Net
assets acquired
|
4,030 | --- | ||||||
|
Acquisition
costs
|
6,112 | --- | ||||||
|
Goodwill
|
$ | 2,082 | $ | --- | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
48
NEW ENGLAND BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
For the Years Ended March
31, 2010 and 2009
NOTE 1 - NATURE OF
OPERATIONS
On
September 7, 2005, NEBS Bancshares, Inc. (the “Company”) was incorporated under
Maryland law to facilitate the conversion of Enfield Federal Savings and Loan
Association (the “Association”) from the mutual holding company form of
organization to the stock form of organization (the “second-step
conversion”). As a result of the second-step conversion, NEBS
Bancshares, Inc. became the holding company for the Association and was
immediately renamed New England Bancshares, Inc. A total of 3,075,855
shares of common stock were sold in the stock offering at the price of $10.00
per share. In addition, a total of 2,270,728 shares were issued to the minority
shareholders of the former New England Bancshares at an exchange ratio of
2.3683. Total shares outstanding after the stock offering and the exchange
totaled 5,346,583 shares. The second-step conversion was accounted
for as a change in corporate form with no resulting change in the historical
basis of the former New England Bancshares' assets, liabilities and equity.
Direct offering costs totaling $1.1 million were deducted from the proceeds of
the shares sold in the offering. Net proceeds of $27.2 million were
raised in the stock offering, excluding $2.5 million which was loaned by the
Company to a trust for the Employee Stock Ownership Plan (ESOP) enabling it to
purchase 246,068 shares of common stock in the stock offering. In addition, as
part of the second-step conversion and dissolution of Enfield Federal Mutual
Holding Company, the former mutual holding company parent of the Company, and
the former New England Bancshares, the Association received $901,000 of cash
previously held by these entities.
As a
result of the second-step conversion, all share and per share amounts have been
restated giving retroactive recognition to the second-step exchange ratio of
2.3683. Options granted under the Company's 2003 Stock-Based Incentive Plan and
common shares held by the Association's ESOP and shares of restricted stock
before the second-step conversion were also exchanged using the conversion ratio
of 2.3683.
On July
12, 2007, the Company acquired First Valley Bancorp, Inc., Bristol,
Connecticut. First Valley Bancorp was the holding company for Valley
Bank, Bristol, Connecticut. Under the terms of the transaction,
shareholders of First Valley Bancorp received 0.8907 shares of Company common
stock and $9.00 in cash for each share of First Valley Bancorp common stock for
a total of 1,068,625 shares and $10.8 million. In addition, the
Company incurred cash payments for transaction expenses, payout of stock options
and employee expenses totaling $2.4 million, creating $13.6 million of
goodwill.
On May 1,
2009, the Company merged its wholly-owned federal savings bank subsidiary,
Enfield Federal, with and into its wholly-owned Connecticut commercial banking
subsidiary, Valley Bank, and renamed the combined bank “New England Bank.” 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 allows the Company to reduce its operating
expenses while maintaining the financial products and services offered by both
banks. The combined structure also assists 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”) of Cheshire, Connecticut. As part of the acquisition, Apple
Valley Bank was merged into New England Bancshares’ wholly-owned banking
subsidiary, New England Bank. Under the terms of the transaction,
shareholders of Apple Valley Bank were entitled to elect to receive either one
share of New England Bancshares common stock or $8.50 in cash for each share of
Apple Valley Bank common stock, subject to an aggregate allocation of 60% stock
and 40% cash. Based upon the $8.50 per share price at January 14,
2009, the consideration was approximately 119% of Apple Valley Bank’s tangible
book value and represented a 2% franchise premium to core deposits.
49
New
England Bank is a state chartered commercial bank that commenced operations on
November 15, 1999. The Bank is engaged principally in the business of
attracting deposits from the general public and investing those deposits in
small business, commercial real estate, residential real estate and consumer
loans. The Bank operates from fifteen locations in
Connecticut.
NOTE 2 - ACCOUNTING
POLICIES
The
accounting and reporting policies of the Company and its subsidiary conform to
accounting principles generally accepted in the United States of America and
predominant practices within the banking industry. The consolidated
financial statements of the Company were prepared using the accrual basis of
accounting. The significant accounting policies of the Company are
summarized below to assist the reader in better understanding the consolidated
financial statements and other data contained herein.
USE OF
ESTIMATES:
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
BASIS OF
PRESENTATION:
The
accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in the consolidation.
CASH AND
CASH EQUIVALENTS:
For
purposes of reporting cash flows, cash and cash equivalents include cash on
hand, cash items, due from banks, interest bearing demand deposits with other
banks and money market mutual funds. Cash and due from banks as of
March 31, 2010 and 2009 includes $1.7 million and $491,000, respectively, which
is subject to withdrawals and usage restrictions to satisfy the reserve
requirements of the Federal Reserve Bank for New England Bank.
SECURITIES:
Investments
in debt securities are adjusted for amortization of premiums and accretion of
discounts computed so as to approximate the interest method. Gains or
losses on sales of investment securities are computed on a specific
identification basis.
The
Company classifies debt and equity securities with readily determinable fair
values into one of two categories: available-for-sale or
held-to-maturity. In general, securities may be classified as
held-to-maturity only if the Company has the positive intent and ability to hold
them to maturity. All other securities must be classified as
available-for-sale.
|
|
--
|
Available-for-sale
securities are carried at fair value on the consolidated balance
sheets. Unrealized holding gains and losses are not included in
earnings but are reported as a net amount (less expected tax) in a
separate component of stockholders’ equity until
realized.
|
|
|
--
|
Held-to-maturity
securities are measured at amortized cost in the consolidated balance
sheets. Unrealized holding gains and losses are not included in
earnings or in a separate component of capital. They are merely
disclosed in the notes to the consolidated financial
statements.
|
50
For any
debt security with a fair value less than its amortized cost basis, the Company
will 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, the
Company will recognize a full impairment charge to earnings. For all
other debt securities that are considered other-than-temporarily impaired and do
not meet either condition, the credit loss portion of impairment will be
recognized in earnings as realized losses. The temporary impairment related to
all other factors will be recorded in other comprehensive income.
Declines
in marketable equity securities below their cost that are deemed other than
temporary are reflected in earnings as realized losses.
On
December 8, 2008, the Federal Home Loan Bank of Boston announced a moratorium on
the repurchase of excess stock held by its members. The moratorium
will remain in effect indefinitely.
LOANS:
Loans
receivable that management has the intent and ability to hold until maturity or
payoff, are reported at their outstanding principal balances adjusted for
amounts due to borrowers on unadvanced loans, any charge-offs, the allowance for
loan losses and any deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans.
Interest
on loans is recognized on a simple interest basis.
Loan
origination, commitment fees and certain direct origination costs are deferred
and the net amount amortized as an adjustment of the related loan’s yield by the
interest method. Deferred amounts are recognized for fixed rate loans
over the contractual life of the related loans. If the loan’s stated
interest rate varies with changes in an index or rate, the effective yield used
by the Association for amortization is the index or rate that is in effect at
the inception of the loan. Home equity line deferred fees are
recognized using the straight-line method over the period the home equity line
is active, assuming that borrowings are outstanding for the maximum term
provided in the contract.
Residential
real estate loans are generally placed on nonaccrual when reaching 90 days past
due or in process of foreclosure. All closed-end consumer loans 90
days or more past due and any equity line in the process of foreclosure are
placed on nonaccrual status. Secured consumer loans are written down
to realizable value and unsecured consumer loans are charged-off upon reaching
120 or 180 days past due depending on the type of loan. Commercial
real estate loans and commercial business loans and leases which are 90 days or
more past due are generally placed on nonaccrual status, unless secured by
sufficient cash or other assets immediately convertible to cash. When
a loan has been placed on nonaccrual status, previously accrued and uncollected
interest is reversed against interest on loans. A loan can be
returned to accrual status when collectibility of principal is reasonably
assured and the loan has performed for a period of time, generally six
months.
Cash
receipts of interest income on impaired loans are credited to principal to the
extent necessary to eliminate doubt as to the collectibility of the net carrying
amount of the loan if the total of such credits reduces the carrying amount of
the loan to an amount less than the collateral value. Some or all of
the cash receipts of interest income on impaired loans is recognized as interest
income if the remaining net carrying amount of the loan is deemed to be fully
collectible. When recognition of interest income on an impaired loan
on a cash basis is appropriate, the amount of income that is recognized is
limited to that which would have been accrued on the net carrying amount of the
loan at the contractual interest rate. Any cash interest payments
received in excess of the limit and not applied to reduce the net carrying
amount of the loan are recorded as recoveries of charge-offs until the
charge-offs are fully recovered.
51
ALLOWANCE
FOR LOAN LOSSES:
The
allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to
earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management’s periodic review of the collectibility of the loans in
light of historical experience, the composition and size of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, the
estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower’s
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan
basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the
loan’s obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify
individual consumer and residential loans for impairment
disclosures.
PREMISES
AND EQUIPMENT:
Premises
and equipment are stated at cost, less accumulated depreciation and
amortization. Cost and related allowances for depreciation and
amortization of premises and equipment retired or otherwise disposed of are
removed from the respective accounts with any gain or loss included in income or
expense. Depreciation and amortization are calculated principally on
the straight-line method over the estimated useful lives of the
assets. Estimated lives are 10 to 50 years for buildings and premises
and 3 to 20 years for furniture, fixtures and equipment. Expenditures
for replacements or major improvements are capitalized; expenditures for normal
maintenance and repairs are charged to expense as incurred.
OTHER
REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other
real estate owned includes properties acquired through foreclosure and
properties classified as in-substance foreclosures in accordance with ASC
310-40, “Receivables – Troubled Debt Restructuring by
Creditors.” These properties are carried at the lower of cost or
estimated fair value less estimated costs to sell. Any writedown from
cost to estimated fair value required at the time of foreclosure or
classification as in-substance foreclosure is charged to the allowance for loan
losses. Expenses incurred in connection with maintaining these
assets, subsequent writedowns and gains or losses recognized upon sale, are
included in other expense.
In
accordance with ASC 310-10-35, “Receivables – Overall – Subsequent
Measurements,” the Company classifies loans as in-substance repossessed or
foreclosed if the Company receives physical possession of the debtor’s assets
regardless of whether formal foreclosure proceedings take place.
52
INCOME
TAXES:
The
Company recognizes income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
established for the temporary differences between the accounting basis and the
tax basis of the Company’s assets and liabilities at enacted tax rates expected
to be in effect when the amounts related to such temporary differences are
realized or settled.
EXECUTIVE
SUPPLEMENTAL RETIREMENT PLAN:
In
connection with its Executive Supplemental Retirement Plan, the Company
established a Rabbi Trust to assist in the administration of the
plan. The accounts of the Rabbi Trust are consolidated in the
Company’s financial statements. Any available-for-sale securities
held by the Rabbi Trust are accounted for in accordance with ASC 320,
“Investments – Debt and Equity Securities.” Until the plan benefits
are paid, creditors may make claims against the trust’s assets if the Company
becomes insolvent.
EARNINGS
(LOSS) PER SHARE (“EPS”):
Basic EPS
is computed by dividing income (loss) available (attributable) 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 276,990
anti-dilutive shares at March 31, 2010 and no anti-dilutive shares at March 31,
2009 as the Company reported a net loss. 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.
FAIR
VALUES OF FINANCIAL INSTRUMENTS:
ASC 825,
“Financial Instruments,” requires that the Company disclose the estimated fair
value for its financial instruments. Fair value methods and
assumptions used by the Company in estimating its fair value disclosures are as
follows:
Cash and
cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets’ fair
values.
