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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number: 0-50876
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NAUGATUCK VALLEY FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
UNITED STATES TO BE APPLIED FOR
- ----------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
333 CHURCH STREET, NAUGATUCK, CONNECTICUT 06770
- --------------------------------------------- -------
(Address of principal executive offices) (Zip Code)
(203) 720-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
------------------- --------------------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
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As of September 20, 2004, there were no shares of the registrant's
common stock outstanding.
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NAUGATUCK VALLEY FINANCIAL CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at June 30, 2004 and
December 31, 2003.............................................................. 3
Consolidated Statements of Income for the three and six months ended
June 30, 2004 and 2003......................................................... 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2004 and 2003......................................................... 5
Notes to Unaudited Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................. 8
Liquidity and Capital Resources................................................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 13
Item 4. Controls and Procedures........................................................ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................... 14
Item 3. Defaults Upon Senior Securities................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders............................ 14
Item 5. Other Information.............................................................. 14
Item 6. Exhibits and Reports on Form 8-K............................................... 14
SIGNATURES
EXHIBITS
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ITEM 1. FINANCIAL STATEMENTS.
Naugatuck Valley Financial Corporation (the "Company") has not yet been
organized and will be formed upon completion of the mutual holding company
reorganization of Naugatuck Valley Savings and Loan (the "Bank"). After
completion of the reorganization, the Company will become the federally
chartered mid-tier stock holding company of the Bank and will own all of the
Bank's capital stock. The Company is not currently an operating company and,
therefore, the information presented in this report is for the Bank and its
subsidiary.
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NAUGATUCK VALLEY SAVINGS AND LOAN
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------
June 30, December 31,
2004 2003
- -------------------------------------------------------------------------- -----------------
(UNAUDITED) (AUDITED)
ASSETS
Cash and due from depository institutions $ 5,967 $ 4,752
Investment in federal funds 6,492 5,023
Investment securities 35,759 38,727
Loans receivable, net 189,833 180,378
Other assets 15,602 15,076
--------- ---------
TOTAL ASSETS $ 253,653 $ 243,956
--------- ---------
LIABILITIES AND CAPITAL ACCOUNTS
Liabilities
Deposits $ 198,923 $ 183,455
Advances from Federal Home Loan Bank of Boston 28,631 34,990
Other liabilities 4,522 4,294
--------- ---------
Total liabilities 232,076 222,739
--------- ---------
Commitments and contingencies
Capital accounts
Retained earnings 21,725 20,947
Accumulated other comprehensive income (148) 270
--------- ---------
Total capital 21,577 21,217
--------- ---------
TOTAL LIABILITIES AND CAPITAL ACCOUNTS $ 253,653 $ 243,956
- -----------------------------------------------------------------------------------------------
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NAUGATUCK VALLEY SAVINGS AND LOAN
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------
(UNAUDITED)
INTEREST AND DIVIDEND INCOME
Interest on loans $ 5,407 $ 5,646 $ 2,712 $ 2,769
Interest and dividends on investments and deposits 676 771 345 392
-------- -------- -------- -------
Total interest income 6,083 6,417 3,057 3,161
-------- -------- -------- -------
INTEREST EXPENSE
Interest on deposits 1,132 1,561 562 742
Interest on borrowed funds 720 701 354 348
-------- -------- -------- -------
Total interest expense 1,852 2,262 916 1,090
-------- -------- -------- -------
NET INTEREST INCOME 4,231 4,155 2,141 2,071
PROVISION FOR LOAN LOSSES -- 45 -- --
-------- -------- -------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,231 4,110 2,141 2,071
-------- -------- -------- -------
NONINTEREST INCOME
Loan fees and service charges 427 432 216 211
Income from bank owned life insurance 97 44 49 44
Gain on sale of mortgages 5 67 -- 50
Gain on sale of investments 24 6 -- 6
Income from investment advisory services, net 57 -- 26 --
Other income 29 41 15 22
