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EX-32.1 - EXHIBIT 32.1 - New England Bancshares, Inc.ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - New England Bancshares, Inc.ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - New England Bancshares, Inc.ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - New England Bancshares, Inc.ex31-1.htm
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2010

or

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to _________________

Commission File Number 0-51589
 
NEW ENGLAND BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
 
Maryland
04-3693643
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
855 Enfield Street, Enfield, Connecticut
06082
(Address of principal executive offices)
(Zip Code)
 
(860) 253-5200
(Issuer’s telephone number)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes    X      No                             

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [  ]    No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  (See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).

Large accelerated filer           Accelerated filer____   Non-accelerated filer           Smaller Reporting Company   X  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes         No     X      

The Issuer had 6,156,676 shares of common stock, par value $0.01 per share, outstanding as of February 10, 2011.

 
 

 

NEW ENGLAND BANCSHARES, INC.
FORM 10-Q

INDEX

   
Page
 
     
 
     
 
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2
     
 
3
     
 
5
     
17
     
23
     
24
     
 
     
25
     
25
     
27
     
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27
     
27
     
28
     
28

 


 
 



Part I. FINANCIAL INFORMATION
Item 1.             Financial Statements.

NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(Dollars in thousands)
   
December 31,
2010
   
March 31,
2010
 
 ASSETS
 
(Unaudited)
       
Cash and due from banks                                                                                    
  $ 6,746     $ 9,984  
Interest-bearing demand deposits with other banks                                                                                    
    38,034       28,998  
Total cash and cash equivalents                                                                             
    44,780       38,982  
Interest-bearing time deposits with other banks                                                                                    
    99       99  
Investments in available-for-sale securities, at fair value
    59,079       63,979  
Federal Home Loan Bank stock, at cost                                                                                    
    4,396       4,396  
Loans, net of allowance for loan losses of $5,477 as of December 31, 2010
             and $4,625 as of March 31, 2010                                                                                    
    520,347       515,504  
Premises and equipment, net                                                                                    
    6,371       6,916  
Other real estate owned                                                                                    
    1,658       2,846  
 Accrued interest receivable                                                                                     
    2,488       2,768  
Deferred income taxes, net                                                                                    
    4,878       4,296  
Cash surrender value of life insurance                                                                                    
    9,930       9,586  
Identifiable intangible assets                                                                                    
    1,388       1,704  
Goodwill                                                                                    
    16,783       16,783  
Other assets                                                                                    
    5,916       7,200  
Total assets                                                                             
  $ 678,113     $ 675,059  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Deposits:
               
     Noninterest-bearing                                                                                    
  $ 57,404     $ 53,091  
     Interest-bearing                                                                                    
    476,488       464,481  
      Total deposits                                                                                 
    533,892       517,572  
Advanced payments by borrowers for taxes and insurance
    2,123       1,171  
Federal Home Loan Bank advances                                                                                    
    35,617       56,860  
Subordinated debentures                                                                                    
    3,916       3,910  
Securities sold under agreements to repurchase                                                                                    
    28,692       23,460  
Other liabilities 
    4,136       4,179  
Total liabilities                                                                             
    608,376       607,152  
                 
Stockholders’ Equity:
               
Preferred stock, par value $.01 per share: 1,000,000 shares authorized;
        none issued                                                                                 
    ---       ---  
Common stock, par value $.01 per share: 19,000,000 shares authorized;
        6,938,087 shares issued at December 31, 2010
        and March 31, 2010                                                                                 
    69         69  
    Paid-in capital                                                                                    
    59,875       59,786  
Retained earnings                                                                                 
    19,554       17,530  
    Unearned ESOP shares, 181,526 shares at December 31, 2010 and
             215,399 at March 31, 2010                                                                                    
    (1,714 )     (1,952 )
Treasury stock, 781,411 shares at December 31, 2010 and 763,798
             shares at March 31, 2010, at cost                                                                                    
    (7,431 )     (7,302 )
    Unearned shares, stock-based plans, 35,984 shares at December 31,
             2010 and 46,621 at March 31, 2010                                                                                    
    (420 )     (522 )
Accumulated other comprehensive (loss) income 
    (196 )     298  
Total stockholders’ equity                                                                             
    69,737       67,907  
Total liabilities and stockholders’ equity                                                                             
  $ 678,113     $ 675,059  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
1


NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income

(Unaudited)
(In thousands, except per share amounts)
 