Interest-bearing
time deposits with other banks: Fair values of interest-bearing time
deposits with other banks are estimated using discounted cash flow analyses
based on current rates for similar types of deposits.
Securities
(including mortgage-backed securities): Fair values for securities
are based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable instruments.
Loans
receivable: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality.
Accrued
interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit
liabilities: The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, passbook savings and money market accounts)
are, by definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time
deposits.
53
Advanced
payments by borrowers for taxes and insurance: The carrying amounts
of advance payments by borrowers for taxes and insurance approximate their fair
values.
Federal
Home Loan Bank advances: The fair value of Federal Home Loan Bank
advances was determined by discounting the anticipated future cash payments by
using the rates currently available to the Company for debt with similar terms
and remaining maturities.
Securities
sold under agreements to repurchase: The carrying amount reported on
the consolidated balance sheet for securities sold under agreements to
repurchase maturing within ninety days approximate its fair
value. Fair values of other securities sold under agreements to
repurchase are estimated using discounted cash flow analyses based on the
current rates for similar types of borrowing arrangements.
Subordinated
debentures: Fair values of subordinated debentures are estimated
using discounted cash flow analyses, using interest rates currently being
offered for debentures with similar terms.
Due to or
from broker: The carrying amount of due to or from broker
approximates its fair value.
Off-balance
sheet instruments: The fair value of commitments to originate loans
is estimated using the fees currently charged to enter similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan
commitments and the unadvanced portion of loans, fair value also considers the
difference between current levels of interest rates and the committed
rates. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligation with the counterparties at the reporting
date.
STOCK-BASED
COMPENSATION:
At March
31, 2009, the Company has two stock-based incentive plans which are described
more fully in
Note
13. The Company accounts for the plans under ASC 718-10,
“Compensation - Stock Compensation - Overall.” During the year ended
March 31, 2010 and 2009, $95,000 and $128,000, respectively in stock-based
employee compensation was recognized.
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 fiscal year
2011. 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. These
standards are not expected to have a significant impact on the Company’s
financial statements.
54
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 October 1, 2009. The guidance did not change the
Company’s valuation techniques for measuring liabilities at fair
value.
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 earnings per share.
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 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 its financial condition and results of operations.
In March
2010, the FASB issued ASU 2010-11, “Scope Exception Related to Embedded Credit
Derivatives.” The ASU clarifies that certain embedded derivatives,
such as those contained in certain securitizations, CDOs and structured notes,
should be considered embedded credit derivatives subject to potential
bifurcation and separate fair value accounting. The ASU allows any
beneficial interest issued by a securitization vehicle to be accounted for under
the fair value option at transition. At transition, the Company may
elect to reclassify various debt securities (on an instrument-by-instrument
basis) from held-to-maturity (HTM) or available-for-sale (AFS) to
trading. The new rules are effective July 1, 2010. The
Company is currently analyzing the impact of the changes to determine the
population of instruments that may be reclassified to trading upon
adoption.
In
January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair
Value Measurements.” The ASU requires disclosing the amounts of
significant transfers in and out of Level 1 and 2 of the fair value hierarchy
and describing the reasons for the transfers. The disclosures are
effective for reporting periods beginning after December 15,
2009. The Company adopted ASU 2010-06 as of April 1,
2010. The required disclosures are included in Note
18. Additionally, disclosures of the gross purchases, sales,
issuances and settlements activity in the Level 3 of the fair value measurement
hierarchy will be required for fiscal years beginning after December 15,
2010.
ADVERTISING
COSTS:
It is the
Company’s policy to expense advertising costs as
incurred. Advertising and promotion expense is shown as a separate
line item in the consolidated Statements of Income.
55
NOTE 3 - INVESTMENTS IN
AVAILABLE-FOR-SALE SECURITIES
Debt
securities have been classified in the consolidated balance sheets according to
management’s intent. The amortized cost of securities and their
approximate fair values are as follows as of March 31:
|
|
Amortized
|
Gross
|
Gross
|
|||||||||||||
|
Cost
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
|
Basis
|
Gains
|
Losses
|
Value
|
||||||||||||
|
|
(In
Thousands)
|
|||||||||||||||
|
March
31, 2010:
|
||||||||||||||||
|
Debt
securities issued by the U.S. Treasury
|
||||||||||||||||
|
and
other U.S. government corporations and
|
||||||||||||||||
|
agencies
|
$ | 8,833 | $ | 130 | $ | 7 | $ | 8,956 | ||||||||
|
Debt
securities issued by states of the United
|
||||||||||||||||
|
States
and political subdivisions of the states
|
15,670 | 115 | 512 | 15,273 | ||||||||||||
|
Mortgage-backed
securities
|
38,988 | 1,233 | 471 | 39,750 | ||||||||||||
|
|
$ | 63,491 | $ | 1,478 | $ | 990 | $ | 63,979 | ||||||||
|
March
31, 2009:
|
||||||||||||||||
|
Debt
securities issued by the U.S. Treasury
|
||||||||||||||||
|
and
other U.S. government corporations and
|
||||||||||||||||
|
agencies
|
$ | 11,930 | $ | 183 | $ | 45 | $ | 12,068 | ||||||||
|
Debt
securities issued by states of the United
|
||||||||||||||||
|
States
and political subdivisions of the states
|
16,917 | 45 | 1,250 | 15,712 | ||||||||||||
|
Mortgage-backed
securities
|
43,618 | 1,129 | 706 | 44,041 | ||||||||||||
|
Marketable
equity securities
|
7 | --- | --- | 7 | ||||||||||||
|
|
72,472 | 1,357 | 2,001 | 71,828 | ||||||||||||
|
Money
market mutual funds included in
|
||||||||||||||||
|
cash
and cash equivalents
|
(7 | ) | --- | --- | (7 | ) | ||||||||||
|
|
$ | 72,465 | $ | 1,357 | $ | 2,001 | $ | 71,821 | ||||||||
Mortgage-backed
securities are insured or issued by Ginnie Mae, Freddie Mac and Fannie Mae or
private issuers, substantially all of which are backed by fixed-rate
mortgages.
The
scheduled maturities of available-for-sale debt securities were as follows as of
March 31, 2010:
|
Fair
|
||||
|
Value
|
||||
|
(In
Thousands)
|
||||
|
Due
in less than one year
|
$ | 16 | ||
|
Due
after one year through five years
|
481 | |||
|
Due
after five years through ten years
|
4,923 | |||
|
Due
after ten years
|
18,809 | |||
|
Mortgage-backed
securities
|
39,750 | |||
| $ | 63,979 | |||
Proceeds
from sales of available-for-sale securities for the year ended March 31, 2010
were $23.8 million. Gross realized gains on those sales amounted to
$854,000 and no gross realized losses were recognized. Proceeds from
sales of available-for-sale securities for the year ended March 31, 2009 were
$10.5 million. Gross realized gains on those sales amounted to
$153,000 and $3,000 of gross realized losses were recognized. The tax
expense applicable to these net realized gains in the years ended March 31, 2010
and 2009 amounted to $80,000 and $58,000, respectively.
56
As of
March 31, 2010 and 2009, securities with carrying amounts of $28.8 million and
$18.0 million, respectively, were pledged to secure securities sold under
agreements to repurchase. As of March 31, 2009 securities with
carrying values of $1.5 million were pledged as collateral to secure municipal
deposits.
The
aggregate fair value and unrealized losses of securities, including debt
securities for which a portion of other-than-temporary impairment has been
recognized in other comprehensive income (loss), that have been in a continuous
unrealized-loss position for less than twelve months and for twelve months or
more, are as follows:
|
|
Less than 12 Months
|
12 Months or Longer
|
Total
|
|||||||||||||||||||||
|
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
||||||||||||||||||
|
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
||||||||||||||||||
|
|
(In
Thousands)
|
|||||||||||||||||||||||
|
March
31, 2010:
|
||||||||||||||||||||||||
|
Debt
securities issued by the U.S. Treasury
|
||||||||||||||||||||||||
|
and
other U.S. government corporations
|
||||||||||||||||||||||||
|
and
agencies
|
$ | 1,384 | $ | 7 | $ | --- | $ | --- | $ | 1,384 | $ | 7 | ||||||||||||
|
Debt
securities issued by states of the
|
||||||||||||||||||||||||
|
United
States and political subdivisions
|
||||||||||||||||||||||||
|
of
the states
|
2,467 | 34 | 6,055 | 478 | 8,522 | 512 | ||||||||||||||||||
|
Mortgage-backed
securities
|
2,561 | 26 | 2,087 | 342 | 4,648 | 368 | ||||||||||||||||||
|
Total
temporarily impaired securities
|
6,412 | 67 | 8,142 | 820 | 14,554 | 887 | ||||||||||||||||||
|
Other-than-temporarily
impaired securities
|
||||||||||||||||||||||||
|
Mortgage-backed
securities
|
--- | --- | 325 | 103 | 325 | 103 | ||||||||||||||||||
|
Total
temporarily impaired and
|
||||||||||||||||||||||||
|
other-than-temporarily
impaired
|
||||||||||||||||||||||||
|
securities
|
$ | 6,412 | $ | 67 | $ | 8,467 | $ | 923 | $ | 14,879 | $ | 990 | ||||||||||||
|
March
31, 2009:
|
||||||||||||||||||||||||
|
Debt
securities issued by the U.S. Treasury
|
||||||||||||||||||||||||
|
and
other U.S. government corporations
|
||||||||||||||||||||||||
|
and
agencies
|
$ | 593 | $ | 45 | $ | --- | $ | --- | $ | 593 | $ | 45 | ||||||||||||
|
Debt
securities issued by states of the
|
||||||||||||||||||||||||
|
United
States and political subdivisions
|
||||||||||||||||||||||||
|
of
the states
|
11,312 | 999 | 1,527 | 251 | 12,839 | 1,250 | ||||||||||||||||||
|
Mortgage-backed
securities
|
2,721 | 56 | 4,345 | 444 | 7,066 | 500 | ||||||||||||||||||
|
Total
temporarily impaired securities
|
14,626 | 1,100 | 5,872 | 695 | 20,498 | 1,795 | ||||||||||||||||||
|
Other-than-temporarily
impaired securities
|
||||||||||||||||||||||||
|
Mortgage-backed
securities
|
--- | --- | 330 | 206 | 330 | 206 | ||||||||||||||||||
|
Total
temporarily impaired and
|
||||||||||||||||||||||||
|
other-than-temporarily
impaired
|
||||||||||||||||||||||||
|
securities
|
$ | 14,626 | $ | 1,100 | $ | 6,202 | $ | 901 | $ | 20,828 | $ | 2,001 | ||||||||||||
Management
has assessed the securities which are classified as available-for-sale and in an
unrealized loss position at March 31, 2010 and determined the decline in fair
value below amortized cost to be temporary. In making this
determination management considered the period of time the securities were in a
loss position, the percentage decline in comparison to the securities’ amortized
cost, the financial condition of the issuer and the Company’s ability and intent
to hold these securities until their fair value recovers to their amortized
cost. Management believes the decline in fair value is primarily
related to the current interest rate environment and market inefficiencies and
not to the credit deterioration of the individual issuer.
Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis and more frequently when economic or market conditions warrant such
evaluation. The investment securities portfolio is evaluated for
other-than-temporary impairment in accordance with ASC 320-10, “Investment -
Debt and Equity Securities.”
57
As
discussed in Note 2 the Company elected to early adopt the provisions of ASC
320-10 for the year ended March 31, 2009, which was applied to existing and new
debt securities held by the Company as of January 1, 2009. For those
debt securities for which the fair value of the security is less than its
amortized cost and the Company does not intend to sell such security and it is
more likely than not that it will not be required to sell such security prior to
the recovery of its amortized cost basis less any credit losses, 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 income (loss), net of related taxes. Had the
Company not adopted ASC 320-10, the Company would have recognized an additional
$206,000, pre-tax, in other-than-temporary impairment losses through earnings
during the year ended March 31, 2009.
