- Annual Report (10-K)

 

 

SECURITIES AND EXCHANGE COMMISSION

100 F Street NE

Washington, D.C. 20549

 

FORM 10-K

 

S	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended March 31, 2012

 

or

 

£	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _________________________to ___________________________

 

Commission File No. 001-51589

 

New England Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland		04-3693643
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

 

855 Enfield Street, Enfield, Connecticut		06082
(Address of Principal Executive Offices)		Zip Code

 

  [phone]

(Registrant’s telephone number)

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of each class		Name of each exchange on which registered
Common Stock, $0.01 par value		The NASDAQ Stock Market, LLC

 

Securities Registered Pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES   £    NO   S

 

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   S

 

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   S    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   S    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).

 

	Large accelerated filer  £		Accelerated filer  £
	Non-accelerated filer  £		Smaller reporting company  S
	(Do not check box if a smaller reporting company)

  

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES   £    NO   S

 

As of June 20, 2012, there were outstanding 5,806,263 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 September 30, 2011 is $49,423,656.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

INDEX

 

PART I
ITEM 1.	BUSINESS		1
ITEM 1A.	RISK FACTORS		15
ITEM 1B.	UNRESOLVED STAFF COMMENTS		18
ITEM 2.	PROPERTIES		19
ITEM 3.	LEGAL PROCEEDINGS		20
ITEM 4.	MINE SAFETY DISCLOSURES		20
PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		20
ITEM 6.	SELECTED FINANCIAL DATA		21
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS		21
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK		44
ITEM 8.	CONSOLIDATED FINANCIAL STATEMENTS		45
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		83
ITEM 9A.	CONTROLS AND PROCEDURES		83
ITEM 9B.	OTHER INFORMATION		83
PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		84
ITEM 11.	EXECUTIVE COMPENSATION		89
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		93
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE		95
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		96
PART IV
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		97
SIGNATURES			98

 

 

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.

 

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 commercial real estate loans, residential 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. 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. References in the Form 10-K to the Bank shall mean New England Bank and its predecessors, where applicable.

 

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New England Bancshares’ Website and Availability of Securities and Exchange Commission Filing

 

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 statistics published by the U.S. Census Bureau, Connecticut’s 2011 population was approximately 3,580,709, an increase of approximately 5.1% from 2000. In 2010, there were approximately 1,487,891 housing units in Connecticut, an increase of 14.3% from 2000. Median household income for Connecticut in 2010 was $67,740.

 

Competition

 

We face intense competition both in making loans and attracting deposits. As of June 30, 2011, the most recent date for which data is available from the FDIC, we held approximately 1.3% of the deposits in Hartford County, where the Bank has 11 out of its 15 branches, which was the 11 ^th 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 commercial real estate loans and residential real estate loans. The other significant segments of our loan portfolio are commercial loans, home equity loans and lines of credit, and other consumer loans. We originate loans for investment purposes.

 

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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, and to a much lesser extent multi-family residential properties. At March 31, 2012, commercial real estate loans totaled $289.1 million, or 51.9% of total loans, compared to 47.4% of total loans at March 31, 2011. 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 50 to 200 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, 2012, the largest commercial real estate loan was a $4.7 million loan, which was secured by owner-occupied commercial real estate. This loan was performing according to its terms at March 31, 2012.

 

One-to-Four-Family Residential Loans. At March 31, 2012, residential loans totaled $125.6 million or 22.6% of total loans. At March 31, 2012, 80.3% of our residential loans were fixed-rate and 19.7% 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 have terms up to 30 years and adjust annually either from the outset of the loan or after a three-, five- or ten-year initial fixed period, 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 satisfied certain criteria and our general underwriting standards fixed- and adjustable-rate residential mortgage loans with 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, 2012, we had $2.2 million of employee residential mortgage loans, or 0.40% of net loans.

 

Commercial Loans. At March 31, 2012, we had $94.7 million in commercial loans, which amounted to 17.0% of total loans. In addition, at such date, we had $25.1 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.

 

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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 typically in amounts of up to 80% of the value of the collateral securing the loan. At March 31, 2012, our largest commercial loan was a $3.8 million commercial term loan secured by business asset. The loan was performing according to its terms at March 31, 2012.

 

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, 2012, home equity loans and lines of credit totaled $37.7 million, or 6.8% of total loans. Additionally, at March 31, 2012, the unadvanced amounts of home equity lines of credit totaled $12.8 million. Home equity loans are offered with fixed rates of interest and with terms up to 15 years. Home equity lines of credit are offered with adjustable rates of interest that are indexed to the prime rate as reported in The Wall Street Journal . Interest rate adjustments on home equity lines of credit are limited to a maximum of 18% or 6% above the initial interest rate, whichever is lower.

 

The procedures for underwriting home equity loans and lines of credit include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loans. We will offer home equity loans with maximum combined loan-to-value ratios of up to 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.

 

Consumer Loans. We offer fixed rate loans secured by mobile homes. These loans have terms up to 25 years and loan-to-value ratios up to 90% of the mobile home’s value and require that the borrower obtain hazard insurance. At March 31, 2012, mobile home loans totaled $7.7 million or 1.4% of total loans and 78.6% of consumer loans. For the fiscal year ended March 31, 2012, the Company originated $1.7 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, 2012, automobile loans totaled $413,000 or 0.1% of total loans and 4.2% of consumer loans.

 

Other consumer loans at March 31, 2012 amounted to $1.7 million, or 0.3% of total loans and 17.3% of consumer loans. These loans include secured and unsecured personal loans. Personal loans generally have a fixed-rate, a maximum borrowing limitation of $10,000 and a maximum term of four years. Collateral loans are generally secured by a passbook account or a certificate of deposit.

 

Loan Underwriting Risks. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans help make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.

 

Loans secured by multi-family and commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in multi-family and commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to provide annual financial statements on multi-family and commercial real estate loans. In reaching a decision on whether to make a multi-family and commercial real estate

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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 or project. 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 or project 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 consumer mortgage lending activities are conducted by our salaried loan representatives. We underwrite all loans that we originate under our loan policies and procedures, which model those of Fannie Mae and Freddie Mac. We originate both adjustable-rate and fixed-rate mortgage loans. Our ability to originate fixed- or adjustable-rate loans is dependent upon the relative customer demand for such loans, which is affected by the current and expected future level of interest rates.

 

We generally retain most of the loans that we originate for our portfolio; however, we will sell participation interests to local financial institutions, primarily on the portion of loans that exceed our borrowing limits. The sales occur at time of origination; therefore none of these loans have been classified as held-for-sale. We sold $3.0 million and $2.5 million of participation interests in fiscal 2012 and 2011, respectively. In fiscal 2007, the Bank commenced selling long-term, fixed-rate residential loans to the Federal Home Loan Bank (the “FHLB”) under its Mortgage Partnership Finance Program 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 $8.6 million and $8.8 million of these loans in fiscal 2012 and 2011, respectively.

 

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 $42.3 million and $58.9 million at March 31, 2012 and 2011, 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

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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 risk management 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 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.

 

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;

 

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	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; 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 our 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, 2012, core deposits, which consist of savings, demand, NOW and money market accounts, comprised 50.4% of our deposits. We do not currently utilize brokered funds. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability to us, matching deposit and loan products and customer preferences and concerns. We generally review our deposit mix and pricing weekly. Our current strategy is to offer competitive rates, but not to be the market leader.

 

In addition to accounts for individuals, we also offer deposit accounts designed for the businesses operating in our market area. Our business banking deposit products and services include a non-interest-bearing commercial checking account, a NOW account for sole proprietors and a commercial cash management account for larger businesses. We have sought to increase our commercial deposits through the offering of these products, particularly to our commercial borrowers.

 

Borrowings . We utilize advances from the Federal Home Loan Bank of Boston and securities sold under agreements to repurchase to supplement our supply of investable funds and to meet deposit withdrawal requirements. The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions. As 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

 

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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.

 

Subsidiaries

 

New England Bancshares is the bank holding company for New England Bank, its wholly owned subsidiary. The Company also owns all of the common stock of a Delaware statutory business trust, FVB Capital Trust I. The capital trust was organized under Delaware law to facilitate the issuance of trust preferred securities and is not consolidated into the Company’s financial results. Its only activity has been the issuance of the $4.1 million trust preferred security related to the junior subordinated debentures reported in the Company’s consolidated financial statements.

 

New England Bank has one wholly owned subsidiary, VB Reo, Inc. VB Reo, Inc. was formed to hold real estate owned acquired by the Bank through foreclosure or deed-in-lieu of foreclosure.

 

Personnel

 

As of March 31, 2012, we had 119 full-time employees and 23 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 Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). 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 Federal Deposit Insurance Corporation (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. As further described below under “The Dodd-Frank Act”, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), is significantly changing the bank regulatory structure and affecting the lending, investing, trading and operating activities of financial institutions and their holding companies.

 

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Certain of the regulatory requirements applicable to New England Bancshares and New England Bank 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.

 

The Dodd-Frank Act

 

The Dodd-Frank Act required the Federal Reserve Board to set minimum capital levels for both bank and savings and loan holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital for holding companies were restricted to capital instruments that were then currently considered to be Tier 1 capital for insured depository institutions. Proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect upon passage, and directed the federal banking regulators to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

 

On June 12, 2012, the Federal Reserve Board, the FDIC and other federal bank regulatory agencies issued a proposed rule that would revise the agencies’ current capital rules as required by the Dodd-Frank Act. The proposed rule would revise the agencies’ risk-based and leverage capital requirements consistent with the Basel Committee on Banking Supervision (“Basel III”). Provisions of the proposed rule include implementation of a new common equity tier 1 minimum capital requirement and a higher minimum tier 1 capital requirement. The rule would also apply limits on a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a specified “buffer” of common equity tier 1 capital in addition to the minimum risk-based capital requirements. The proposed rule would also revise the agencies’ prompt corrective action framework by incorporating the new regulatory capital minimums and updating the definition of tangible common equity. On June 12, 2012, the bank regulatory agencies also issued a proposed rule that would revise the agencies’ rules for calculating risk-weighted assets to enhance risk sensitivity. These revisions include methods for determining risk-weighted assets for residential mortgages, securitization exposures, and counterparty credit risk.

 

The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets are still examined for compliance by their applicable bank regulators. The Dodd-Frank Act also gave state attorneys general the ability to enforce applicable federal consumer protection laws.

 

The Dodd-Frank Act broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The legislation also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and noninterest bearing transaction accounts have unlimited deposit insurance through December 31, 2012.

 

The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

 

The Dodd Frank Act also repealed the federal prohibition on the payment of interest on business transaction and other demand accounts, requires that originators of securitized loans retain a percentage of the risk for transferred loans, directs the Federal Reserve Board to regulate pricing of certain debit card interchange fees and contains a number of reforms related to mortgage origination.

 

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Many provisions of the Dodd-Frank Act involve delayed effective dates and/or require implementing regulations. Their impact on operations cannot yet fully be assessed. However, there is a significant possibility that the Dodd-Frank Act will result in an increased regulatory burden and compliance, operating and interest expense for banks and their holding companies.

 

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 or may 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, 2012, the Bank’s loans-to-one borrower limitation was $8.9 million and the largest aggregate outstanding balance of loans to one borrower was $7.4 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. The current requirements and actual capital levels for New England Bank and New England Bancshares are detailed in Note 15 of “Notes to Consolidated Financial Statements” filed in Part II, Item 8, “Financial Statements and Supplementary Data.”

 

As noted under “—The Dodd-Frank Act” above, the Federal Reserve Board, the FDIC and other federal bank regulatory agencies have recently issued a proposed rule that would revise the capital requirements applicable to New England Bank and New England Bancshares.

 

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.

 

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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.

 

As noted under “—The Dodd-Frank Act” above, the Federal Reserve Board, the FDIC and other federal bank regulatory agencies have recently issued a proposed rule that would revise the prompt corrective action framework.

 

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.

 

As noted under “—The Dodd-Frank Act” above, the Federal Reserve Board, the FDIC and other federal bank regulatory agencies have recently issued a proposed rule that would apply additional limits to the capital distributions that a banking organization may make.

 

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, 2012 totaled $34,000.

 

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.

 

Federal Insurance of Deposit Accounts. The FDIC insures deposits at FDIC insured financial institutions such as New England Bank. Deposit accounts in New England Bank are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. Pursuant to the Dodd-Frank Act, certain noninterest bearing checking accounts have unlimited coverage through December 31, 2012.

 

The FDIC imposes an assessment for deposit insurance on all depository institutions. Under the FDIC’s risk-based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by FDIC regulations, with institutions deemed less risky paying lower rates. Assessment rates (inclusive of possible adjustments) currently range from 2½ to 45 basis points

 

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of each institution’s total assets less tangible capital. The FDIC may revise the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The FDIC’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s volume of deposits.

 

As part of its plan to restore the Deposit Insurance Fund in the wake of the large number of bank failures following the financial crisis, the FDIC imposed a special assessment of 5 basis points for the second calendar quarter of 2009. In addition, the FDIC required all insured institutions to prepay their quarterly risk-based assessments for the fourth calendar quarter of 2009, and for all of calendar 2010, 2011 and 2012. The prepayment was recorded as a prepaid expense at December 31, 2009 and is being amortized to expense over three years. Any unused prepaid assessments would be returned to the institution in June 2013.

 

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 know of any practice, condition or violation that might lead to termination of New England Bank’s deposit insurance.

 

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. During the year ended March 31, 2012, New England Bank paid $46,000 in fees related to the FICO.

 

Transactions with Affiliates. 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. Certain transactions, such as extensions of credit to, or guarantees issued on behalf of, an affiliate, are subject to specific collateralization requirements. The Dodd-Frank Act significantly expands the coverage and scope of the limitations on affiliate transactions within a banking organization. For example, commencing in July 2011, the Dodd-Frank Act required that the 10% of capital limit on these transactions begin to apply to financial subsidiaries as well. 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.

 

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 its most recent examination.

 

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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, 2012, New England Bank was in compliance with this requirement with investments in the capital stock of the Federal Home Loan Bank of Boston of $4.1 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. 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 securities 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 association.

 

The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including its depository institution subsidiaries being “well capitalized” and “well managed,” to opt to become a “financial holding company.” A financial holding company may engage in a broader array of financial activities than a typical bank holding company. 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). The current requirements and actual capital levels for New England Bancshares and New England Bank are detailed in Note 15 of “Notes to Consolidated Financial Statements” filed in Part II, Item 8, “Financial Statements and Supplementary Data.” Traditionally, the capital guidelines for a bank holding company have been structured similarly to the regulatory capital requirements for the subsidiary depository institutions, but were somewhat more lenient. For example, the holding company capital requirements allow inclusion of certain instruments in Tier 1 capital that are not includable at the institution level. As noted under “—The Dodd-Frank Act” above, the Dodd-Frank Act required that holding company capital standards be as stringent as those applicable to the insured institutions themselves. The Federal Reserve Board, the FDIC and other federal bank regulatory agencies have recently issued a proposed rule that would revise the capital requirements applicable to New England Bank and New England Bancshares.

 

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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 using available resources to provide capital funds 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. The Dodd-Frank Act codified the source of strength policy and requires the promulgation of implementing regulations. 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 FDIC 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.

 

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. Our federal tax returns are not currently under audit or have not been subject to an audit during the past five years, except as follows. In 2011 the Internal Revenue Service completed an audit of our federal tax returns for the years ended March 31, 2009 and 2008.

 

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.

 

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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 lending may expose us to increased lending risks.

 

At March 31, 2012, our commercial loan portfolio consisted of $289.0 million of commercial real estate loans and $94.7 million of commercial business loans, or 51.9% and 17.0% of total loans, respectively. 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 commercial 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.

 

Historically low interest rates may adversely affect our net interest income and profitability.

 

During the past four years it has been the policy of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. As a result, yields on securities we have purchased and market rates on the loans we have originated are at levels lower than were available prior to the recent low interest rate environment. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets. This has resulted in recent increases in our net interest rate spread. However, our ability to lower our interest expense is limited at these interest rate levels, while the average yield on our interest-earning assets may

 

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continue to decrease. Although our net interest rate spread increased by 12 basis points and 46 basis points in fiscal 2010 and 2011, respectively, our net interest rate spread decreased by 11 basis points during fiscal 2012. The Federal Reserve Board has indicated its intention to maintain low interest rates in the near future. Accordingly, our net interest income may decrease, which may have an adverse affect on our profitability. For information with respect to changes in interest rates, see “—Changes in interest rates could adversely affect our results of operations and financial condition,” below.

 

Changes in interest rates could adversely affect our results of operations and financial condition.

 

Our profitability depends substantially on our net interest income, which is the difference between the interest income earned on our interest-earning assets and the interest expense paid on our interest-bearing liabilities. Increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable-rate loans. In addition, as market interest rates rise, we will have competitive pressures to increase the rates we pay on deposits. Because interest rates we pay on our deposits would be expected to increase more quickly than the increase in the yields we earn on our interest-earning assets, our net interest income would be adversely affected.

 

We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the interest rates on existing loans and securities.

 

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, 2011, we held 1.3% of the deposits in Hartford County, which was the 11 ^th 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.

 

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 continue to operate in a challenging and uncertain economic environment, both nationally and locally. Continued declines in real estate values and home sales volumes along with greater financial stress on borrowers due to the uncertain economic environment and high 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.

 

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

 

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio, resulting in additions to our allowance. In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.

 

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The Dodd-Frank Wall Street Reform and Consumer Protection Act will, among other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new laws and regulations that are expected to increase our costs of operations.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) is significantly change the bank regulatory structure and affecting the lending, deposit taking, investing, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

 

A provision of the Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits effective July 21, 2011, thus allowing businesses to have interest-bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse effect on our interest expense.

 

The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.

 

The Federal Reserve Board, the FDIC and other federal bank regulatory agencies recently issued a proposed rule that would revise the agencies’ current capital rules as required by the Dodd-Frank Act. The proposed rule would include a new common equity tier 1 minimum capital requirement and a higher minimum tier 1 capital requirement. The rule would also apply limits on a banking organization’s capital distributions if the banking organization does not hold a specified “buffer” of common equity tier 1 capital in addition to the minimum risk-based capital requirements. The proposed rule would also revise the agencies’ prompt corrective action framework by incorporating the new regulatory capital minimums and updating the definition of tangible common equity.

 

It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.

 

Our earnings have been negatively affected by the reduction in dividends paid by the Federal Home Loan Bank of Boston. In addition, any restrictions placed on the operations of the Federal Home Loan Bank of Boston could hinder our ability to use it as a liquidity source.