-------- -------- -------- -------
Total noninterest income 639 590 306 333
-------- -------- -------- -------
NONINTEREST EXPENSE
Compensation, taxes and benefits 2,202 1,866 1,080 981
Office occupancy 558 540 275 270
Computer processing 270 246 124 131
Federal insurance premiums 14 14 7 7
(Gain) loss on foreclosed real estate, net (37) (2) (5) (6)
Other expenses 737 667 384 298
-------- -------- -------- -------
Total noninterest expense 3,744 3,331 1,865 1,681
-------- -------- -------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,126 1,369 582 723
PROVISION FOR INCOME TAXES 348 448 182 231
-------- -------- -------- -------
NET INCOME $ 778 $ 921 $ 400 $ 492
- ---------------------------------------------------------------------------------------------------------
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NAUGATUCK VALLEY SAVINGS AND LOAN
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
-----------------------------
2004 2003
- ---------------------------------------------------------------------------------------------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 778 $ 921
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses -- 45
Depreciation and amortization expense 336 326
Provision for deferred taxes (1) --
Net gain on sale of real estate owned (44) (14)
Gain on sale of mortgages (5) (67)
Loans originated for sale (1,927) (5,959)
Proceeds from the sale of loans 1,932 6,026
Gain on sale of investments (24) (6)
Decrease (increase) in accrued income receivable 41 (16)
Increase (decrease) in deferred loan fees 55 (53)
Increase in bank owned life insurance asset (97) (44)
Decrease (increase) in other assets (241) 161
(Decrease) increase in other liabilities (4) 177
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 799 1,497
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities 13,459 8,693
Proceeds from maturities of held-to-maturity securities -- 100
Purchase of available-for-sale securities (7,552) (12,309)
Purchase of held-to-maturity securities (3,610) (291)
Loan originations net of principal payments (9,510) (32)
Proceeds from the sale of foreclosed real estate 181 43
Purchase of property and equipment (425) (452)
Purchase of bank owned life insurance asset -- (3,600)
--------- --------
NET CASH USED BY INVESTING ACTIVITIES (7,457) (7,848)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in time deposits (429) 1,675
Net change in other deposit accounts 15,897 11,031
Advances from Federal Home Loan Bank 650 3,403
Repayment of Advances from Federal Home Loan Bank (7,009) (7,212)
Net change in mortgagors' escrow accounts 233 190
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,342 9,087
--------- --------
Increase in cash and cash equivalents 2,684 2,736
Cash and cash equivalents at beginning of period 9,775 18,158
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,459 $ 20,894
- -----------------------------------------------------------------------------------------------------------
Cash paid during the period for:
Interest $ 1,834 $ 2,248
Income taxes 297 375
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NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated interim financial statements are
unaudited and include the accounts of the Bank, and those of Naugatuck Valley
Mortgage Servicing Corporation, its wholly-owned subsidiary. The consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim financial
information and with the instructions to SEC Form 10-Q. Accordingly, they do not
include all the information and footnotes required by GAAP for complete
financial statements. All significant intercompany accounts and transactions
have been eliminated in the consolidation. These financial statements reflect,
in the opinion of Management, all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the Bank's financial
position and the results of its operations and its cash flows for the periods
presented. Operating results for the six months ended June 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. These financial statements should be read in conjunction with
the financial statements and notes thereto included in the Bank's 2003
Consolidated Financial Statements included in the Company's Registration
Statement on Form S-1, as amended.
The year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by GAAP.
NOTE 2 - COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," establishes standards for disclosure of comprehensive
income, which includes net income and any changes in equity from non-owner
sources that are not recorded in the income statement (such as changes in the
net unrealized gain (loss) on available-for-sale securities). The purpose of
reporting comprehensive income is to report a measure of all changes in equity
that result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. The Bank's one
source of other comprehensive income is the net unrealized gain (loss) on its
available-for-sale securities.