The
following table summarizes other-than-temporary impairment losses on securities
for the years ended March 31:
|
|
2010
|
2009 | ||||||||||||||
|
|
Non-Agency
|
Auction
|
Non-Agency
|
|||||||||||||
|
|
Mortgage-Backed
|
Rate
|
Mortgage-backed
|
|||||||||||||
|
|
Securities
|
Securities
|
Securities
|
Total
|
||||||||||||
|
|
(In
Thousands)
|
(In
Thousands)
|
||||||||||||||
|
Total
other-than-temporary
|
||||||||||||||||
|
impairment
losses
|
$ | 52 | $ | 2,730 | $ | 217 | $ | 2,947 | ||||||||
|
Less:
unrealized other-than-temporary
|
||||||||||||||||
|
Losses
recognized in other comprehensive
|
||||||||||||||||
|
loss
(1)
|
--- | --- | 206 | 206 | ||||||||||||
|
Net
impairment losses recognized in earnings (2)
|
$ | 52 | $ | 2,730 | $ | 11 | $ | 2,741 | ||||||||
(1) Represents
the noncredit component of the other-than-temporary impairment on the
securities.
(2) Represents
the credit component of the other-than-temporary impairment on
securities.
Activity
related to the credit component recognized in earnings on debt securities held
by the Company for which a portion of other-than-temporary impairment was
recognized in other comprehensive loss for the years ended March 31, 2010 is as
follows:
|
2010
|
2009
|
|||||||
|
Total
|
Total
|
|||||||
|
(In
Thousands)
|
(In
Thousands)
|
|||||||
|
Balance,
April 1
|
$ | 11 | $ | --- | ||||
|
Additions
for the credit component on debt securities
|
||||||||
|
in which other-than-temporary impairment was
|
||||||||
|
not previously recognized
|
52 | 11 | ||||||
|
Balance,
March 31
|
$ | 63 | $ | 11 | ||||
For the
year ended March 31, 2010, securities with other-than-temporary impairment
losses related to credit that were recognized in earnings consisted of
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. 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
values of the expected cash flows were compared to the Company’s holdings to
determine the credit-related impairment loss. Based on the expected
cash flows derived from the model, the Company expects to recover the remaining
unrealized losses on non-agency mortgage-backed
securities. Significant assumptions used in the valuation of
non-agency mortgage-backed securities were as follows as of March 31,
2010:
|
Weighted
|
Range
|
|||||||||||
|
Average
|
Minimum
|
Maximum
|
||||||||||
|
Prepayment
rates
|
16.0 | % | 5.8 | % | 22.4 | % | ||||||
|
Default
rates
|
5.0 | 0.2 | 15.4 | |||||||||
|
Loss
severity
|
40.7 | 25.0 | 59.6 | |||||||||
58
NOTE 4 -
LOANS
Loans
consisted of the following as of March 31:
|
|
2010
|
2009
|
||||||
|
|
(In
Thousands)
|
|||||||
|
Mortgage
loans:
|
||||||||
|
Residential
|
$ | 213,034 | $ | 158,319 | ||||
|
Commercial
|
205,244 | 162,809 | ||||||
|
Construction
|
19,450 | 15,498 | ||||||
|
Total
mortgage loans
|
437,728 | 336,626 | ||||||
|
Consumer
loans
|
7,293 | 6,491 | ||||||
|
Commercial
loans
|
74,918 | 76,935 | ||||||
|
|
519,939 | 420,052 | ||||||
|
Deferred
loan origination costs (fees), net
|
190 | (28 | ) | |||||
|
Allowance
for loan losses
|
(4,625 | ) | (6,458 | ) | ||||
|
Loans,
net
|
$ | 515,504 | $ | 413,566 | ||||
Certain
directors and executive officers of the Company and companies in which they have
significant ownership interest were customers of the Bank during the year ended
March 31, 2010. Total loans to such persons and their companies
amounted to $5.0 million as of March 31, 2010. During the year ended
March 31, 2010, principal payments totaled $679,000 and principal advances
amounted to $530,000.
Changes
in the allowance for loan losses were as follows for the years ended March
31:
|
2010
|
2009
|
|||||||
|
(In
Thousands)
|
||||||||
|
Balance
at beginning of period
|
$ | 6,458 | $ | 4,046 | ||||
|
Provision
for loan losses
|
3,049 | 2,929 | ||||||
|
Recoveries
of loans previously charged off
|
61 | --- | ||||||
|
Loans
charged off
|
(4,943 | ) | (517 | ) | ||||
|
Balance
at end of period
|
$ | 4,625 | $ | 6,458 | ||||
The
following table sets forth information regarding nonaccrual loans and accruing
loans 90 days or more overdue as of March 31:
|
2010
|
2009
|
|||||||
|
(In
Thousands)
|
||||||||
|
Total
nonaccrual loans
|
$ | 8,995 | $ | 11,926 | ||||
|
Accruing
loans which are 90 days or more overdue
|
$ | --- | $ | 15 | ||||
59
Information
about loans that met the definition of an impaired loan in ASC 310-10-35,
“Receivables – Overall – Subsequent Measurements,” was as follows as of March
31:
|
|
2010
|
2009
|
||||||||||||||
|
|
Recorded
|
Related
|
Recorded
|
Related
|
||||||||||||
|
|
Investment
|
Allowance
|
Investment
|
Allowance
|
||||||||||||
|
|
In
Impaired
|
For
Credit
|
In
Impaired
|
For
Credit
|
||||||||||||
|
|
Loans
|
Losses
|
Loans
|
Losses
|
||||||||||||
|
|
(In
Thousands)
|
|||||||||||||||
|
Loans
for which there is a related allowance for credit losses
|
$ | 3,518 | $ | 1,050 | $ | 6,241 | $ | 2,645 | ||||||||
|
Loans
for which there is no related allowance for credit losses
|
4,460 | --- | 3,894 | --- | ||||||||||||
|
Totals
|
$ | 7,978 | $ | 1,050 | $ | 10,135 | $ | 2,645 | ||||||||
|
Average
recorded investment in impaired loans during the
|
||||||||||||||||
|
year
ended March 31
|
$ | 8,671 | $ | 4,206 | ||||||||||||
|
Related
amount of interest income recognized during the time,
|
||||||||||||||||
|
in
the year ended March 31 that the loans were impaired
|
||||||||||||||||
|
Total
recognized
|
$ | 228 | $ | 38 | ||||||||||||
|
Amount
recognized using a cash-basis method
|
||||||||||||||||
|
of
accounting
|
$ | 208 | $ | 38 | ||||||||||||
Included
in certain loan categories in the impaired loans are troubled debt
restructurings that were classified as impaired. At March 31, 2010,
the company had $950,000 in loans that were modified in trouble debt
restructurings and impaired.
NOTE 5 - PREMISES AND
EQUIPMENT, NET
The
following is a summary of premises and equipment as of March 31:
|
|
2010
|
2009
|
||||||
|
|
(In
Thousands)
|
|||||||
|
Land
|
$ | 1,163 | $ | 834 | ||||
|
Buildings
and building improvements
|
3,679 | 2,667 | ||||||
|
Furniture,
fixtures and equipment
|
3,079 | 2,843 | ||||||
|
Leasehold
improvements
|
2,589 | 2,490 | ||||||
|
|
10,510 | 8,834 | ||||||
|
Accumulated
depreciation and amortization
|
(3,594 | ) | (2,844 | ) | ||||
|
|
$ | 6,916 | $ | 5,990 | ||||
NOTE 6 - GOODWILL AND OTHER
INTANGIBLE ASSETS
The
changes in the carrying amounts of goodwill and other intangibles for the years
ended March 31, 2010 and 2009 were as follows:
|
Core
Deposit
|
||||||||
|
Goodwill
|
Intangibles
|
|||||||
|
(In
Thousands)
|
||||||||
|
Balance,
March 31, 2008
|
$ | 14,701 | $ | 2,671 | ||||
|
Amortization
expense
|
--- | (506 | ) | |||||
|
Balance,
March 31, 2009
|
14,701 | 2,165 | ||||||
|
Additional
due to merger
|
2,082 | --- | ||||||
|
Amortization
expense
|
--- | (461 | ) | |||||
|
Balance,
March 31, 2010
|
$ | 16,783 | $ | 1,704 | ||||
60
Estimated
annual amortization expense of identifiable intangible assets is as
follows:
|
(In
Thousands)
|
||||
|
Years
Ended March 31,
|
||||
|
2011
|
$ | 416 | ||
|
2012
|
372 | |||
|
2013
|
327 | |||
|
2014
|
261 | |||
|
2015
|
149 | |||
|
Thereafter
|
179 | |||
|
Total
|
$ | 1,704 | ||
A summary
of acquired identifiable intangible assets is as follows as of March 31,
2010:
|
Gross
Carrying
|
Accumulated
|
Net
Carrying
|
||||||||||
|
Amount
|
Amortization
|
Amount
|
||||||||||
|
(In
Thousands)
|
||||||||||||
|
Core
deposit intangibles
|
$ | 3,345 | $ | (1,641 | ) | $ | 1,704 | |||||
There was
no impairment recorded in fiscal years 2010 and 2009 based on valuations at
March 31, 2010 and 2009.
NOTE 7 -
DEPOSITS
The
aggregate amount of time deposit accounts in denominations of $100,000 or more
was $95.8 million and $87.9 million as of March 31, 2010 and 2009,
respectively. All deposits are insured up to $250,000.
For time
deposits as of March 31, 2010, the scheduled maturities for each of the
following five years ended
March 31,
are:
|
(In
Thousands)
|
||||
|
2011
|
$ | 160,755 | ||
|
2012
|
50,120 | |||
|
2013
|
23,384 | |||
|
2014
|
31,997 | |||
|
2015
|
19,991 | |||
|
Fair
value adjustment
|
253 | |||
|
Total
|
$ | 286,500 | ||
NOTE 8 - FEDERAL HOME LOAN
BANK ADVANCES
Advances
consist of funds borrowed from the Federal Home Loan Bank of Boston (the
“FHLB”).
Maturities
of advances from the FHLB for the years ending after March 31, 2010 are
summarized as follows:
|
(In
Thousands)
|
||||
|
2011
|
$ | 31,993 | ||
|
2012
|
10,143 | |||
|
2013
|
3,472 | |||
|
2014
|
1,632 | |||
|
2015
|
4,190 | |||
|
Thereafter
|
5,451 | |||
|
Fair
value adjustment
|
(21 | ) | ||
| $ | 56,860 | |||
61
Amortizing
advances are being repaid in equal monthly payments and are being amortized from
the date of the advance to the maturity date on a direct reduction
basis. As of March 31, 2010, the Company has two advances which the
FHLB has the option of calling as of the put date, and quarterly
thereafter:
|
Amount
|
Maturity Date
|
Put Date
|
Interest Rate
|
||||||
|
(In
Thousands)
|
|||||||||
| $ | 5,000 |
August
1, 2016
|
May
3, 2010
|
4.89 | % | ||||
| 2,000 |
September
2, 2014
|
June
1, 2010
|
3.89 | ||||||
Borrowings
from the FHLB are secured by a blanket lien on qualified collateral, consisting
primarily of loans with first mortgages secured by one-to four-family properties
and other qualified assets.
At March
31, 2010, the interest rates on FHLB advances ranged from 1.91% to
5.21%. At March 31, 2010, the weighted average interest rate on FHLB
advances was 4.05%.