 

The Federal Home Loan Bank (“FHLB”) of Boston did not pay any dividends during the years 2009 and 2010. Although the FHLB Boston began paying a dividend again in the first quarter of 2011, the dividend paid was far below the dividend paid by the FHLB of Boston prior to 2009. The failure of the FHLB of Boston to pay full dividends for any quarter will reduce our earnings during that quarter. In addition, the FHLB of Boston is an important source of liquidity for us, and any restrictions on their operations may hinder our ability to use it as a liquidity source.

 

17

 

Risks associated with system failures, interruptions, or breaches of security could negatively affect our earnings.

 

Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches, but such events may still occur and may not be adequately addressed if they do occur. In addition any compromise of our systems could deter customers from using our products and services. Although we rely on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.

 

The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

18

 

 

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 $5.8 million at March 31, 2011.

 

Location			Leased or Owned		Original Year Leased or Acquired		Date of Lease Expiration
Executive/Main Office:
855 Enfield Street, Enfield, Connecticut			Leased		2006		2031
Operations Center:
45 North Main Street, Bristol, Connecticut			Leased		2006		2017 (1)
Branch Offices:
4 Riverside Avenue, Bristol, Connecticut			Leased		1999		2020 (2)
888 Farmington Avenue, Bristol, Connecticut			Owned		2004		—
124 Main Street, Broad Brook, Connecticut			Owned		2003		—
286 Maple Avenue, Cheshire, Connecticut			Leased		2001		2021 (3)
1 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		2013
8 South Main Street, Terryville, Connecticut			Leased		2002		2012 (6)
707 North Colony Road, Wallingford, Connecticut			Leased		2006		2016 (1)
20 Main Street, Windsor Locks, Connecticut			Leased		2002		2017

 

 

 

(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 two additional five-year terms
(3)	We have an option to renew this lease for one additional ten-year term.
(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.

 

19

 

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.

MINE SAFETY DISCOLURES

 

None.

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company’s common stock is listed on the NASDAQ Global Market under the symbol “NEBS.” According to the records of its transfer agent, the Company had approximately 1,348 stockholders of record as of June 20, 2012. The following table sets forth the high and low sales prices and dividends paid per share for the Company’s common stock for each of the fiscal quarters in the two-year period ended March 31, 2012. See Item 1, “Business—Regulation and Supervision—Limitation on Capital Distributions” and Note 10 in the Notes to the Consolidated Financial Statements for more information relating to restrictions on dividends.

		High				Low				Dividends
Fiscal 2012:
Fourth Quarter		$	11.02			$	9.72			$	0.03
Third Quarter			11.26				9.09				0.03
Second Quarter			9.70				9.09				0.03
First Quarter			9.90				9.00				0.03
Fiscal 2011:
Fourth Quarter		$	10.56			$	7.92			$	0.03
Third Quarter			9.00				7.00				0.03
Second Quarter			7.88				6.50				0.02
First Quarter			8.65				7.00				0.02

 

The Company repurchased 67,191 shares of its common stock in the quarter ended March 31, 2012 as follows:

 

	For the three months ended March 31, 2012				Total shares repurchased				Average price paid per share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
	January				57,991			$	10.51				182,696				149,561
	February				2,200				10.10				184,896				147,361
	March				7,000				10.22				191,896				140,361
	Total				67,191			$	10.47

 

The Company’s stock repurchase program was authorized August 29, 2011 to repurchase 332,257 shares of the Company’s outstanding shares. Stock repurchases were made from time to time and were effected through open market purchases, block trades and in privately negotiated transactions.

 

20

 

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.

 

21

 

FDIC insurance assessment consists 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 the amortization, 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. in July 2007.

 

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 “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 ASU 2010-28. 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.

 

22

 

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 and commercial loans 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, although we have not entered into any agreements regarding the establishment or acquisition of new branches;
	•	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 $37.3 million and $28.2 million for the years ended March 31, 2012 and 2011, respectively, and at March 31, 2012 comprised approximately 51.9% 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 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

 

23

 

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. In addition, we added four branch offices with our acquisition of Valley Bank in July 2007, and three branch offices in connection with our acquisition of Apple Valley Bank & Trust Company in June 2009. We intend to pursue expansion in our market area in the future, whether through de novo branching or acquisition. However, we have not entered into any binding commitments regarding our expansion plans.

 

Aggressively attract core deposits

 

Core deposits (accounts other than certificates of deposit) comprised 50.4% of our total deposits at March 31, 2012. 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 sell some of our long term fixed rate residential mortgage loans.

 

Merger Agreement With United Financial Bancorp, Inc.

 

On May 30, 2012, New England Bancshares entered into an Agreement and Plan of Merger (the “Merger Agreement”) with United Financial Bancorp, Inc. (“United Financial”), the holding company of United Bank, pursuant to which the Company will merge with and into United Financial, with United Financial as the surviving entity (the “Merger”). In addition, the Bank will merge with and into United Bank, with United Bank as the surviving entity.

 

Under the terms of the Merger Agreement, each share of Company common stock issued and outstanding at the time of closing will be converted into the right to receive 0.9575 of a share of United Financial common stock. The merger is currently expected to be completed in the fourth quarter of 2012.

 

The directors and executive officers of the Company have agreed to vote their shares in favor of the approval of the Merger Agreement at the Company stockholders’ meeting to be held to vote on the proposed transaction. David J. O’Connor, current President and Chief Executive Officer of the Company, and one additional member of the Company’s Board of Directors will join the Board of Directors of United Financial. If the Merger Agreement is terminated under certain circumstances, the Company has agreed to pay United Financial a termination fee of $3.2 million.

 

24

 

The completion of the Merger is subject to customary closing conditions, including regulatory approval and approval by stockholders of the Company and United Financial. The Company has also agreed not to (i) solicit proposals relating to alternative business combination transactions or (ii) subject to certain exceptions, enter into discussions concerning confidential information in connection with, alternative business combination transactions.

 

The Merger Agreement also contains usual and customary representations and warranties that the Company and United Financial made to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the contract between the Company and United Financial, and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating its terms. Moreover, the representations and warranties are subject to a contractual standard of materiality that may be different from what may be viewed as material to stockholders, and the representations and warranties may have been used to allocate risk between the Company and United Financial rather than establishing matters as facts.

 

Balance Sheet Analysis

 

Loans . We originate real estate loans secured by commercial real estate, residential real estate and construction loans, which are secured by residential and commercial real estate. At March 31, 2012, real estate loans totaled $452.4 million, or 81.2% of total loans, compared to $441.8 million, or 83.2%, of total loans at March 31, 2011.

 

Commercial real estate loans totaled $289.1 million at March 31, 2012, which represented 63.9% of real estate loans and 51.9% of total loans, compared to $251.7 million at March 31, 2011, which represented 57.0% of real estate loans and 47.4% of total loans. Commercial real estate loans increased $37.3 million, or 14.8%, for the year ended March 31, 2012 primarily due to the Company focusing on this type of lending.

 

One-to-four family residential real estate loans totaled $125.6 million at March 31, 2012, which represented 27.8% of real estate loans and 22.6% of total loans compared to $149.7 million at March 31, 2011, which represented 33.9% of real estate loans and 28.2% of total loans. Residential real estate loans decreased $24.1 million for the year ended March 31, 2012, primarily due to the Company selling originated loans in the secondary market and loan payoffs.

 

We originate home equity loans and lines of credit secured by residential real estate. This portfolio totaled $37.7 million at March 31, 2012, which represented 6.8% of total loans, compared to $40.4 million at March 31, 2011, which represented 7.6% of total loans.

 

We also originate commercial business loans secured by business assets other than real estate, such as business equipment, inventory and accounts receivable, in addition to issuing letters of credit. Commercial business loans totaled $94.7 million at March 31, 2012, which represented 17.0% of total loans, compared to $81.0 million at March 31, 2011, which represented 15.2% of total loans. Commercial business loans increased $13.7 million, or 16.9% for the year ended March 31, 2012 primarily due to the Company focusing on these types of loans.

 

We originate a variety of consumer loans, including loans secured by mobile homes, automobiles and passbook or certificate accounts. Consumer loans totaled $9.8 million and represented 1.8% of total loans at March 31, 2012, and $8.6 million at March 31, 2011 which represented 1.6% of total loans.

 

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The following table sets forth the composition of our loan portfolio at the dates indicated.

 

		At March 31,
		2012								2011								2010								2009								2008
		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:
1-to-4 family residential		$	125,636				22.56	%		$	149,740				28.18	%		$	174,004				33.47	%		$	125,613				29.90	%		$	130,297				34.65	%
Commercial real estate			289,057				51.91				251,743				47.37				223,567				43.00				177,498				42.26				155,152				41.26
Home equity loans and lines			37,724				6.77				40,364				7.60				40,157				7.72				33,515				7.98				32,239				8.57
Total mortgage loans			452,417				81.24				441,847				83.15				437,728				84.19				336,626				80.14				317,688				84.48
Consumer loans			9,772				1.76				8,581				1.61				7,293				1.40				6,491				1.55				6,292				1.67
Commercial loans			94,668				17.00				80,967				15.24				74,918				14.41				76,935				18.31				52,058				13.85
Total loans			556,857				100.00	%			531,395				100.00	%			519,939				100.00	%			420,052				100.00	%			376,038				100.00	%
Deferred loan origination fees, net			1,086								886								190								(28	)							(223	)
Allowance for loan losses			(5,697	)							(5,686	)							(4,625	)							(6,458	)							(4,046	)
Total loans, net		$	552,246							$	526,595							$	515,504							$	413,566							$	371,769

 

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The following table sets forth certain information at March 31, 2012 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.

 

		1-to-4 Family Resi- dential				Commercial Real Estate				Home Equity Loans and Lines of Credit				Consumer				Commercial				Total Loans
		(In thousands)
Amounts due in:
One year or less		$	1,582			$	10,949			$	510			$	655			$	26,707			$	40,403
More than one year to three years			375				16,703				3,142				570				16,267				37,057
More than three years to five years			1,330				17,601				6,931				807				18,556				45,225
More than five years to ten years			5,700				42,401				13,986				441				27,261				89,789
More than ten years to fifteen years			10,821				55,514				7,405				3,455				2,579				79,774
More than fifteen years			105,828				145,889				5,750				3,844				3,298				264,609
Total amount due		$	125,636			$	289,057			$	37,724			$	9,772			$	94,668			$	556,857

 

The following table sets forth the dollar amount of all loans at March 31, 2012 that are due after March 31, 2013 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, 2013
		Fixed Rates				Floating or Adjustable Rates				Total
		(In thousands)
Mortgage loans:
1-to-4 family residential loans		$	99,114			$	24,940			$	124,054
Commercial real estate			55,040				223,068				278,108
Home equity loans and lines of credit			15,332				21,882				37,214
Total mortgage loans			169,486				269,890				439,376
Consumer loans			8,693				424				9,117
Commercial loans			37,270				30,691				67,961
Total loans		$	215,449			$	301,005			$	516,454

 

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The following table shows loan activity during the periods indicated.

 

		For the Fiscal Year Ended March 31,
		2012				2011				2010
		(In thousands)
Beginning balance, loans, net		$	526,595			$	515,504			$	413,566
Originations:
Mortgage loans:
1-to-4 family residential loans			15,441				9,448				18,877
Commercial real estate			57,612				33,446				32,216
Construction loans			4,199				1,589				4,195
Total mortgage loans			77,252				44,483				55,288
Consumer loans			2,899				482				2,609
Commercial loans			34,139				11,973				15,711
Total loan originations			114,290				56,938				73,608
Loans sold			(8,571	)			(8,798	)			—
Loan participations purchased			—				10,555				51,236
Loans acquired in merger			—				—				60,233
Deduct:
Principal loan repayments and other, net			(78,479	)			(46,652	)			(78,257	)
Loan charge-offs, net of recoveries			(1,589	)			(952	)			(4,882	)
Ending balance, loans, net		$	552,246			$	526,595			$	515,504

 

Available-for-Sale Securities. Our securities portfolio consists primarily of mortgage-backed securities, municipal securities, U.S. government and agency securities and, to a lesser extent, marketable equity securities. Although municipal securities generally have greater credit risk than U.S. Treasury and government securities, they generally have higher yields than government securities of similar duration. Available-for-sale securities increased $2.3 million, or 3.9%, in the year ended March 31, 2012 due to increases in all investment categories, except for municipal securities. The majority of our mortgage-backed securities were issued by Ginnie Mae, Fannie Mae or Freddie Mac.

 

The following table sets forth the carrying values and fair values of our securities portfolio at the dates indicated.

 

		At March 31,
		2012								2011								2010
		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		$	6,499			$	6,470			$	7,355			$	7,332			$	8,833			$	8,956
Municipal securities			25,322				25,361				19,372				18,767				15,670				15,273
Mortgage-backed securities			29,014				29,756				32,236				33,169				38,988				39,750
Marketable equity securities			—				—				9				9				—				—
Total			60,835				61,587				58,972				59,277				63,491				63,979
Money market mutual funds included in cash and cash equivalents			—				—				(9	)			(9	)			—				—
Total		$	60,835			$	61,587			$	58,963			$	59,268			$	63,491			$	63,979

 

At March 31, 2012, we had no investments in a single company or entity that had an aggregate book value in excess of 10% of our equity, except for the U.S. government and federal agencies.

 

28

 

 

The following table sets forth activity in our available-for-sale securities:

 

		At and For the Fiscal Year Ended March 31,
		2012				2011				2010
		(In thousands)
Mortgage-related securities:
Mortgage-related securities, beginning of period (1)		$	33,169			$	39,750			$	44,041
Acquired in merger			—				—				2,412
Purchases			7,579				8,484				7,996
Sales			—				—				(470	)
Repayments and prepayments			(10,777	)			(15,301	)			(14,603	)
Increase (decrease) in net premium			(24	)			40				75
Increase (decrease) in net unrealized gain			(191	)			196				299
Net (decrease) increase in mortgage-related securities			(3,413	)			(6,581	)			(4,291	)
Mortgage-related securities, end of period (1)		$	29,756			$	33,169			$	39,750
Investment securities:
Investment securities, beginning of period (1)		$	26,099			$	24,229			$	27,780
Acquired in merger			—				—				592
Purchases			38,488				33,824				31,757
Sales			(23,855	)			(21,054	)			(22,445	)
Maturities			(9,449	)			(10,326	)			(14,953	)
(Decrease) increase in net premium			(90	)			(41	)			43
Reclass from other assets to securities			—				—				671
(Decrease) increase in net unrealized gain			638				(533	)			784
Net increase(decrease) in investment securities			5,732				1,870				(3,551	)
Investment securities, end of period (1)		$	31,831			$	26,099			$	24,229

 

 

(1)	At fair value

 

The following table sets forth the maturities and weighted average yields of securities at March 31, 2012. 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		$	—				—	%		$	—				—	%		$	501				2.73	%		$	5,969				1.99	%		$	6,470				2.04	%
Municipal securities			178				3.30				1,398				3.61				4,027				3.10				19,758				3.68				25,361				3.58
Mortgage-backed securities			—				—				36				3.82				490				4.70				29,230				2.25				29,756				2.93
Total		$	178				3.30	%		$	1,434				3.61	%		$	5,018				3.22	%		$	54,957				2.74	%		$	61,587				3.10	%

 

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 $40.5 million for the year ended March 31, 2012 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.

 

29

 

 

The following table sets forth the balances of our deposit products at the dates indicated.

 

		At March 31,
		2012				2011
		(In thousands)
Non-interest bearing accounts		$	69,412			$	59,787
NOW and money market accounts			142,062				117,914
Savings accounts			81,311				76,731
Certificates of deposit			288,483				286,337
Total		$	581,268			$	540,769

 

The following table indicates the amount of jumbo certificates of deposit by time remaining until maturity as of March 31, 2012. Jumbo certificates of deposit require minimum deposits of $100,000.

 

Maturity Period		Amount				Weighted Average Rate
		(Dollars in thousands)
Three months or less		$	14,724				1.83	%
Over three through six months			12,581				1.62
Over six through twelve months			20,653				1.56
Over twelve months			60,400				2.82
Total		$	108,358				2.31	%

 

The following table sets forth the time deposits classified by rates at the dates indicated.

 

						At March 31,
		2012				2011				2010
						(In thousands)
Certificate accounts:
0.00 to 2.00%		$	162,384			$	136,870			$	101,981
2.01 to 3.00%			41,709				44,866				49,484
3.01 to 4.00%			57,553				69,090				88,608
4.01 to 5.00%			19,427				27,324				38,040
5.01 to 6.00%			7,410				8,187				8,134
Fair value adjustment			—				—				253	(1)
Total		$	288,483			$	286,337			$	286,500

 

 

 

(1)	Represents the remaining balance of the fair value adjustment on the deposits of Apple Valley Bank at the time of the purchase of Apple Valley Bank in July 2009.

 

The following table sets forth the amount and maturities of time deposits classified by rates at March 31, 2012.

 

		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%		$	106,707			$	38,948			$	8,759			$	7,970			$	162,384				56.3	%
2.01 to 3.00%			16,361				2,631				2,364				20,353				41,709				14.5
3.01 to 4.00%			10,581				11,106				18,216				17,650				57,553				19.9
4.01 to 5.00%			4,875				14,552				—				—				19,427				6.7
5.01 to 6.00%			1,590				5,820				—				—				7,410				2.6
Total		$	140,114			$	73,057			$	29,339			$	45,973			$	288,483				100.0	%

 

30

 

The following table sets forth the deposit activity for the periods indicated.

 

		For the Fiscal Year Ended March 31,
		2012				2011				2010
		(In thousands)
Net deposits		$	32,259			$	14,346			$	11,219
Deposits acquired through merger			—				—				76,380
Interest credited on deposit accounts (1)			8,240				8,851				10,537
Total increase in deposit accounts		$	40,499			$	23,197			$	98,136

 

 

 

(2)	Includes amortization of fair value adjustment.

 

Borrowings . We use advances from the Federal Home Loan Bank and securities sold under agreements to repurchase 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,
		2012				2011				2010
		(Dollars in thousands)
Federal Home Loan Bank advances:
Average balance outstanding		$	37,094			$	46,437			$	61,837
Maximum amount outstanding at any month-end during the period			38,974				56,860				66,566
Balance outstanding at end of period			33,044				39,113				56,860
Weighted average interest rate during the period			3.30	%			3.94	%			4.19	%
Weighted average interest rate at end of period			3.24	%			3.22	%			4.05	%

 

Subordinated Debentures. On July 28, 2005, FVB Capital Trust I (“Trust”), 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”). The Trust 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 the Trust.

 

Capital Securities accrue and pay distributions quarterly at a variable annual rate equal to the 3 month LIBOR plus 1.90%. The rate for the quarterly period February 23, 2012 to May 22, 2012 equated to 2.39%. 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 the Trust has funds necessary to make these payments.