- -------------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
June 30, June 30,
------------------------- ------------------------
(IN THOUSANDS) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------
Net income $ 778 $ 921 $ 400 $ 492
Net unrealized (loss) gain on
securities available for sale
during the period (418) 208 (479) 292
------- ------- ------- -------
TOTAL COMPREHENSIVE INCOME $ 360 $ 1,129 $ (79) $ 784
- ------------------------------------------------------------------------------------------------
NOTE 3 - MUTUAL HOLDING COMPANY REORGANIZATION AND MINORITY STOCK ISSUANCE
On May 17, 2004, and as amended and restated on June 15, 2004, the Board of
Directors of the Bank unanimously adopted a Plan of Reorganization and Minority
Stock Issuance (the "Plan of Reorganization"). Pursuant to the Plan of
Reorganization, which was approved by the Bank's depositors at a special meeting
of depositors held on September 16, 2004, the Bank will: (i) convert to a stock
savings bank as the successor to the Bank in its current mutual form; (ii)
organize the Company as a federally chartered corporation that will own 100% of
the common stock of the Stock Bank; and (iii) organize a Mutual Holding Company
as a federally chartered mutual holding company that will own at least 51% of
the common stock of the Company so long as the Mutual Holding Company remains in
existence. The Stock Bank will succeed to the business and operations of the
Bank in its mutual form and the Company will sell a minority interest in its
common stock in a public stock offering.
Following the completion of the reorganization, all depositors who had
membership or liquidation rights with respect to the Bank as of the effective
date of the reorganization will continue to have such rights solely with respect
to the Mutual Holding Company so long as they continue to hold deposit accounts
with the Bank. In addition, all
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persons who become depositors of the Bank subsequent to the reorganization will
have such membership and liquidation rights with respect to the Mutual Holding
Company.
The Company plans to offer to the public shares of common stock representing a
minority ownership of the estimated pro forma market value of the Bank as
determined by an independent appraisal. The Mutual Holding Company will maintain
the majority ownership of the Company. Cost incurred in connection with the
offering will be recorded as a reduction of the proceeds from the offering. If
the transaction is not consummated, all costs incurred in connection with the
transaction will be expensed. At June 30, 2004, reorganization costs of
approximately $316,000 had been included in other assets.
NOTE 4 - CRITICAL ACCOUNTING POLICIES
The Bank considers 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 on income to be critical accounting
policies. The Bank considers the following to be critical accounting policies:
allowance for loan losses and deferred income taxes.
ALLOWANCE FOR LOAN LOSSES. Determining the amount of the allowance for loan
losses necessarily involves a high degree of judgment. Management reviews the
level of the allowance on a quarterly basis, at a minimum, and establishes the
provision for loan losses based on the composition of the loan portfolio,
delinquency levels, loss experience, economic conditions, and other factors
related to the collectibility of the loan portfolio.
Although the Bank believes that it uses the best information available to
establish the allowance for loan losses, future additions to the allowance may
be necessary based on estimates that are susceptible to change as a result of
changes in economic conditions and other factors. The Bank engages an
independent review of its commercial loan portfolio annually and adjusts its
loan ratings based upon this review. In addition, the Bank's regulatory
authorities as an integral part of their examination process, periodically
review the Bank's allowance for loan losses. Such agencies may require the Bank
to recognize adjustments to the allowance based on its judgments about
information available to it at the time of its examination.