NOTE 9 - SUBORDINATED
DEBENTURES
On July
28, 2005, FVB Capital Trust I (“Trust I”), a Delaware statutory trust formed by
First Valley Bancorp, completed the sale of $4.1 million of 6.42%, 5 Year
Fixed-Floating Capital Securities (“Capital Securities”). Trust I
also issued common securities to First Valley Bancorp and used the net proceeds
from the offering to purchase a like amount of 6.42% Junior Subordinated
Debentures (“Debentures”) of First Valley Bancorp. Debentures are the
sole assets of Trust I.
Capital
Securities accrue and pay distributions quarterly at an annual rate of 6.42% for
the first 5 years of the stated liquidation amount of $10 per Capital
Security. First Valley Bancorp fully and unconditionally guaranteed
all of the obligations of the Trust, which are now guaranteed by the
Company. The guaranty covers the quarterly distributions and payments
on liquidation or redemption of Capital Securities, but only to the extent that
Trust I has funds necessary to make these payments.
Capital
Securities are mandatorily redeemable upon the maturing of Debentures on August
23, 2035 or upon earlier redemption as provided in the Indenture. The
Company has the right to redeem Debentures, in whole or in part on or after
August 23, 2010 at the liquidation amount plus any accrued but unpaid interest
to the redemption date.
The trust
and guaranty provide for the binding of any successors in the event of a merger,
as is the case in the merger of First Valley Bancorp and the
Company. The Company has assumed the obligations of First Valley
Bancorp in regards to the subordinated debentures due to the acquisition of
First Valley Bancorp by the Company.
NOTE 10 - SECURITIES SOLD
UNDER AGREEMENTS TO REPURCHASE
The
securities sold under agreements to repurchase as of March 31, 2010 are
securities sold, primarily on a short-term basis, by the Company that have been
accounted for not as sales but as borrowings. The securities
consisted of U.S. Agencies and mortgage-backed securities. The
securities were held in the Company’s safekeeping account under the control of
the Company and pledged to the purchasers of the securities. The
purchasers have agreed to sell to the Company substantially identical securities
at the maturity of the agreements.
62
NOTE 11 - INCOME
TAXES
The
components of income tax expense (benefit) are as follows for the years ended
March 31:
|
|
2010
|
2009
|
||||||
|
|
(In
Thousands)
|
|||||||
|
Current:
|
||||||||
|
Federal
|
$ | (1,028 | ) | $ | 1,093 | |||
|
State
|
(1 | ) | 238 | |||||
|
|
(1,029 | ) | 1,331 | |||||
|
Deferred:
|
||||||||
|
Federal
|
1,424 | (2,180 | ) | |||||
|
State
|
144 | (440 | ) | |||||
|
Change
in valuation allowance
|
(327 | ) | 373 | |||||
|
|
1,241 | (2,247 | ) | |||||
|
Total
income tax expense (benefit)
|
$ | 212 | $ | (916 | ) | |||
The
reasons for the differences between the statutory federal income tax rate and
the effective tax rates are summarized as follows for the years ended March
31:
|
|
2010
|
2009
|
||||||
|
Federal
income tax at statutory rate
|
34.0 | % | (34.0 | )% | ||||
|
Increase
(decrease) in tax resulting from:
|
||||||||
|
Nontaxable
interest income
|
(10.2 | ) | (10.3 | ) | ||||
|
Nontaxable
life insurance income
|
(6.6 | ) | (4.6 | ) | ||||
|
Excess
book basis of Employee Stock Ownership Plan
|
0.3 | 2.7 | ||||||
|
Merger
related expenses
|
4.0 | --- | ||||||
|
Other
adjustments
|
2.0 | 3.7 | ||||||
|
Change
in valuation allowance
|
(17.3 | ) | 13.7 | |||||
|
State
tax, net of federal tax benefit
|
5.0 | (4.9 | ) | |||||
|
Effective
tax rates
|
11.2 | % | (33.7 | )% | ||||
The
Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of March 31:
|
|
2010
|
2009
|
||||||
|
|
(In
Thousands)
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Excess
of allowance for loan losses over tax bad debt reserve
|
$ | 1,751 | $ | 2,496 | ||||
|
Deferred
loan origination fees
|
178 | 11 | ||||||
|
Net
unrealized holding loss on available-for-sale securities
|
--- | 250 | ||||||
|
Write-down
of investment securities
|
24 | 1,068 | ||||||
|
Premises
and equipment, principally due to differences in
depreciation
|
188 | --- | ||||||
|
Deferred
compensation
|
909 | 826 | ||||||
|
Unrecognized
director fee plan benefits
|
1 | 3 | ||||||
|
Capital
loss carryforward
|
107 | 61 | ||||||
|
Net
operating loss carryforward
|
1,488 | --- | ||||||
|
Other
|
617 | 360 | ||||||
|
Gross
deferred tax assets
|
5,263 | 5,075 | ||||||
|
Valuation
allowance
|
(107 | ) | (434 | ) | ||||
|
Gross
deferred tax assets, net of valuation allowance
|
5,156 | 4,641 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Premises
and equipment, principally due to differences in
depreciation
|
--- | (13 | ) | |||||
|
Net
mark-to-market adjustments
|
(666 | ) | (854 | ) | ||||
|
Net
unrealized holding gain on available-for-sale securities
|
(189 | ) | --- | |||||
|
Other
|
(5 | ) | (5 | ) | ||||
|
Gross
deferred tax liabilities
|
(860 | ) | (872 | ) | ||||
|
Net
deferred tax asset
|
$ | 4,296 | $ | 3,769 | ||||
63
Based on
the Company’s historical and current pretax earnings and anticipated results of
future operations, management believes the existing net deductible temporary
differences will reverse during periods in which the Company will generate
sufficient net taxable income, and that it is more likely than not that the
Company will realize the net deferred tax assets existing as of March 31,
2010.
Legislation
was enacted in 1996 to repeal most of Section 593 of the Internal Revenue Code
pertaining to how a qualified savings institution calculates its bad debt
deduction for federal income tax purposes. This repeal eliminated the
percentage-of-taxable-income method to compute the tax bad debt
deduction. Under the legislation, the recapture of the pre-1988 tax
bad debt reserves has been suspended and would occur only under very limited
circumstances. Therefore, a deferred tax liability has not been
provided for this temporary difference. The Company’s pre-1988 tax
bad debt reserves, which are not expected to be recaptured, amount to $3.3
million. The potential tax liability on the pre-1988 reserves for
which no deferred income taxes have been provided is approximately $1.3 million
as of March 31, 2010.
The
Company adopted ASC 740-20, “Income Taxes - Intraperiod Tax Allocation,” as of
March 31, 2010. It is the Company’s policy to provide for uncertain
tax positions and the related interest and penalties based upon management’s
assessment of whether a tax benefit is more likely than not to be sustained upon
examination by tax authorities. There was no effect on the Company’s
balance sheet or income statement from adoption of ASC 740-20.
NOTE 12 - BENEFIT
PLANS
The Bank
has a non-contributory defined benefit trusteed pension plan through the
Financial Institutions Retirement Fund covering all eligible
employees. The Bank contributed $49,000 and $86,000 to the plan
during the years ended March 31, 2010 and 2009, respectively. The
Bank’s plan is part of a multi-employer plan for which detail as to the Bank’s
relative position is not readily determinable. Effective January 1,
2006, the Bank excluded from membership in the plan those employees hired on or
after January 1, 2006. Effective February 1, 2007, the Bank ceased
benefit accruals under the plan.
The Bank
established the New England Bank Director Fee Continuation Plan (the “Plan”) to
provide the directors serving on the board as of the date of the plan’s
implementation with a retirement income supplement. The plan has six
directors. Participant-directors are entitled to an annual benefit,
as of their Retirement Date, equal to $1,000 for each full year of service as a
director from June 1, 1995, plus $250 for each full year of service as a
director prior to June 1, 1995, with a maximum benefit of $6,000 per year
payable in ten annual installments.
The
following table sets forth information about the Plan as of March
31:
|
|
2010
|
2009
|
||||||
|
|
(In Thousands) | |||||||
|
Change
in projected benefit obligation:
|
||||||||
|
Benefit
obligation at beginning of year
|
$ | 157 | $ | 156 | ||||
|
Service
cost
|
3 | 4 | ||||||
|
Interest
cost
|
9 | 9 | ||||||
|
Benefits
paid
|
(18 | ) | (12 | ) | ||||
|
Benefit
obligation at end of year
|
151 | 157 | ||||||
|
Plan
assets
|
--- | --- | ||||||
|
Funded
status
|
$ | (151 | ) | $ | (157 | ) | ||
Amounts
recognized in or removed from accumulated other comprehensive loss, before tax
effect, consist of the following as of March 31:
|
2010
|
2009
|
|||||||
|
(In
Thousands)
|
||||||||
|
Unrecognized
net loss
|
$ | 2 | $ | 5 | ||||
|
Unrecognized
prior service cost
|
4 | 3 | ||||||
| $ | 6 | $ | 8 | |||||
64
The
accumulated benefit obligation for the Plan was $151,000 and $157,000 at March
31, 2010 and 2009, respectively.
|
|
2010
|
2009
|
||||||
|
Components
of net periodic cost:
|
(In Thousands) | |||||||
|
Service
cost
|
$ | 3 | $ | 4 | ||||
|
Interest
cost
|
9 | 9 | ||||||
|
Unrecognized
net loss
|
2 | 5 | ||||||
|
Unrecognized
prior service cost recognized
|
4 | 8 | ||||||
|
Net
periodic pension cost
|
18 | 26 | ||||||
|
Other
changes in benefit obligations recognized in other comprehensive income
(loss):
|
||||||||
|
Unrecognized
net loss
|
(2 | ) | (5 | ) | ||||
|
Prior
service cost
|
(4 | ) | (8 | ) | ||||
|
Total
recognized in other comprehensive income (loss)
|
(6 | ) | (13 | ) | ||||
|
Total
recognized in net periodic pension cost and
|
||||||||
|
other
comprehensive income (loss)
|
$ | 12 | $ | 13 | ||||
The
estimated unrecognized loss and prior service cost that will be accreted into
accumulated other comprehensive income (loss) from net periodic benefit cost
over the year ended March 31, 2011 is $1,400 and $200,
respectively.
The
discount rate used in determining the projected benefit obligation and net
periodic benefit cost was 6.0% for the years ended March 31, 2010 and
2009.
Estimated
future benefit payments are as follows for the years ended March
31:
|
|
(In
Thousands)
|
|||
|
2011
|
$ | 18 | ||
|
2012
|
18 | |||
|
2013
|
18 | |||
|
2014
|
18 | |||
|
2015
|
18 | |||
|
2016-2020
|
96 | |||
The Bank
sponsors a 401(k) Plan whereby the Bank matches 50% of the first 6% of employee
contributions. During the years ended March 31, 2010 and 2009, the
Bank contributed $107,000 and $127,000, respectively, under this
plan.
The Bank
has an Executive Supplemental Retirement Plan Agreement and a Life Insurance
Endorsement Method Split Dollar Plan Agreement for the benefit of the President
of the Bank. The plan provides the President with an annual
retirement benefit equal to approximately $173,000 over a period of 240
months. Following the initial 240 month period, certain additional
amounts may be payable to the President until his death based on the performance
of the life insurance policies that the Bank has acquired as an informal funding
source for its obligation to the President. The income recorded on
the life insurance policies amounted to $375,000 and $359,000 for the years
ended March 31, 2010 and 2009, respectively. A periodic amount is
being expensed and accrued to a liability reserve account during the President’s
active employment so that the full present value of the promised benefit will be
expensed at his retirement. The expense of this plan to the Bank for
the years ended March 31, 2010 and 2009 was $291,000 and $275,000,
respectively. The cumulative liability for this plan is reflected in
other liabilities on the consolidated balance sheets as of March 31, 2010 and
2009 in the amounts of $1.6 million and $1.3 million, respectively.