   
December 31,
   
December 31,
 
   
2010
   
2009
   
2010
   
2009
 
Interest and dividend income:
                       
      Interest on loans                                                                                        
  $ 7,553     $ 7,509     $ 22,993     $ 21,382  
      Interest and dividends on securities:
                               
         Taxable                                                                              
    372       660       1,368       1,973  
         Tax-exempt                                                                                        
    179       132       513       431  
      Interest on federal funds sold, interest-bearing deposits and
         dividends on money market mutual funds
    40       64       100       265  
         Total interest and dividend income                                                                                        
    8,144       8,365       24,974       24,051  
                                 
Interest expense:
                               
      Interest on deposits                                                                                        
    2,211       2,603       6,650       8,130  
      Interest on advanced payments by borrowers for
            taxes and insurance                                                                                        
    4       4       11       12  
      Interest on Federal Home Loan Bank advances                                                                                        
    413       627       1,515       1,996  
      Interest on subordinated debentures                                                                                        
    25       68       143       205  
      Interest on securities sold under agreements to repurchase
    68       37       205       134  
         Total interest expense                                                                                        
    2,721       3,339       8,524       10,477  
         Net interest and dividend income                                                                                        
    5,423       5,026       16,450       13,574  
Provision for loan losses                                                                                        
    359       623       1,666       2,006  
         Net interest and dividend income after provision for loan losses
    5,064       4,403       14,784       11,568  
                                 
Noninterest income:
                               
      Service charges on deposit accounts                                                                                        
    321       326       1,018       925  
      Gain on securities, net                                                                                        
    50       413       259       511  
      Gain on sale of loans                                                                                        
    80       ---       297       8  
      Increase in cash surrender value of life insurance policies
    89       98       273       282  
      Impairment loss on securities (includes total losses of $24 and $41, net
of $0 and $0 recognized in other comprehensive income, pretax
    ---       (10 )     ---       (51 )
      Other income                                                                                        
    6       75       281       524  
         Total noninterest income                                                                                        
    546       902       2,128       2,199  
Noninterest expense:
                               
      Salaries and employee benefits                                                                                        
    2,071       1,933       6,268       5,718  
      Occupancy and equipment expense                                                                                        
    829       827       2,485       2,381  
      Advertising and promotion                                                                                        
    70       39       237       105  
      Professional fees                                                                                        
    187       183       476       693  
      Data processing expense                                                                                        
    166       158       501       491  
      FDIC insurance assessment                                                                                        
    228       195       674       940  
      Stationery and supplies                                                                                        
    46       76       153       209  
      Amortization of identifiable intangible assets                                                                                        
    101       112       316       350  
      Other real estate owned                                                                                        
    37       24       448       75  
      Other expense                                                                                        
    469       647       1,543       1.713  
         Total noninterest expense                                                                                        
    4,204       4,194       13,101       12,675  
         Income before income taxes                                                                                        
    1,406       1,111       3,811       1,092  
Income tax expense                                                                                        
    496       255       1,371       116  
         Net income                                                                                        
  $ 910     $ 856     $ 2,440     $ 976  
                                 
   Earnings per share:
                               
            Basic                                                    
  $ 0.15     $ 0.14     $ 0.41     $ 0.16  
            Diluted                                                
    0.15       0.14       0.41       0.16  
   Dividends per share                                                                                        
    0.03       0.02       0.07       0.06  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
2


NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
 
(Unaudited)
(In thousands)

             
   
Nine Months Ended
December 31,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
      Net income                                                                                         
  $ 2,440     $ 976  
      Adjustments to reconcile net income (loss) to net cash provided by
      operating activities:
               
            Net amortization of fair value adjustments                                                                                         
    (309 )     (277 )
            Accretion of securities, net                                                                                         
    (45 )     (44 )
            Gain on sales and calls of investments, net 
    (259 )     (511 )
            Writedown of available-for-sale securities 
    ---       51  
            Writedown of other real estate owned 
    308       ---  
            Provision for loan losses                                                                                         
    1,666       2,006  
            Gain on sale of loans, net                                                                                         
    (214 )     (8 )
            Loss on sale of other real estate owned                                                                                         
    9       ---  
            Change in deferred loan origination costs, net                                                                                         
    (574 )     (231 )
            Depreciation and amortization                                                                                         
    659       707  
            Decrease (increase) in accrued interest receivable
    280       (36 )
            Deferred income tax (benefit) expense                                                                                         
    (264 )     441  
            Increase in cash surrender value of life insurance policies
    (273 )     (282 )
            Decrease (increase) in prepaid expenses and other assets
    2,474       (3,181 )
            Amortization of identifiable intangible assets                                                                                         
    316       350  
            Decrease in accrued expenses and other liabilities
    (543 )     (564 )
            Undistributed net loss of subsidiary                                                                                         
    52       ---  
            ESOP shares released                                                                                         
    241       203  
            Compensation cost for stock option plan                                                                                         
    85       96  
            Compensation cost for stock-based incentive plan
    102       102  
                 