DEFERRED INCOME TAXES. The Bank uses the asset and liability method of
accounting for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. If current available information
raises doubt as to the realization of the deferred tax assets, a valuation
allowance is established. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The Bank
exercises significant judgment in evaluating the amount and timing of
recognition of the resulting tax liabilities and assets, including projections
of future taxable income. These judgments and estimates are reviewed continually
as regulatory and business factors change.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This discussion should be read in conjunction with the Bank's Consolidated
Financial Statements for the year ended December 31, 2003 included in the
Company's Registration Statement on Form S-1, as amended.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are based on assumptions
and may describe future plans, strategies and expectations of the Bank. These
forward-looking statements are generally identified by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project" or similar
expressions. The Bank'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 operations of the Bank and its subsidiaries
include, but are not limited to, changes in interest rates, national and
regional economic conditions, legislative and 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 the loan or
investment portfolios, demand for loan products, deposit flows, competition,
demand for financial services in the Bank's market area, changes in real estate
market values in the Bank's market area, and changes in relevant 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. Except as required by applicable law or regulation, the Bank
does not undertake, and specifically disclaims any obligation, to release
publicly the result of any revisions that may be made to any forward-looking
statements to reflect events or circumstances after the date of the statements
or to reflect the occurrence of anticipated or unanticipated events.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2003 AND JUNE 30, 2004
Total assets increased by $9.7 million during the period from December 31, 2003
to June 30, 2004, primarily due to an increase in loans of $9.5 million. The
increase in loans primarily reflects an increase in our multi-family and
commercial loans of $6.0 million, or 21.8%, due in large part to an increase in
subdivision lending and individual builder lending and an increase in our
consumer loans of $4.2 million, or 20.0%, due to promotions of home equity lines
of credit and second mortgage loans. These increases were partially offset by a
decrease in our one- to four-family loans of $694,000, or 0.5%, due to the sale
of one group of loans in 2004. The increase in the loan portfolio was funded by
an increase in deposits of $15.5 million partially offset by a decrease in
borrowings of $6.4 million. Deposits increased primarily due to the continued
growth of our new Derby branch, which opened in February 2003, increased
advertising and competitive interest rates. Capital increased by $360,000, or
1.7%, from $21.2 million at December 31, 2003 to $21.6 million at June 30, 2004
as a result of net income offset by a decrease in unrealized gains on
available-for-sale securities.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004
AND 2003
GENERAL. Net income decreased $92,000 or 18.7% for the three months ended June
30, 2004 as compared to the three months ended June 30, 2003, primarily due to
an increase in noninterest expense and a decrease in noninterest income,
partially offset by an increase in net interest income.
Net income decreased $143,000, or 15.5%, for the six months ended June 30, 2004
as compared to the six months ended June 30, 2003, primarily due to an increase
in noninterest expense partially offset by increases in net interest income and
in noninterest income.
NET INTEREST INCOME. Net interest income increased $70,000, or 3.4%, to $2.1
million for the three months ended June 30, 2004. Net interest income increased
$76,000, or 1.8%, to $4.2 million for the six months ended June 30, 2004. The
primary reason for the increase in net interest income for both the three and
six month periods was the decrease in interest expense. Interest expense
decreased in both periods as we were able to lower rates on all categories of
deposit accounts in 2004 and as maturing certificates of deposit renewed at
lower rates. We also experienced an increase in lower rate core deposit accounts
as a result of promotion of low-cost or no-cost checking accounts for businesses
and consumers, which decreased our cost of funds.
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The following table summarizes changes in interest income and expense for the
three and six months ended June 30, 2004 and 2003.
THREE MONTHS SIX MONTHS
ENDED JUNE, ENDED JUNE 30,
------------------------ --------------------------