 

Capital Securities are mandatorily redeemable upon the maturing of the Debentures on August 23, 2035 or upon earlier redemption as provided in the Indenture. The Company has the right to redeem the Debentures, in whole or in part 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 Debentures due to the acquisition of First Valley Bancorp by the Company.

 

31

 

 

Results of Operations for the Years Ended March 31, 2012 and 2011

 

Overview.

 

		2012				2011				% Change
		(Dollars in thousands)
Net income		$	4,559			$	3,154				44.55	%
Return on average assets			0.64	%			0.46	%			39.13
Return on average equity			6.29	%			4.55	%			38.24
Average equity to average assets			10.17	%			10.12	%			0.49

 

Net income increased due primarily to increases in net interest and dividend income, a decrease in the provision for loan losses and a gain from a legal settlement related to the investment portfolio partially offset by increases in noninterest expense and income tax expense. Net interest and dividend income increased primarily as a result of a higher average balance 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 average balance of interest-bearing liabilities.

 

Net Interest and Dividend Income. Net interest and dividend income totaled $22.6 million for the year ended March 31, 2012, an increase of $500,000 or 2.3% compared to the prior fiscal year. This resulted mainly from a $33.8 million increase in average interest-earning assets during the year partially offset by an 11 basis point decrease in our interest rate spread to 3.25% and a $13.9 million increase in average interest-bearing liabilities. Our net interest margin decreased 9 basis points to 3.48% for fiscal 2012.

 

Interest and dividend income decreased $614,000, or 2.2%, from $33.4 million for fiscal 2011 to $32.8 million for fiscal 2012. Average interest-earning assets were $660.8 million for fiscal 2012, an increase of $33.8 million, or 5.4%, compared to $627.0 million for fiscal 2011. The increase in average interest-earning assets resulted primarily from increases in loans and federal funds sold, interest-bearing deposits and marketable equity securities, partially offset by a decrease in mortgage-backed and mortgage-related securities. The yield on interest-earning assets decreased from 5.33% to 4.95% due primarily to a decline in interest rates which affected our loan portfolio, the yield on which decreased 23 basis points.

 

Interest expense decreased $1.2 million, or 11.3%, from $11.0 million for fiscal 2011 to $9.8 million for fiscal 2012. Average interest-bearing liabilities grew $13.9 million, or 2.5%, from $555.9 million for fiscal 2011 to $569.8 million for fiscal 2012 due primarily to increases in deposits partially offset by a decrease in Federal Home Loan Bank advances and subordinated debentures, and securities sold under agreements to repurchase. The average rate paid on interest-bearing liabilities decreased to 1.71% for fiscal 2012 from 1.98% for fiscal 2011 due to the decline in interest rates on deposits and securities sold under agreements to repurchase.

 

32

 

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,
		2012												2011												2010
		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		$	57,706			$	166				0.29	%		$	41,606			$	123				0.30	%		$	53,122			$	295				0.56	%
Investments in available for sale securities, other than mortgage-backed and mortgage-related securities (1)			27,013				1,307				4.84				26,114				1,456				5.58				24,909				1,483				5.95
Mortgage-backed and mortgage-related securities			31,778				1,001				3.15				33,827				1,338				3.96				41,798				2,037				4.87
Federal Home Loan Bank and Bankers Bank stock			4,694				21				0.45				4,396				—				—				4,322				—				—
Loans, net (2)			539,582				30,304				5.62				521,012				30,496				5.85				480,813				28,867				6.00
Total interest-earning assets			660,774				32,799				4.96				626,955				33,413				5.33				604,964				32,682				5.40
Noninterest-earning assets			39,714												48,550												45,491
Cash surrender value of life insurance			10,195												9,806												9,392
Total assets		$	710,683											$	685,311											$	659,847
Liabilities and Stockholders’ Equity:
Deposits:
Savings accounts		$	77,911			$	596				0.76	%		$	73,019			$	605				0.83	%		$	69,297			$	683				0.99	%
NOW accounts			17,069				51				0.30				16,891				54				0.32				16,342				63				0.39
Money market accounts			118,421				875				0.74				99,291				922				0.93				83,112				1,282				1.54
Certificate accounts			290,000				6,694				2.31				286,405				7,167				2.50				285,163				8,467				2.97
Total deposits			503,401				8,216				1.63				475,606				8,748				1.84				453,914				10,495				2.31
Federal Home Loan Bank advances and subordinated debentures			41,026				1,328				3.24				50,351				1,995				3.96				65,743				2,841				4.32
Advanced payments by borrowers for taxes and insurance			1,589				15				0.94				1,336				15				1.12				1,209				15				1.24
Securities sold under agreements to repurchase			23,809				213				0.89				28,610				261				0.91				18,593				190				1.02
Total interest-bearing liabilities			569,825				9,772				1.71				555,903				11,019				1.98				539,459				13,541				2.51
Demand deposits			60,978												51,874												45,569
Other liabilities			7,634												8,211												7,915
Total liabilities			638,437												615,988												592,943
Stockholders’ Equity			72,246												69,323												66,904
Total liabilities and stockholders’ equity		$	710,683											$	685,311											$	659,847
Net interest income/net interest rate spread (3)						$	23,027				3.25	%						$	22,394				3.35	%						$	19,141				2.89	%
Net interest margin (4)											3.48	%											3.57	%											3.16	%
Ratio of interest-earning assets to interest-bearing liabilities			115.96	%											112.78	%											112.14	%

  

 

(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.

 

33

 

 

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, 2012 Compared to Fiscal Year Ended March 31, 2011												Fiscal Year Ended March 31, 2011 Compared to Fiscal Year Ended March 31, 2010
		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		$	(4	)		$	46			$	42			$	(117	)		$	(55	)		$	(172	)
Investments in available-for-sale securities, other than mortgage-backed and mortgage-related securities			(209	)			60				(149	)			(134	)			107				(27	)
Mortgage-backed and mortgage-related securities			(260	)			(76	)			(336	)			(348	)			(351	)			(699	)
Federal Home Loan Bank stock			21				—				21				—				—				—
Loans, net (1)			(1,106	)			915				(191	)			(698	)			2,327				1,629
Total interest-earning assets			(1,558	)			945				613				(1,297	)			2,028				731
Interest-bearing liabilities:
Savings accounts			(58	)			49				(9	)			(117	)			39				(78	)
NOW accounts			(4	)			1				(3	)			(11	)			2				(9	)
Money market accounts			(702	)			655				(47	)			(705	)			345				(360	)
Certificate accounts			(561	)			88				(473	)			(1,337	)			37				(1,300	)
Federal Home Loan Bank advances and subordinated debentures			(333	)			(334	)			(667	)			(223	)			(623	)			(846	)
Advanced payments by borrowers for taxes and insurance			(1	)			2				1				—				—				—
Securities sold under agreements to repurchase			(6	)			(43	)			(49	)			(17	)			88				71
Total interest-bearing liabilities			(1,665	)			418				(1,247	)			(2,410	)			(112	)			(2,522	)
Increase in net interest income		$	107			$	527			$	634			$	1,113			$	2,140			$	3,253

 

 

(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 on a cash basis. Loan fees are included in interest income.

 

Provision for Loan Losses. Provisions 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 provisions for loan losses of $1.6 million and $2.0 million in the years ended March 31, 2012 and 2011, respectively. The provision was relatively stable as the quality of the loan portfolio has remained relatively stable over the last year.

 

Although management utilizes its best judgment in providing for losses, there can be no assurance that we will not have to change the 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.

 

34

 

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 2012 to 2011.

 

		2012				2011				% Change
		(In thousands)
Service charges on deposit accounts		$	1,407			$	1,321				6.5	%
Gain on sales and calls of securities, net			276				327				(18.5	)
Gain on sale of loans			280				306				(8.5	)
Increase in cash surrender value of life insurance policies			348				367				(5.2	)
Gain from legal settlement			1,283				—				100.0
Other income			422				205				105.9
Total		$	4,016			$	2,526				59.0	%

 

The $1,490,000 increase in noninterest income was primarily due to the $1,283,000 increase in gain on from legal settlement related to the investment portfolio and a $217,000 increase in other income, partially offset by the $51,000 decrease in gain on sale of securities and the $26,000 decrease in gain on sale of loans.

 

Noninterest Expense. The following table shows the components of noninterest expense and the percentage changes from fiscal 2012 to fiscal 2011.

 

		2012				2011				% Change
		(In thousands)
Salaries and employee benefits		$	8,966			$	8,585				4.4	%
Occupancy and equipment expenses			3,213				3,358				(4.3	)
Advertising and promotion			571				282				102.5
Professional fees			1,100				594				85.2
Data processing expense			710				675				5.2
FDIC insurance assessment			569				944				(39.7	)
Stationery and supplies			190				213				(10.8	)
Amortization of identifiable intangible assets			372				417				(10.8	)
Write-down of other real estate owned			141				524				(73.1	)
Other real estate owned			245				177				38.4
Other expense			2,027				2,008				(0.9	)
Total		$	18,104			$	17,777				1.8
Efficiency ratio (1)			68.1	%			72.4	%

 

 

(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 the increase in advertising and promotion and professional fees, partially offset by decreases in FDIC insurance assessment and write-down of other real estate owned.

 

Income Taxes. The Company recorded income tax expense of $2.3 million for the fiscal year ended March 31, 2012 compared to $1.6 million in the previous year.

 

35

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 contractually 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 owed 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 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.

 

Management informs the Boards of Directors monthly of the amount of loans delinquent more than 30 days, and all loans in foreclosure and all foreclosed and repossessed property that we own on a quarterly basis.

 

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 $16.7 million, or 2.29% of total assets, at March 31, 2012, which was an increase of $1.8 million from March 31, 2011. As a result, nonperforming loans as a percentage of loans increased from 2.53% at March 31, 2011 to 2.72% at March 31, 2012. At March 31, 2012 we had four residential properties and three commercial properties classified as other real estate owned totaling $1.5 million. We had five residential properties and three commercial properties classified as other real estate owned with a balance of $1.5 million at March 31, 2011. At March 31, 2012, non-accrual loans consisted of twenty six residential real estate loans, thirty commercial loans, twenty two commercial real estate loans, eight consumer loans and seven home equity loans, compared to twenty-three residential real estate loans, eighteen commercial loans, seventeen commercial real estate loans, eight consumer loans and six home equity loans at March 31, 2011.

 

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The following table provides information with respect to our non-performing assets at the dates indicated.

 

		At March 31,
		2012				2011				2010				2009				2008
		(Dollars in thousands)
Non-accruing loans:
Mortgage loans:
Residential loans		$	3,734			$	4,429			$	3,119			$	1,905			$	737
Commercial real estate			7,141				5,461				2,664				3,918				—
Home equity loans and lines of credit			170				184				102				439				398
Total mortgage loans			11,045				10,074				5,885				6,262				1,135
Consumer loans			56				165				46				28				22
Commercial loans			4,072				3,203				3,064				5,636				10
Total nonaccrual loans			15,173				13,442				8,995				11,926				1,167
Other real estate owned			1,491				1,496				2,846				141				—
Other repossessed assets			—				—				173				—				—
Total nonperforming assets		$	16,664			$	14,938			$	12,014			$	12,067			$	1,167
Performing troubled debt restructurings			3,000				—				—				—				—
Total nonperforming assets and performing troubled debt restructurings		$	19,664			$	14,938			$	12,014			$	12,067			$	1,167
Impaired loans		$	15,311			$	15,339			$	7,978			$	10,135			$	398
Accruing loans 90 days or more past due			—				214				—				15				8
Allowance for loan losses as a percent of loans (1)			1.02	%			1.07	%			0.89	%			1.54	%			1.08	%
Allowance for loan losses as a percent of nonperforming loans (2)			37.55	%			42.30	%			51.42	%			54.15	%			346.70	%
Nonperforming loans as a percent of loans (1)(2)			2.72	%			2.53	%			1.73	%			2.84	%			0.31	%
Nonperforming assets as a percent of total assets			2.29	%			2.19	%			1.78	%			2.11	%			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.

 

Interest income that would have been recorded for the year ended March 31, 2012 had non-accruing loans been current according to their original terms amounted to $640,000, none of which was recognized in interest income.

 

Troubled Debt Restructurings. At March 31, 2012, we had total troubled debt restructurings of $5.0 million. At March 31, 2012, $3.0 million of our troubled debt restructurings were accruing and performing in accordance with their modified terms.

 

For the year ended March 31, 2012, gross interest income that would have been recorded had our troubled debt restructurings been current in accordance with their original terms was $278,000. Interest income recognized on such loans for the year ended March 31, 2012 was $232,000.

 

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.

 

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Classified Assets. The following table shows the aggregate amounts of our classified and criticized assets at the dates indicated.

 

		At March 31,
		2012				2011
		(In thousands)
Special mention assets		$	9,252			$	11,420
Substandard assets			25,983				26,693
Doubtful assets			—				—
Loss assets			—				—
Total classified and criticized assets		$	35,235			$	38,113

 

 

Classified assets at March 31, 2012 included ninety three loans totaling $18.5 million that were considered non-performing. Classified assets at March 31, 2011 included seventy two loans totaling $13.4 million that were considered non-performing.

 

Classified and special mention assets decreased $2.9 million to $35.2 million at March 31, 2012, from $38.1 million at March 31, 2011, and were 6.3% and 7.2% of total loans at March 31, 2012 and 2011, respectively. The decrease was caused primarily by the reduction of loans in the special mention category.

 

Potential problem loans are loans that are currently performing and are not included in non-accrual loans above, but may be delinquent. These loans require an increased level of management attention, because we have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and as a result such loans may be included at a later date in non-accrual loans. At March 31, 2012, we had no potential problem loans that are not discussed above under “—Classified Assets.”

 

 

Delinquencies. The following table provides information about delinquencies in our loan portfolio at the dates indicated.

 

		At March 31, 2012																At March 31, 2011																At March 31, 2010
		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			5			$	2,771				12			$	2,217				7			$	1,724				13			$	2,772				13			$	2,617				14			$	2,105
Commercial real estate			11				2,854				12				4,976				20				7,109				9				2,223				11				2,676				10				3,843
Home equity loans and lines			2				266				3				84				10				533				3				89				5				174				3				80
Total mortgage loans			18				5,891				27				7,277				37				9,366				25				5,084				29				5,467				27				6,028
Consumer loans			6				149				3				47				2				14				7				162				5				43				2				3
Commercial loans			9				1,795				18				3,545				14				2,322				12				2,069				10				2,108				15				2,074
Total			33			$	7,835				48			$	10,869				53			$	11,702				44			$	7,315				44			$	7,618				44			$	8,105
Delinquent loans to loans (1)							1.41	%							1.95	%							2.20	%							1.37	%							1.46	%							1.56	%

 

 

(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 and willingness to repay the loan; (2) the type, marketability, and value of the collateral; (3) the strength of our collateral position; and (4) the borrower’s repayment history.

 

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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 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, 2012, our allowance for loan losses represented 1.02% of total loans and 37.55% of non-performing loans. The allowance for loan losses increased $11,000 from March 31, 2011 to March 31, 2012 due to a provision for loan losses of $1.6 million, partially offset by net charge-offs of $1.6 million. The provision for loan losses for the year ended March 31, 2012 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.

 

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.

 

		At March 31,
		2012								2011								2010								2009								2008
		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		$	789				22.56	%		$	738				28.18	%		$	566				33.47	%		$	545				29.90	%		$	531				34.65	%
Commercial real estate			2,794				51.91				1,981				47.37				1,824				43.00				1,981				42.26				2,202				41.26
Home equity loans and lines of credit			127				6.78				154				7.60				177				7.72				296				7.98				287				8.57
Consumer loans			64				1.75				98				1.61				39				1.40				68				1.55				54				1.67
Commercial loans			1,923				17.00				2,715				15.24				2,019				14.41				3,568				18.31				972				13.85
Total allowance for loan losses		$	5,697				100.00	%		$	5,686				100.00	%		$	4,625				100.00	%		$	6,458				100.00	%		$	4,046				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.

 

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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,
		2012				2011				2010				2009				2008
		(Dollars in thousands)
Balance at beginning of period		$	5,686			$	4,625			$	6,458			$	4,046			$	1,875
Provision for loan losses			1,600				2,013				3,049				2,929				307
Charge-offs:
Residential loans			379				145				202				127				24
Commercial real estate loans			313				29				540				—				58
Home equity loans and lines of credit			17				—				14				—				—
Consumer loans			42				65				27				36				34
Commercial loans			974				771				4,160				354				15
Total charge-offs			1,725				1,010				4,943				517				131
Recoveries:
Residential loans			58				9				3				—				—
Consumer loans			22				7				24				—				3
Commercial loans			56				42				34				—				11
Total Recoveries			136				58				61				—				14
Net charge-offs			1,589				952				4,882				517				117
Allowance obtained through merger			—				—				—				—				1,981
Balance at end of period		$	5,697			$	5,686			$	4,625			$	6,458			$	4,046
Ratio of net charge-offs during the period to average loans outstanding during the period			0.29	%			0.18	%			0.94	%			0.12	%			0.03	%
Allowance for loan losses as a percent of loans (1)			1.02	%			1.07	%			0.89	%			1.54	%			1.08	%
Allowance for loan losses as a percent of nonperforming loans (2)			37.55	%			42.30	%			51.42	%			54.15	%			346.70	%

 

 

(1)	Loans are presented before allowance for loan losses.
(2)	Non-performing loans consist of all loans 90 days or more past due and other loans which 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.

 

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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, 2012, cash and cash equivalents totaled $62.1 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $61.6 million at March 31, 2012. In addition, at March 31, 2012 we had $33.0 million in outstanding advances from the Federal Home Loan Bank of Boston, and the ability to borrow an additional $30.8 million from the Federal Home Loan Bank of Boston, subject to collateral requirements.

 

At March 31, 2012, we had $78.6 million in loan commitments outstanding, which included $12.6 million in undisbursed construction loans and $37.9 million in unused lines of credit. Certificates of deposit due within one year of March 31, 2012 totaled $140.1 million, or 24.1% 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, 2013. 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, 2012.

 

		Payments Due by Period
		Total				One Year or Less				More than One Year to Three Years				More than Three Years to Five Years				More than Five Years
		(In thousands)
Long-Term Debt Obligations (1)		$	37,181			$	3,835			$	14,016			$	13,302			$	6,028
Operating Lease Obligations			12,393				990				1,901				1,861				7,641
Total		$	49,574			$	4,825			$	15,917			$	15,163			$	13,669

__________________

(1)	Consists of Federal Home Loan Bank advances, subordinated debentures 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,
		2012				2011				2010
					(In thousands)
Investing activities:
Loan originations		$	114,290			$	56,938			$	73,608
Loan participations purchased			—				10,555				51,236
Securities purchased			46,067				42,308				39,753
Financing activities:
Increase in deposits		$	40,499			$	23,197			$	98,136
(Decrease) increase in FHLB advances			(6,069	)			(17,747	)			(9,973	)
(Decrease) increase in securities sold under agreements to repurchase			6,086				(1,794	)			11,391

 

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 for the Bank 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. The Company is also subject to capital requirements on a consolidated basis. At March 31, 2012, the Company and 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 “Notes to the Consolidated Financial Statements.”

