NEW ENGLAND BANCSHARES, INC.
(Unaudited)
NOTE 1 – Nature of Operations
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 with branches in Hartford, Tolland and New Haven Counties. 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, home equity loans and lines of credit and consumer loans.
NOTE 2 – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and the instructions to Form 10-Q, and accordingly do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments necessary, consisting of only normal recurring accruals, to present fairly the financial position, results of operations and cash flows of the Company for the periods presented. In preparing the interim financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. The interim results of operations presented are not necessarily indicative of the operating results to be expected for the year ending March 31, 2012 or any interim period.
While management believes that the disclosures presented are adequate so as not to make the information misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes included in the Company’s Form 10-K for the year ended March 31, 2011.
T
he condensed consolidated balance sheet as of March 31, 2011 was derived from the Company’s audited financial statements, but does not include all the disclosures required by accounting principles generally accepted in the United States of America.
NOTE 3 – Earnings per Share (EPS)
Basic EPS is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. As of September 30, 2011, 142,763 and 142,763 shares were anti-dilutive for the three and six month periods, respectively. As of September 30, 2010, 158,664 and 156,664 shares were anti-dilutive for the three and six month periods, respectively. Anti-dilutive shares are stock options with exercise prices in excess of the weighted-average market value for the same period and are not included in the determination of diluted earnings per share. 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.
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Income
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Shares
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Per-Share
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(Numerator)
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(Denominator)
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Amount
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(In thousands)
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|
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Three Months ended September 30, 2011
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|
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Basic EPS
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|
|
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|
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Net Income
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$
|
932
|
|
|
—
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|
|
|
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Dividends and undistributed earnings allocated to unvested shares
|
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(1
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)
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—
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|
|
|
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Net income and income available to common stockholders
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$
|
931
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|
|
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5,938,526
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|
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$
|
0.16
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|
|
Effect of dilutive securities options
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—
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|
|
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64,876
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|
|
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Diluted EPS
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|
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|
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Income available to common stockholders and assumed conversions
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$
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931
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6,003,402
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$
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0.15
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Six Months ended September 30, 2011
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Basic EPS
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Net Income
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$
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1,711
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|
|
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—
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|
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|
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Dividends and undistributed earnings allocated to unvested shares
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(3
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)
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—
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Net income and income available to common stockholders
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$
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1,708
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|
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5,938,850
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$
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0.29
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Effect of dilutive securities options
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—
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65,679
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|
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Diluted EPS
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Income available to common stockholders and assumed conversions
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$
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1,708
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6,004,529
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$
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0.28
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Three Months ended September 30, 2010
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Basic EPS
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Net Income
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$
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849
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|
|
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—
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Dividends and undistributed earnings allocated to unvested shares
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(3
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)
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—
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Net income and income available to common stockholders
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$
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846
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5,911,312
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$
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0.14
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Effect of dilutive securities options
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—
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21,962
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Diluted EPS
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|
|
|
|
|
|
|
|
|
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Income available to common stockholders and assumed conversions
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$
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846
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|
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5,933,274
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$
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0.14
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|
|
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Six Months ended September 30, 2010
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Basic EPS
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|
|
|
|
|
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Net Income
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$
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1,530
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|
|
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—
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|
|
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Dividends and undistributed earnings allocated to unvested shares
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(5
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)
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|
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—
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Net income and income available to common stockholders
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$
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1,525
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|
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5,911,317
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$
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0.26
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Effect of dilutive securities options
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—
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29,910
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Diluted EPS
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|
|
|
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Income available to common stockholders and assumed conversions
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$
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1,525
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|
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5,941,227
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$
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0.26
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NOTE 4 – Recent Accounting Pronouncements
I
n April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This ASU provides additional guidance or clarification to help creditors determine whether a restructuring constitutes a troubled debt restructuring. For public entities, the amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired, and should measure impairment on those receivables prospectively for the first interim or annual period beginning on or after June 15, 2011. Additional disclosures are also required under this ASU. The Company adopted this ASU as of July 1, 2011. Refer to Note 6 – Loans for this disclosure.
In April 2011, the FASB issued ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” The objective of this ASU is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. This ASU prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements. The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. Early adoption is not permitted.
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards.” The amendments in this ASU explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.
In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. Under this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. An entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. An entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.
NOTE 5 – Stock-Based Incentive Plan
A
t September 30, 2011, the Company maintained a stock-based incentive plan and an equity incentive plan. For the six months ended September 30, 2011 and 2010, compensation cost for the Company’s stock plans was measured at the grant date based on the value of the award and was recognized over the service period, which was the vesting period. The compensation cost that has been charged against income in the six months ended September 30, 2011 and 2010 for the granting of stock options under the plans was $57,000 and $57,000, respectively. During the six months ended September 30, 2011 and 2010, the Company granted 20,000 and 6,000 stock options, respectively.
The compensation cost that has been charged against income for the granting of restricted stock awards under the plan for the six months ended September 30, 2011 and 2010 was $66,000 and $68,000, respectively.
NOTE 6 – Loans
A summary of the balances of loans follows:
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September 30, 2011
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March 31, 2011
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(In thousands)
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Residential real estate:
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1-4 family
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$
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135,599
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$
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149,740
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Home equity loans
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38,969
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40,364
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Commercial real estate
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267,699
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251,743
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Consumer loans
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9,415
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8,581
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Commercial loans
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91,672
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80,967
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Total loans
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543,354
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531,395
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|
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|
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|
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|
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Allowance for loan losses
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|
|
(6,084
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)
|
|
|
(5,686
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)
|
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Net deferred loan fees
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|
|
1,022
|
|
|
|
886
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Loans, net
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$
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538,292
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$
|
526,595
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The Company has transferred a portion of its originated commercial real estate loans and commercial loans to participating lenders. The amounts transferred have been accounted for as sales and therefore not included in the Company’s accompanying consolidated balance sheets. The Company and participating lenders share ratably in any gains and losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments (net of servicing fees) to participating lenders and disburses required escrow funds to relevant parties. At September 30, 2011 and March 31, 2011, the Company was servicing loans for participants aggregating $14.5 million and $13.1 million, respectively.