2004 2003 % CHANGE 2004 2003 % CHANGE
----------- ----------- ----------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
INTEREST INCOME:
Loans............................. $ 2,712 $ 2,769 (2.06)% $ 5,407 $ 5,646 (4.23)%
Fed Funds sold.................... 13 27 (51.85) 24 46 (47.83)
Investment securities............. 325 353 (7.93) 635 700 (9.29)
Federal Home Loan Bank stock...... 7 12 (41.67) 17 25 (32.00)
---------- ---------- --------- ----------
Total interest income.......... 3,057 3,161 (3.29) 6,083 6,417 (5.20)
INTEREST EXPENSE:
Certificate accounts.............. 439 606 (27.56) 892 1,262 (29.32)
Regular savings accounts.......... 49 57 (14.04) 96 130 (26.15)
Checking and NOW accounts......... 10 20 (50.00) 25 48 (47.92)
Money market savings accounts..... 64 59 8.47 119 121 (1.65)
---------- ---------- --------- ----------
Total interest-bearing deposits 562 742 (24.26) 1,132 1,561 (27.48)
FHLB advances..................... 354 348 1.72 720 701 2.71
---------- ---------- --------- ----------
Total interest expense......... 916 1,090 (15.96) 1,852 2,262 (18.13)
---------- ---------- --------- ----------
Net interest income............ $ 2,141 $ 2,071 3.38 $ 4,231 $ 4,155 1.83
========== ========== ========= ==========
The following table summarizes average balances and average yields and costs for
the three and six months ended June 30, 2004 and 2003.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------
2004 2003 2004 2003
------------------ ------------------- ------------------ ------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE COST BALANCE COST BALANCE COST
---------- ------- ---------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans............................. $184,350 5.88% $166,626 6.65% $182,574 5.92% $167,315 6.75%
Fed Funds sold.................... 5,539 0.94 9,403 1.15 5,277 0.91 8,266 1.11
Investment securities............. 36,130 3.60 37,863 3.73 34,099 3.72 35,696 3.92
Federal Home Loan Bank stock...... 1,779 1.57 1,561 3.07 1,768 1.92 1,561 3.20
-------- -------- -------- --------
Total interest-earning assets... $227,798 5.37 $215,453 5.87 $223,718 5.44 $212,838 6.03
======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
Certificate accounts.............. $ 85,737 2.05% $ 91,260 2.66% $ 85,950 2.08% $ 90,686 2.78%
Regular savings accounts.......... 45,229 0.43 41,228 0.55 43,704 0.44 39,811 0.65
Checking and NOW accounts......... 36,275 0.11 30,408 0.26 33,968 0.15 29,216 0.33
Money market savings accounts..... 27,043 0.95 20,579 1.15 25,949 0.92 19,764 1.22
-------- -------- -------- --------
Total interest-bearing deposits 194,284 1.16 183,475 1.62 189,571 1.19 179,477 1.74
FHLB advances..................... 29,467 4.81 27,717 5.02 30,051 4.79 27,651 5.07
-------- -------- --------- --------
Total interest-bearing
liabilities................ $223,751 1.64 $211,192 2.06 $219,622 1.69 $207,128 2.18
======== ======== ======== ========
Interest and dividend income decreased $104,000, or 3.3%, for the three months
ended June 30, 2004 as a result of a decrease in the average yield on
interest-earning assets to 5.37% from 5.87% partially offset by an increase in
the average balance of interest-earning assets to $227.8 million from $215.5
million. Interest and dividend income decreased $334,000, or 5.2%, for the six
months ended June 30, 2004 as a result of a decrease in the average yield on
interest-earning assets to 5.44% from 6.03% partially offset by an increase in
the average balance of interest-earning assets to $223.7 million from $212.8
million. Interest on loans decreased during the three and six months ended June
30, 2004 due to the decrease in the average yield on loans partially offset by
the increase in the average balance of those assets. Interest on securities
decreased during the three and six months ended June 30, 2004 due to the
decrease in the average yield on securities and the decrease in the average
balance of those assets. During the three and six months ended June 30, 2004, we
originated loans at lower interest rates and our securities had lower average
yields due to the prevailing low interest rate environment.
Net interest income decreased $174,000, or 16.0%, for the three months ended
June 30, 2004 as a result of a decrease in the average yield on interest-bearing
liabilities to 1.64% from 2.06% partially offset by an increase in the
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average balance of interest-earning assets to $223.8 million from $211.2
million. Interest expense decreased $410,000, or 18.1%, for the six months ended
June 30, 2004 as a result of a decrease in the average yield on interest-bearing
liabilities to 1.69% from 2.18% partially offset by an increase in the average
balance of interest-earning assets to $219.6 million from $207.1 million. Rates
paid on interest-bearing liabilities decreased during both the three and six
months ended June 30, 2004 due to a decline in market interest rates.