      Net cash provided by (used in) operating activities                                                                                         
    6,151       (202 )
                 
Cash flows from investing activities:
               
            Purchases of available-for-sale securities                                                                                         
    (32,136 )     (33,967 )
            Proceeds from sales of available-for-sale securities
    15,065       17,829  
            Proceeds from maturities of available-for-sale securities
    21,964       20,150  
            Purchases of Federal Home Loan Bank stock                                                                                         
    ---       (35 )
            Purchases of interest-bearing time deposits with other banks
    ---       (1,500 )
            Cash and cash equivalents acquired from Apple Valley Bank & Trust,
  net of cash paid to shareholders                                                                               
    ---       10,289  
            Proceeds from sales of other real estate owned                                                                                         
    589       401  
            Loan originations and principal collections, net                                                                                         
    (5,699 )     1,902  
            Purchases of loans                                                                                         
    (9,206 )     (17,256 )
            Proceeds from sale of loans                                                                                         
    8,276       ---  
            Investment in cash surrender value of life insurance
    (71 )     ---  
            Capital expenditures - premises and equipment                                                                                         
    (107 )     (240 )
                 
            Net cash used in investing activities                                                                                         
    (1,325 )     (2,427 )
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
3


NEW ENGLAND BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
 
(Unaudited)
(In thousands)
(continued)


   
Nine Months Ended
December 31,
 
   
2010
   
2009
 
             
Cash flows from financing activities:
           
            Net increase in demand, NOW, MMDA and savings accounts
    16,107       23,944  
            Net increase in time deposits                                                                                         
    466       4  
            Net increase in advanced payments by borrowers for taxes and insurance
    952       674  
            Proceeds from Federal Home Loan Bank advances
    1,798       ---  
            Principal payments on Federal Home Loan Bank advances
    (23,038 )     (9,689 )
            Net increase in securities sold under agreement to repurchase
    5,232       6,743  
            Purchase of treasury stock                                                                                         
    (129 )     (1,450 )
            Payments of cash dividends on common stock                                                                                         
    (416 )     (356 )
                 
Net cash provided by financing activities                                                                                         
    972       19,870  
                 
Net increase in cash and cash equivalents                                                                                         
    5,798       17,241  
Cash and cash equivalents at beginning of period                                                                                         
    38,982       41,433  
Cash and cash equivalents at end of period                                                                                         
  $ 44,780     $ 58,674  
                 
Supplemental disclosures:
               
            Interest paid                                                                                         
  $ 8,980     $ 10,831  
            Income taxes paid (received)                                                                                         
    1,417       (109 )
            Increase (decrease) in due to broker                                                                                         
    500       (715 )
            Loan transferred to other real estate owned                                                                                         
    966       923  
            Other real estate owned transferred to other assets
    1,248       ---  
                 
Acquisition of Apple Valley Bank & Trust:
               
  Assets acquired
               
            Cash and cash equivalents                                                                                         
  $ ---     $ 13,220  
            Investments in available-for-sale securities                                                                                         
    ---       3,004  
            Federal Home Loan Bank stock, at cost                                                                                         
    ---       465  
            Loans, net of allowance for loan losses                                                                                         
    ---       60,233  
            Premises and equipment, net                                                                                         
    ---       1,881  
            Other real estate owned                                                                                         
    ---       260  
            Accrued interest receivable                                                                                         
    ---       239  
            Deferred income taxes, net                                                                                         
    ---       1,968  
            Other assets                                                                                         
    ---       77  
  Total assets acquired                                                                                         
    ---       81,347  
                 
  Liabilities assumed
               
            Deposits                                                                                         
    ---       76,380  
            Advanced payments by borrowers for taxes and insurance
    ---       380  
            Other liabilities                                                                                         
    ---       403  
  Total liabilities assumed                                                                                         
    ---       77,163  
                 
Net assets acquired                                                                                         
    ---       4,184  
                 
Acquisition costs                                                                                         
    ---       6,112  
                 
Goodwill                                                                                         
  $ ---     $ 1,928  
                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
4


NEW ENGLAND BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


NOTE 1 – 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.  The Company was organized in 2005 in connection with the “second-step” mutual-to-stock conversion of Enfield Mutual Holding Company.  For additional information regarding the second-step conversion, see note 1 to the notes to consolidated financial statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K.  Reference is made to “New England Bancshares” or the “Company” for periods both before and after the second-step conversion.