 

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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, 2012 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, 2012, 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 July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This ASU is created to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. This ASU is intended to provide additional information to assist financial statement users in assessing the entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The amendments in this ASU are effective as of the end of a reporting period for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The required disclosures are included in Note 4 to the Company’s Financial Statements.

 

In December 2010, the FASB issued ASU 2010-28, “Intangibles – Goodwill and Other.” This ASU addresses when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The amendments in this ASU are effective for fiscal years, and interim periods beginning after December 15, 2010. The adoption of this pronouncement did not have a material impact on the Company’s results of operation or financial position.

 

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” This ASU addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. This ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this pronouncement did not have a material impact on the Company’s results of operation or financial position.

 

In 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 required disclosures are included in Note 4 to the Company’s Financial Statements.

 

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. The amendments are effective during interim and annual periods beginning after December 15, 2011.

 

42

 

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. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

 

In September 2011, the FASB issued ASU 2011-08, “Intangibles – Goodwill and Other”, an update to ASC 350, “Intangibles – Goodwill and Other.” ASU 2011-08 simplifies how entities, both public and nonpublic, test goodwill for impairment. The amendments in this update permit an entity to first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. For public and nonpublic entities, the amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance is not expected to have an impact on the Company’s results of operations or financial position.

 

In September 2011, the FASB issued ASU 2011-09, “Disclosures About an Employer’s Participation in a Multiemployer Plan,” which amends ASC 715-80, “Compensation – Retirement Benefits - Multiemployer Plans,” and requires additional separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans. This objective of this ASU is to help users of financial statements assess the potential future cash flow implications relating to an employer’s participation in multiemployer pension plans. The disclosures also will indicate the financial health of all of the significant plans in which the employer participates and assist a financial statement user to access additional information that is available outside the financial statements. The amendments in this ASU are effective for fiscal years ending after December 15, 2011, with early adoption permitted. The amendments should be applied retrospectively for all prior periods presented. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

 

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities.” This ASU is to enhance current disclosures. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The amendments in this ASU are effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

 

In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The amendments in this update defer those changes in ASU 2011-05 that relate to the presentation of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05 are not affected by this update. The amendments are effective during interim and annual periods beginning after December 15, 2011. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

 

  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.

 

43

 

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.

 

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.

 

44

 

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, 2012 and 2011, 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, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

 

	/s/ Shatswell, MacLeod & Company, P.C.
	SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
June 12, 2012

 

45

 

NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED BALANCE SHEETS

 

March 31, 2012 and 2011

 

( Dollars In Thousands, Except Per Share Amounts )

 

		2012				2011
ASSETS
Cash and due from banks		$	9,666			$	8,738
Interest-bearing demand deposits with other banks			52,398				34,865
Money market mutual funds			—				9
Total cash and cash equivalents			62,064				43,612
Investments in available-for-sale securities, at fair value			61,587				59,268
Federal Home Loan Bank stock, at cost			4,100				4,396
Loans, net of allowance for loan losses of $5,697 as of March 31, 2012 and $5,686 as of March 31, 2011			552,246				526,595
Premises and equipment, net			6,161				6,245
Other real estate owned			1,491				1,496
Accrued interest receivable			2,392				2,451
Deferred income taxes, net			4,741				4,874
Cash surrender value of life insurance			10,371				10,023
Identifiable intangible assets			915				1,287
Goodwill			16,783				16,783
Other assets			3,651				5,014
Total assets		$	726,502			$	682,044
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	69,412			$	59,787
Interest-bearing			511,856				480,982
Total deposits			581,268				540,769
Advanced payments by borrowers for taxes and insurance			1,504				1,400
Federal Home Loan Bank advances			33,044				39,113
Subordinated debentures			3,927				3,918
Securities sold under agreements to repurchase			27,752				21,666
Other liabilities			5,637				4,487
Total liabilities			653,132				611,353
Stockholders’ Equity:
Preferred stock, par value $.01 per share: 1,000,000 shares authorized; none issued			—				—
Common stock, par value $.01 per share: 19,000,000 shares authorized; 6,945,591 shares issued at March 31, 2012 and 6,938,087 shares issued at March 31, 2011			69				69
Paid-in capital			60,001				59,876
Retained earnings			23,942				20,091
Unearned ESOP shares, 147,641 shares at March 31, 2012 and 181,515 at March 31, 2011			(1,476	)			(1,714	)
Treasury stock, 998,967 shares at March 31, 2012 and 781,411 March 31, 2011, at cost			(9,625	)			(7,431	)
Unearned shares, stock-based incentive plans, no shares at March 31, 2012 and 35,984 shares at March 31, 2011			—				(386	)
Accumulated other comprehensive income			459				186
Total stockholders’ equity			73,370				70,691
Total liabilities and stockholders’ equity		$	726,502			$	682,044

 

The accompanying notes are an integral part of these consolidated financial statements.

 

46

 

NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF INCOME

 

For the Years Ended March 31, 2012 and 2011

 

(Dollars In Thousands, Except Per Share Amounts )

 

		2012				2011
Interest and dividend income:
Interest and fees on loans		$	30,209			$	30,496
Interest and dividends on securities:
Taxable			1,261				1,757
Tax-exempt			691				683
Interest on federal funds sold, interest-bearing deposits and dividends on money market mutual funds			166				123
Total interest and dividend income			32,327				33,059
Interest expense:
Interest on deposits			8,216				8,748
Interest on advanced payments by borrowers for taxes and insurance			15				15
Interest on Federal Home Loan Bank advances			1,225				1,827
Interest on subordinated debentures			103				168
Interest on securities sold under agreements to repurchase			213				261
Total interest expense			9,772				11,019
Net interest and dividend income			22,555				22,040
Provision for loan losses			1,600				2,013
Net interest and dividend income after provision for loan losses			20,955				20,027
Noninterest income:
Service charges on deposit accounts			1,407				1,321
Gain on securities, net			309				327
Impairment loss on securities (includes total losses of $33 net if $- recognized on other comprehensive income, pretax)			(33	)			—
Gain on sale of loans			280				306
Increase in cash surrender value of life insurance policies			348				367
Gain from legal settlement			1,283				—
Other income			422				205
Total noninterest income			4,016				2,526
Noninterest expense:
Salaries and employee benefits			8,966				8,585
Occupancy and equipment expense			3,213				3,358
Advertising and promotion			571				282
Professional fees			1,100				594
Data processing expense			710				675
FDIC insurance assessment			569				944
Stationery and supplies			190				213
Amortization of identifiable intangible assets			372				417
Write-down of other real estate owned			141				524
Other real estate owned			245				177
Other expense			2,027				2,008
Total noninterest expense			18,104				17,777
Income before income taxes			6,867				4,776
Income tax expense			2,308				1,622
Net income		$	4,559			$	3,154
Earnings per share:
Basic		$	0.77			$	0.53
Diluted			0.76				0.53
Dividends per share			0.12				0.10

 

The accompanying notes are an integral part of these consolidated financial statements.

 

47

 

NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

For the Years Ended March 31, 2012 and 2011

 

(Dollars In Thousands, Except Per Share Amounts)

 

																						Unearned
																						Shares
																						Stock-								Accumulated
																		Unearned				Based								Other
		Common Stock								Paid-in				Retained				ESOP				Incentive				Treasury				Comprehensive
		Shares				Amount				Capital				Earnings				Shares				Plans				Stock				Income				Total
Balance, March 31, 2010			6,938,087			$	69			$	59,786			$	17,530			$	(1,952	)		$	(522	)		$	(7,302	)		$	298			$	67,907
ESOP shares released (33,884 shares)			—				—				4				—				238				—				—				—				242
Compensation cost for stock-based incentive plans			—				—				86				—				—				136				—				—				222
Dividends paid ($0.10 per share)			—				—				—				(593	)			—				—				—				—				(593	)
Treasury stock purchases (17,613 shares)			—				—				—				—				—				—				(129	)			—				(129	)
Comprehensive income:
Net income			—				—				—				3,154				—				—				—				—				—
Other comprehensive loss, net of tax effect			—				—				—				—				—				—				—				(112	)			—
Comprehensive income			—				—				—				—				—				—				—				—				3,042
Balance, March 31, 2011			6,938,087				69				59,876				20,091				(1,714	)			(386	)			(7,431	)			186				70,691
Issuance of stock for option exercise			7,504				—				61				—				—				—				—				—				61
ESOP shares released (33,874 shares)			—				—				86				—				238				—				—				—				324
Compensation cost for stock-based incentive plans			—				—				72				—				—				57				—				—				129
Dividends paid ($0.12 per share)			—				—				—				(708	)			—				—				—				—				(708	)
Treasury stock purchases (192,209 shares)			—				—				—				—				—				—				(1,959	)			—				(1,959	)
Transfer of ungranted incentive stock to treasury stock (25,347 shares)			—				—				(94	)			—				—				329				(235	)			—				—
Comprehensive income:
Net income			—				—				—				4,559				—				—				—				—				—
Other comprehensive loss, net of tax effect			—				—				—				—				—				—				—				273				—
Comprehensive income			—				—				—				—				—				—				—				—				4,832
Balance, March 31, 2012			6,945,591			$	69			$	60,001			$	23,942			$	(1,476	)		$	—			$	(9,625	)		$	459			$	73,370

 

The accompanying notes are an integral part of these consolidated financial statements.

 

48

 

NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

For the Years Ended March 31, 2012 and 2011

( In Thousands )

 

 

		2011				2012
Cash flows from operating activities:
Net income		$	4,559			$	3,154
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization (accretion) of fair value adjustments			117				(330	)
Amortization (accretion) of securities, net			108				(16	)
Gain on sales and calls of securities, net			(309	)			(327	)
Writedown of available for sale securities			33				—
Writedown of other real estate owned			141				524
Provision for loan losses			1,600				2,013
Gain on sale of loans, net			(280	)			(306	)
Loans originated for sale			(4,802	)			(5,082	)
Proceeds from sale of loans for sale			4,952				5,240
(Gain) loss on sale of other real estate owned			(6	)			40
Change in deferred loan origination costs, net			(200	)			(696	)
Depreciation and amortization			732				841
Loss on disposal of fixed assets			41				11
Decrease in accrued interest receivable			59				317
Deferred income tax benefit			(40	)			(511	)
Increase in cash surrender value of life insurance policies			(348	)			(367	)
Decrease in prepaid expenses and other assets			1,342				3,419
Amortization of identifiable intangible assets			372				417
Increase (decrease) in accrued expenses and other liabilities			570				(220	)
ESOP shares released			285				274
Compensation cost for stock option plan			72				86
Compensation cost for stock-based incentive plan			57				136
Net cash provided by operating activities			9,055				8,617
Cash flows from investing activities:
Proceeds from maturities of interest-bearing time deposits with other banks			—				99
Purchases of available-for-sale securities			(46,067	)			(41,309	)
Proceeds from sales of available-for-sale securities			23,855				21,054
Proceeds from maturities of available-for-sale securities			21,126				25,626
Proceeds from redemption of Federal Home Loan Bank stock			296				—
Proceeds from sales of other real estate owned			333				361
Loan originations and principal collections, net			(31,406	)			(6,252	)
Purchases of loans			—				(10,555	)
Recoveries of loans previously charged off			136				58
Proceeds from sale of loans			3,769				3,755
Non-refundable deposit on other real estate owned			13				—
Investment in life insurance policies			—				(70	)
Capital expenditures - premises and equipment			(668	)			(166	)
Net cash used in investing activities			(28,613	)			(7,399	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

49

 

NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

For the Years Ended March 31, 2012 and 2011

( In Thousands )

(continued)

 

		2012				2011
Cash flows from financing activities:
Net increase in demand deposits, NOW, MMDA and savings accounts			38,353				23,360
Net increase in time deposits			2,146				90
Net increase in advanced payments by borrowers for taxes and insurance			104				229
Proceeds from Federal Home Loan Bank advances			—				14,298
Principal payments on Federal Home Loan Bank advances			(6,073	)			(32,049	)
Net increase (decrease) in securities sold under agreements to repurchase			6,086				(1,794	)
Purchase of treasury stock			(1,959	)			(129	)
Proceeds from exercise of stock options			61				—
Payments of cash dividends on common stock			(708	)			(593	)
Net cash provided by financing activities			38,010				3,412
Net increase in cash and cash equivalents			18,452				4,630
Cash and cash equivalents at beginning of year			43,612				38,982
Cash and cash equivalents at end of year		$	62,064			$	43,612
Supplemental disclosures:
Interest paid		$	9,800			$	11,228
Income taxes paid			2,510				1,069
Increase in due to broker			619				500
Loans transferred to other real estate owned			536				1,303
Other real estate owned transferred to other assets			—				1,248
Other real estate owned transferred to loans			60				480

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

50

 

NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

For the Years Ended March 31, 2012 and 2011

 

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 - 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 subsidiary. 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, 2012 and 2011 includes $2.5 million and $2.3 million, respectively, which is subject to withdrawals and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank.

 

51

 

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.

 

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 other-than-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.

 

As a member of the Federal Home Loan Bank of Boston (FHLB), the Company is required to invest in $100 par value stock of the FHLB. The FHLB capital structure mandates that members must own stock as determined by their Total Stock Investment Requirement which is the sum of a member’s Membership Stock Investment Requirement and Activity-Based Stock Investment Requirement. The Membership Stock Investment Requirement is calculated as 0.35% of member’s Stock Investment Base, subject to a minimum investment of $10,000 and a maximum investment of $25,000,000. The Stock Investment Base is an amount calculated based on certain assets held by a member that are reflected on call reports submitted to applicable regulatory authorities. The Activity-Based Stock Investment Requirement is calculated as 4.5% of a member’s outstanding principal balances of FHLB advances plus a percentage of advance commitments, 4.5% of standby letters of credit issued by the FHLB and 4.5% of the value of intermediated derivative contracts. Management evaluates the Company’s investment in the FHLB stock for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market conditions warrant such evaluation. Based on its most recent analysis of the FHLB as of March 31, 2012 management deems its investment in FHLB stock to be not other-than-temporarily impaired.

 

On February 23, 2012, the Federal Home Loan Bank of Boston notified the Bank of its intent to repurchase excess stock. On March 9, 2012, the Federal Home Loan Bank of Boston repurchased 2,957 shares of its stock from the Bank for $295,700.

 

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.

 

52

 

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 Bank 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 collectability 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 collectability of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired loans is recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered.

 

ALLOWANCE FOR LOAN LOSSES:

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability 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 collectability of the loans in light of historical experience, 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. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

General Component:

 

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during fiscal year 2012.

 

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

 

Residential real estate: The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not grant subprime loans. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

 

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Commercial real estate: Loans in this segment are primarily income-producing properties throughout Connecticut. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management periodically obtains rent rolls and continually monitors the cash flows of these loans.

 

Home equity loans and lines of credit: Loans in this segment primarily include first and second mortgages on residential real estate and have maturities up to 15 years. The risks for this category are similar to the risks in the residential real estate category.

 

Commercial loans: Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

 

Consumer loans: Loans in this segment are generally secured by non-real estate collateral, which includes mobile homes, vehicles and deposit accounts. To a lesser extent the Bank makes unsecured loans and repayment is dependent on the credit quality of the individual borrower.

 

Allocated Component:

 

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

 

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.

 

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). All TDRs are initially classified as impaired.

 

Unallocated Component:

 

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

 

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.

 

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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.

 

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 PER SHARE (“EPS”):

 

Basic EPS is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The Company had 113,721 and 155,664 anti-dilutive shares at March 31, 2012 and 2011, respectively. Anti-dilutive shares are stock options with weighted-average exercise prices in excess of the weighted-average market value of the Company’s stock 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.

 

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Securities (including mortgage-backed securities): Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

 

Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

 

Accrued interest receivable: The carrying amount of accrued interest receivable approximates its fair value.

 

Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

 

Advanced payments by borrowers for taxes and insurance: The carrying amounts of advance payments by borrowers for taxes and insurance approximate their fair values.

 

Federal Home Loan Bank advances: The fair value of Federal Home Loan Bank advances was determined by discounting the anticipated future cash payments by using the rates currently available to the Company for debt with similar terms and remaining maturities.

 

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.

 

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.

 

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, 2012, 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, 2012 and 2011, $140,000 and $248,000, respectively in stock-based employee compensation was recognized.

 

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.

 

RECENT ACCOUNTING PRONOUNCEMENTS:

 

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This ASU is created to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing

 

 

56

 

receivables. This ASU is intended to provide additional information to assist financial statement users in assessing the entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The amendments in this ASU are effective as of the end of a reporting period for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The required disclosures are included in Note 4.

 

In December 2010, the FASB issued ASU 2010-28, “Intangibles – Goodwill and Other.” This ASU addresses when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The amendments in this ASU are effective for fiscal years, and interim periods beginning after December 15, 2010. The adoption of this pronouncement did not have a material impact on the Company’s results of operation or financial position.

 

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” This ASU addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. This ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this pronouncement did not have a material impact on the Company’s results of operation or financial position.

 

In 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 required disclosures are included in Note 4.

 

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. 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. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

 

In September 2011, the FASB issued ASU 2011-08, “Intangibles – Goodwill and Other”, an update to ASC 350, “Intangibles – Goodwill and Other.” ASU 2011-08 simplifies how entities, both public and nonpublic, test goodwill for impairment. The amendments in this update permit an entity to first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. For public and nonpublic entities, the amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance is not expected to have an impact on the Company’s results of operations or financial position.