The Bank
formed a Rabbi Trust for the Executive Supplemental Retirement
Plan. The Trust’s assets consist of split dollar life insurance
policies. The cash surrender values of the policies are reflected as
an asset on the consolidated balance sheets. As of March 31, 2010 and
2009, total assets in the Rabbi Trust were $4.5 million and $4.3 million,
respectively.
65
The Bank
adopted the New England Bank Supplemental Executive Retirement Plan (SERP),
effective June 4, 2002. The SERP provides restorative payments to
executives designated by the Board of Directors who are prevented by certain
provisions of the Internal Revenue Code from receiving the full benefits
contemplated by other benefit plans. The Board of Directors has
designated the President to participate in the Plan. The expense of
this plan to the Bank for the years ending March 31, 2010 and 2009 is $9,000 and
$8,000, respectively.
The
Company and the Bank each entered into an employment agreement with its
President. The employment agreements provide for the continued
payment of specified compensation and benefits for specified
periods. The agreements also provide for termination of the executive
for cause (as defined in the agreements) at any time. The employment
agreements provide for the payment, under certain circumstances, of amounts upon
termination following a “change in control” as defined in the
agreements. The agreements also provide for certain payments in the
event of the officer’s termination for other than cause and in the case of
voluntary termination.
The Bank
maintains change in control agreements with several employees. The
agreements are renewable annually. The agreements provide that if
involuntary termination or, under certain circumstances, voluntary termination
follows a change in control of the Bank, the employee would be entitled to
receive a severance payment equal to a multiple of his “base amount,” as defined
under the Internal Revenue Code. The Bank would also continue and/or
pay for life, health and disability coverage for a period of time following
termination.
In 2009,
the Company adopted ASC 715-60, “Compensation - Retirement Benefits - Defined
Benefit Plan - Other Postretirement,” and recognized a liability for the
Company’s future postretirement benefit obligations under the President’s
endorsement split-dollar life insurance arrangement. The Company
recognized this change in accounting principles as a cumulative effect
adjustment to retained earnings of $74,000. The total liability for
the arrangements included in other liabilities was $101,000 and $87,000 at March
31, 2010 and 2009, respectively. The expense recognized under this
arrangement was $14,000 and $13,000 for fiscal year 2010 and 2009,
respectively.
NOTE 13 - STOCK COMPENSATION
PLANS
In 2003,
the Company adopted the New England Bancshares, Inc. 2003 Stock-Based Incentive
Plan (the “2003 Plan”) which includes grants of options to purchase Company
stock and awards of Company stock. The number of shares of common
stock reserved for grants and awards under the 2003 Plan is 473,660, consisting
of 338,327 shares for stock options and 135,333 shares for stock
awards. All employees and outside directors of the Company are
eligible to participate in the 2003 Plan.
In 2006,
the Company adopted the New England Bancshares, Inc. 2006 Equity Incentive Plan
(the “2006 Plan”) which includes grants of options to purchase Company stock and
awards of Company stock. The number of shares of common stock
reserved for grants and awards under the 2006 Plan is 274,878, consisting of
196,342 shares for stock options and 78,536 shares for stock
awards.
The 2003
and 2006 Plans define the stock option exercise price as the fair market value
of the Company stock at the date of the grant. The Company determines
the term during which a participant may exercise a stock option, but in no event
may a participant exercise a stock option more than ten years from the date of
grant. The stock options vest in installments over five
years.
The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for stock option grants in the year ended March 31, 2010 and
2009.
|
2010
|
2009
|
|||||||
|
Dividend
yield
|
1.24 | % | 1.58 | % | ||||
|
Expected
life
|
10
years
|
10
years
|
||||||
|
Expected
volatility
|
31.0 | % | 18.0 | % | ||||
|
Risk-free
interest rate
|
3.29 | % | 3.18 | % | ||||
66
A summary
of the status of the Plans as of March 31, 2010 and 2009 and changes during the
years then ended is presented below:
|
2010
|
2009
|
|||||||||||||||
|
Weighted-Average
|
Weighted-Average
|
|||||||||||||||
|
Shares
|
Exercise Price
|
Shares
|
Exercise Price
|
|||||||||||||
|
Outstanding
at beginning of year
|
333,416 | $ | 8.96 | 349,997 | $ | 8.84 | ||||||||||
|
Granted
|
5,000 | 6.46 | 4,000 | 9.08 | ||||||||||||
|
Exercised
|
--- | --- | (20,181 | ) | 6.90 | |||||||||||
|
Forfeited
|
(2,000 | ) | 12.84 | (400 | ) | 12.84 | ||||||||||
|
Outstanding
at end of year
|
336,416 | $ | 8.90 | 333,416 | $ | 8.96 | ||||||||||
|
Options
exercisable at year-end
|
276,990 | 246,521 | ||||||||||||||
|
Weighted-average
fair value of options
|
||||||||||||||||
|
granted
during the year
|
$ | 2.51 | $ | 2.30 | ||||||||||||
The
following table summarizes information about stock options outstanding as of
March 31, 2010:
|
Options Outstanding
|
Options Exercisable
|
||||||||||||||
|
Number
|
Weighted-Average
|
Number
|
|||||||||||||
|
Outstanding
|
Remaining
|
Weighted-Average
|
Exercisable
|
Weighted-Average
|
|||||||||||
|
as of 3/31/10
|
Contractual Life
|
Exercise Price
|
as of 3/31/10
|
Exercise Price
|
|||||||||||
| 180,752 |
2.9
years
|
$ | 6.40 | 180,752 | $ | 6.40 | |||||||||
| 25,101 |
4.1
years
|
8.17 | 25,101 | 8.17 | |||||||||||
| 2,000 |
5.9
years
|
10.81 | 1,600 | 10.81 | |||||||||||
| 104,563 |
6.4
years
|
12.84 | 62,737 | 12.84 | |||||||||||
| 15,000 |
7.1
years
|
13.29 | 6,000 | 13.29 | |||||||||||
| 2,000 |
8.4
years
|
9.90 | 400 | 9.90 | |||||||||||
| 2,000 |
8.8
years
|
8.25 | 400 | 8.25 | |||||||||||
| 5,000 |
9.5
years
|
6.46 | --- | --- | |||||||||||
| 336,416 |
4.5
years
|
$ | 8.90 | 276,990 | $ | 8.20 | |||||||||
Under the
2003 and 2006 Plans, common stock of the Company may be granted at no cost to
employees and outside directors of the Company. Plan participants are
entitled to cash dividends and to vote such shares. Such shares vest
in five equal annual installments. Upon issuance of shares of
restricted stock under the Plans, unearned compensation equivalent to the market
value at the date of grant is charged to the capital accounts and subsequently
amortized to expense over the five-year vesting period. In February
2003, 86,251 shares were awarded under the 2003 Plan and in September 2006,
53,189 shares were awarded under the 2006 Plan. The awards vest in
installments over five years. The compensation cost that has been
charged against income for the granting of stock awards under the plan was
$137,000 and $137,000 for the years ended March 31, 2010 and 2009,
respectively.
Upon a
change in control as defined in the 2003 and 2006 Plans, options held by
participants will become immediately exercisable and shall remain exercisable
until the expiration of the term of the option, regardless of whether the
participant is employed or in service with the Company; and all stock awards
held by a participant will immediately vest and further restrictions
lapse.
As of
March 31, 2010, there was $167,000 of unrecognized compensation cost related to
unvested stock options granted under the Plans. That cost is expected
to be recognized over a weighted-average period of 1.78 years.
67
NOTE 14 - EMPLOYEE STOCK
OWNERSHIP PLAN (ESOP)
All Bank
employees meeting certain age and service requirements are eligible to
participate in the ESOP. On June 4, 2002, the ESOP purchased 73,795
shares of the common stock of the Company (174,768 as adjusted for the 2.3683
share exchange). To fund the purchases, the ESOP borrowed $738,000
from the Company. The borrowing is currently at an interest rate of
4.75% and is to be repaid in equal annual installments through December 31,
2011. In fiscal 2006, the ESOP purchased 246,068 shares of common
stock in the second-step conversion with a $2.5 million loan from the Company,
which has a 15 year term at an interest rate of 7.25%. Dividends paid
on unreleased shares are used to reduce the principal balance of the
loan. The collateral for the borrowing is the common stock of the
Company purchased by the ESOP. Contributions by the Bank to the ESOP
are discretionary; however, the Bank intends to make annual contributions to the
ESOP in an aggregate amount at least equal to the principal and interest
requirements on the debt. The shares of stock of the Company are held
in a suspense account until released for allocation among
participants. The shares will be released annually from the suspense
account and the released shares will be allocated among the participants on the
basis of the participant’s compensation for the year of allocation compared to
all other participants. As any shares are released from collateral,
the Company reports compensation expense equal to the current market price of
the shares and the shares will be outstanding for earnings-per-share
purposes. The shares not released are reported as unearned ESOP
shares in the capital accounts section of the balance sheet. ESOP
expense for the years ended March 31, 2010 and 2009 was $194,000 and $308,000,
respectively.
The ESOP
shares as of March 31 were as follows:
|
2010
|
2009
|
|||||||
|
Allocated
shares
|
158,441 | 141,166 | ||||||
|
Unreleased
shares
|
215,407 | 249,291 | ||||||
|
Total
ESOP shares
|
373,848 | 390,457 | ||||||
|
Fair
value of unreleased shares
|
$ | 1,634,939 | $ | 1,500,732 | ||||
NOTE 15 - REGULATORY
MATTERS
The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company’s and the Bank’s financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company’s and the Bank’s capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of March 31, 2010 and
2009, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of
March 31, 2010, the most recent notification from the Federal Deposit Insurance
Corporation categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution’s category.
68
The
Company’s actual capital amounts and ratios are also presented in the
table.
|
To
Be Well
|
||||||||||||||||||||||||
|
Capitalized
Under
|
||||||||||||||||||||||||
|
For
Capital
|
Prompt
Corrective
|
|||||||||||||||||||||||
|
Actual
|
Adequacy Purposes
|
Action Provisions
|
||||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
|
(Dollar
amounts in thousands)
|
||||||||||||||||||||||||
|
As
of March 31, 2010:
|
||||||||||||||||||||||||
|
Total
Capital (to Risk Weighted Assets)
|
$ | 52,200 | 11.12 | % | $ | 37,544 | > 8.0 | % | N/A | N/A | ||||||||||||||
|
Tier
1 Capital (to Risk Weighted Assets)
|
47,575 | 10.14 | 18,772 | > 4.0 | N/A | N/A | ||||||||||||||||||
|
Tier
1 Capital (to Average Assets)
|
47,575 | 7.33 | 25,959 | > 4.0 | N/A | N/A | ||||||||||||||||||
|
As
of March 31, 2009:
|
||||||||||||||||||||||||
|
Total
Capital (to Risk Weighted Assets)
|
$ | 52,435 | 13.28 | % | $ | 31,576 | > 8.0 | % | N/A | N/A | ||||||||||||||
|
Tier
1 Capital (to Risk Weighted Assets)
|
47,481 | 12.03 | 15,788 | > 4.0 | N/A | N/A | ||||||||||||||||||
|
Tier
1 Capital (to Average Assets)
|
47,481 | 8.78 | 21,263 | > 4.0 | N/A | N/A | ||||||||||||||||||
The New
England Bank’s actual capital amounts and ratios at March 31, 2010 are presented
in the table below:
|
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)
|
$ | 52,148 | 11.14 | % | $ | 37,442 | > 8.0 | % | $ | 46,803 | > 10.0 | % | ||||||||||||
|
Tier
1 Capital (to Risk Weighted Assets)
|
47,523 | 10.15 | 18,721 | > 4.0 | 28,082 | > 6.0 | ||||||||||||||||||
|
Tier
1 Capital (to Average Assets)
|
47,523 | 7.34 | 25,912 | > 4.0 | 32,390 | > 5.0 | ||||||||||||||||||
Quantitative
measures established by regulation to ensure capital adequacy require the
Association to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier capital (as defined in the regulations) to
risk-weighted assets (as defined), of Core capital (as defined) to adjusted
total assets (as defined) and Tangible capital (as defined) to adjusted tangible
assets (as defined). Management believes, as of March 31, 2009, that
the Association meets all capital adequacy requirements to which it is
subject.