The Bank, incorporated in 1999, is a Connecticut chartered commercial bank headquartered in Enfield, Connecticut.  The Bank’s deposits are insured by the FDIC.  The Bank is engaged principally in the business of attracting deposits from the general public and investing those deposits primarily in residential real estate loans, commercial real estate loans, and commercial loans, and to a lesser extent, construction and consumer loans.
 
NOTE 2 – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and the instructions to Form 10-Q, and accordingly do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments necessary, consisting of only normal recurring accruals, to present fairly the financial position, results of operations and cash flows of the Company for the periods presented.  In preparing the interim financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period.  Actual results could differ significantly from those estimates.  The interim results of operations presented are not necessarily indicative of the operating results to be expected for the year ending March 31, 2011 or any interim period.

 
5



While management believes that the disclosures presented are adequate so as not to make the information misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes included in the Company’s Form 10-K for the year ended March 31, 2010.

The condensed consolidated balance sheet as of March 31, 2010 was derived from the Company’s audited financial statements, but does not include all the disclosures required by accounting principles generally accepted in the United States of America.

NOTE 3 – Earnings per Share (EPS)

Basic EPS is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.  As of December 31, 2010, 158,664 shares were anti-dilutive for the three and nine month periods, compared to 331,416 anti-dilutive shares for the three and nine month periods ended December 31, 2009.  Anti-dilutive shares are stock options with exercise prices in excess of the weighted-average market value for the same period and are not included in the determination of diluted earnings per share.  Unallocated common shares held by the Bank’s employee stock ownership plan are not included in the weighted-average number of common shares outstanding for purposes of calculating both basic and diluted EPS.
 
 
 

 
 
6



   
Income
   
Shares
   
Per-Share
 
 
 
(Numerator)
   
(Denominator)
   
Amount
 
 
 
(In Thousands)
       
Three Months ended December 31, 2010
                 
     Basic EPS
                 
     Net income
  $ 910       ---        
     Dividends and undistributed earnings allocated
                     
          to unvested shares     
    (2 )     ---        
     Net income and income available to common stockholders
    908       5,910,582     $ 0.15  
     Effect of dilutive securities options
    ---       26,992          
     Diluted EPS
                       
     Income available to common stockholders and
                       
     assumed conversions
  $ 908       5,937,574     $ 0.15  
                         
Nine Months ended December 31, 2010
                       
     Basic EPS
                       
     Net income
  $ 2,440       ---          
     Dividends and undistributed earnings allocated
                       
          to unvested shares
    (7 )     ---          
     Net income and income available to common stockholders
    2,433       5,911,071     $ 0.41  
     Effect of dilutive securities options
    ---       28,877          
     Diluted EPS
                       
     Income available to common stockholders and
                       
     assumed conversions
  $ 2,433       5,939,948     $ 0.41  
                         
Three Months ended December 31, 2009
                       
     Basic EPS
                       
     Net income
  $ 856       ---          
     Dividends and undistributed earnings allocated
                       
          to unvested shares
    (7 )     ---          
     Net income and income available to common stockholders
    849       6,045,521     $ 0.14  
     Effect of dilutive securities options
    ---       ---          
     Diluted EPS
                       
     Income available to common stockholders and
                       
     assumed conversions
  $ 849       6,045,521     $ 0.14  
                         
Nine Months ended December 31, 2009
                       
     Basic EPS
                       
     Net income
  $ 976       ---          
     Dividends and undistributed earnings allocated
                       
          to unvested shares
    (8 )     ---          
     Net income and income available to common stockholders
    968       5,944,247     $ 0.16  
     Effect of dilutive securities options
    ---       ---          
     Diluted EPS
                       