 

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In September 2011, the FASB issued ASU 2011-09, “Disclosures About an Employer’s Participation in a Multiemployer Plan,” which amends ASC 715-80, “Compensation – Retirement Benefits - Multiemployer Plans,” and requires additional separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans. This objective of this ASU is to help users of financial statements assess the potential future cash flow implications relating to an employer’s participation in multiemployer pension plans. The disclosures also will indicate the financial health of all of the significant plans in which the employer participates and assist a financial statement user to access additional information that is available outside the financial statements. The amendments in this ASU are effective for fiscal years ending after December 15, 2011, with early adoption permitted. The amendments should be applied retrospectively for all prior periods presented. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

 

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities.” This ASU is to enhance current disclosures. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The amendments in this ASU are effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

 

In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The amendments in this update defer those changes in ASU 2011-05 that relate to the presentation of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05 are not affected by this update. The amendments are effective during interim and annual periods beginning after December 15, 2011. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

 

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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:

 

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost Basis				Gains				Losses				Value
						(In thousands)
March 31, 2012:
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies		$	6,499			$	8			$	37			$	6,470
Debt securities issued by states of the United States and political subdivisions of the states			25,322				330				291				25,361
Mortgage-backed securities			29,015				994				253				29,756
		$	60,836			$	1,332			$	581			$	61,587
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 scheduled maturities of available-for-sale debt securities were as follows as of March 31, 2012:

 

		Fair Value
		(In Thousands)
Due in less than one year		$	178
Due after one year through five years			1,398
Due after five years through ten years			4,528
Due after ten years			25,727
Mortgage-backed securities			29,756
		$	61,587

 

Proceeds from sales of available-for-sale securities for the year ended March 31, 2012 were $23.9 million. Gross realized gains and losses on those sales amounted to $306,000 and $3,000, respectively. Proceeds from sales of available-for-sale securities for the year ended March 31, 2011 were $21.1 million. Gross realized gains and losses on those sales amounted to $290,000 and $7,000, respectively. The tax expense applicable to these net realized gains in the years ended March 31, 2012 and 2011 amounted to $118,000 and $112,000, respectively.

 

As of March 31, 2012 and 2011, securities with carrying amounts of $29.6 million and $33.6 million, respectively, were pledged to secure securities sold under agreements to repurchase.

 

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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 Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
			(In Thousands)
March 31, 2012:
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies		$	3,212			$	37			$	—			$	—			$	3,212			$	37
Debt securities issued by states of the United States and political subdivisions of the states			11,219				240				1,502				51				12,721				291
Mortgage-backed securities			6,469				98				1,231				73				7,700				171
Total temporarily impaired securities			20,900				375				2,733				124				23,633				499
Other-than-temporarily impaired securities
Mortgage-backed securities			—				—				372				82				372				82
Total temporarily impaired and other-than-temporarily impaired securities		$	20,900			$	375			$	3,105			$	206			$	24,005			$	581
March 31, 2011:
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies		$	3,000			$	48			$	—			$	—			$	3,000			$	48
Debt securities issued by states of the United States and political subdivisions of the states			8,950				352				3,313				336				12,263				688
Mortgage-backed securities			2,446				15				1,123				117				3,569				132
Total temporarily impaired securities			14,396				415				4,436				453				18,832				868
Other-than-temporarily impaired securities
Mortgage-backed securities			—				—				384				104				384				104
Total temporarily impaired and other-than-temporarily impaired securities		$	14,396			$	415			$	4,820			$	557			$	19,216			$	972

 

Management has assessed the securities which are classified as available-for-sale and in an unrealized loss position at March 31, 2012 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 . ”  

 

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The following table summarizes other-than-temporary impairment losses on non-agency mortgage backed securities for the years ended March 31:

 

		2012				2011
		(In Thousands)
Total other-than-temporary impairment losses		$	33			$	—
Less: unrealized other-than-temporary
Losses recognized in other comprehensive loss (1)			—				—
Net impairment losses recognized in earnings (2)		$	33			$	—

 

⁽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 are as follows:

 

		2012				2011
		Total				Total
		(In Thousands)
Balance, April 1		$	63			$	63
Additions for the credit component on debt securities in which other-than-temporary impairment was previously recognized			33				—
Balance, March 31		$	96			$	63

 

For the year ended March 31, 2012 and 2011, 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:

 

		Weighted				Range
March 31, 2012		Average				Minimum				Maximum
Prepayment rates			11.3	%			5.6	%			18.6	%
Default rates			7.2				3.0				16.2
Loss severity			56.9				45.4				70.9
March 31, 2011
Prepayment rates			14.9	%			5.4	%			20.6	%
Default rates			5.3				0.3				9.9
Loss severity			57.4				39.9				67.0

 

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NOTE 4 - LOANS

 

Loans consisted of the following as of March 31:

 

		2012				2011
		(In Thousands)
Residential real estate		$	125,636			$	149,740
Commercial real estate			289,057				251,743
Home equity loans			37,724				40,364
Consumer loans			9,772				8,581
Commercial loans			94,668				80,967
			556,857				531,395
Deferred loan origination costs, net			1,086				886
Allowance for loan losses			(5,697	)			(5,686	)
Loans, net		$	552,246			$	526,595

 

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, 2012. Total loans to such persons and their companies amounted to $2.7 million as of March 31, 2012. During the year ended March 31, 2012, principal payments totaled $1.6 million and principal advances amounted to $293,000.

 

Changes in the allowance for loan losses were as follows for the years ended March 31:

 

		Residential Real Estate				Home Equity Loans				Commercial Real Estate				Consumer Loans				Commercial Loans				Total
		(In thousands)
Balance March 31, 2010		$	566			$	177			$	1,824			$	39			$	2,019			$	4,625
Provision			308				(23	)			187				118				1,423				2,013
Charge Offs			(145	)			—				(30	)			(65	)			(770	)			(1,010	)
Recoveries			9				—				—				7				42				58
Balance March 31, 2011		$	738			$	154			$	1,981			$	99			$	2,714			$	5,686
Provision			372				(10	)			1,126				(15	)			127				1,600
Charge Offs			(379	)			(17	)			(313	)			(42	)			(974	)			(1,725	)
Recoveries			58				—				—				22				56				136
Balance March 31, 2012		$	789			$	127			$	2,794			$	64			$	1,923			$	5,697

 

The following table presents the balance in the allowance for loan losses by portfolio segment and based on impairment evaluation method as of March 31, 2012:

 

		Individually Evaluated for Impairment				Collectively Evaluated for Impairment				Total
						(In Thousands)
Allowance for loan losses:
Residential real estate		$	15			$	774			$	789
Commercial real estate			207				2,587				2,794
Home equity loans			—				127				127
Consumer loans			—				64				64
Commercial loans			372				1,551				1,923
Total allowance for loan losses		$	594			$	5,103			$	5,697
Loan balances:
Residential real estate		$	1,247			$	124,389			$	125,636
Commercial real estate			9,961				279,096				289,057
Home equity loans			—				37,724				37,724
Consumer loans			—				9,772				9,772
Commercial loans			4,103				90,565				94,668
Total loan balances		$	15,311			$	541,546			$	556,857

 

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The following table presents the balance in the allowance for loan losses by portfolio segment and based on impairment evaluation method as of March 31, 2011:

		Individually Evaluated for Impairment				Collectively Evaluated for Impairment				Total
		(In Thousands)
Allowance for loan losses:
Residential real estate		$	361			$	377			$	738
Commercial real estate			634				1,347				1,981
Home equity loans			—				154				154
Consumer loans			35				64				99
Commercial loans			667				2,047				2,714
Total allowance for loan losses		$	1,697			$	3,989			$	5,686
Loan balances:
Residential real estate		$	5,204			$	144,536			$	149,740
Commercial real estate			16,185				235,558				251,743
Home equity loans			184				40,180				40,364
Consumer loans			166				8,415				8,581
Commercial loans			4,954				76,013				80,967
Total loan balances		$	26,693			$	504,702			$	531,395

 

The following table provides information about delinquencies and nonaccrual loans in our loan portfolio as of March 31, 2012:

 

		30-59 Days				60-89 Days				90 Days or More				Total Past Due				90 Days or More and Accruing				Nonaccrual loans
		(Dollars in Thousands)
Residential real estate		$	2,771			$	—			$	2,217			$	4,988			$	—			$	3,734
Commercial real estate			1,702				1,152				4,976				7,830				—				7,141
Home equity loans			112				154				84				350				—				170
Consumer loans			100				49				47				196				—				56
Commercial loans			1,641				154				3,545				5,340				—				4,072
Total		$	6,326			$	1,509			$	10,869			$	18,704			$	—			$	15,173

 

The following table provides information about delinquencies and nonaccrual loans in our loan portfolio as March 31, 2011:

 

		30-59 Days				60-89 Days				90 Days or More				Total Past Due				90 Days or More and Accruing				Nonaccrual loans
		(Dollars in Thousands)
Residential real estate		$	757			$	967			$	2,772			$	4,496			$	214			$	4,429
Commercial real estate			2,376				4,733				2,223				9,332				—				5,461
Home equity loans			533				—				89				622				—				184
Consumer loans			4				10				162				176				—				165
Commercial loans			812				1,510				2,069				4,391				—				3,203
Total		$	4,482			$	7,220			$	7,315			$	19,017			$	214			$	13,442

 

The following table shows the risk rating grade of the loan portfolio broken-out by type as of March 31, 2012 (In Thousands):

 

		Real Estate Loans
		Residential				Home Equity				Commercial				Consumer				Commercial				Total
Grade:
Pass		$	—			$	—			$	266,757			$	—			$	86,360			$	353,117
Special mention			—				—				7,896				—				1,356				9,252
Substandard			4,285				310				14,404				32				6,952				25,983
Not formally rated			121,351				37,414				—				9,740				—				168,505
Total		$	125,636			$	37,724			$	289,057			$	9,772			$	94,668			$	556,857

 

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The following table shows the risk rating grade of the loan portfolio broken-out by type as of March 31, 2011 (In Thousands):

 

		Real Estate Loans
		Residential				Home Equity				Commercial				Consumer				Commercial				Total
Grade:
Pass		$	—			$	—			$	228,171			$	—			$	71,980			$	300,151
Special mention			—				—				7,387				—				4,033				11,420
Substandard			5,204				184				16,185				166				4,954				26,693
Not formally rated			144,536				40,180				—				8,415				—				193,131
Total		$	149,740			$	40,364			$	251,743			$	8,581			$	80,967			$	531,395

 

Credit Quality Information

 

The Company utilizes a ten grade internal loan rating system for commercial real estate, construction and commercial loans as follows:

 

Loans rated 1 – 6: Loans in these categories are considered “pass” rated loans with low to average risk.

 

Loans rated 7: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

 

Loans rated 8: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

 

Loans rated 9: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

 

Loans rated 10: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

 

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans. For residential real estate and consumer loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and subsequently monitors these loans based on borrower’s payment activity.

 

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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, 2012 (In Thousands):

  

		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded:
Residential real estate:
1-4 family		$	936			$	973			$	—			$	1,843			$	44
Home equity loans			—				—				—				184				—
Commercial real estate			8,510				8,590				—				5,458				501
Consumer loans			—				—				—				44				—
Commercial loans			3,214				3,967				—				2,482				162
Total impaired with no related allowance recorded		$	12,660			$	13,530			$	—			$	10,011			$	707
With an allowance recorded:
Residential real estate:
1-4 family		$	311			$	389			$	15			$	1,470			$	20
Home equity loans			—				—				—				—				—
Commercial real estate			1,451				1,482				207				3,792				72
Consumer loans			—				—				—				50				—
Commercial loans			889				913				372				2,156				45
Total impaired with an allowance recorded		$	2,651			$	2,784			$	594			$	7,468			$	137
Total:
Residential real estate:
1-4 family		$	1,247			$	1,362			$	15			$	3,313			$	64
Home equity loans			—				—				—				184				—
Commercial real estate			9,961				10,072				207				9,250				573
Consumer loans			—				—				—				94				—
Commercial loans			4,103				4,880				372				4,638				207
Total impaired loans		$	15,311			$	16,314			$	594			$	17,479			$	844

 

The following table summarizes the information related to impaired loans as of March 31, 2011 (In Thousands):

 

		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded:
Residential real estate:
1-4 family		$	1,997			$	2,011			$	—			$	2,509			$	166
Home equity loans			184				184				—				92				6
Commercial real estate			2,458				2,466				—				3,664				286
Consumer loans			53				48				—				20				1
Commercial loans			1,707				1,779				—				858				11
Total impaired with no related allowance recorded		$	6,399			$	6,488			$	—			$	7,143			$	470
With an allowance recorded:
Residential real estate:
1-4 family		$	2,959			$	3,011			$	361			$	1,894			$	39
Home equity loans			—				—				—				17				2
Commercial real estate			5,509				5,576				634				2,190				52
Consumer loans			128				118				35				40				1
Commercial loans			1,899				1,951				667				1,352				45
Total impaired with an allowance recorded		$	10,495			$	10,656			$	1,697			$	5,493			$	139
Total:
Residential real estate:
1-4 family		$	4,956			$	5,022			$	361			$	4,403			$	205
Home equity loans			184				184				—				109				8
Commercial real estate			7,967				8,042				634				5,854				338
Consumer loans			181				166				35				60				2
Commercial loans			3,606				3,730				667				2,210				56
Total impaired loans		$	16,894			$	17,144			$	1,697			$	12,636			$	609

 

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The following table summarizes loans that were modified under a troubled debt restructuring during the year ended March 31, 2012 (Dollars in Thousands).

 

		For the Year Ended March 31, 2012
		Number of Contracts				Pre-modification Outstanding Recorded Investment				Post-modification Outstanding Recorded Investment
Troubled debt restructurings
Residential real estate:
1-4 family			—			$	—			$	—
Home equity loans			—				—				—
Commercial real estate			2				803				803
Consumer loans			—				—				—
Commercial loans			4				702				702
Total			6			$	1,505			$	1,505

 

None of the loans noted above have defaulted. One of the commercial real estate loans was modified to increase the principal balance due to arrearages and costs and then amortized over a 30 year period from the modification date. The other commercial real estate loan and two of the commercial loans were modified in accordance with a forbearance agreement between the Bank and the borrower. The other two commercial loans were modified as to term and rate in efforts to make it possible for the loans to be repaid in full. There were no principal reductions in any of these modifications. The Company had no commitments to lend additional funds as of March 31, 2012.

 

NOTE 5 - PREMISES AND EQUIPMENT, NET

 

The following is a summary of premises and equipment as of March 31:

 

		2012				2011
		(In Thousands)
Land		$	1,163			$	1,163
Buildings and building improvements			3,780				3,679
Furniture, fixtures and equipment			2,512				2,344
Leasehold improvements			2,716				2,591
			10,171				9,777
Accumulated depreciation and amortization			(4,010	)			(3,532	)
		$	6,161			$	6,245

 

NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS

 

The changes in the carrying amounts of goodwill and other intangibles for the years ended March 31, 2012 and 2011 were as follows:

 

		Goodwill				Core Deposit Intangibles
		(In Thousands)
Balance, March 31, 2010		$	16,783			$	1,704
Amortization expense			—				(417	)
Balance, March 31, 2011			16,783				1,287
Amortization expense			—				(372	)
Balance, March 31, 2012		$	16,783			$	915

 

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Estimated annual amortization expense of identifiable intangible assets is as follows:

 

			(In Thousands)
Years Ended March 31,
2013			$	327
2014				260
2015				149
2016				104
2017				60
2018				15
Total			$	915

 

A summary of acquired identifiable intangible assets is as follows as of March 31, 2012:

 

		Gross Carrying Amount				Accumulated Amortization			Net Carrying Amount
		(In Thousands)
Core deposit intangibles		$	3,345			$	(2,430)		$	915

 

There was no impairment of goodwill or core deposit intangibles recorded in fiscal years 2012 and 2011 based on valuations at March 31, 2012 and 2011.

 

NOTE 7 - DEPOSITS

 

The aggregate amount of time deposit accounts in denominations of $100,000 or more was $108.4 million and $101.3 million as of March 31, 2012 and 2011, respectively. All deposits are insured up to $250,000.

 

For time deposits as of March 31, 2012, the scheduled maturities for each of the following five years ended March 31, are:

 

			(In Thousands)
2013			$	140,114
2014				73,057
2015				29,339
2016				26,925
2017				19,048
Total			$	288,483

 

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, 2012 are summarized as follows:

 

		(In Thousands)
2013		$	3,835
2014			6,399
2015			7,617
2016			7,812
2017			5,490
Thereafter			1,904
Fair value adjustment			(13	)
		$	33,044

 

67

 

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, 2012, 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 1, 2012		4.89	%
	2,000			September 2, 2014		May 30, 2012		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, 2012, the interest rates on FHLB advances ranged from 1.64% to 4.97%. At March 31, 2012, the weighted average interest rate on FHLB advances was 3.30%.

 

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 a variable annual rate equal to the 3 month LIBOR plus 1.90%. The rate for the quarterly period February 23, 2012 to May 22, 2012 equated to 2.39%. 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 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, 2012 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.

 

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NOTE 11 - INCOME TAXES

 

The components of income tax expense are as follows for the years ended March 31:

 

		2012				2011
		(In Thousands)
Current:
Federal		$	1,799			$	1,788
State			549				345
			2,348				2,133
Deferred:
Federal			45				(536	)
State			(13	)			25
Change in valuation allowance			(72	)			—
			(40	)			(511	)
Total income tax expense		$	2,308			$	1,622

 

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:

 

		2012				2011
Federal income tax at statutory rate			34.0	%			34.0	%
Increase (decrease) in tax resulting from:
Nontaxable interest income			(3.4	)			(4.9	)
Nontaxable life insurance income			(1.8	)			(2.7	)
Excess book basis of Employee Stock Ownership Plan			0.3				0.4
Other adjustments			0.4				2.1
Change in valuation allowance			(1.1	)			—
State tax, net of federal tax benefit			5.2				5.1
Effective tax rates			33.6	%			34.0	%

 

The Company had gross deferred tax assets and gross deferred tax liabilities as follows as of March 31:

 

		2012				2011
		(In Thousands)
Deferred tax assets:
Excess of allowance for loan losses over tax bad debt reserve		$	2,201			$	2,183
Deferred loan origination fees			142				21
Write-down of investment securities			37				24
Premises and equipment, principally due to differences in depreciation			192				282
Deferred compensation			998				1,018
Unrecognized director fee plan benefits			—				—
Capital loss carryforward			35				107
Net operating loss carryforward			1,224				1,320
Other			633				725
Gross deferred tax assets			5,462				5,680
Valuation allowance			(35	)			(107	)
Gross deferred tax assets, net of valuation allowance			5,427				5,573
Deferred tax liabilities:
Net mark-to-market adjustments			(388	)			(574	)
Net unrealized holding gain on available-for-sale securities			(293	)			(120	)
Other			(5	)			(5	)
Gross deferred tax liabilities			(686	)			(699	)
Net deferred tax asset		$	4,741			$	4,874

 

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, 2012.

 

69

 

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, 2012.

 

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. As of March 31, 2012 and 2011, there was no material uncertain tax positions related to federal and state tax matters. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended March 31, 2009 through March 31, 2012.