As of
March 31, 2009, the most recent notification from the Office of Thrift
Supervision categorized the Association as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Association must maintain minimum total risk-based, Tier 1
risk-based and core capital ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed the Association's category.
69
Enfield
Federal Savings & Loan Association’s actual capital amounts and
ratios at March 31, 2009 are presented in the table below:
|
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)
|
$ | 26,756 | 12.19 | % | $ | 17,564 | > 8.0 | % | $ | 21,956 | > 10.0 | % | ||||||||||||
|
Tangible
Capital (to Tangible Assets)
|
24,502 | 7.52 | 4,887 | > 1.5 | N/A | N/A | ||||||||||||||||||
|
Core
Capital (to Adjusted Tangible Assets)
|
24,502 | 7.52 | 13,031 | > 4.0 | 16,289 | > 5.0 | ||||||||||||||||||
|
Tier
1 Capital (to Risk Weighted Assets)
|
24,502 | 11.16 | N/A | N/A | 13,173 | > 6.0 | ||||||||||||||||||
Valley
Bank’s actual capital amounts and ratios at March 31, 2009 are presented in the
table below:
|
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)
|
$ | 22,882 | 11.56 | % | $ | 15,841 | > 8.0 | % | $ | 19,802 | > 10.0 | % | ||||||||||||
|
Tier
1 Capital (to Risk Weighted Assets)
|
20,385 | 10.29 | 7,921 | > 4.0 | 11,881 | > 6.0 | ||||||||||||||||||
|
Tier
1 Capital (to Average Assets)
|
20,385 | 8.98 | 9,076 | > 4.0 | 11,345 | > 5.0 | ||||||||||||||||||
NOTE 16 - EARNINGS (LOSS)
PER SHARE (EPS)
Reconciliation
of the numerators and denominators of the basic and diluted per share
computations for net income (loss) are as follows:
|
|
Income
|
Shares
|
Per-Share
|
|||||||||
|
|
(Numerator)
|
(Denominator)
|
Amount
|
|||||||||
|
(In
Thousands)
|
||||||||||||
|
Year
ended March 31, 2010
|
||||||||||||
|
Basic
EPS
|
||||||||||||
|
Net
income
|
$ | 1,676 | --- | |||||||||
|
Dividends
and undistributed earnings allocated
|
||||||||||||
|
to
unvested shares
|
(6 | ) | --- | |||||||||
|
Net
income and income available to common stockholders
|
1,670 | 5,938,924 | $ | 0.28 | ||||||||
|
Effect
of dilutive securities options
|
--- | --- | ||||||||||
|
Effect
of restrictive stock
|
--- | --- | ||||||||||
|
Diluted
EPS
|
||||||||||||
|
Income
available to common stockholders and
|
||||||||||||
|
assumed
conversions
|
$ | 1,670 | 5,938,924 | $ | 0.28 | |||||||
70
|
|
Income
|
Shares
|
Per-Share
|
|||||||||
|
|
(Numerator)
|
(Denominator)
|
Amount
|
|||||||||
|
(In
Thousands)
|
||||||||||||
|
Year
ended March 31, 2009
|
||||||||||||
|
Basic
EPS
|
||||||||||||
|
Net
loss
|
$ | (1,802 | ) | --- | ||||||||
|
Dividends
and undistributed loss allocated
|
||||||||||||
|
to
unvested shares
|
10 | --- | ||||||||||
|
Net
loss and loss available to common stockholders
|
(1,792 | ) | 5,646,911 | $ | (0.32 | ) | ||||||
|
Effect
of dilutive securities options
|
--- | --- | ||||||||||
|
Effect
of restrictive stock
|
--- | --- | ||||||||||
|
Diluted
EPS
|
||||||||||||
|
Loss
available to common stockholders and
|
||||||||||||
|
assumed
conversions
|
$ | (1,792 | ) | 5,646,911 | $ | (0.32 | ) | |||||
NOTE 17 - COMMITMENTS AND
CONTINGENT LIABILITIES
The
Company is obligated under non-cancelable operating leases for banking premises
and equipment expiring between fiscal year 2011 and 2031. The total
minimum rental due in future periods under these existing agreements is as
follows as of March 31, 2010:
|
Year Ended March 31
|
(In
Thousands)
|
|||
|
2011
|
$ | 931 | ||
|
2012
|
924 | |||
|
2013
|
888 | |||
|
2014
|
860 | |||
|
2015
|
849 | |||
|
Thereafter
|
8,099 | |||
|
Total
minimum lease payments
|
$ | 12,551 | ||
Certain
leases contain provisions for escalation of minimum lease payments contingent
upon increases in real estate taxes and percentage increases in the consumer
price index. Certain leases contain options to extend for periods
from one to five years. The total rental expense amounted to $1.0
million and $895,000 for the years ended March 31, 2010 and 2009,
respectively.
NOTE 18 - FAIR VALUE
MEASUREMENTS
Effective
April 1, 2008, the Company adopted ASC 820-10, “Fair Value Measurements and
Disclosures,” which provides a framework for measuring fair value under
generally accepted accounting principles. This guidance also allows
an entity the irrevocable option to elect fair value for the initial and
subsequent measurement for certain financial assets and liabilities on a
contract-by-contract basis. The Company did not elect fair value
treatment for any financial assets or liabilities upon adoption.
In
accordance with ASC 820-10, the Company groups its financial assets and
financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value.
Level 1 -
Valuations for assets and liabilities traded in active exchange markets, such as
the New York Stock Exchange. Level 1 also includes U.S. Treasury,
other U.S. Government and agency mortgage-backed securities that are traded by
dealers or brokers in active markets. Valuations are obtained from
readily available pricing sources for market transactions involving identical
assets or liabilities.
Level 2 -
Valuations for assets and liabilities traded in less active dealer or broker
markets. Valuations are obtained from third party pricing services
for identical or comparable assets or liabilities.
71
Level 3 -
Valuations for assets and liabilities that are derived from other methodologies,
including option pricing models, discounted cash flow models and similar
techniques, are not based on market exchange, dealer, or broker traded
transactions. Level 3 valuations incorporate certain assumptions and
projections in determining the fair value assigned to such assets and
liabilities.
A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.
A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below. These valuation
methodologies were applied to all of the Company’s financial assets and
financial liabilities carried at fair value for March 31, 2010 and
2009.
The
Company’s cash instruments are generally classified within level 1 or level 2 of
the fair value hierarchy because they are valued using quoted market prices,
broker or dealer quotations, or alternative pricing sources with reasonable
levels of price transparency.
The
Company’s investment in mortgage-backed securities and other debt securities
available-for-sale is generally classified within level 2 of the fair value
hierarchy. For these securities, we obtain fair value measurements
from independent pricing services. The fair value measurements
consider observable data that may include dealer quotes, market spreads, cash
flows, the U.S. treasury yield curve, trading levels, market consensus
prepayment speeds, credit information and the instrument’s terms and
conditions.
Level 3
is for positions that are not traded in active markets or are subject to
transfer restrictions, valuations are adjusted to reflect illiquidity and/or
non-transferability, and such adjustments are generally based on available
market evidence. In the absence of such evidence, management’s best
estimate is used. Subsequent to inception, management only changes
level 3 inputs and assumptions when corroborated by evidence such as
transactions in similar instruments, completed or pending third-party
transactions in the underlying investment or comparable entities, subsequent
rounds of financing, recapitalization and other transactions across the capital
structure, offerings in the equity or debt markets, and changes in financial
ratios or cash flows.
The
Company’s impaired loans are reported at the fair value of the underlying
collateral if repayment is expected solely from the
collateral. Collateral values are estimated using level 2 inputs
based upon appraisals of similar properties obtained from a third
party.
The
following summarizes assets measured at fair value on a recurring basis for the
period ending March 31:
|
|
Fair Value Measurements at Reporting Date
Using:
|
|||||||||||||||
|
|
Quoted
Prices in
|
Significant
|
Significant
|
|||||||||||||
|
|
Active
Markets for
|
Other
Observable
|
Unobservable
|
|||||||||||||
|
|
Identical
Assets
|
Inputs
|
Inputs
|
|||||||||||||
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
|
March
31, 2010:
|
||||||||||||||||
|
Securities
available-for-sale
|
$ | 63,979 | $ | 3,155 | $ | 60,824 | $ | --- | ||||||||
|
March
31, 2009:
|
||||||||||||||||
|
Securities
available-for-sale
|
$ | 71,821 | $ | 1,473 | $ | 70,348 | $ | --- | ||||||||
|
Impaired
securities included
|
||||||||||||||||
|
in
other assets
|
671 | --- | 671 | --- | ||||||||||||
|
|
$ | 72,492 | $ | 1,473 | $ | 71,019 | $ | --- | ||||||||
72
Under
certain circumstances we make adjustments to fair value for our assets and
liabilities although they are not measured at fair value on an ongoing
basis. The following table presents the financial instruments carried
on the consolidated balance sheet by caption and by level in the fair value
hierarchy at March 31, 2010 and 2009, for which a nonrecurring change in fair
value has been recorded:
|
|
Fair Value Measurements at Reporting Date
Using:
|
|||||||||||||||
|
|
Quoted
Prices in
|
Significant
|
Significant
|
|||||||||||||
|
|
Active
Markets for
|
Other
Observable
|
Unobservable
|
|||||||||||||
|
|
Identical
Assets
|
Inputs
|
Inputs
|
|||||||||||||
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
|
March
31, 2010:
|
||||||||||||||||
|
Impaired
loans
|
$ | 2,468 | $ | --- | $ | 1,186 | $ | 1,282 | ||||||||
|
March
31, 2009:
|
||||||||||||||||
|
Impaired
loans
|
$ | 3,596 | $ | --- | $ | 3,596 | $ | --- | ||||||||
|
|
Fair
Value Measurements
|
|||
|
|
Using
Significant Unobservable Inputs
|
|||
|
|
Level 3
|
|||
|
Impaired Loans
|
||||
|
Beginning
balance March 31, 2009
|
$ | |||
|
Transfers
in and/or out of Level 3
|
1,282 | |||
|
Ending
balance, March 31, 2010
|
$ | 1,282 | ||
The
following are carrying amounts and estimated fair values of the Company’s
financial assets and liabilities as of March 31:
|
2010
|
2009
|
|||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
|
Amount
|
Fair Value
|
Amount
|
Fair Value
|
|||||||||||||
|
(In
Thousands)
|
||||||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 38,982 | $ | 38,982 | $ | 41,433 | $ | 41,433 | ||||||||
|
Interest-bearing
time deposits with other banks
|
99 | 99 | 99 | 99 | ||||||||||||
|
Available-for-sale
securities
|
63,979 | 63,979 | 71,821 | 71,821 | ||||||||||||
|
Federal
Home Loan Bank stock
|
4,396 | 4,396 | 3,896 | 3,896 | ||||||||||||
|
Loans,
net
|
515,504 | 518,387 | 413,566 | 415,595 | ||||||||||||
|
Other
investment securities
|
--- | --- | 671 | 671 | ||||||||||||
|
Accrued
interest receivable
|
2,768 | 2,768 | 2,321 | 2,321 | ||||||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Deposits
|
517,572 | 521,382 | 419,436 | 421,925 | ||||||||||||
|
Advanced
payments by borrowers for taxes and insurance
|
1,171 | 1,171 | 953 | 953 | ||||||||||||
|
FHLB
advances
|
56,860 | 59,041 | 66,833 | 69,523 | ||||||||||||
|
Securities
sold under agreements to repurchase
|
23,460 | 23,465 | 12,069 | 12,071 | ||||||||||||
|
Subordinated
debentures
|
3,910 | 1,390 | 3,901 | 1,709 | ||||||||||||
|
Due
to broker
|
--- | --- | 715 | 715 | ||||||||||||
The
carrying amounts of financial instruments shown in the above tables are included
in the consolidated balance sheets
under the indicated captions except for other investments, due from broker and
due to broker which are included in other assets and other
liabilities. Accounting policies related to financial instruments are
described in Note 2.