NOTE 7 – Allowance for Loan Losses, Impaired Assets and Troubled Debt Restructuring
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) 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 re-evaluated quarterly to ensure their relevance in the current real estate environment.
A
ctivity in the allowance for loan losses is summarized below:
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1 – 4 Family
Residential
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Home Equity
Loans
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Commercial
Real Estate
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Consumer
Loans
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Commercial
Loans
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Total
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(In thousands)
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Balance March 31, 2011
|
|
$
|
738
|
|
|
$
|
154
|
|
|
$
|
1,981
|
|
|
$
|
99
|
|
|
$
|
2,714
|
|
|
$
|
5,686
|
|
|
Provision
|
|
|
(77
|
)
|
|
|
(30
|
)
|
|
|
731
|
|
|
|
(32
|
)
|
|
|
283
|
|
|
|
875
|
|
|
Charge Offs
|
|
|
(214
|
)
|
|
|
—
|
|
|
|
(191
|
)
|
|
|
(14
|
)
|
|
|
(87
|
)
|
|
|
(506
|
)
|
|
Recoveries
|
|
|
8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8
|
|
|
|
13
|
|
|
|
29
|
|
|
Balance September 30, 2011
|
|
$
|
455
|
|
|
$
|
124
|
|
|
$
|
2,521
|
|
|
$
|
61
|
|
|
$
|
2,923
|
|
|
$
|
6,084
|
|
T
he following table presents the balance in the allowance for loan losses by portfolio segment and based on impairment evaluation method as of September 30, 2011:
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Individually
|
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Collectively
|
|
|
|
|
|
|
|
Evaluated for
|
|
|
Evaluated for
|
|
|
|
|
|
|
|
Impairment
|
|
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Impairment
|
|
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Total
|
|
|
|
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(In thousands)
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|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
55
|
|
|
$
|
400
|
|
|
$
|
455
|
|
|
Home equity loans
|
|
|
—
|
|
|
|
124
|
|
|
|
124
|
|
|
Commercial real estate
|
|
|
1,037
|
|
|
|
1,484
|
|
|
|
2,521
|
|
|
Consumer loans
|
|
|
—
|
|
|
|
61
|
|
|
|
61
|
|
|
Commercial loans
|
|
|
844
|
|
|
|
2,079
|
|
|
|
2,923
|
|
|
Total allowance for loan losses
|
|
$
|
1,936
|
|
|
$
|
4,148
|
|
|
$
|
6,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Residential
|
|
$
|
3,463
|
|
|
$
|
132,136
|
|
|
$
|
135,599
|
|
|
Home equity loans
|
|
|
288
|
|
|
|
38,681
|
|
|
|
38,969
|
|
|
Commercial real estate
|
|
|
9,848
|
|
|
|
257,851
|
|
|
|
267,699
|
|
|
Consumer loans
|
|
|
—
|
|
|
|
9,415
|
|
|
|
9,415
|
|
|
Commercial loans
|
|
|
6,094
|
|
|
|
85,578
|
|
|
|
91,672
|
|
|
Total loan balances
|
|
$
|
19,693
|
|
|
$
|
523,661
|
|
|
$
|
543,354
|
|
There have been no significant changes in the Company’s methodology for evaluating the allowance for loan losses.
R
isk Characteristics by Portfolio Segment.
Loans secured by one- to four-family residential real estate have historically been the least risky loan type. However they are affected by declines in the general residential housing market, unemployment and under-employment, and the tightening of lending requirements and standards. Loans secured by commercial real estate, including multi-family loans, generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in 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. 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. 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.
Credit Risk Management.
Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. 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 30
th
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.
We consider repossessed assets and loans that are 90 days or more past due to be non-performing assets. Past due status is based on contractual terms of the loan. 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. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
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.
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.
The following table shows the risk rating grade of the loan portfolio broken-out by type as of September 30, 2011.
|
|
|
Real Estate Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
Home Equity
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Commercial
|
|
|
Total
|
|
|
|
|
(In thousands)
|
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
132,137
|
|
|
$
|
38,681
|
|
|
$
|
252,290
|
|
|
$
|
9,349
|
|
|
$
|
83,994
|
|
|
$
|
516,451
|
|
|
Special mention
|
|
|
—
|
|
|
|
—
|
|
|
|
5,561
|
|
|
|
—
|
|
|
|
1,584
|
|
|
|
7,145
|
|
|
Substandard
|
|
|
3,462
|
|
|
|
288
|
|
|
|
9,848
|
|
|
|
66
|
|
|
|
6,094
|
|
|
|
19,758
|
|
|
Doubtful
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
135,599
|
|
|
$
|
38,969
|
|
|
$
|
267,699
|
|
|
$
|
9,415
|
|
|
$
|
91,672
|
|
|
$
|
543,354
|
|
I
mpaired Loans.
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. The following table shows the Company’s impaired loans at September 30, 2011 and for the three months ended September 30, 2011.