     Income available to common stockholders and
                       
     assumed conversions
  $ 968       5,944,247     $ 0.16  

NOTE 4 – Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets,” and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).”  These standards are effective for the first interim reporting period of fiscal year 2011.  SFAS No. 166 amends the guidance in ASC 860 to eliminate the concept of a qualifying special-purpose entity (“QSPE”) and changes some of the requirements for derecognizing financial assets. SFAS No. 167 amends the consolidation guidance in ASC 810-10.  Specifically, the amendments will (a) eliminate the exemption for QSPEs from the new guidance, (b) shift the determination of which enterprise should consolidate a variable interest entity (“VIE”) to a current control approach, such that an entity that has both the power to make decisions and right to receive benefits or absorb losses that could potentially be significant, will consolidate a VIE, and (c) change when it is necessary to reassess who should consolidate a VIE.  The adoption had no impact on the Company’s financial statements.

 
7




In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements.”  The ASU requires disclosing the amounts of significant transfers in and out of Level 1 and 2 of the fair value hierarchy and describing the reasons for the transfers.  The disclosures are effective for reporting periods beginning after December 15, 2009.  The Company adopted ASU 2010-06 as of April 1, 2010.  Additionally, disclosures of the gross purchases, sales, issuances and settlements activity in the Level 3 of the fair value measurement hierarchy will be required for fiscal years beginning after December 15, 2010.

In March 2010, the FASB issued ASU 2010-11, “Scope Exception Related to Embedded Credit Derivatives.”  The ASU clarifies that certain embedded derivatives, such as those contained in certain securitizations, CDOs and structured notes, should be considered embedded credit derivatives subject to potential bifurcation and separate fair value accounting.  The ASU allows any beneficial interest issued by a securitization vehicle to be accounted for under the fair value option at transition.  At transition, the Company may elect to reclassify various debt securities (on an instrument-by-instrument basis) from held-to-maturity (HTM) or available-for-sale (AFS) to trading.  The new rules are effective July 1, 2010.  The Company is currently analyzing the impact of the changes to determine the population of instruments that may be reclassified to trading upon adoption.

In April 2010, the FASB issued ASU 2010-18, “Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset.” As a result of this ASU, modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments in this ASU are effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively. Early application is permitted.

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.

In December 2010, the FASB issued ASU 2010-28, “Intangibles - Goodwill and Other.”  This ASU is to addresses when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts.  For public entities, the amendments in this ASU are effective for fiscal years, and interim periods beginning after December 15, 2010.  For nonpublic entities, the amendments are effective for fiscal years and interim periods beginning after December 15, 2011.

 
8



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.

NOTE 5 – Stock-Based Incentive Plan

At December 31, 2010, the Company maintained a stock-based incentive plan and an equity incentive plan.  For the nine months ended December 31, 2010 and 2009, compensation cost for the Company’s stock plans was measured at the grant date based on the value of the award and was recognized over the service period, which was the vesting period.  The compensation cost that has been charged against income in the nine months ended December 31, 2010 and 2009 for the granting of stock options under the plans was $85,000 and $96,000, respectively.  During the nine months ended December 31, 2010, the Company granted 8,000 stock options.

The compensation cost that has been charged against income for the granting of restricted stock awards under the plan for the nine months ended December 31, 2010 and 2009 was $102,000 and $102,000.

NOTE 6 – Loans

A summary of the balances of loans follows:

 
 
December 31, 2010
   
March 31, 2010
 
 
 
(In thousands)
 
Residential real estate:
           
     1-4 family
  $ 155,281     $ 174,004  
     Home equity loans
    41,333       40,157  
Commercial real estate
    241,199       223,567  
Consumer loans
    8,635       7,293  
Commercial loans
    78,612       74,918  
     Total loans
    525,060       519,939  
                 
Allowance for loan losses
    (5,477 )     (4,625 )
Net deferred loan fees
    764       190  
                 
     Loans, net
  $ 520,347     $ 515,504  
 
The Company has transferred a portion of its originated commercial real estate loans and commercial loans to participating lenders.  The amounts transferred have been accounted for as sales and therefore not included in the Company’s accompanying consolidated balance sheets.  The Company and participating lenders share ratably in any gains and losses that may result from a borrower’s lack of compliance with contractual terms of the loan.  The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, emits payments (net of servicing fees) to participating lenders and disburses required escrow funds to relevant parties.  At December 31, 2010 and March 31, 2010, the Company was servicing loans for participants aggregating $13.4 million and $13.2 million, respectively.