PROVISION FOR LOAN LOSSES. The following table summarizes the activity in the
allowance for loan losses and provision for loan losses for the three and six
months ended June 30, 2004 and 2003.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------------------------------
2004 2003 2004 2003
------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
Allowance at beginning of period......................... $1,811 $2,006 $1,810 $1,994
Provision for loan losses................................ -- -- -- 45
Charge-offs.............................................. (20) (213) (20) (264)
Recoveries............................................... 34 2 35 20
------ ------ ------ ------
Net charge-offs.......................................... 14 (211) 15 (244)
------ ------ ------ ------
Allowance at end of period............................... $1,825 $1,795 $1,825 $1,795
====== ====== ====== ======
We did not record a provision for loan losses for either the three or six month
period ended June 30, 2004. The lack of provision in 2004 reflected lower
charge-offs and decreased non-performing assets. The charge-offs during the 2003
periods are due to a one time charge to write down to market value loans for
which we had previously established specific allowance.
The following table provides information with respect to our nonperforming
assets at the dates indicated. We did not have any troubled debt restructurings
or any accruing loans past due 90 days or more at the dates presented.
AT JUNE 30, AT DECEMBER 31,
2004 2003 % CHANGE
------------------ ------------------ -------------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans......................................... $918 $ 906 1.32%
Real estate owned........................................ 71 208 (65.87)
---- ------ -------
Total nonperforming assets............................ $989 $1,114 (11.22)
==== ====== =======
Total nonperforming loans to total loans................. 0.48% 0.50% (4.00)
Total nonperforming loans to total assets................ 0.36% 0.37% (2.70)
Total non performing assets to total assets.............. 0.39% 0.46% (15.22)
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NONINTEREST INCOME. The following table summarizes noninterest income for the
three and six months ended June 30, 2004 and 2003.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- ----------------------
2004 2003 % CHANGE 2004 2003 % CHANGE
------- -------- ---------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
Loan fees and service charges................... $216 $211 2.37% $427 $432 (1.16)%
Income from bank owned life insurance........... 49 44 11.36 97 44 120.45
Gain on sale of mortgages....................... -- 50 (100.00) 5 67 (92.54)
Gain on sale of investments..................... -- 6 (100.00) 24 6 300.00
Income from investment advisory services, net... 26 -- N/A 57 -- N/A
Other income.................................... 15 22 (31.82) 29 41 (29.27)
---- ---- ---- ----
Total........................................ $306 $333 (8.11) $639 $590 8.31
==== ==== ==== ====
Noninterest income decreased during the three months ended June 30, 2004
primarily as a result of the lack of gain on sale of mortgages because our asset
sensitive interest rate sensitivity position allowed us to hold fixed-rate
mortgage loans in portfolio. The lack of gain on sale of mortgages was partially
offset by income from investment advisory services. In the third quarter of
2003, we began offering investment advisory services through a third party
registered broker-dealer. Noninterest income increased during the six months
ended June 30, 2004 primarily as a result of income from investment advisory
services and income from bank owned life insurance. During 2003 we purchased
life insurance policies, from which we derive income, on certain key executives.
NONINTEREST EXPENSE. The following table summarizes noninterest expense for the
three and six months ended June 30, 2004 and 2003.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- ----------------------
2004 2003 % CHANGE 2004 2003 % CHANGE
------- -------- ----------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
Compensation, taxes and benefits......... $1,080 $ 981 10.09% $2,202 $1,866 18.01%
Office occupancy......................... 275 270 1.85 558 540 3.33
Computer processing...................... 124 131 (5.34) 270 246 9.76
Federal insurance premiums............... 7 7 -- 14 14 --
(Gain) loss on foreclosed real estate,
net................................. (5) (6) (16.67) (37) (2) 1,750.00
Other expenses........................... 384 298 28.86 737 667 10.49
------ ------ ------ ------
Total................................. $1,865 $1,681 10.95 $3,744 $3,331 12.40
====== ====== ====== ======
Noninterest expense increased in both the three and six months ended June 30,
2004 primarily as a result of an increase in compensation, taxes and benefits
due to an increase in employees, the resulting payroll taxes and increased
pension expense. The increase in employees is primarily a result of the opening
of our Derby branch office in February 2003. Other expenses increased due to
increases in advertising, fees for an asset/liability management consulting
agreement, fees for a new outsourced internal audit function and expenses
relating to our charter conversion.