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
|
|
$
|
2,254
|
|
|
$
|
2,286
|
|
|
$
|
—
|
|
|
$
|
2,018
|
|
|
$
|
19
|
|
|
Home equity loans
|
|
|
288
|
|
|
|
288
|
|
|
|
—
|
|
|
|
234
|
|
|
|
2
|
|
|
Commercial real estate
|
|
|
5,840
|
|
|
|
5,810
|
|
|
|
—
|
|
|
|
4,300
|
|
|
|
22
|
|
|
Commercial loans
|
|
|
2,667
|
|
|
|
2,915
|
|
|
|
—
|
|
|
|
2,413
|
|
|
|
12
|
|
|
Total impaired with no related allowance recorded
|
|
$
|
11,049
|
|
|
$
|
11,299
|
|
|
$
|
—
|
|
|
$
|
8,965
|
|
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
|
|
$
|
1,209
|
|
|
$
|
1,337
|
|
|
$
|
55
|
|
|
$
|
1,483
|
|
|
$
|
22
|
|
|
Home equity loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0
|
|
|
Commercial real estate
|
|
|
4,008
|
|
|
|
4,073
|
|
|
|
1,037
|
|
|
|
4,736
|
|
|
|
93
|
|
|
Commercial loans
|
|
|
3,427
|
|
|
|
3,504
|
|
|
|
844
|
|
|
|
2,761
|
|
|
|
25
|
|
|
Total impaired with an allowance recorded
|
|
$
|
8,644
|
|
|
$
|
8,914
|
|
|
$
|
1,936
|
|
|
$
|
8,980
|
|
|
$
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
|
|
$
|
3,463
|
|
|
$
|
3,623
|
|
|
$
|
55
|
|
|
$
|
3,501
|
|
|
$
|
41
|
|
|
Home equity loans
|
|
|
288
|
|
|
|
288
|
|
|
|
—
|
|
|
|
234
|
|
|
|
2
|
|
|
Commercial real estate
|
|
|
9,848
|
|
|
|
9,883
|
|
|
|
1,037
|
|
|
|
9,036
|
|
|
|
115
|
|
|
Commercial loans
|
|
|
6,094
|
|
|
|
6,419
|
|
|
|
844
|
|
|
|
5,174
|
|
|
|
37
|
|
|
Total impaired loans
|
|
$
|
19,693
|
|
|
$
|
20,213
|
|
|
$
|
1,936
|
|
|
$
|
17,945
|
|
|
$
|
195
|
|
Delinquencies.
The following table provides information about delinquencies in our loan portfolio as of September 30, 2011.
|
|
|
30-59
Days
|
|
|
Greater
Than 60-89 Days
|
|
|
Greater
Than
90 Days
|
|
|
Past Due
|
|
|
Non Accrual
|
|
|
|
|
(In thousands)
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
|
|
$
|
52
|
|
|
$
|
617
|
|
|
$
|
2,706
|
|
|
$
|
3,375
|
|
|
$
|
3,319
|
|
|
Home equity loans
|
|
|
84
|
|
|
|
327
|
|
|
|
85
|
|
|
|
496
|
|
|
|
288
|
|
|
Commercial real estate
|
|
|
1,471
|
|
|
|
531
|
|
|
|
2,778
|
|
|
|
4,780
|
|
|
|
7,019
|
|
|
Consumer loans
|
|
|
60
|
|
|
|
3
|
|
|
|
14
|
|
|
|
77
|
|
|
|
94
|
|
|
Commercial loans
|
|
|
1,480
|
|
|
|
1,007
|
|
|
|
2,682
|
|
|
|
5,169
|
|
|
|
4,055
|
|
|
Total
|
|
$
|
3,147
|
|
|
$
|
2,485
|
|
|
$
|
8,265
|
|
|
$
|
13,897
|
|
|
$
|
14,775
|
|
Troubled Debt Restructuring.
The following table provides information about troubled debt restructurings as of September 30, 2011.
|
|
|
September 30, 2011
|
|
|
|
|
Number of
Contracts
|
|
|
Pre-modification Outstanding Recorded
Investment
|
|
|
Post-modification Outstanding
Recorded Investment
|
|
|
Troubled debt restructurings
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
1-4 family
|
|
|
1
|
|
|
|
219
|
|
|
|
219
|
|
|
Home equity loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Commercial real estate
|
|
|
1
|
|
|
|
585
|
|
|
|
585
|
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Commercial loans
|
|
|
4
|
|
|
|
710
|
|
|
|
710
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
|
|
Number of
Contracts
|
|
|
Recorded Investment
|
|
|
Troubled debt restructurings
that subsequently defaulted
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
1-4 family
|
|
|
—
|
|
|
|
—
|
|
|
Home equity loans
|
|
|
—
|
|
|
|
—
|
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
The loans that are included in this table have all been reviewed for individual impairment under FAS 114. Collateral values have been taken into consideration and adjustments to the allowance for loan and lease losses have been calculated accordingly.