 

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 $124,000 and $155,000 to the plan during the years ended March 31, 2012 and 2011, 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:

 

		2012				2011
		(In Thousands)
Change in projected benefit obligation:
Benefit obligation at beginning of year		$	145			$	151
Service cost			3				4
Interest cost			8				8
Benefits paid			(18	)			(18	)
Benefit obligation at end of year			138				145
Plan assets			—				—
Funded status		$	(138	)		$	(145	)

 

Amounts recognized in accumulated other comprehensive income, before tax effect, consist of the following as of March 31:

 

		2012				2011
		(In Thousands)
Unrecognized net actuarial loss		$	1			$	1
Unrecognized prior service cost			0				1
		$	1			$	2

 

70

 

The accumulated benefit obligation for the Plan was $138,000 and $145,000 at March 31, 2012 and 2011, respectively.

 

		2012				2011
		(In Thousands)
Components of net periodic cost:
Service cost		$	3			$	4
Interest cost			8				8
Unrecognized net loss			1				1
Unrecognized prior service cost recognized			—				3
Net periodic pension cost			12				16
Other changes in benefit obligations recognized in other comprehensive income (loss):
Unrecognized net loss			(1	)			(1	)
Prior service cost			—				(3	)
Total recognized in other comprehensive income (loss)			(1	)			(4	)
Total recognized in net periodic pension cost and other comprehensive income (loss)		$	11			$	12

 

The estimated unrecognized net actuarial loss and prior service cost that will be accreted from accumulated other comprehensive income (loss) into net periodic benefit cost over the year ended March 31, 2013 is $500 and $---, respectively.

 

The discount rate used in determining the projected benefit obligation and net periodic benefit cost was 6.0% as of and for the years ended March 31, 2012 and 2011.

 

Estimated future benefit payments are as follows for the years ended March 31:

 

			(In Thousands)
2013			$	18
2014				18
2015				18
2016				18
2017				18
2018-2021				72

 

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, 2012 and 2011, the Bank contributed $135,000 and $124,000, 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 $348,000 and $367,000 for the years ended March 31, 2012 and 2011, 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, 2012 and 2011 was $142,000 and $309,000, respectively. The cumulative liability for this plan is reflected in other liabilities on the consolidated balance sheets as of March 31, 2012 and 2011 in the amounts of $2.0 million and $1.9 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, 2012 and 2011, total assets in the Rabbi Trust were $4.8 million and $4.7 million, respectively.

 

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, 2012 and 2011 is $8,000 and $6,000, respectively.

 

71

 

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 $107,000 and $98,000 at March 31, 2012 and 2011, respectively. The Company recognized $9,000 of expense under this arrangement for fiscal year 2012 and $3,000 of income for fiscal year 2011.

 

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, 2012 and 2011.

 

		2012				2011
Dividend yield			1.24	%			1.10	%
Expected life			10 years				10 years
Expected volatility			29.4	%			39.4	%
Risk-free interest rate			3.59	%			3.74	%

 

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A summary of the status of the Plans as of March 31, 2012 and 2011 and changes during the years then ended is presented below:

 

		2012								2011
		Shares				Weighted-Average Exercise Price				Shares				Weighted-Average Exercise Price
Outstanding at beginning of year			351,416			$	8.88				336,416			$	8.90
Granted			20,000				9.70				17,000				8.70
Exercised			(7,504	)			8.16				—				—
Forfeited			(16,400	)			11.38				(2,000	)			9.90
Outstanding at end of year			347,512			$	8.83				351,416			$	8.88
Options exercisable at year-end			315,512								302,303
Weighted-average fair value of options granted during the year		$	3.72							$	4.07

 

The following table summarizes information about stock options outstanding as of March 31, 2012:

 

Options Outstanding										Options Exercisable
Number Outstanding as of 3/31/12				Weighted-Average Remaining Contractual Life		Weighted-Average Exercise Price				Number Exercisable as of 3/31/12				Weighted-Average Exercise Price
	180,752			0.9 years		$	6.40				180,752			$	6.40
	17,997			2.1 years			8.17				17,997				8.17
	2,000			3.9 years			10.81				2,000				10.81
	100,563			4.4 years			12.84				100,563				12.84
	10,000			5.1 years			13.29				8,000				13.29
	2,000			6.4 years			8.25				1,200				8.25
	5,000			7.5 years			6.46				2,000				6.46
	8,000			8.0 years			7.83				1,600				7.83
	7,000			8.9 years			9.93				1,400				9.93
	14,200			9.0 years			9.70				—				—
	347,512			2.9 years		$	8.83				315,512			$	8.79

 

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 $57,000 and $137,000 for the years ended March 31, 2012 and 2011, 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, 2012, there was $91,000 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 3.42 years.

 

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 was at an interest rate of 4.75% and was paid off on 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.

 

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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, 2012 and 2011 was $285,000 and $274,000, respectively.

 

The ESOP shares as of March 31 were as follows:

 

			2012				2011
Allocated shares				222,707				191,147
Unreleased shares				147,641				181,515
Total ESOP shares				370,348				372,662
Fair value of unreleased shares			$	1,550,231			$	1,757,065

 

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, 2012 and 2011, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

 

As of March 31, 2012, 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.

 

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The Company’s actual capital amounts and ratios are also presented in the 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)
As of March 31, 2012:
Total Capital (to Risk Weighted Assets)		$	64,837				12.26	%		$	42,309					≥8.0	%		N/A			N/A
Tier 1 Capital (to Risk Weighted Assets)			59,140				11.18				21,154					≥4.0			N/A			N/A
Tier 1 Capital (to Average Assets)			59,140				8.41				28,125					≥4.0			N/A			N/A
As of March 31, 2011:
Total Capital (to Risk Weighted Assets)		$	58,120				12.08	%		$	38,504					≥8.0	%		N/A			N/A
Tier 1 Capital (to Risk Weighted Assets)			52,434				10.89				19,252					≥4.0			N/A			N/A
Tier 1 Capital (to Average Assets)			52,434				7.99				26,264					≥4.0			N/A			N/A

 

The New England Bank’s actual capital amounts and ratios are presented in the table below:

 

		Actual								For Capital Adequacy Purposes									To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio					Amount				Ratio
								(Dollar amounts in thousands)
As of March 31, 2012:
Total Capital (to Risk Weighted Assets)		$	59,795				11.31	%		$	42,295				≥8.0		%		$	52,869				≥10.0	%
Tier 1 Capital (to Risk Weighted Assets)			54,098				10.23				21,148				≥4.0					31,721				≥6.0
Tier 1 Capital (to Average Assets)			54,098				7.69				28,125				≥4.0					35,156				≥5.0
As of March 31, 2011:
Total Capital (to Risk Weighted Assets)		$	58,379				12.13	%		$	38,504				≥8.0		%		$	48,130				≥10.0	%
Tier 1 Capital (to Risk Weighted Assets)			52,693				10.95				19,252				≥4.0					28,878				≥6.0
Tier 1 Capital (to Average Assets)			52,693				8.02				26,264				≥4.0					32,831				≥5.0

 

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NOTE 16 - EARNINGS PER SHARE (EPS)

 

Reconciliation of the numerators and denominators of the basic and diluted per share computations for net income are as follows:

 

		Income (Numerator)				Shares (Denominator)				Per-Share Amount
		(In Thousands)
Year ended March 31, 2012
Basic EPS
Net income		$	4,559				—
Dividends and undistributed earnings allocated to unvested shares			(3	)			—
Net income and income available to common stockholders			4,556				5,897,385			$	0.77
Effect of dilutive securities options			—				69,190
Diluted EPS
Income available to common stockholders and assumed conversions		$	4,556				5,966,575			$	0.76
Year ended March 31, 2011
Basic EPS
Net income		$	3,154				—
Dividends and undistributed earnings allocated to unvested shares			(6	)			—
Net income and income available to common stockholders			3,148				5,917,961			$	0.53
Effect of dilutive securities options			—				37,706
Diluted EPS
Income available to common stockholders and assumed conversions		$	3,148				5,955,667			$	0.53

 

NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES

 

The Company is obligated under non-cancelable operating leases for banking premises and equipment expiring between fiscal year 2013 and 2031. The total minimum rental due in future periods under these existing agreements is as follows as of March 31, 2012:

 

Year Ended March 31			(In Thousands)
	2013		$	990
	2014			952
	2015			949
	2016			935
	2017			926
	Thereafter			7,641
	Total minimum lease payments		$	12,393

 

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 $1.13 million and $1.10 million for the years ended March 31, 2012 and 2011, respectively.

 

NOTE 18 - FAIR VALUE MEASUREMENTS

 

ASC 820-10, “Fair Value Measurements and Disclosures,” 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.

 

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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.

 

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, 2012 and 2011. The Company did not have any significant transfers of assets between levels 1 and 2 of the fair value hierarchy during the year ended March 31, 2012.

 

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. For level 3 inputs, fair value is based upon management estimates of the value of the underlying collateral or the present value of the expected cash flows. Other real estate owned values are reported based on management estimates.

 

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The following summarizes assets measured at fair value on a recurring basis for the period ending March 31 (In Thousands):

 

		Fair Value Measurements at Reporting Date Using:
		Total				Quoted Prices in Active Markets for Identical Assets Level 1				Significant Other Observable Inputs Level 2				Significant Unobservable Inputs Level 3
March 31, 2012:
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies		$	6,470			$	1,369			$	5,101			$	—
Debt securities issued by states of the United States and political subdivisions of the states			25,361				1,941				23,420				—
Mortgage-backed securities			29,756				10				29,746				—
Total		$	61,587			$	3,320			$	58,267			$	—
March 31, 2011:
Securities available-for-sale		$	59,268			$	4,459			$	54,809			$	—

 

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, 2012 and 2011, for which a nonrecurring change in fair value has been recorded (In Thousands):

 

		Fair Value Measurements at Reporting Date Using:
		Total				Quoted Prices in Active Markets for Identical Assets Level 1				Significant Other Observable Inputs Level 2				Significant Unobservable Inputs Level 3
March 31, 2012:
Impaired loans		$	2,057			$	—			$	—			$	2,057
Other real estate owned			1,000				—				—				1,000
Total		$	3,057			$	—			$	—			$	3,057
March 31, 2011:
Impaired loans		$	8,798			$	—			$	—			$	8,798
Other real estate owned			522				—				—				522
Total		$	9,320			$	—			$	—			$	9,320

 

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The following are carrying amounts and estimated fair values of the Company’s financial assets and liabilities as of March 31:

 

		2012								2011
		Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
		(In Thousands)
Financial assets:
Cash and cash equivalents		$	62,064			$	62,064			$	43,612			$	43,612
Available-for-sale securities			61,587				61,587				59,268				59,268
Federal Home Loan Bank stock			4,100				4,100				4,396				4,396
Loans, net			552,246				564,037				526,595				529,609
Accrued interest receivable			2,392				2,392				2,451				2,451
Financial liabilities:
Deposits			581,268				585,961				540,769				545,607
Advanced payments by borrowers for taxes and insurance			1,504				1,504				1,400				1,400
FHLB advances			33,044				35,314				39,113				40,554
Securities sold under agreements to repurchase			27,752				27,753				21,666				21,668
Subordinated debentures			3,927				1,441				3,918				1,371
Due to broker			1,119				1,119				500				500

 

The carrying amounts of financial instruments shown in the above tables are included in the consolidated balance sheets under the indicated captions except for due to broker which is included in other liabilities. Accounting policies related to financial instruments are described in Note 2.

 

NOTE 19 - OTHER COMPREHENSIVE INCOME

 

Other comprehensive income for the years ended March 31, 2012 and 2011 are as follows:

 

		March 31, 2012
		Before Tax Amount				Tax Effects				Net of Tax Amount
		(In Thousands)
Net unrealized holding gains on available-for-sale securities		$	722			$	(281	)		$	441
Reclassification adjustment for realized gains in net income			(276	)			108				(168	)
Other comprehensive benefit – director fee continuation plan			1				(1	)			—
Total		$	447			$	(174	)		$	273

 

		March 31, 2011
		Before Tax Amount				Tax Effects				Net of Tax Amount
		(In Thousands)
Net unrealized holding gains on available-for-sale securities		$	144			$	(58	)		$	86
Reclassification adjustment for realized gains in net income			(327	)			127				(200	)
Other comprehensive benefit – director fee continuation plan			4				(2	)			2
Total		$	(179	)		$	67			$	(112	)

 

Accumulated other comprehensive income consists of the following as of March 31:

 

		2012				2011
		(In thousands)
Net unrealized holding gains on available-for-sale securities, net of taxes (1)		$	458			$	185
Unrecognized director fee plan benefits, net of tax			1				1
Total		$	459			$	186

 

⁽¹⁾ The March 31, 2012 and 2011 ending balance includes $82,000 and $104,000, respectively of unrealized losses in which other-than-temporary impairment has been recognized.

 

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NOTE 20 - OFF-BALANCE SHEET ACTIVITIES

 

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, standby letters of credit and unadvanced funds on loans. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

 

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

 

Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include secured interests in mortgages, accounts receivable, inventory, property, plant and equipment and income-producing properties.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of March 31, 2012 and 2011, the maximum potential amount of the Company’s obligation was $2.7 million and $3.0 million, respectively, for financial and standby letters of credit. The Company’s outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Company may seek recourse through the customer’s underlying line of credit. If the customer’s line of credit is also in default, the Company may take possession of the collateral, if any, securing the line of credit.

 

The notional amounts of financial instrument liabilities with off-balance sheet credit risk are as follows as of March 31:

 

		2012				2011
		(In Thousands)
Commitments to originate loans		$	20,908			$	8,984
Standby letters of credit			2,654				3,018
Unadvanced portions of loans:
Construction			12,559				10,455
Home equity			12,837				12,501
Commercial lines of credit			25,082				26,288
Overdraft protection lines			4,606				4,506
		$	78,646			$	65,752

 

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.

 

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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		2012				2011
Cash on deposit with New England Bank		$	3,180			$	1,593
Investment in subsidiaries			72,255				70,953
Loans to ESOP			1,770				1,995
Accrued interest receivable			32				36
Other assets			212				182
Total assets		$	77,449			$	74,759
LIABILITIES AND STOCKHOLDERS’ EQUITY
Other liabilities		$	63			$	56
Subordinated debentures			3,927				3,918
Deferred tax liability			89				94
Stockholders’ equity			73,370				70,691
Total liabilities and stockholders’ equity		$	77,449			$	74,759

 

Statements of Income

(In Thousands)

 

		For the Years Ended March 31,
		2012				2011
Total interest income		$	142			$	157
Interest expense			103				168
Net interest income (expense)			39				(11	)
Other expense			261				226
Loss before income tax benefit and equity in undistributed net income of subsidiaries			(222	)			(237	)
Income tax benefit			(75	)			(81	)
Loss before equity in undistributed net income of subsidiaries			(147	)			(156	)
Dividend received from subsidiary			4,000				—
Equity in undistributed net income of subsidiaries			706				3,310
Net income		$	4,559			$	3,154

 

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NEW ENGLAND BANCSHARES, INC.

(Parent Company Only)

 

Statements of Cash Flows

(In Thousands)

 

		For the Years Ended March 31,
		2012				2011
Cash flows from operating activities:
Net income		$	4,559			$	3,154
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of fair value adjustments			9				8
Decrease in accrued interest receivable			4				4
(Increase) decrease in other assets			(30	)			1,403
Increase (decrease) in other liabilities			3				(24	)
Undistributed net income of subsidiaries			(706	)			(3,310	)
Compensation cost for stock-based incentive plan			129				222
Net cash provided by operating activities			3,968				1,457
Cash flows from investing activities:
Principal payments received on loans to ESOP			225				212
Net cash provided by investing activities			225				212
Cash flows from financing activities:
Purchase of treasury stock			(1,959	)			(129	)
Payment of cash dividends on common stock			(708	)			(593	)
Proceeds from exercise of stock options			61				—
Net cash used in financing activities			(2,606	)			(722	)
Net increase in cash and cash equivalents			1,587				947
Cash and cash equivalents at beginning of year			1,593				646
Cash and cash equivalents at end of year		$	3,180			$	1,593

 

NOTE 24 – SUBSEQUENT EVENTS

 

On May 31, 2012, the Company executed a definitive merger agreement with United Financial Bancorp, Inc. (“United Financial”) under which United Financial will acquire the Company in a transaction valued then at $91 million based on United Financial’s 20 day volume weighted average stock price of $15.89 as of May 30, 2012.

 

Under the terms of the definitive merger agreement, at the effective time of the merger, each share of the Company’s common stock will be converted to 0.9575 of a share of United Financial common stock. The consideration received by the Company’s stockholders is intended to qualify as a tax-free transaction.

 

The transaction, which has been approved by the boards of directors of both the Company and United Financial, is expected to close in the fourth quarter of 2012.

 

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ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A.

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, 2012, 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, 2012, the Company’s internal control over financial reporting was effective based on the criteria established in Internal Control—Integrated Framework .

 

New England Bancshares is neither an accelerated filer nor a large accelerated filer defined by §240.12b-2. Accordingly, the Company and its independent public accounting firm are not required to include in this Annual Report an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting.

 

(c)               There has been no change in the Company’s internal control over financial reporting during the Company’s fourth quarter of fiscal 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control financial reporting, 

ITEM 9B.

OTHER INFORMATION

 

None.

 

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PART III

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors

 

The Company has eleven directors. Our Bylaws provide that directors are divided into three classes, with one class of directors elected annually. Our directors are generally elected to serve for a three-year period and until their respective successors have been elected and qualified. Below is certain information regarding the members of our Board of Directors. Unless otherwise stated, each individual has held his or her current occupation for the last five years. The age indicated for each individual is as of March 31, 2012. Years of service as a director of the Bank and the Company includes service with other banks and holding companies prior to such entities being merged into the Bank and the Company.

 

Directors with terms ending in fiscal 2013:

 

Lucien P. Bolduc is a certified public accountant with the accounting firm of Mercik, Kuczarski & Bolduc, LLC located in Enfield, Connecticut. We believe Mr. Bolduc’s long experience in public accounting makes him a valuable director. Age 52. Director of the Company and the Bank since 2002.

 

Myron J. Marek is a retired retail jeweler. We believe Mr. Marek’s long experience with the local business community gives him unique insights into the challenges and opportunities that we face and makes him a valuable director. Age 79. Director of the Company since 2002 and the Bank since 1987.

 

Thomas P. O’Brien is the Manager of O’Brien Funeral Home, located in Forestville, Connecticut. He is a former City Councilman and current member of the Board of Education in Bristol. Mr. O’Brien’s experience with the local business community and many years of service with the Bank’s board of directors gives him perspective on the challenges and opportunities that we face and makes him a valuable director. Age 66. Director of the Company since 2011 and the Bank since 1999.

 

Kathryn C. Reinhard has been employed by the Southington Board of Education as a substitute teacher and tutor since 1997. She served on the board of directors of The Apple Valley Bank & Trust Company from 1999 until it was merged into New England Bank in June 2009. We believe Ms. Reinhard’s long experience with the local business community gives her unique insights into the challenges and opportunities that we face and makes her a valuable director. Director of the Company since 2009. Age 59.