73
NOTE 19 - OTHER
COMPREHENSIVE INCOME (LOSS)
Other
comprehensive income (loss) for the years ended March 31, 2010 and 2009 are as
follows:
|
|
March 31, 2010
|
|||||||||||
|
|
Before
Tax
|
Tax
|
Net
of Tax
|
|||||||||
|
|
Amount
|
Effects
|
Amount
|
|||||||||
|
|
(In
Thousands)
|
|||||||||||
|
Net
unrealized holding gains on available-for-sale securities
|
$ | 1,951 | $ | (523 | ) | $ | 1,428 | |||||
|
Reclassification
adjustment for realized gains in net income
|
(819 | ) | 84 | (735 | ) | |||||||
|
Other
comprehensive benefit – director fee continuation plan
|
6 | (2 | ) | 4 | ||||||||
|
Total
|
$ | 1,138 | $ | (441 | ) | $ | 697 | |||||
|
|
March 31, 2009
|
|||||||||||
|
|
Before
Tax
|
Tax
|
Net
of Tax
|
|||||||||
|
|
Amount
|
Effects
|
Amount
|
|||||||||
|
|
(In
Thousands)
|
|||||||||||
|
Net
unrealized holding losses on available-for-sale securities
|
$ | (807 | ) | $ | 314 | $ | (493 | ) | ||||
|
Reclassification
adjustment for realized gains in net income
|
(189 | ) | 73 | (116 | ) | |||||||
|
Other
comprehensive benefit – director fee continuation plan
|
13 | (5 | ) | 8 | ||||||||
|
Total
|
$ | (983 | ) | $ | 382 | $ | (601 | ) | ||||
Accumulated
other comprehensive (loss) income consists of the following as of March
31:
|
|
2010
|
2009
|
||||||
|
|
(In
thousands)
|
|||||||
|
Net
unrealized holding gains (losses) on available-for-sale securities, net of
taxes (1)
|
$ | 299 | $ | (394 | ) | |||
|
Unrecognized
director fee plan benefits, net of tax
|
(1 | ) | (5 | ) | ||||
|
Total
|
$ | 298 | $ | (399 | ) | |||
(1) The
March 31, 2010 and 2009 ending balance includes $103,000 and $206,000,
respectively of unrealized losses in which other-than-temporary impairment has
been recognized.
NOTE 20 - OFF-BALANCE SHEET
ACTIVITIES
The
Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to
originate loans, standby letters of credit and unadvanced funds on
loans. The instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance
sheets. The contract amounts of those instruments reflect the extent
of involvement the Company has in particular classes of financial
instruments.
The
Company’s exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for loan commitments and standby letters of
credit is represented by the contractual amounts of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Commitments
to originate loans are agreements to lend to a customer provided there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates
each customer’s creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management’s credit evaluation of the
borrower. Collateral held varies, but may include secured interests
in mortgages, accounts receivable, inventory, property, plant and equipment and
income-producing properties.
74
Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. As of March 31, 2010 and
2009, the maximum potential amount of the Company’s obligation was $1.8 million
and $1.7 million, respectively, for financial and standby letters of
credit. The Company’s outstanding letters of credit generally have a
term of less than one year. If a letter of credit is drawn upon, the
Company may seek recourse through the customer’s underlying line of
credit. If the customer’s line of credit is also in default, the
Company may take possession of the collateral, if any, securing the line of
credit.
The
notional amounts of financial instrument liabilities with off-balance sheet
credit risk are as follows as of
March
31:
|
|
2010
|
2009
|
||||||
|
|
(In
Thousands)
|
|||||||
|
Commitments
to originate loans
|
$ | 13,742 | $ | 6,116 | ||||
|
Standby
letters of credit
|
1,780 | 1,692 | ||||||
|
Unadvanced
portions of loans:
|
||||||||
|
Construction
|
3,455 | 8,414 | ||||||
|
Home
equity
|
13,449 | 8,757 | ||||||
|
Commercial
lines of credit
|
33,225 | 26,181 | ||||||
|
Purchase
of loans
|
6,900 | --- | ||||||
|
Overdraft
protection lines
|
2,927 | 2,986 | ||||||
|
|
$ | 75,478 | $ | 54,146 | ||||
There is
no material difference between the notional amounts and the estimated fair
values of the off-balance sheet liabilities.
NOTE 21 - SIGNIFICANT GROUP
CONCENTRATIONS OF CREDIT RISK
Most of
the Company’s business activity is with customers located within
Connecticut. There are no concentrations of credit to borrowers that
have similar economic characteristics. The majority of the Company’s
loan portfolio is comprised of loans collateralized by real estate located in
the state of Connecticut.
NOTE 22 -
RECLASSIFICATION
Certain
amounts in the prior year have been reclassified to be consistent with the
current year's statement presentation.
75
NOTE 23 - PARENT COMPANY
ONLY FINANCIAL STATEMENTS
The
following financial statements are for the Company (Parent Company Only) and
should be read in conjunction with the consolidated financial statements of the
Company.
|
NEW ENGLAND BANCSHARES, INC.
(Parent
Company Only)
Balance Sheets
(In
Thousands)
|
||||||||
|
|
March 31,
|
|||||||
|
ASSETS
|
2010
|
2009
|
||||||
|
Cash
on deposit with Enfield Federal Savings and Loan
Association
|
$ | 646 | $ | 2,093 | ||||
|
Investment
in subsidiaries
|
67,514 | 61,353 | ||||||
|
Loans
to ESOP
|
2,207 | 2,406 | ||||||
|
Accrued
interest receivable
|
40 | 83 | ||||||
|
Other
assets
|
1,585 | 1,618 | ||||||
|
Due
from subsidiary
|
--- | 479 | ||||||
|
Total
assets
|
$ | 71,992 | $ | 68,032 | ||||
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
||||||||
|
Other
liabilities
|
$ | 76 | $ | 74 | ||||
|
Subordinated
debentures
|
3,910 | 3,901 | ||||||
|
Deferred
tax liability
|
99 | 103 | ||||||
|
Stockholders’
equity
|
67,907 | 63,954 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 71,992 | $ | 68,032 | ||||
|
Statements of Income
(In
Thousands)
|
||||||||
|
|
||||||||
|
|
For
the Years Ended
|
|||||||
|
|
March 31,
|
|||||||
|
|
2010
|
2009
|
||||||
|
Dividend
from subsidiaries
|
$ | --- | $ | 4,000 | ||||
|
Interest
income
|
258 | 213 | ||||||
|
Total
interest and dividend income
|
258 | 4,213 | ||||||
|
Interest
expense
|
273 | 273 | ||||||
|
Net
interest and dividend income
|
(15 | ) | 3,940 | |||||
|
Other
expense
|
487 | 452 | ||||||
|
(Loss)
income before income tax benefit and equity in
|
||||||||
|
undistributed
net income (loss) of subsidiaries
|
(502 | ) | 3,488 | |||||
|
Income
tax benefit
|
(97 | ) | (118 | ) | ||||
|
(Loss)
income before equity in undistributed net income (loss) of
subsidiaries
|
(405 | ) | 3,606 | |||||
|
Equity
in undistributed net income (loss) of subsidiaries
|
2,081 | (5,408 | ) | |||||
|
Net
income (loss)
|
$ | 1,676 | $ | (1,802 | ) | |||
76
NEW ENGLAND BANCSHARES,
INC.
(Parent
Company Only)
Statements of Cash
Flows
(In
Thousands)
|
|
For
the Years Ended
|
|||||||
|
|
March 31,
|
|||||||
|
|
2010
|
2009
|
||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income (loss)
|
$ | 1,676 | $ | (1,802 | ) | |||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||
|
Amortization
of fair value adjustments
|
9 | 8 | ||||||
|
Decrease
(increase) in accrued interest receivable
|
43 | (37 | ) | |||||
|
Decrease
in due from subsidiaries
|
479 | --- | ||||||
|
Decrease
(increase) in other assets
|
33 | (518 | ) | |||||
|
Decrease
in other liabilities
|
(2 | ) | --- | |||||
|
Undistributed
net (income) loss of subsidiaries
|
(2,081 | ) | 5,408 | |||||
|
Compensation
cost for stock-based incentive plan
|
232 | --- | ||||||
|
Net
cash provided by operating activities
|
389 | 3,059 | ||||||
|
Cash
flows from investing activities:
|
||||||||
|
Principal
payments received on loans to ESOP
|
199 | 187 | ||||||
|
Net
cash provided by investing activities
|
199 | 187 | ||||||
|
Cash
flows from financing activities:
|
||||||||
|
Purchase
of treasury stock
|
(1,560 | ) | (2,204 | ) | ||||
|
Exercise
of stock options
|
--- | 139 | ||||||
|
Payment
of cash dividends on common stock
|
(475 | ) | (850 | ) | ||||
|
Net
cash used in financing activities
|
(2,035 | ) | (2,915 | ) | ||||
|
Net
(decrease) increase in cash and cash equivalents
|
(1,447 | ) | 331 | |||||
|
Cash
and cash equivalents at beginning of year
|
2,093 | 1,762 | ||||||
|
Cash
and cash equivalents at end of year
|
$ | 646 | $ | 2,093 | ||||
77
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM
9A(T). CONTROLS AND PROCEDURES
(a) The
Company’s management, including the Company’s principal executive officer and
principal financial officer, have evaluated the effectiveness of the Company’s
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”). Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company’s disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required
disclosure.
(b) Management’s
report on internal control over financial reporting.
Management of the Company is
responsible for establishing and maintaining adequate internal control over
financial reporting.
The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. The Company’s
internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America, and
that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and (iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management assessed the effectiveness
of the Company’s internal control over financial reporting as of March 31, 2010,
based on the framework set forth by the Committee of Sponsoring Organizations of
the Treadway Commission in Internal Control—Integrated
Framework. Based on that assessment, management concluded that, as of
March 31, 2010, the Company’s internal control over financial reporting was
effective based on the criteria established in Internal Control—Integrated
Framework.
This annual report does not include an
attestation report of the Company's registered public accounting firm regarding
internal control over financial reporting. Management's report was not subject
to attestation by the Company's registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
company to provide only management's report in this annual report.
(c) There
has been no change in the Company’s internal control over financial reporting
during the Company’s fourth quarter of fiscal 2010 that has materially affected,
or is reasonably likely to materially affect, the Company’s internal control
financial reporting,
78
ITEM
9B. OTHER
INFORMATION
None.