NOTE 8 – Investments in Available-for-Sale Securities
D
ebt 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 September 30 and March 31, 2011:
|
|
|
Amortized Cost Basis
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair
Value
|
|
|
September 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies
|
|
$
|
7,006
|
|
|
$
|
38
|
|
|
$
|
—
|
|
|
$
|
7,044
|
|
|
Debt securities issued by states of the United States and political subdivisions of the states
|
|
|
18,542
|
|
|
|
256
|
|
|
|
159
|
|
|
|
18,639
|
|
|
Mortgage-backed securities
|
|
|
31,171
|
|
|
|
1,279
|
|
|
|
307
|
|
|
|
32,143
|
|
|
Marketable equity securities
|
|
|
8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8
|
|
|
|
|
|
56,727
|
|
|
|
1,573
|
|
|
|
466
|
|
|
|
57,834
|
|
|
Money market mutual funds included in cash and cash equivalents
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
|
$
|
56,719
|
|
|
$
|
1,573
|
|
|
$
|
466
|
|
|
$
|
57,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies
|
|
$
|
7,355
|
|
|
$
|
25
|
|
|
$
|
48
|
|
|
$
|
7,332
|
|
|
Debt securities issued by states of the United States and political subdivisions of the states
|
|
|
19,372
|
|
|
|
83
|
|
|
|
688
|
|
|
|
18,767
|
|
|
Mortgage-backed securities
|
|
|
32,236
|
|
|
|
1,169
|
|
|
|
236
|
|
|
|
33,169
|
|
|
Marketable equity securities
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
|
|
58,972
|
|
|
|
1,277
|
|
|
|
972
|
|
|
|
59,277
|
|
|
Money market mutual funds included in cash and cash equivalents
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
|
$
|
58,963
|
|
|
$
|
1,277
|
|
|
$
|
972
|
|
|
$
|
59,268
|
|
The following table summarizes gross unrealized losses and fair value, aggregated by investment category and length of time the investments have been in a continuous unrealized loss position, at September 30, 2011:
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
Unrealized
|
|
|
Fair
|
|
Unrealized
|
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
Value
|
|
Losses
|
|
|
|
|
(In thousands)
|
|
Debt securities issued by states of
United States and political subdivisions of the states
|
|
$
|
1,314
|
|
|
$
|
19
|
|
|
$
|
2,268
|
|
$
|
140
|
|
|
$
|
3,582
|
|
$
|
159
|
|
|
Mortgage-backed securities
|
|
|
6,445
|
|
|
|
71
|
|
|
|
858
|
|
|
131
|
|
|
|
7,303
|
|
|
202
|
|
|
Total temporarily impaired securities
|
|
|
7,759
|
|
|
|
90
|
|
|
|
3,126
|
|
|
271
|
|
|
|
10,885
|
|
|
361
|
|
|
Other-than-temporarily impaired securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
—
|
|
|
|
347
|
|
|
105
|
|
|
|
347
|
|
|
105
|
|
|
Total temporarily impaired securities
|
|
$
|
7,759
|
|
|
$
|
90
|
|
|
$
|
3,473
|
|
$
|
376
|
|
|
$
|
11,232
|
|
$
|
466
|
|
Management has assessed the securities which are classified as available-for-sale and in an unrealized loss position at September 30, 2011 and determined the decline in fair value below amortized cost to be temporary, except for those securities described below. In making this determination management considered the period of time the securities were in a loss position, the
percentage decline in comparison to the securities’ amortized cost, the financial condition of the issuer and the Company’s ability and intent to hold these securities until their fair value recovers to their amortized cost. Management believes the decline in fair value is primarily related to the current interest rate environment and not to the credit deterioration of the individual issuer, except for those securities described below.
M
anagement evaluates securities for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market conditions warrant such evaluation. The investment securities portfolio is generally evaluated for other-than-temporary impairment under ASC 320-10, “
Investments – Debt and Equity Securities
.” However, certain purchased beneficial interests, including non-agency mortgage-backed securities and pooled trust preferred securities are evaluated using ASC 325-40,
“Beneficial Interests in Securitized Financial Assets.”
F
or those debt securities for which the fair value of the security is less than its amortized cost and the Company does not intend to sell such security and it is more likely than not that it will not be required to sell such security prior to the recovery of its amortized cost basis less any credit losses, ASC 320-10 requires that the credit component of the other-than-temporary impairment losses be recognized in earnings while the noncredit component is recognized in other comprehensive loss, net of related taxes.
A
ctivity 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 income for the three months ended September 30, 2011 is as follows:
|
|
|
Non-Agency
Mortgage-Backed
|
|
|
|
|
(In thousands)
|
|
|
Balance, April 1, 2011
|
|
$
|
63
|
|
|
Additions for the credit component on debt securities in which other-than-temporary impairment was not previously recognized
|
|
|
—
|
|
|
|
|
|
|
|
|
Balance September 30, 2011
|
|
$
|
63
|
|
I
n 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 value of the expected cash flows was compared to the Company’s holdings to determine the credit-related impairment loss. Based on the expected cash flows derived from the model, the Company expects to recover the remaining unrealized losses on non-agency mortgage-backed securities. Significant assumptions used in the valuation of non-agency mortgage-backed securities were as follows as of September 30, 2011.
|
|
|
Weighted
|
|
Range
|
|
|
|
Average
|
|
Minimum
|
|
Maximum
|
|
Prepayment rates
|
|
16.7
|
%
|
|
11.1
|
%
|
|
23.6
|
%
|
|
Default rates
|
|
10.7
|
|
|
4.4
|
|
|
17.2
|
|
|
Loss severity
|
|
47.1
|
|
|
38.4
|
|
|
56.8
|
|
NOTE 9 – Fair Value Measurement Disclosures
The following table presents the fair value disclosures of assets and liabilities in accordance with ASC 820-10 which became effective for the Company’s consolidated financial statements on April 1, 2008. The fair value hierarchy established by this guidance is based on observable and unobservable inputs participants use to price an asset or liability. ASC 820-10 has prioritized these inputs into the following fair value hierarchy:
L
evel 1 Inputs
– Unadjusted quoted prices in active markets for identical assets or liabilities that are available at the measurement date.
L
evel 2 Inputs
– Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
L
evel 3 Inputs
– Unobservable inputs for determining the fair value of the asset or liability and are based on the entity’s own assumptions about the assumptions that market participants would use to price the asset or liability.