 

Directors with terms ending in fiscal 2014:

 

David J. O’Connor was the President and Chief Executive Officer of Enfield Federal from 1999 until its merger with the Bank in April 2009, at which time he became the President and Chief Executive Officer of the Bank. Mr. O’Connor has been President and Chief Executive Officer of New England Bancshares since 2002. Mr. O’Connor has over 45 years of banking experience in New England. Before joining Enfield Federal, he was the Executive Vice President, Treasurer and Chief Financial Officer of The Berlin City Bank, a community bank in New Hampshire. We believe Mr. O’Connor’s long experience as a successful chief executive officer in both favorable and unfavorable economic climates makes him a valuable director. Age 65. Director of the Company since 2002 and the Bank since 1999.

 

David J. Preleski is a principal in the law firm of Vitrano, Preleski & Wynne, LLC where he has been employed since 1996. Mr. Preleski’s previous experience includes a twenty year career in banking with Bristol Savings Bank, First Federal Bank and Webster Financial Corporation. He is a former President and Corporator of Bristol Savings Bank and has experience as a legal liaison with bank regulatory agencies. He is a director of the New England Carousel Museum and a Past President of the Board of Directors of the Family Center. In the past year, Mr. Preleski has become a director of the Greater Bristol Chamber of Commerce and a member of the audit committee of the Main Street Community Foundation, Inc. We believe Mr. Preleski’s background in banking and as a business lawyer provides the Board of Directors with a unique perspective in addressing the legal requirements that we must satisfy and makes him a valuable director. Age 55. Director of the Company since 2008.

 

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Richard K. Stevens is President of Chase Fischer Realty, Inc., formerly Leete-Stevens, Inc., a funeral home located in Enfield, Connecticut. He is past president of the North Central Connecticut Chamber of Commerce. Mr. Stevens is presently a commissioner of the Enfield Fire District and has served in that capacity for over 25 years. He is a past trustee for the Johnson Memorial Hospital. Mr. Stevens was past president of the Enfield Rotary Club where he has been a member for 40 years. He was also Team Leader for the Enfield Rotary Club Group Study Exchange Program that visited Singapore. We believe Mr. Stevens’ long experience with the local business community gives him unique insights into the challenges and opportunities that we face and makes him a valuable director. Age 65. Director of the Company since 2002 and the Bank since 1995.

 

Richard M. Tatoian is a self-employed attorney practicing in Enfield, Connecticut. We believe Mr. Tatoian’s background as a business lawyer provides the Board of Directors with a unique perspective in addressing the legal requirements that we must satisfy and makes him a valuable director. Age 66. Director of the Company since 2002 and the Bank since 1995.

 

Directors with terms ending in fiscal 2015:

 

Thomas O. Barnes is the Chairman of the Board of Barnes Group, Inc. where he has been employed since 1993. Barnes Group, Inc. is a public company involved in various manufacturing and distribution enterprises. Mr. Barnes is a past Chairman of the Board of the Connecticut Children’s Medical Center and has served on many other boards of charitable organizations. We believe Mr. Barnes’ long experience with the local business community gives him unique insights into the challenges and opportunities that we face and makes him a valuable director. Age 63. Director of the Company since 2007 and the Bank since 1998.

 

Peter T. Dow was the President of Dow Mechanical Corporation, a manufacturer of quality control inspection equipment, located in Enfield, Connecticut, until 2005. Since December 2005, Mr. Dow has been a consultant with Dow Gage LLC, a manufacturer of precision measuring and inspection equipment used in quality control. Mr. Dow has been a director of the Company since 2002. He was appointed Chairman of the Board of Directors of the Company and the Bank in April 2004. We believe Mr. Dow’s long experience with the local business community gives him unique insights into the challenges and opportunities that we face and makes him a valuable director. Age 72. Director of the Bank since 1982.

 

William C. Leary is a retired Judge of Probate for the District of Windsor Locks, having served in that capacity from 1971 to 2008. He also served three terms in the Connecticut State Legislature. He is currently of Counsel to the Law Firm of O’Malley, Deneen, Leary, Messina and Oswecki in Windsor, Connecticut. Mr. Leary served as Chairman of the Board of Windsor Locks Community Bank, FSL, prior to its acquisition by Enfield Federal in December 2003. He is a member of more than a dozen civic community and charitable organizations, including serving as President of the Connecticut Community for Addiction Recovery (CCAR) and as a Trustee of Providence College. We believe Mr. Leary’s background as a lawyer, probate judge and volunteer provides the Board of Directors with a unique perspective in addressing the legal requirements that we must satisfy and makes him a valuable director. Age 73. Director of the Company and Bank since 2003.

 

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Directors’ Compensation

 

The following table sets forth the compensation received by non-employee directors for their service on our Boards of Directors during fiscal 2012. No stock awards or option awards were granted to our directors in fiscal 2012.

 

Director		Fees Earned or Paid In Cash				All Other Compensation (1)				Total
Thomas O. Barnes		$	11,500			$	—			$	11,500
Lucien P. Bolduc			18,300				—				18,300
Edmund D. Donovan (2)			4,000				—				4,000
Peter T. Dow			18,150				2,049				20,199
William C. Leary			13,140				—				13,140
Myron J. Marek			14,500				1,295				15,795
Dorothy K. McCarty			13,200				1,295				14,495
Thomas P. O’Brien (3)			12,050				—				12,050
David J. Preleski			8,800				—				8,800
Kathryn C. Reinhard			4,000				—				4,000
Richard K. Stevens			14,600				3,291				17,891
Richard M. Tatoian			15,950				3,291				19,241

 

 

(1)	For Ms. McCarty and Messrs. Dow, Marek, Stevens and Tatoian, includes $1,295, $2,049, $1,295, $3,291, and $3,291, respectively, accrued in connection with the Bank’s Director Fee Continuation Plan. See “—Directors’ Retirement Plan.” Also includes dividends paid on unvested stock awards.

(2)	Director Donovan retired from the Board of Directors on March 30, 2011.

(3)	Director O’Brien was appointed to the Board of Directors on April 12, 2011.

 

Cash Retainer and Meeting Fees for Non-Employee Directors. The following table sets forth the applicable retainers and fees that will be paid to our non-employee directors for their service on the Boards of Directors of the Company and the Bank during fiscal 2011.

 

Annual Retainer for New England Bancshares, Inc. Board Service		$4,000
Annual Retainer for New England Bank Board Service		$4,000
Fee for Attendance at New England Bank Board Meetings		$700 ($800 for Chairman of the Board)
Fee for Attendance at New England Bank Board Committee Meetings (except Executive Credit Committee)		$400 ($450 for Committee Chairman)
Fee for Attendance at New England Bank Executive Credit Committee Meeting		$250 ($300 for Committee Chairman)

 

Directors’ Retirement Plan. The Bank established a Director Fee Continuation 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 five participants. Under the plan, participants are entitled to an annual benefit, as of their retirement date, of $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 before June 1, 1995. The maximum benefit under the plan is $6,000 per year, payable in ten annual installments. For purposes of the plan, “retirement date” is defined as the June 1 ^st following a director’s 70 ^th birthday. Upon an eligible retired director’s death, but before the ten payments have been made, the Bank will pay the director’s beneficiary, a discounted lump sum payment equal to the remaining installment payments. If an active eligible non-employee director dies before his or her retirement date, the Bank will pay the director’s designated beneficiary a benefit equal to the discounted value of the ten annual installments the director would have been entitled to had he or she lived to his or her retirement date. The benefit is payable in a lump sum. The Bank has acquired life insurance policies for each of the eligible non-employee directors as an informal source of funding for its obligations under the plan.

 

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Executive Officers

 

The Board of Directors annually elects our executive officers. Our executive officers are: 

Name				Age (1)		Position(s)
David J. O’Connor				65		President, Chief Executive Officer and Director
Charles J. Desimone, Jr.				68		Executive Vice President and Chief Credit and Risk Officer
Jeffrey J. Levitsky				47		Interim Chief Financial Officer
Anthony M. Mattioli				53		Market President
Peter W. McClintock				63		Executive Vice President – Retail Division
John F. Parda				63		Executive Vice President and Chief Loan Officer

 

⁽¹⁾ As of March 31, 2012.

 

Below is certain information regarding the Company’s executive officers who are not also directors. Unless otherwise stated, each individual has held his current occupation for the last five years.

 

Charles J. DeSimone, Jr. Mr. Desimone joined New England Bancshares in 2011 as Executive Vice President and Chief Credit and Risk Management Officer. Prior to joining New England Bancshares, he held executive banking positions as Senior Lending Officer/Senior Credit Officer at Rockville Bank, and Senior Credit Officer at Southington Savings Bank. Mr. DeSimone has 41 years of banking experience, and has an MBA from the University of Hartford.

 

Jeffrey J. Levitsky. Mr. Levitsky has served as Interim Chief Financial Officer of the Company since September 30, 2011. He has served as Assistant Vice President and Controller of the Bank since joining the Bank in January 2008. Prior to joining the Bank, Mr. Levitsky was Assistant Vice President and Controller for Simsbury Bank, where he worked for ten years.

 

Peter W. McClintock. Mr. McClintock has been with New England Bancshares since 2006 and was appointed to Executive Vice President-Retail Division in 2010. He is a graduate of Drexel University with a major in Marketing and Stonier School of Banking and has over 41 years of banking and business experience before joining New England Bank.

 

Anthony M. Mattioli. Mr. Mattioli joined New England Bank in 2000 and was named Market President in 2008. He has over 26 years of banking experience with Connecticut financial institutions, with most of those years dedicated to commercial banking. Mr. Mattioli earned his Bachelor of Arts degrees in Economics and English from Boston College in 1981

 

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 2001 and Executive Vice President and Chief Loan Officer in 2008. Mr. Parda has over 41 years of diversified banking experience with Connecticut financial institutions and has an MBA from the University of Hartford.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers and directors, and persons who own more than 10% of any registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. These individuals are required by regulation to furnish the Company with copies of all Section 16(a) reports they file.

Based solely on its review of the copies of the reports it has received and written representations provided to the Company from the individuals required to file the reports, the Company believes that each of its executive officers and directors has complied with applicable reporting requirements for transactions in Company common stock during the fiscal year ended March 31, 2012, except for one late Form 3 filed by Kathryn C. Reinhard, and one late Form 3 and one late Form 4 reporting two option grants filed by Peter W. McClintock.

 

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Code of Ethics and Business Conduct  

The Company has adopted a Code of Ethics and Business Conduct that is designed to promote the highest standards of ethical conduct by the Company’s directors, executive officers and employees. The Code of Ethics and Business Conduct requires that the Company’s directors, executive officers and employees avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity and in the Company’s best interest. Under the terms of the Code of Ethics and Business Conduct, directors, executive officers and employees are required to report any conduct that they believe in good faith to be an actual or apparent violation of the Code of Ethics and Business Conduct.

As a mechanism to encourage compliance with the Code of Ethics and Business Conduct, the Company has established procedures to receive, retain and treat complaints regarding accounting, internal accounting controls and auditing matters. These procedures ensure that individuals may submit concerns regarding questionable accounting or auditing matters in a confidential and anonymous manner. The Code of Ethics and Business Conduct also prohibits the Company from retaliating against any director, executive officer or employee who reports actual or apparent violations of the Code of Ethics and Business Conduct.

 

Audit Committee and Audit Committee Financial Expert

The Company has a separately-designated standing audit committee established in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, and the rules of The Nasdaq Stock Market, Inc. The members of the audit committee are Lucien P. Bolduc, Richard K. Stevens and Richard M. Tatoian. The Board of Directors has determined that director Bolduc is as an audit committee financial expert under the rules of the Securities and Exchange Commission. Director Bolduc is independent, as independence for audit committee members is defined under the rules of The Nasdaq Stock Market, Inc.

 

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ITEM 11.

EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following information is furnished for all individuals serving as the principal executive officer of the Company, as well as the two other most highly compensated executive officers of the Company who received total compensation of $100,000 or more during the fiscal year ended March 31, 2012, referred to herein as the “named executive officers.”

 

															Option				All Other
Name and							Salary				Bonus				Awards				Compensation				Total
Principal Position			Year				($)				($)				($)(1)				($)(2)				($)
David J. O’Connor			2012				350,000				127,500				—				60,972				538,472
President and Chief			2011				335,000				65,000				—				57,266				457,266
Executive Officer
John F. Parda			2012				177,000				15,900				20,832				40,964				254,696
Executive Vice President			2011				170,000				17,000				8,480				38,237				233,717
and Chief Loan Officer
Anthony M. Mattioli			2012				160,500				38,500				19,344				38,661				257,005
Market President			2011				154,500				17,000				8,480				35,785				215,765

 

(1)		Reflects the aggregate grant date fair value of 2,000 stock options granted to each of Mr. Parda and Mr. Mattioli on April 12, 2010, with a grant date fair value of $4.24 per stock option and stock options granted to each of Mr. Parda and Mr. Mattioli on April 11, 2011, with a grant date fair value of $3.72 per stock option. These options vest ratably over a five-year period beginning April 12, 2011 and April 9, 2012, respectively. The assumptions used in the valuation of these awards are included in Note 13 to our audited financial statements included in this Annual Report on Form 10-K for the year ended March 31, 2012.
(2)		Details of the amounts reported in the “All Other Compensation” column for the year ended March 31, 2012 are provided in the table that follows:

 

Item: 2012 All Other Compensation		Mr. O’Connor				Mr. Parda				Mr. Mattioli
Employer contribution to 401(k) plan		$	7,454			$	5,307			$	4,774
Market value of allocations under the employee stock ownership plan			17,249				11,993				10,758
Value of insurance premiums under split-dollar life insurance arrangement			9,188				824				382
Value of life insurance policy			649				740				674
Dividends paid on stock awards			2,146				547				—
Perquisites (a)			24,286				21,553				22,073
Total		$	60,972			$	40,964			$	38,661

 

(a)

Perquisites include insurance premiums, club dues and personal use of company car for Mr. O’Connor; insurance premiums and car allowance for Mr. Parda; and insurance premiums, car allowance and club dues for Mr. Mattioli.

 

Employment Agreements. New England Bancshares and New England Bank each maintain an employment agreement with Mr. O’Connor. The employment agreements are intended to ensure that New England Bancshares and New England Bank will be able to retain Mr. O’Connor’s services. The continued success of New England Bancshares and New England Bank depends to a significant degree on the skills and competence of Mr. O’Connor.

 

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The employment agreements each provide for a three-year term. The Bank employment agreement is renewable on an annual basis following a review of Mr. O’Connor’s performance by the Board of Directors. The New England Bancshares employment agreement renews daily. The employment agreements provide that Mr. O’Connor’s base salary will be reviewed at least annually. Mr. O’Connor’s current base salary is $364,000.

 

In addition to the base salary, Mr. O’Connor’s employment agreements provide for, among other things, participation in stock benefit plans and other fringe benefits applicable to executive personnel. Under the terms of both of the employment agreements, Mr. O’Connor will be entitled to receive a severance benefit if he is terminated by New England Bancshares or New England Bank without cause or if he voluntarily terminates for reasons constituting “good reason” under the agreements. The severance benefit he would be entitled to is a single cash lump payment equal to the base salary payments due to him for the remaining term of the employment agreements and the contributions that would have been made on his behalf to any employee benefit plans of New England Bancshares and New England Bank during the remaining term of the employment agreements. In addition, New England Bancshares or New England Bank would be required to continue to provide Mr. O’Connor with continued life insurance and non-taxable medical and dental coverage for the remaining term of the employment agreements, provided, however if Mr. O’Connor is no longer eligible to receive such coverage, New England Bancshares or New England Bank will pay Mr. O’Connor the cash equivalent of such coverage within 10 days following his termination.

 

The employment agreements also provide for a severance benefit if Mr. O’Connor’s employment is voluntarily terminated for “good reason” or involuntarily terminated without cause within two years following a change in control of New England Bancshares or New England Bank. The severance payment would be a lump sum payment equal to three times the average of Mr. O’Connor’s five preceding taxable years’ annual compensation. In addition, Mr. O’Connor would be entitled to receive a lump sum payment equal to the contributions that would have been made on his behalf to any employee benefit plans of New England Bancshares and New England Bank for a 36-month period following his date of termination. Finally, New England Bancshares or New England Bank would be required to continue to provide Mr. O’Connor with continued life insurance and non-taxable medical and dental coverage for a 36-month period following his date of termination, provided, however if Mr. O’Connor is no longer eligible to receive such coverage, New England Bancshares or New England Bank will pay Mr. O’Connor the value of such coverage within 10 days following his termination.

 

Mr. O’Connor would also be entitled to receive an additional tax indemnification payment under the New England Bancshares employment agreement if payments under the agreements or any other payments triggered liability under the Internal Revenue Code as an excise tax constituting “excess parachute payments.” Under applicable law, the excise tax is triggered by change in control-related payments that equal or exceed three times the executive’s average annual compensation over the five years preceding the change in control. The excise tax equals 20% of the amount of the payment in excess of one times the executive’s average compensation over the preceding five-year period.

 

Payments to Mr. O’Connor under the New England Bank employment agreement are guaranteed by New England Bancshares if payments or benefits are not paid by New England Bank. Payment under the New England Bancshares employment agreement will be made by New England Bancshares. Even though both the Bank and the New England Bancshares employment agreements provide for a severance payment, Mr. O’Connor would only be entitled to receive a severance payment under one agreement. The employment agreements also provide that New England Bank and New England Bancshares will indemnify Mr. O’Connor to the fullest extent legally allowable. The employment agreements restrict Mr. O’Connor from competing against New England Bancshares or New England Bank for a period of one year from the date of termination of the agreement if Mr. O’Connor is terminated without cause, except if such termination occurs after a change in control.

 

Change in Control Agreements. The Bank currently maintains a two-year change in control agreement with each of Messrs. Parda and Mattioli. Each year, the Board of Directors may extend the term of Mr. Parda’s agreement for an additional one-year period and the term of Mr. Mattioli’s agreement extends for one day each day so that there is a constant twenty-four (24) month term. Each agreement provides that if the executive’s employment is involuntarily terminated without cause or voluntarily terminated for “good reason” within two years following a change in control of the New England Bancshares or New England Bank, the executive would be entitled to receive a lump sum severance payment equal to 2.99 times his “base amount,” as defined under the Internal Revenue Code, which will be paid within 10 days (5 days for Mr. Mattioli) following the executive’s date of termination. In addition, New England Bank would be required to continue to provide the executive with continued life insurance and non-taxable medical and dental coverage for a 24-month period (up to 12 months for Mr. Mattioli) following his date of termination, provided, however if the executive is no longer eligible to receive such coverage, the Bank will pay the executive the value of such coverage within 10 days following his date of termination.