 
9



NOTE 7 – Allowance for Loan Losses and Impaired Assets

Analysis and Determination of the Allowance for Loan Losses.  We maintain an allowance for loan losses to absorb probable losses inherent in the existing portfolio.  When a loan, or portion thereof, is considered uncollectible, it is charged against the allowance.  Recoveries of amounts previously charged-off are added to the allowance when collected.  The adequacy of the allowance for loan losses is evaluated on a regular basis by management.  Based on management’s judgment, the allowance for loan losses covers all known losses and inherent losses in the loan portfolio.

Our methodology for assessing the appropriateness of the allowance for loan losses consists of specific allowances for identified problem loans and a general valuation allowance on the remainder of the loan portfolio.  Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.

Specific Allowances for Identified Problem Loans.  We establish an allowance on identified problem loans based on factors including, but not limited to:  (1) the borrower’s ability to repay the loan; (2) the type and value of the collateral; (3) the strength of our collateral position; and (4) the borrower’s repayment history.

General Valuation Allowance on the Remainder of the Portfolio.  We also establish a general allowance by applying loss factors to the remainder of the loan portfolio to capture the inherent losses associated with the lending activity.  This general valuation allowance is determined by segregating the loans by loan category and assigning loss factors to each category.  The loss factors are determined based on our historical loss experience, delinquency trends and management’s evaluation of the collectability of the loan portfolio.  Based on management’s judgment, we may adjust the loss factors due to: (1) changes in lending policies and procedures; (2) changes in existing general economic and business conditions affecting our primary market area; (3) credit quality trends; (4) collateral value; (5) loan volumes and concentrations; (6) seasoning of the loan portfolio; (7) recent loss experience in particular segments of the portfolio; (8) duration of the current business cycle; and (9) bank regulatory examination results.  Loss factors are re-evaluated quarterly to ensure their relevance in the current real estate environment.

Activity in the allowance for loan losses is summarized below:

   
For the nine months ended December 31,
 
   
2010
   
2009
 
   
(In thousands)
 
Balance at March 31, 2010
  $ 4,625     $ 6,458  
Provision for loan losses
    1,666       2,006  
Charge-offs
    (868 )     (4,170 )
Recoveries
    54       60  
     Balance at December 31, 2010
  $ 5,477     $ 4,354  



 
10


The allowance for loan losses is broken down by the following loan categories at December 31, 2010:

   
Total
 
   
(In thousands)
 
Residential real estate:
     
     1-4 family
  $ 914  
     Home equity loans
    61  
Commercial real estate
    2,109  
Consumer
    28  
Commercial loans
    2,365  
     Total
  $ 5,477  
 
There have been no significant changes in the Company’s methodology for evaluating the allowance for loan losses.

Risk Characteristics by Portfolio Segment.  Loans secured by one- to four-family residential real estate have historically been the least risky loan type.  However they are affected by declines in the general residential housing market, unemployment and under-employment, and the tightening of lending requirements and standards.  Loans secured by commercial real estate, including multi-family loans, generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans.  Of primary concern in commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project.  Payments on loans secured by income properties often depend on successful operation and management of the properties.  As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy.  Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate.  Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction.  During the construction phase, a number of factors could result in delays and cost overruns.  If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the building.  If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a building having a value which is insufficient to assure full repayment.  Commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.  As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself.  Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.  Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly.  In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower.  In addition, consumer loan collections depend on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

 
11



Credit Risk Management.  Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due.  Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans.

When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status.  We make initial contact with the borrower when the loan becomes 15 days past due.  If payment is not received by the 30th day of delinquency, additional letters and phone calls generally are made.  Typically, when the loan becomes 60 days past due, we send a letter notifying the borrower that we may commence legal proceedings if the loan is not paid in full within 30 days.  Generally, loan workout arrangements are made with the borrower at this time; however, if an arrangement cannot be structured before the loan becomes 90 days past due, we will send a formal demand letter and, once the time period specified in that letter expires, commence legal proceedings against any real property that secures the loan or attempt to repossess any business assets or personal property that secures the loan.  If a foreclosure action is instituted and the loan is not brought current, paid in full or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure.