PART
III
|
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Directors
The information relating to the
directors of the Company is incorporated herein by reference to the sections
captioned “Corporate Governance—Committees of the Board of Directors” and
“Proposal 1 - Election of Directors” in the Company’s Proxy Statement for the
2010 Annual Meeting of Stockholders.
Executive
Officers
Certain
executive officers of the Bank also serve as executive officers of the
Company. The day-to-day management duties of the executive officers
of the Company and Bank relate primarily to their duties as to the
Bank. The executive officers are elected annually and hold office
until their successors have been elected and qualified or until they are removed
or replaced. The executive officers of the Company currently are as
follows:
|
Name
|
Age(1)
|
Position(s)
|
||||
|
David
J. O’Connor
|
63
|
President,
Chief Executive Officer and Director
|
||||
|
Michael
J. Marcucci
|
48
|
Executive
Vice President and Senior Risk Officer
|
||||
|
Scott
D. Nogles
|
40
|
Executive
Vice President and Chief Financial Officer
|
||||
|
John
F. Parda
|
61
|
Executive
Vice President and Chief Loan Officer
|
||||
(1) As
of March 31, 2010.
David J.
O’Connor. Mr. O’Connor has been the Chief Executive Officer,
President and Director of the Bank since 1999 and of New England Bancshares
since 2002. Mr. O’Connor has over 44 years of banking experience
in New England.
Michael J.
Marcucci. Mr. Marcucci joined New England Bancshares in 2008
as Executive Vice President and Senior Risk Officer. Before joining New England
Bancshares, he was Senior Vice President of Credit Administration at Webster
Bank from 2003 to 2008.
Scott D.
Nogles. Mr. Nogles joined New England Bancshares and the Bank
in 2004 as Senior Vice President and Chief Financial Officer. He was
named Executive Vice President and Chief Financial Officer in
2008. Mr. Nogles has an MBA from the University of Connecticut and is
a CPA.
John F. Parda. Mr.
Parda joined the Bank in 1999 as Vice President and Senior Loan
Officer. He was named Senior Vice President and Senior Loan Officer
in 2001and Executive Vice President and Chief Loan Officer in
2008. Mr. Parda has over 30 years of diversified banking experience
with Connecticut financial institutions.
79
Compliance
with Section 16(a) of the Exchange Act
Reference is made to the cover page of
this report and to the section captioned “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Company’s Proxy Statement for the 2010 Annual
Meeting of Stockholders.
Disclosure
of Code of Ethics and Business Conduct
For information concerning the
Company’s code of ethics, the information contained under the section captioned
“Corporate Governance—Code of Ethics and Business Conduct” in the Company’s
Proxy Statement for the 2010 Annual Meeting of Stockholders is incorporated by
reference. A copy of the code of ethics and business conduct is
available, without charge, upon written request to Nancy L. Grady, Corporate
Secretary, New England Bancshares, Inc., 855 Enfield Street, Enfield,
Connecticut 06082.
Corporate
Governance
For information regarding the audit
committee and its composition and the audit committee financial expert, the
section captioned “Corporate
Governance – Committees of the Board of Directors – Audit Committee” in
the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders is
incorporated by reference.
ITEM
11. EXECUTIVE
COMPENSATION
The information regarding executive
compensation is incorporated herein by reference to the sections captioned
“Corporate Governance - Directors’ Compensation” and “Executive Compensation” in
the Company’s Proxy Statement for the 2010 Annual Meeting of
Stockholders.
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
|
|
(a)
|
Security
Ownership of Certain Beneficial
Owners
|
Information
required by this item is incorporated herein by reference to the section
captioned “Stock
Ownership” in the Company’s Proxy Statement for the 2010 Annual Meeting
of Stockholders.
|
|
(b)
|
Security
Ownership of Management
|
Information
required by this item is incorporated herein by reference to the section
captioned “Stock
Ownership” in the Company’s Proxy Statement for the 2010 Annual Meeting
of Stockholders.
|
|
(c)
|
Changes
in Control
|
Management
of New England Bancshares knows of no arrangements, including any pledge by any
person of securities of New England Bancshares, the operation of which may at a
subsequent date result in a change in control of the registrant.
|
|
(d)
|
Equity
Compensation Plan Information
|
80
The following table provides
information as of March 31, 2010 for compensation plans under which equity
securities may be issued.
|
Plan
category
|
Number
of Securities to
be
issued upon exercise of
outstanding
options,
warrants
and rights
(a)
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
(b)
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding
securities
reflected in
column
(a))
(c)
|
|
Equity
compensation plans approved by security holders
|
333,416
|
$8.90
|
185,389
|
|
Equity
compensation plans not approved by security holders
|
---
|
---
|
---
|
|
Total
|
333,416
|
$8.90
|
185,389
|
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
Certain
Relationships and Related Transactions
For information regarding certain
relationships and related transactions, the section captioned “Transactions with Related
Persons” in the Company’s Proxy Statement for the 2010 Annual Meeting of
Stockholders is incorporated by reference.
Corporate
Governance
For information regarding director
independence, the section captioned “Proposal 1 – Election of
Directors” in the Company’s Proxy Statement for the 2010 Annual Meeting
of Stockholders is incorporated by reference.
81
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The
information relating to the Company’s principal accountant fees and services is
incorporated herein by reference to the section captioned “Proposal
2—Ratification of Independent Auditors” in the Company’s Proxy Statement for the
2010 Annual Meeting of Stockholders.
PART
IV
|
ITEM
15.
|
EXHIBITS
AND FINANCIAL SATEMENT SCHEDULES
|
|
2.1
|
Agreement
and Plan of Merger, dated November 21, 2006, by and among, New England
Bancshares, Inc., New England Bancshares Acquisition, Inc. and First
Valley Bancorp, Inc. (1)
|
|
|
3.1
|
Articles
of Incorporation of New England Bancshares, Inc. (2)
|
|
|
3.2
|
Bylaws
of New England Bancshares, Inc. (2)
|
|
|
4.0
|
Specimen
stock certificate of New England Bancshares, Inc. (2)
|
|
|
10.1
|
Form
of Enfield Federal Savings and Loan Association Employee Stock Ownership
Plan and Trust(3)
|
|
|
10.2
|
Enfield
Federal Savings and Loan Association Employee Savings & Profit-Sharing
Plan and Adoption Agreement (3)
|
|
|
10.3
|
Employment
Agreement by and between New England Bank and David J.
O’Connor
|
|
|
10.4
|
Employment
Agreement by and between New England Bancshares, Inc. and David J.
O’Connor
|
|
|
10.5
|
Form
of New England Bancshares, Inc. Amended and Restated 2008 Severance
Compensation Plan
|
|
|
10.6
|
Enfield
Federal Savings and Loan Association Executive Supplemental Retirement
Plan, as amended and restated (4)
|
|
|
10.7
|
First
Amendment to Amended and Restated New England Bank Executive Supplemental
Retirement Plan
|
|
|
10.8
|
Form
of Enfield Federal Savings and Loan Association Amended and Restated
Supplemental Executive Retirement Plan
|
|
|
10.9
|
Form
of Enfield Federal Savings and Loan Association Director Fee Continuation
Plan entered into with Peter T. Dow, Myron J. Marek, Dorothy K. McCarty,
Richard K. Stevens and Richard M. Tatoian (3)
|
|
|
10.10
|
Form
of First Amendment to Directors Fee Continuation
Agreement
|
|
|
10.11
|
Split
Dollar Arrangement with David J. O’Connor (3)
|
|
|
10.12
|
New
England Bancshares, Inc. 2003 Stock-Based Incentive Plan, as amended and
restated (5)
|
|
|
10.13
|
New
England Bancshares, Inc. 2006 Equity Incentive Plan (6)
|
|
|
10.14
|
Form
of Amended and Restated Change in Control Agreement by and among New
England Bank, New England Bancshares, Inc. entered into with
John F. Parda and Scott D. Nogles
|
|
|
10.15
|
Lease
agreement with Troiano Professional Center, LLC (7)
|
|
| 10.16 | Split-Dollar Endorsement Agreement with David J. O’Connor | |
| 10.17 | Split-Dollar Endorsement Agreement with Scott Nogles | |
| 10.18 | Split-Dollar Endorsement Agreement with John Parda | |
| 21.0 | List of Subsidiaries | |
|
23.1
|
Consent
of Shatswell, MacLeod & Company, P.C.
|
|
|
31.1
|
Rule
13a-14(a) /15d-14(a) Certification of Chief Executive
Officer
|
|
|
31.2
|
Rule
13a-14(a) /15d-14(a) Certification of Chief Financial
Officer
|
|
|
32.1
|
Section
1350 Certification of Chief Executive Officer
|
|
|
32.2
|
Section
1350 Certification of Chief Financial
Officer
|
___________________
|
(1)
|
Incorporated
by reference into this document from the exhibits to the Current Report on
Form 8-K filed on November 28, 2006.
|
|
|
(2)
|
Incorporated
by reference into this document from the Company’s Form SB-2, Registration
Statement filed under the Securities Act of 1933, Registration No.
333-128277.
|
|
|
(3)
|
Incorporated
by reference into this document from the Company’s Form SB-2, Registration
Statement filed under the Securities Act of 1933, Registration No.
333-82856.
|
|
|
(4)
|
Incorporated
by reference into this document from the exhibits to the Annual Report on
Form 10-K for the year ended March 31, 2006.
|
|
|
(5)
|
Incorporated
by reference from the Proxy Statement for the 2003 Special Meeting of
Stockholders.
|
|
|
(6)
|
Incorporated
by reference from the Proxy Statement for the 2006 Meeting of
Stockholders.
|
|
|
(7)
|
Incorporated
by reference into this document from the exhibits to the Annual Report on
Form 10-K for the year ended March 31,
2007.
|
82
SIGNATURES
In accordance with Section 13 or 15(d)
of the Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
New
England Bancshares, Inc.
|
||
|
Date: June
25, 2010
|
By:
|
/s/ David J. O’Connor
|
|
David
J. O’Connor
|
||
|
President,
Chief Executive Officer
|
||
|
and
Director
|
||
In accordance with the Exchange Act,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
|
/s/ David J. O’Connor
|
/s/ Scott D. Nogles
|
|
|
David
J. O’Connor, President, Chief Executive
|
Scott
D. Nogles, Executive Vice President and Chief
|
|
|
Officer
and Director (principal executive officer)
|
Financial
Officer (principal financial and
|
|
|
accounting
officer)
|
||
|
Date: June
25, 2010
|
Date: June
25, 2010
|
|
|
/s/ Thomas O. Barnes
|
/s/ Lucien P. Bolduc
|
|
|
Thomas
O. Barnes, Director
|
Lucien
P. Bolduc, Director
|
|
|
Date: June
25, 2010
|
Date: June
25, 2010
|
|
|
/s/ Edmund D. Donovan
|
/s/ Peter T. Dow
|
|
|
Edmund
D. Donovan, Director
|
Peter
T. Dow, Chairman of the Board
|
|
|
Date: June
25, 2010
|
Date: June
25, 2010
|
|
|
/s/ William C. Leary, Esq.
|
/s/ Myron J. Marek
|
|
|
William
C. Leary, Director
|
Myron
J. Marek, Director
|
|
|
Date: June
25, 2010
|
Date: June
25, 2010
|
|
|
/s/ Dorothy K. McCarty
|
/s/ David J. Preleski,
Esq.
|
|
|
Dorothy
K. McCarty, Director
|
David
J. Preleski, Esq., Director
|
|
|
Date: June
25, 2010
|
Date: June
25, 2010
|
|
|
/s/ Kathryn C. Reinhard
|
/s/ Richard K. Stevens
|
|
|
Kathryn
C. Reinhard, Director
|
Richard
K. Stevens, Director
|
|
|
Date: June
25, 2010
|
Date: June
25, 2010
|
|
|
/s/ Richard M. Tatoian,
Esq.
|
||
|
Richard
M. Tatoian, Esq., Director
|
||
|
Date: June
25, 2010
|
83