 

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Payments to the executive under each agreement will be paid by New England Bancshares if payments (or other benefits) are not paid by New England Bank. In the event payments made to the executive include an “excess parachute payment” as defined in Section 280G of the Internal Revenue Code, such payments will be cutback by the minimum dollar amount necessary to avoid this result.

 

Supplemental Executive Retirement Plans. New England Bank maintains the Executive Supplemental Retirement Plan, as amended and restated, to provide Mr. O’Connor with, upon his attainment of age 65, an annual retirement benefit of $172,796 payable in equal monthly installments over a period equal to the later of: (1) 20 years following Mr. O’Connor’s retirement or termination of employment for reason other than cause; or (2) Mr. O’Connor’s lifetime (the “SERP Benefit”). If Mr. O’Connor voluntarily terminates his employment with New England Bank, Mr. O’Connor will be entitled to receive the balance of his accrued SERP Benefit as of the date of his termination, which will commence upon his attainment of age 65 and will be payable in equal monthly installments over a period equal to the later of: (1) 20 years; or (2) Mr. O’Connor’s lifetime. If Mr. O’Connor is discharged from New England Bank for reasons other than cause, he will be entitled to the full SERP Benefit. If Mr. O’Connor dies before the completion of benefit payments under the plan, his beneficiary will receive the remaining installments due from the plan. If a change in control occurs (as defined in the plan), followed by Mr. O’Connor’s voluntary or involuntary termination of employment with New England Bank, Mr. O’Connor will receive a lump sum payment equal to the actuarial equivalent of the full SERP Benefit. The lump sum payment will be made within 30 days following Mr. O’Connor’s termination of employment in connection with a change in control.

 

New England Bank has established a rabbi trust to hold the insurance policies purchased to satisfy the obligations of New England Bank with respect to the Executive Supplemental Retirement Plan. Until the plan benefits are paid to Mr. O’Connor, creditors may make claims against the trust’s assets if the Bank becomes insolvent. As of March 31, 2012, New England Bank had accrued $2.0 million for its liabilities under this plan.

 

In addition to the Executive Supplemental Retirement Plan, New England Bank maintains a Supplemental Executive Retirement Plan. This plan provides restorative payments to designated executives who are prevented from receiving the full benefits under the ESOP or the full matching contribution under the 401(k) Plan due to the legal limitations imposed on tax-qualified plans. The Board of Directors of New England Bank has designated Mr. O’Connor to participate in the plan. In addition to providing for benefits lost under the ESOP and the 401(k) Plan, the supplemental executive retirement plan also provides supplemental benefits to participants upon a change in control (as defined in the plan) before the complete scheduled repayment of the ESOP loan. Generally, upon such an event, the supplemental executive retirement plan will provide the participant with a benefit equal to what the participant would have received under the ESOP had he or she remained employed throughout the term of the ESOP loan, less the benefits actually provided. The participant’s benefit under the plan will commence within 90 days following the first to occur: (i) the participant’s termination of employment; (ii) the participant’s disability; (iii) the participant’s death; or (iv) a change in control of New England Bank or New England Bancshares.

 

Split-Dollar Life Insurance. New England Bank maintains a split-dollar life insurance arrangement to provide Mr. O’Connor with a death benefit. Under the terms of the arrangement, title and ownership of the life insurance policy resides with New England Bank, and New England Bank pays all of the insurance premiums. Upon Mr. O’Connor’s death, his beneficiaries will be entitled to 25% of the total proceeds, less the cash value of the policy. New England Bank will be entitled to the remaining life insurance proceeds. New England Bank will be entitled at all times to the cash surrender value of the life insurance policy.

 

New England Bank has also purchased and is the owner of single premium life insurance policies on the lives of Messrs. O’Connor, Parda and Mattioli. New England Bank has entered into Split Dollar Endorsement Agreements with each of Messrs. O’Connor, Parda and Mattioli in accordance with which a portion of the death benefit payable at the executive’s death is endorsed and payable to the executive’s beneficiary, if the executive dies while employed. Under the Split Dollar Endorsement Agreements, upon an executive’s death while he is an executive of New England Bank, the executive’s beneficiary will be paid a death benefit equal to a percentage of his annualized rate of 2008 base salary as of January 1, 2008. For these purposes, base salary is determined before reduction for contributions to a cafeteria plan or 401(k) Plan. In the case of Messrs. Parda and Mattioli, the applicable percentage is 200% of such executive’s annualized rate of 2008 base salary, which totals $226,000 in the case of Mr. Parda and $249,000 in the case of Mr. Mattioli, and in the case of Mr. O’Connor, is 100% of his annualized rate of 2008 base salary, which totals $250,000. In the event an executive dies after he terminated employment for any reason, including retirement, his beneficiary will not be entitled to any benefits under his Split Dollar Endorsement Agreement. The Split Dollar Endorsement Agreement may be terminated at any time by New England Bank or the executive, by written notice to the other or upon New England Bank’s cancellation of the life insurance policies. Upon termination, the executive forfeits any right in the death benefit and New England Bank may retain or terminate the insurance policy in its sole discretion.

 

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Outstanding Equity Awards at Fiscal Year-End

 

The following table provides information concerning unexercised options and stock awards that have not vested as of March 31, 2012 for each named executive officer.

 

		Option Awards																	Stock Awards
Name			Number of Securities Underlying Unexercised Options (#) Unexercisable				Number of Securities Underlying Unexercised Options (#) Unexercisable				Option Exercise Price ($)				Option Exercise Date				Number of Shares or Units of Stock That Have Not Vested (#)				Market Value of Shares or Units of Stock That Have Not Vested ($)
David J. O’Connor			49,085	(1)			—			$	12.84				9/11/16
			84,581	(2)			—				6.40				2/11/13
John F. Parda			1,120	(6)			4,480	(6)			9.70				4/12/21
			800	(3)			1,200	(3)			7.90				4/12/20
			4,000	(4)			1,000	(4)			13.29				4/9/17
			4,000	(1)			—				12.84				9/11/16
			4,737	(5)			—				8.17				5/10/14
			9,473	(3)			—				6.40				2/11/13
Anthony M. Mattioli			1,200	(7)			800	(7)			8.25				12/15/18
			800	(3)			1,200	(3)			7.90				4/12/20
			1,040	(6)			4,160	(6)			9.70				4/11/21

  

 

(1)		Granted pursuant to the New England Bancshares, Inc. 2006 Equity Incentive Plan and vest in five equal annual installments commencing on September 11, 2007.
(2)		Granted pursuant to the New England Bancshares, Inc. 2003 Stock-Based Incentive Plan and vest in five equal annual installments commencing on February 11, 2004.
(3)		Granted pursuant to the New England Bancshares, inc. 2006 Equity Incentive Plan and vest in five equal installments commencing on April 12, 2011.
(4)		Granted pursuant to the New England Bancshares, Inc. 2006 Equity Incentive Plan and vest in five equal annual installments commencing on April 9, 2008.
(5)		Granted pursuant to the New England Bancshares, Inc. 2003 Stock-Based Incentive Plan and vest in five equal annual installments commencing on May 10, 2005.
(6)		Granted pursuant to New England Bancshares, Inc. 2003 Stock-Based Incentive Plan and vest in five equal annual installments commencing on April 11, 2012.
(7)		Granted pursuant to New England Bancshares, Inc. 2003 Stock-Based Incentive Plan and vest in five equal annual installments commencing on December 15, 2009.

 

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ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Stock Ownership

 

The following table provides information as of June 21, 2012, with respect to persons known by the Company to be the beneficial owners of more than 5% of the Company’s outstanding common stock. A person may be considered to own any shares of common stock over which he or she has, directly or indirectly, sole or shared voting or dispositive power. Percentages shown are based upon 5,806,263 shares of the Company’s common stock outstanding at June 19, 2012.

 

		Number of Shares				Percent of Common
Name and Address			Owned				Stock Outstanding
Wellington Management Company, LLP			387,211	(1)			6.7	%
280 Congress Street
Boston, MA 02210
New England Bank			370,348	(2)			6.4	%
Employee Stock Ownership Plan
855 Enfield Street
Enfield, Connecticut 06082
Investors of America, Limited Partnership			368,336	(3)			6.3	%
James F. Dierberg
Dierberg Educational Foundation, Inc.
135 North Meramec
Clayton, Missouri 63105

 

(1)		Pursuant to a Schedule 13G filed by Wellington Management Company, LLP (“Wellington”), on February 14, 2012.  Wellington reported shared dispositive power with respect to 387,211 and shared voting power with respect to 342,410 shares
(2)		Includes 147,641 shares that have not been allocated to participants’ accounts.  Under the terms of the ESOP, the ESOP trustee will vote shares allocated to participants’ accounts in the manner directed by the participants.  The ESOP trustee, subject to its fiduciary responsibilities, will vote unallocated shares and allocated shares for which no timely voting instructions are received in the same proportion as shares for which the trustee has received timely voting instructions from participants.
(3)		Pursuant to a Schedule 13G/A filed by Investors of America, Limited Partnership, James F. Dierberg and Dierberg Educational Foundation, Inc. as members of a group (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended) on February 9, 2009.  Investors of America, Limited Partnership, James F. Dierberg and Dierberg Educational Foundation, Inc. reported sole voting and dispositive power with respect to 333,136 shares, 30,000 shares and 5,200 shares, respectively.

  

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The following table provides information about the shares of our common stock that may be considered to be owned by each of our directors, by our named executive officers listed in the Summary Compensation Table included in Item 11 of this Annual Report on Form 10-K, and by all of our directors and executive officers as a group as of June 19, 2012. A person may be considered to own any shares of common stock over which he or she has, directly or indirectly, sole or shared voting or dispositive power. Unless otherwise indicated, none of the shares shown have been pledged as collateral and each of the named individuals has sole voting and dispositive power with respect to the shares shown.

 

Name		Number of Shares Owned (1)				Percent of Common Stock Outstanding (2)
Thomas O. Barnes			20,874				*
Lucien P. Bolduc			33,151				*
Peter T. Dow			49,172	(3)			*
William C. Leary			25,613				*
Myron J. Marek			24,375				*
Anthony M. Mattioli			8,176				*
Thomas P. O’Brien			25,000				*
David J. O’Connor			248,667	(4)			4.1	%
John F. Parda			61,125	(5)			*
David J. Preleski			3,576				*
Kathryn C. Reinhard			10,000				*
Richard K. Stevens			53,075				*
Richard M. Tatoian			33,382				*
All executive officers, directors and director nominees as a group (16 persons)			611,218				10.1	%

 

 

*		Less than 1% of shares outstanding.
(1)		Includes 19,852 shares that can be acquired pursuant to stock options within 60 days of June 19, 2012 by each of Messrs. Bolduc, Dow, Stevens and Tatoian; and 5,354 shares that can be acquired pursuant to stock options within 60 days of June 19, 2012 by each of Messrs. Leary and Marek. In addition, for each named executive officer listed, amounts include the following:

 

Name		Shares of Restricted Stock (held in trust)				Shares Allocated Under ESOP (held in trust) (a)				Shares Credited Under 401(k) Plan (held in trust)				Stock Options Exercisable within 60 Days
David J. O’Connor			—				29,738				32,466				133,666
Anthony M. Mattioli			—				—				—				2,000
John F. Parda			—				13,873				5,594				24,009

  

 

(a)

Executives have voting but not dispositive power with respect to shares of restricted stock and shares allocated to them under the ESOP.

 

(2)		Based on 5,806,263 shares of our common stock outstanding as of June 19, 2012.
(3)		Includes 20,158 shares held in a trust in which Mr. Dow shares voting and dispositive power.
(4)		Includes 703 shares held in a trust in which Mr. O’Connor shares voting and dispositive power.
(5)		Includes 464 shares held in a trust in which Mr. Parda shares voting and dispositive power.

 

Changes in Control

 

On May 30, 2012, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with United Financial Bancorp, Inc. (“United Financial”), the holding company of United Bank, pursuant to which the Company will merge with and into United Financial, with United Financial as the surviving entity. In addition, New England Bank will merge with and into United Bank, with United Bank as the surviving entity. The directors of the Company have agreed to vote their shares in favor of the approval of the Merger Agreement at the Company stockholders’ meeting to be held to vote on the proposed transaction.

 

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Equity Compensation Plan Information

 

The following table provides information as of March 31, 2012 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			347,512			$	8.83				155,790
Equity compensation plans not approved by security holders			—				—				—
Total			347,512			$	8.83				155,790

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

Transactions with Related Persons

 

The Sarbanes-Oxley Act of 2002 generally prohibits loans by the Company to its executive officers and directors. However, the Sarbanes-Oxley Act contains a specific exemption from such prohibition for loans by New England Bank to its executive officers and directors in compliance with federal banking regulations. Federal regulations require that all loans or extensions of credit to executive officers and directors of insured financial institutions must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and must not involve more than the normal risk of repayment or present other unfavorable features. New England Bank is therefore prohibited from making any new loans or extensions of credit to executive officers and directors at different rates or terms than those offered to the general public. Notwithstanding this rule, federal regulations permit New England Bank to make loans to executive officers and directors at reduced interest rates if the loan is made under a benefit program generally available to all other employees and does not give preference to any executive officer or director over any other employee, although New England Bank does not currently have such a program in place. The outstanding loans made to our directors and executive officers, and members of their immediate families, were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to New England Bank, and did not involve more than the normal risk of collectibility or present other unfavorable features.

 

The Nominating and Corporate Governance Committee of the Board of Directors periodically reviews the Company’s transactions with directors, executive officers and other persons related to the Company in accordance with the Company’s Policy and Procedures for Approval of Transactions with Related Persons.

 

Director Independence

 

Each of the directors of the Company is considered independent under the rules of The Nasdaq Stock Market, Inc., except for David J. O’Connor, who is an employee of the Company and New England Bank. In determining the independence of the Company’s directors, the Board considered transactions, relationships or arrangements between directors and the Company and/or the Bank that are not required to be disclosed in this Annual Report on Form 10-K under the heading “Transactions with Related Persons” above, including legal services provided by director David Preleski’s law firm and loans that some of our directors have from the Bank.

 

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ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Audit Fees

 

The following table sets forth the fees billed to the Company for the fiscal years ending March 31, 2012 and 2011 by Shatswell, MacLeod & Company, P.C.:

 

		2012				2011
Audit Fees		$	123,496			$	120,087
Audit-Related Fees			8,631				—
Tax Fees (1)			9,881				16,000

  __________________________

(1)

Consists of tax filings and tax-related compliance and other advisory services.

 

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor

 

The Audit Committee is responsible for appointing, setting compensation and overseeing the work of the independent registered public accounting firm. In accordance with its charter, the Audit Committee approves, in advance, all audit and permissible non-audit services to be performed by the independent registered public accounting firm. Such approval process ensures that the external auditor does not provide any non-audit services to the Company that are prohibited by law or regulation.

 

In addition, the Audit Committee has established a policy regarding pre-approval of all audit and permissible non-audit services provided by the independent registered public accounting firm. Requests for services by the independent registered public accounting firm for compliance with the auditor services policy must be specific as to the particular services to be provided. The request may be made with respect to either specific services or a type of service for predictable or recurring services. During the year ended March 31, 2012, all services were approved, in advance, by the Audit Committee in compliance with these procedures.

 

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PART IV

 

ITEM 15.

EXHIBITS AND FINANCIAL SATEMENT SCHEDULES

 

	3.1		Articles of Incorporation of New England Bancshares, Inc. (1)
	3.2		Bylaws of New England Bancshares, Inc. (2)
	4.0		Specimen stock certificate of New England Bancshares, Inc. (1)
	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 (8)
	10.4		Employment Agreement by and between New England Bancshares, Inc. and David J. O’Connor (8)
	10.5		Form of New England Bancshares, Inc. Amended and Restated 2008 Severance Compensation Plan (8)
	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 (8)
	10.8		Form of Enfield Federal Savings and Loan Association Amended and Restated Supplemental Executive Retirement Plan (8)
	10.9		Form of Enfield Federal Savings and Loan Association Director Fee Continuation Plan entered into with Peter T. Dow, Myron J. Marek, Richard K. Stevens and Richard M. Tatoian (3)
	10.10		Form of First Amendment to Directors Fee Continuation Agreement (8)
	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 Anthony M. Mattioli (8)
	10.15		Lease agreement with Troiano Professional Center, LLC (7)
	10.16		Split-Dollar Endorsement Agreement with David J. O’Connor (8)
	10.17		Split-Dollar Endorsement Agreement with Anthony M. Mattioli (8)
	10.18		Split-Dollar Endorsement Agreement with John Parda (8)
	21.0		List of Subsidiaries (8)
	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
	101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Balance Sheets as of March 31, 2012 and March 31, 2011, (ii) the Consolidated Statements of Income for the years ended March 31, 2012 and 2011, (iii) the Consolidated Statements of Cash Flows for the years ended March 31, 2012 and 2011, and (iv) the notes to the Consolidated Financial Statements. (9)

 

 

	(1)	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.
	(2)	Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on December 11, 2007.
	(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.
	(8)	Incorporated by reference into this document from the exhibits to the Annual Report on Form 10-K for the year ended March 31, 2010.
	(9)	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.

 

97

 

SI GNATURES

 

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 27, 2012
	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/ Jeffrey J. Levitsky
David J. O’Connor, President, Chief Executive		Jeffrey J. Levitsky, Interim Chief
Officer and Director (principal executive officer)		Financial Officer (principal financial and accounting officer)
Date:  June 27, 2012		Date:  June 27, 2012

 

/s/ Thomas O. Barnes		/s/ Lucien P. Bolduc
Thomas O. Barnes, Director		Lucien P. Bolduc, Director
Date:  June 27, 2012		Date:  June 27, 2012

 

/s/ Peter T. Dow		/s/ William C. Leary, Esq.
Peter T. Dow, Chairman of the Board		William C. Leary, Director
Date:  June 27, 2012		Date:  June 27, 2012

 

/s/ Myron J. Marek		/s/ Thomas P. O’Brien
Myron J. Marek, Director		Thomas P. O’Brien, Director
Date:  June 27, 2012		Date:  June 27, 2012

 

/s/ David J. Preleski, Esq.		/s/ Kathryn C. Reinhard
David J. Preleski, Esq., Director		Kathryn C. Reinhard, Director
Date:  June 27, 2012		Date:  June 27, 2012

 

/s/ Richard K. Stevens		/s/ Richard M. Tatoian, Esq.
Richard K. Stevens, Director		Richard M. Tatoian, Esq., Director
Date:  June 27, 2012		Date:  June 27, 2012

 

 

98