T
he following summarizes assets measured at fair value on a recurring basis for the period ending September 30, 2011:
|
|
|
Fair Value Measurement at Reporting Date Using:
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
|
Significant Other Observable Inputs
|
|
|
Significant Unobservable Inputs
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Securities available for sale
|
|
$
|
57,826
|
|
|
$
|
4,767
|
|
|
$
|
53,059
|
|
|
$
|
—
|
|
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 September 30, 2011, for which a nonrecurring change in fair value has been recorded.
|
|
|
Fair Value Measurement at Reporting Date Using:
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
|
Significant Other Observable Inputs
|
|
|
Significant Unobservable Inputs
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
(In thousands)
|
|
|
Impaired Loans
|
|
$
|
6,887
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,887
|
|
|
Other real estate owned
|
|
|
1,195
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,195
|
|
|
Total
|
|
$
|
8,082
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,082
|
|
|
|
|
Fair Value Measurements
Using Significant Unobservable Inputs
Level 3
|
|
|
|
|
Other Real
Estate Owned
|
|
|
Impaired Loans
|
|
|
Totals
|
|
|
|
|
(In thousands)
|
|
|
Beginning Balance, March 31, 2011
|
|
$
|
522
|
|
|
$
|
8,776
|
|
|
$
|
9,298
|
|
|
Net transfers into (out of) Level 3
|
|
|
673
|
|
|
|
(1,889
|
)
|
|
|
(1,216
|
)
|
|
Ending Balance, September 30, 2011
|
|
$
|
1,195
|
|
|
$
|
6,887
|
|
|
$
|
8,082
|
|
T
he following are the carrying amounts and estimated fair values of the Company’s financial assets and liabilities:
|
|
|
September 30, 2011
|
|
|
March 31, 2011
|
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
66,185
|
|
|
$
|
66,185
|
|
|
$
|
43,612
|
|
|
$
|
43,612
|
|
|
Available for sale securities
|
|
|
57,826
|
|
|
|
57,826
|
|
|
|
59,268
|
|
|
|
59,268
|
|
|
Federal Home Loan Bank stock
|
|
|
4,396
|
|
|
|
4,396
|
|
|
|
4,396
|
|
|
|
4,396
|
|
|
Loans held for sale
|
|
|
332
|
|
|
|
340
|
|
|
|
—
|
|
|
|
—
|
|
|
Loans, net
|
|
|
538,292
|
|
|
|
552,051
|
|
|
|
526,595
|
|
|
|
529,609
|
|
|
Accrued interest receivable
|
|
|
2,390
|
|
|
|
2,390
|
|
|
|
2,451
|
|
|
|
2,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
567,555
|
|
|
|
572,299
|
|
|
|
540,769
|
|
|
|
545,607
|
|
|
Advanced payments by borrowers for taxes and insurance
|
|
|
1,257
|
|
|
|
1,257
|
|
|
|
1,400
|
|
|
|
1,400
|
|
|
FHLB advances
|
|
|
38,105
|
|
|
|
40,257
|
|
|
|
39,113
|
|
|
|
40,554
|
|
|
Securities sold under agreement to repurchase
|
|
|
25,738
|
|
|
|
25,737
|
|
|
|
21,666
|
|
|
|
21,668
|
|
|
Subordinated debentures
|
|
|
3,923
|
|
|
|
1,398
|
|
|
|
3,918
|
|
|
|
1,371
|
|
|
Due to broker
|
|
|
500
|
|
|
|
500
|
|
|
|
500
|
|
|
|
500
|
|
|
|
Management’s Discussion and Analysis of Financial Conditions and Results of Operations
.
|
The following analysis discusses changes in the financial condition and results of operations at and for the three and six months ended September 30, 2011 and 2010, and should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and the notes thereto, appearing in Part I, Item 1 of this document.
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. By identifying these forward-looking statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed under “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011 and Part II, Item 1A of this Report on Form 10-Q, as well as the following factors: interest rates, general economic conditions, legislation and regulations, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, accounting principles and guidelines, and our ability to recognize enhancements related to our acquisition within expected time frames. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
Except as required by applicable law and regulation, the Company does not undertake – and specifically disclaims any obligation – to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Comparison of Financial Condition at September 30, 2011 and March 31, 2011
Assets
Total assets were $713.6 million at September 30, 2011, an increase of $31.6 million compared to $682.0 million at March 31, 2011. The increase in total assets was primarily due to a $22.6 million increase in cash and cash equivalents and an $11.7 million increase in net loans, partially offset by a $1.4 million decrease in investments and a $1.3 million decrease in other assets.
Liabilities
Total liabilities were $640.9 million at September 30, 2011, an increase of $29.5 million compared to $611.4 million at March 31, 2011. The increase in total liabilities was caused primarily by a $26.8 million increase in total deposits and a $4.1 million increase in repurchase agreements offset by a $1.0 million decrease in FHLB advances and a $143,000 decrease in advance payments by borrowers for taxes and insurance. At September 30, 2011, deposits are comprised of savings accounts totaling $77.5 million, money market deposit accounts totaling $120.4 million, demand and NOW accounts totaling $78.7 million, and certificates of deposits totaling $290.9 million. The Company’s core deposits, which the Company considers to be all deposits except for certificates of deposits, increased to 48.8% of total deposits at September 30, 2011 from 47.0% at March 31, 2011.
Stockholders’ Equity
Total stockholders’ equity increased $2.0 million to $72.7 million at September 30, 2011 from $70.7 million at March 31, 2011. The increase was primarily caused by net income of $1.7 million and an increase in other comprehensive income of $541,000 partially offset by dividends paid of $357,000.