INCOME TAXES. The provision for income taxes decreased in both the three and six
month periods ended June 30, 2004 due to a decrease in taxable income and
decreases in the effective tax rates. The effective tax rates were 31.2% and
30.9% for the three and six month periods ended June 30, 2004 compared to 32.0%
and 32.7% for the three and six month periods ended June 30, 2003. The decreases
in the effective tax rates for both 2004 periods are the result of increases in
tax exempt bank owned life insurance income.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability to meet current and future short-term financial
obligations. Our primary sources of funds consist of deposit inflows, loan
repayments and maturities and sales of investment securities and advances from
the Federal Home Loan Bank of Boston. 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.
Each quarter we project liquidity availability and demands on this liquidity for
the next 90 days. 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 interest-earning deposits, Federal funds and short- and
intermediate-term U.S. Government agency obligations.
Our most liquid assets are cash and cash equivalents and interest-bearing
deposits. The levels of these assets depend on our operating, financing, lending
and investing activities during any given period. At June 30, 2004 cash and cash
equivalents totaled $12.5 million, including Federal funds of $6.5 million.
Securities classified as available-for-sale, which provide additional sources of
liquidity, totaled $30.5 million at June 30, 2004. At June 30, 2004, we had the
ability to borrow a total of $93.3 million from the Federal Home Loan Bank of
Boston, of which $28.6 million was outstanding. At June 30, 2004, we had
arranged overnight lines of credit of $2.5 million with the Federal Home Loan
Bank of Boston. We had no overnight advances outstanding with the Federal Home
Loan Bank of Boston on these dates. In addition, at June 30, 2004, we had
ability to borrow $2.0 million from a correspondent bank. We had no advances
outstanding on this line on these dates.
At June 30, 2004, we had $14.2 million in unused line availability on home
equity lines of credit, $13.1 million in unadvanced commercial lines, $5.3
million in mortgage commitments, $1.0 million in commercial mortgage loan
commitments, $2.5 million in unadvanced construction mortgage commitments, $1.4
million in letters of credit, and $71,000 in overdraft line of credit
availability. Certificates of deposit due within one year of June 30, 2004
totaled $50.6 million, or 25% of total deposits. If these 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 June 30, 2005. 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.
Historically, we have remained highly liquid, with our liquidity position
increasing substantially over the past two fiscal years. We are not aware of any
trends and/or demands, commitments, events or uncertainties that could result in
a material decrease in liquidity. We expect that all of our liquidity needs,
including the contractual commitments set forth in the table below, the
estimated costs of our branch expansion plans and increases in loan demand can
be met by our currently available liquid assets and cash flows. In the event
loan demand were to increase at a pace greater than expected, or any unforeseen
demand or commitment were to occur, we would access our borrowing capacity with
the Federal Home Loan Bank of Boston. We expect that our currently available
liquid assets and our ability to borrow from the Federal Home Loan Bank of
Boston would be sufficient to satisfy our liquidity needs without any material
adverse effect on our liquidity.
We are not aware of any trends and/or demands, commitments, events or
uncertainties that could result in a material increase in liquidity other than
the capital received in this offering. The capital from the offering will
significantly increase our liquidity and capital resources. Over time, the
initial level of liquidity will be reduced as net proceeds from the offering are
used for general corporate purposes, including the funding of lending
activities. Our financial condition and results of operations will be enhanced
by the capital from the reorganization, resulting in increased net
interest-earning assets and net income. However, the large increase in equity
resulting from the capital raised in the offering will, initially, have an
adverse impact on our return on equity.
Our primary investing activities are the origination of loans and the purchase
of securities. For the six months ended June 30, 2004 we originated $33.9
million of loans and purchased $11.2 million of securities. During the six
months ended June 30, 2004, these activities were funded primarily by the
proceeds from maturities of available-for-sale
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securities of $13.5 million, an increase of deposits of $15.5 million and
proceeds from the sale of loans of $1.9 million.