Comparison of Operating Results for the Three Months Ended September 30, 2011 and 2010
General
The Company’s results of operations depend primarily on net interest and dividend income, which is the difference between the interest and dividend income earned on its interest-earning assets, such as loans and securities, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings. The Company also generates noninterest income, primarily from fees and service charges. Gains on sales of securities and increases in cash surrender value of life insurance policies are additional sources of noninterest income. The Company’s noninterest expense primarily consists of employee compensation and benefits, occupancy and equipment expense, FDIC insurance assessments, advertising and promotion, data processing, professional fees and other operating expense.
Net Income
For the three months ended September 30, 2011, the Company reported net income of $932,000, compared to $849,000 for the year ago period. Basic and diluted income per share for the quarter ended September 30, 2011 were $0.16 and $0.15, respectively, compared to $0.14 each for the quarter ended September 30, 2010.
Net Interest and Dividend Income
Net interest and dividend income for the three months ended September 30, 2011 and 2010 totaled $5.6 million and $5.5 million, respectively. The Company’s net interest margin was 3.54% for the three months ended September 30, 2011 and 3.52% for the three months ended September 30, 2010. The increase in the net interest margin for the quarter was primarily due to a 29 basis point decrease in the rate earned on interest-earning assets partially offset by an increase in average interest-earning assets of $20.1 million, a $10.6 million decrease in average interest-bearing liabilities and a 31 basis point decrease in the yield paid on interest-bearing liabilities. The changes to the yield on average interest-earning assets and the rate paid on average interest-bearing liabilities caused the Company’s interest rate spread to decrease from 3.30% for the quarter ended September 30, 2010 to 3.26% for the quarter ended September 30, 2011.
Interest and dividend income amounted to $8.1 million and $8.4 million for the three months ended September 30, 2011 and 2010, respectively. Average interest-earning assets were $656.8 million for the quarter ended September 30, 2011 compared to $636.7 million for the quarter ended September 30, 2010. The increase in average interest-earning assets was caused primarily by a $12.2 million increase in average interest bearing demand deposits with other banks
and a $12.1 million increase in net loans, partially offset by a $5.5 million decrease in average investment securities. The yield earned on average interest-earning assets decreased 29 basis points to 5.05% for the three months ended September 30, 2011 from 5.34% for the three months ended September 30, 2010 due to the current low interest rate environment.
Interest expense for the quarters ended September 30, 2011 and 2010 was $2.5 million and $2.9 million, respectively. Average interest-bearing liabilities decreased $10.6 million during the quarter ended September 30, 2011 from $566.5 million to $555.9 million primarily due to an $9.2 million decrease in average repurchase agreements and a $14.2 million decrease in average FHLB advances offset by an $11.7 million increase in average interest-bearing deposits. The average rate paid on interest-bearing liabilities decreased to 1.73% for the quarter ended September 30, 2011 from 2.04% for the year ago period, due primarily to the decrease in rates paid on certificates of deposit, money market deposit accounts and securities sold under agreements to repurchase, and a decrease in FHLB advances which generally have higher rates. The average rate paid on certificates of deposit decreased from 2.50% for the quarter ended September 30, 2010 to 2.34% for the current year quarter as market rates have decreased for this type of deposit.
Provision for Loan Losses
The provision for loan losses for the quarters ended September 30, 2011 and 2010 were $516,000 and $648,000, respectively. The additions to and resulting increase in the allowance for loan losses at September 30, 2011 reflected continued growth in the commercial loan portfolio and the challenging economic climate.
Noninterest Income
For the quarter ended September 30, 2011, noninterest income was $749,000 compared to $1.0 million for the quarter ended September 30, 2010. Affecting noninterest income for the three months ended September 30, 2011 were decreases of $76,000 in gains on securities, $110,000 in gains on sale of loans and $76,000 in other income.
Noninterest Expense
Noninterest expense for the quarter ended September 30, 2011 was $4.4 million compared to $4.6 million for the quarter ended September 30, 2010. The decrease was due largely to a $260,000 decrease in write downs of real estate owned and a $246,000 decrease in the other real estate owned expenses, partially offset by a $162,000 increase in salaries and employee benefits. The Company’s efficiency ratio slightly deteriorated from 71.5% for the quarter ended September 30, 2010 to 71.6% for the current year quarter.
Provision for Income Taxes
The Company recorded income tax expense of $544,000 and $480,000 for the quarters ended September 30, 2011 and 2010, respectively, with effective tax rates of 36.9% and 36.1%, respectively.
Comparison of Operating Results for the Six Months Ended September 30, 2011 and 2010
Net Income
For the six months ended September 30, 2011, the Company reported net income of $1.7 million, compared to $1.5 million for the year ago period. Basic and diluted income per share for the six months ended September 30, 2011 were $0.29 and $0.28, respectively, compared to $0.26 each for the quarter ended September 30, 2010.
Net Interest and Dividend Income
Net interest and dividend income for the six months ended September 30, 2011 and 2010 totaled $11.2 million and $11.0 million, respectively. The Company’s net interest margin decreased to 3.51% for the six months ended September 30, 2011 from 3.55% for the six months ended September 30, 2010. The decrease for the period was primarily due to an increase in average interest-earning assets of $19.1 million, partially offset by the increase in net interest income. A 34 basis point decrease in the yield on average interest-earning assets and a 29 basis point decrease in the rate paid on average interest-bearing liabilities caused the Company’s interest rate spread to decrease from 3.32% for the six months ended September 30, 2010 to 3.27% for the six months ended September 30, 2011.
Interest and dividend income amounted to $16.2 million and $16.8 million for the six months ended September 30, 2011 and 2010, respectively. Average interest-earning assets were $649.5 million for the six months ended September 30, 2011, an increase of $19.1 million, or 3.0%, compared to $630.4 million for the six months ended September 30, 2010. The increase in average interest-earning assets was caused primarily by a $10.2 million increase in average net loans and a 12.8 million increase in federal funds sold partially offset by a $4.2 million decrease in investment securities. The yield earned on average interest-earning assets decreased to 5.04% for the six months ended September 30, 2011 from 5.38% for the six months ended September 30, 2010.
Interest expense for the six months ended September 30, 2011 and 2010 was $5.0 million and $5.8 million, respectively. Average interest-bearing liabilities grew just $230,000 during the six months ended September 30, 2011 from $562.0 million to $562.2 million primarily due to a $25.0 million increase in average interest-bearing deposits, partially offset by a $15.2 million decrease in FHLB advances and a $9.8 million decrease in repurchase agreements. The average rate paid on interest-bearing liabilities decreased to 1.77% for the six months ended September 30, 2011 from 2.06% for the year ago period, due primarily to the decrease in rates paid on certificates of deposit, money market deposit accounts and securities sold under agreements to repurchase in the current low interest rate environment. The average rate paid on certificates of deposit decreased from 2.51% for the six months ended September 30, 2010 to 2.36% for the current year period as market rates have decreased for this type of deposit.
Provision for Loan Losses
The provision for loan losses for the six months ended September 30, 2011 and 2010 were $875,000 and $1.3 million, respectively. The additions to and resulting increase in the allowance for loan losses at September 30, 2011 reflected continued growth in the commercial loan portfolio and the challenging economic climate.
Noninterest Income
For the six months ended September 30, 2011, noninterest income was $1.3 million compared to $1.6 million for the six months ended September 30, 2010. Affecting noninterest income for the six months ended September 30, 2011 were decreases of $62,000 and $88,000 on gain on sale of securities and loans, respectively. Other noninterest income also decreased $82,000 for the six months ended September 30, 2011.
Noninterest Expense
Noninterest expense for the six months ended September 30, 2011 and 2010 was $9.0 million and $8.9 million, respectively. During the six months ended September 30, 2011 the Company recorded increases of $321,000 in salaries and employee benefits, $197,000 in other expenses and $108,000 in advertising and promotion, partially offset by decreases of $479,000 in write downs of other real estate owned and other real estate owned expenses and $64,000 in FDIC insurance.
Provision for Income Taxes
The Company recorded income tax expense of $955,000 and $875,000 for the six months ended September 30, 2011 and 2010, respectively, with effective tax rates of 35.8% and 36.4%, respectively.
Liquidity and Capital Resources
The term liquidity refers to the ability of the Company to meet current and future short-term financial obligations. The Company further defines liquidity as the ability to generate adequate amounts of cash to fund loan originations, deposit withdrawals and operating expenses. Liquidity management is both a daily and long-term function of business management. The Bank’s primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-related securities, funds provided by operations and borrowings. The Bank can borrow funds from the Federal Home Loan Bank based on eligible collateral of loans and securities. The Bank had Federal Home Loan Bank borrowings as of September 30, 2011 of $38.1 million, with unused borrowing capacity of $32.0 million.
The Company’s primary investing activities are the origination of loans and the purchase of mortgage and investment securities. During the six months ended September 30, 2011 and 2010 the Company originated loans, net of principal paydowns, of approximately $20.7 million and $463,000, respectively. Purchases of investment securities totaled $15.4 million and $22.3 million for the six months ended September 30, 2011 and 2010, respectively.
Loan repayment and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds. Total deposits were $567.6 million at September 30, 2011, a $26.8 million increase from the $540.8 million balance at March 31, 2011.
At September 30, 2011, the Company had outstanding commitments to originate $20.5 million of loans, and available home equity and unadvanced lines of credit and construction loans of approximately $37.1 million. In addition, the Company had $3.0 million of commercial letters of credit. Management of the Bank anticipates that the Bank will have sufficient funds to meet its current loan commitments. Retail certificates of deposit scheduled to mature in one year or less totaled $151.9 million, or 26.8% of total deposits at September 30, 2011. The Company relies on competitive rates, customer service and long-standing relationships with customers to retain deposits. Based on the Company’s experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict future terms and conditions upon renewal, a significant portion of such deposits will remain with the Company.
As of September 30, 2011, the Company and the Bank met all capital adequacy requirements to which they were subject. The Company’s capital amounts and ratios as of September 30, 2011 are presented in the following table.
(Dollar amounts in thousands)
|
|
|
|
|
|
New England Bancshares, Inc.
|
|
|
|
Required
|
|
Amount
|
|
|
Ratio
|
|
Tier 1 Capital
|
|
4
|
%
|
|
$
|
54,054
|
|
|
|
7.85
|
%
|
|
Total Risk-Based Capital
|
|
8
|
%
|
|
$
|
60,138
|
|
|
|
11.95
|
%
|
|
Tier 1 Risk-Based Capital
|
|
4
|
%
|
|
$
|
54,054
|
|
|
|
10.86
|
%
|
The Bank’s actual capital amounts and ratios as of September 30, 2011 are presented in the following table.
|
|
|
Actual
|
|
For Capital Adequacy Purposes
|
|
To Be Well Capitalized Under Prompt Corrective Action Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(Dollar amounts in thousands)
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
56,775
|
|
|
11.28
|
%
|
|
$
|
40,264
|
|
≥
8.0
|
%
|
|
$
|
50,329
|
|
≥
10.0
|
%
|
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
50,691
|
|
|
10.07
|
|
|
|
20,132
|
|
≥
4.0
|
|
|
|
30,198
|
|
≥
6.0
|
|
|
Tier 1 Capital (to Average Assets)
|
|
|
50,691
|
|
|
7.36
|
|
|
|
27,538
|
|
≥
4.0
|
|
|
|
34,423
|
|
≥
5.0
|
|
Management is not aware of any known trends, events or uncertainties that will have or are reasonably likely to have a material effect on the Company’s or the Bank’s liquidity, capital or operations, nor is management aware of any current recommendations by regulatory authorities which, if implemented, would have a material effect on the Company’s or the Bank’s liquidity, capital or operations.