Historically, our investment portfolio has been funded by excess liquidity when
deposit inflows exceed loan demand. When we have not had such excess liquidity,
we have not borrowed from the Federal Home Loan Bank of Boston to supplement our
investment portfolio.
Financing activities consist primarily of activity in deposit accounts and in
Federal Home Loan Bank advances. We experienced a net increase in total deposits
of $15.5 million for the six months ended June 30, 2004. 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 deposit
relationships. Occasionally, we offer promotional rates on certain deposit
products in order to attract deposits. We experienced a decrease in Federal Home
Loan Bank advances of $6.4 million for the six months ended June 30, 2004. The
increases in deposit accounts and Federal Home Loan Bank advances, if any,
primarily fund our investing and lending activities.
At June 30, 2004, we were subject to the regulatory capital requirements of the
Federal Deposit Insurance Corporation, including a risk-based capital measure.
The risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning balance sheet assets
and off-balance sheet items to broad risk categories. At June 30, 2004, we
exceeded all of our regulatory capital requirements. We are considered "well
capitalized" under regulatory guidelines. After the reorganization, we will be
subject to the regulatory capital requirements of the Office of Thrift
Supervision.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of operations, the Bank engages in a variety of financial
transactions that, in accordance with generally accepted accounting principles,
are not recorded in 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, unused lines of credit, amounts due on
construction loans, amounts due on commercial loans, commercial letters of
credit and commitments to sell loans.
For the six months ended June 30, 2004 and the year ended December 31, 2003, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For a discussion of the Bank's asset and liability management policies as well
as the potential impact of interest rate changes upon the market value of the
Bank's portfolio equity, see "Management's Discussion and Analysis and Results
of Operations - Market Risk Analysis" in the Company's Registration Statement on
Form S-1, as amended. The main components of market risk for the Bank are
interest rate risk and liquidity risk. The Bank manages interest rate risk and
liquidity risk through an Asset/Liability Committee comprised of one outside
Director and senior management. The committee monitors compliance with the
Bank's Asset/Liability Policy which provides guidelines to analyze and manage
gap, which is the difference between the amount of assets and the amounts of
liabilities which mature or reprice during specific time frames. Model
simulation is used to measure earnings volatility under both rising and falling
rate scenarios. The Bank's interest rate risk and liquidity position at June 30,
2004 has not significantly changed from year end 2003.
ITEM 4. CONTROLS AND PROCEDURES.
The Company's management, including the Company's principal executive officer
and principal financial officer, have evaluated the effectiveness of the
Company's "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act"). Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company's disclosure controls and procedures
were effective for the purpose
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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.
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings. The Bank is not
involved in any pending legal proceedings other than routine legal proceedings
occurring in the ordinary course of business. Such routine legal proceedings, in
the aggregate, are believed by management to be immaterial to its financial
condition and results of operations.
ITEM 2. - UNREGISTERED SALES OF EQUITY IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES. Not applicable
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable
ITEM 5. - OTHER INFORMATION. Not applicable
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS -
3.1 - Charter of Naugatuck Valley Financial Corporation (1)
3.2 - Bylaws of Naugatuck Valley Financial Corporation (1)
4.0 - Form of Stock Certificate of Naugatuck Valley Financial
Corporation (1)
31.1 - Rule 13a-14(a)/15d-14(a) Certification.
31.2 - Rule 13a-14(a)/15d-14(a) Certification.
32 - Section 1350 Certifications.
- --------------------
(1) Incorporated herein by reference to the Exhibits to the Company's
Registration Statement on Form S-1, as amended, initially filed on June 18,
2004.
B. REPORTS ON FORM 8-K - None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Naugatuck Valley Financial Corporation (in organization)
Date: September 27, 2004 by: /s/ John C. Roman
------------------ -------------------------------------
John C. Roman
President and Chief Executive Officer
Date: September 27, 2004 by: /s/ Lee R. Schlesinger
------------------ -------------------------------------
Lee R. Schlesinger
Vice President and Treasurer
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