Off-Balance Sheet Arrangements
In the normal course of operations, the Bank engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in its financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit and letters of credit.
For the six months ended September 30, 2011, the Bank did not engage in off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
Subsequent Events
On October 21, 2011, the Company received proceeds from a legal settlement relating to its investment portfolio. The Company will record income from this settlement, net of the tax effect, of $636,000 during the quarter ending December 31, 2011.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk Management
The Bank manages the interest rate sensitivity of its interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect the Bank’s earnings while decreases in interest rates may beneficially affect its earnings. To reduce the potential volatility of its earnings, the Bank has sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Also, the Bank attempts to manage its interest rate risk through: its investment portfolio; an increased focus on commercial and multi-family and commercial real estate lending, which emphasizes the origination of shorter-term adjustable-rate loans; and efforts to originate adjustable-rate residential mortgage loans. In addition, the Bank sells a portion of its originated 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 committees establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.
Net Interest Income Simulation Analysis
The Bank analyzes its interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income simulation. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest sensitive.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period.
The Bank’s goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income. Interest income simulations are completed quarterly and presented to the Asset/Liability Committee. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. The numerous assumptions used in the simulation processes are reviewed by the Asset/Liability Committee on a
quarterly basis. Changes to these assumptions can significantly affect the results of the simulation. The simulations incorporate assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analyses incorporate managements’ current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.
The simulation analyses are only an estimate of the Bank’s interest rate risk exposure at a particular point in time. The Bank continually reviews the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Company’s financial condition or results of operations.
The following risk factor represents a material update and addition to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2011 (“Form 10-K”). The risk factor below should be read in conjunction with the risk factors and other information disclosed in our Form 10-K. The risks described below and in our Form 10-K are not the only risks facing the Company. Additional risks not presently known to the Company, or that we currently deem immaterial, may also adversely affect the Company’s business, financial condition or results of operations.
T
he Standard & Poor’s downgrade in the U.S. government’s sovereign credit rating, and in the credit ratings of instruments issued, insured or guaranteed by certain related institutions, agencies and instrumentalities, could result in risks to the Company and general economic conditions that we are not able to predict.
O
n August 5, 2011, Standard & Poor’s downgraded the United States long-term debt rating from its AAA rating to AA+. On August 8, 2011, Standard & Poor’s downgraded the credit ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long-term U.S. debt. Instruments of this nature are key assets on the balance sheets of financial institutions, including the Bank. These downgrades could adversely affect the market value of such instruments, and could adversely impact our ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available. We cannot predict if, when or how these changes to the credit ratings will affect economic conditions. These ratings downgrades could result in a significant adverse impact to the Company, and could exacerbate the other risks to which the Company is subject, including those described under Risk Factors in the Company’s Annual Report on Form 10-K for the year ended March 31, 2011.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
.
The Company repurchased 5,000 shares of its common stock in the quarter ended September 30, 2011 as follows:
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For the three months ended September 30, 2011
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Total shares repurchased
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Average price paid per share
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Total
Number of Shares Purchased as Part of Publicly Announced Plans or Programs
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Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
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July
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—
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$
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0.00
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—
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24,424
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August
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—
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0.00
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—
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356,681
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September
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5,000
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9.46
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5,000
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351,681
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Total
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5,000
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$
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9.46
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5,000
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351,681
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The Company’s stock repurchase program was authorized May 12, 2008 to repurchase 304,924 shares or 5% of the Company’s then outstanding shares.
On August 29, 2011, the Board of Directors approved a stock repurchase program, which authorized the repurchase of up to 332,257 shares of the Company’s outstanding shares of common stock. Stock repurchases will be made from time to time and may be effected through open market purchases, block trades and in privately negotiated transactions.
Item 3.
Defaults Upon Senior Securities
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None.
None.
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3.1
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Articles of Incorporation of New England Bancshares, Inc.
(1)
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3.2
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Bylaws of New England Bancshares, Inc.
(2)
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4.1
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Specimen stock certificate of New England Bancshares, Inc.
(2)
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
(3)
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
(3)
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32.1
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Section 1350 Certification of Chief Executive Officer
(3)
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32.2
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Section 1350 Certification of Chief Financial Officer
(3)
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|
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101
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Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of September 30, 2011 and March 31, 2011, (ii) the Condensed Consolidated Statements of Income for the three and six months ended September 30, 2011 and 2010, (iii) the Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2011 and 2010, and (iv) the notes to the Condensed Consolidated Financial Statements.
(3)
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_____________________________
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(1)
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Incorporated by reference into this document from the Registration Statement on Form SB-2 (No. 333-128277) as filed on September 13, 2005.
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(2)
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Incorporated by reference into this document from Exhibit 3.1 to the Form 8-K as filed with the Securities and Exchange Commission on October 11, 2007.
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(3)
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This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
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In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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NEW ENGLAND BANCSHARES, INC.
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Dated:
November 14, 2011
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By:
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s/ Jeffrey J. Levitsky
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Jeffrey J. Levitsky
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Interim Chief Financial Officer
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(principal financial officer)
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Dated:
November 14, 2011
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By:
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s/ David J. O’Connor
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David J. O’Connor
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Chief Executive Officer
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