We consider repossessed assets and loans that are 90 days or more past due to be non-performing assets.  Past due status is based on contractual terms of the loan.  When a loan becomes 90 days delinquent, the loan is placed on non-accrual status at which time the accrual of interest ceases and an allowance for any uncollectible accrued interest is established and charged against operations.  Typically, payments received on a non-accrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.  The table below breaks out nonaccrual loans by loan type at December 31, 2010:

   
Total
 
   
(In thousands)
 
Residential real estate:
     
   1-4 family
  $ 6,156  
   Home equity loans
    259  
Commercial real estate
    4,312  
Consumer loans
    90  
Commercial loans
    1,271  
   Total nonaccrual loans
  $ 12,088  
 
Management informs the Boards of Directors monthly of the amount of loans delinquent more than 90 days, all loans in foreclosure and all foreclosed and repossessed property that we own.

Banking regulations require us to review and classify our assets on a regular basis.  In addition, the Connecticut Department of Banking and FDIC have the authority to identify problem assets and, if appropriate, require them to be classified.  There are three classifications for problem assets:  substandard, doubtful and loss.  “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable and there is a high possibility of loss.  An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.  The regulations also provide for a “special mention” category, described as assets that do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention.  When we classify an asset as substandard or doubtful, we establish a specific allowance for loan losses.  If we classify an asset as loss, we charge off an amount equal to 100% of the portion of the asset classified as loss.

 
12



The following table shows the risk rating grade of the loan portfolio broken-out by type as of December 31, 2010.

   
Real Estate Loans
                   
Grade:
 
Residential
   
Home Equity
   
Commercial
   
Consumer
   
Commercial
   
Total
 
   Pass
  $ 147,836     $ 41,074     $ 219,385     $ 8,525     $ 71,164     $ 487,984  
   Special mention
    1,104       ---       7,050       1       2,238       10,393  
   Substandard
    6,341       259       14,764       109       5,184       26,657  
   Doubtful
    ---       ---       ---       ---       26       26  
   Loss
     ---       ---       ---       ---       ---        ---  
Total
  $ 155,281     $ 41,333     $ 241,199     $ 8,635     $ 78,612     $ 525,060  
 
Impaired Loans.  A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.  The following table shows the Company’s impaired loans at December 31, 2010 and for the nine months ended December 31, 2010.

   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
   With no related allowance recorded:
                             
Residential real estate:
                             
     1-4 family
  $ 3,646     $ 3,655     $ ---     $ 2,418     $ 107  
     Home equity loans
    86       86       ---       69       4  
 Commercial real estate
    7,785       7,796       ---       3,971       147  
Consumer loans
    33       31       ---       13       ---  
Commercial loans
    971       971       ---       635       2  
   Total impaired with no related
   allowance recorded
  $ 12,521     $ 12,539     $ ---     $ 7,106     $ 260  
                                         
   With an allowance recorded:
                                       
Residential real estate:
                                       
     1-4 family
  $ 1,714     $ 2,488     $ 466     $ 1,445     $ 33  
     Home equity loans
    9       20       11       9       2  
 Commercial real estate
    3,093       3,490       363       1,163       2  
Consumer loans
    33       35       5       15       1  
Commercial loans
    429       770       305       832       40  
   Total impaired with an
   allowance recorded
  $ 5,278     $ 6,803     $ 1,150     $ 3,464     $ 78  
                                         
   Total:
                                       
Residential real estate:
                                       
     1-4 family
  $ 5,360     $ 6,143     $ 466     $ 3,863     $ 140  
     Home equity loans
    95       106       11       78       6  
 Commercial real estate
    10,878       11,286       363       5,134       149  
Consumer loans
    66       66       5       28       1  
Commercial loans
    1,400       1,741       305       1,467       42  
   Total impaired loans
  $ 17,799     $ 19,342     $ 1,150     $ 10,570     $ 338  


 
13


Delinquencies.  The following table provides information about delinquencies in our loan portfolio as of December 31, 2010.

   
30-59
Days
   
Greater
Than 60-89 Days
   
Greater
Than
90 Days
   
Total
Past Due
   
Total Current
   
Total
   
Greater Than
 90 Days and
Accruing
 
   
(Dollars in Thousands)
 
Residential real estate:
                                         
   1-4 family
  $ 1,165     $ 1,373     $ 3,377     $ 5,915     $ 149,366     $ 155,281     $ ---  
   Home equity loans
    256       143       216       615       40,718       41,333       ---  
Commercial real estate
    2,599       2,603       1,603       6,805       234,394       241,199       ---  
Consumer loans
    111       54       54       219       8,416       8,635       ---  
Commercial loans
    519       1,418       785       2,722       75,890       78,612       200  
            Total
  $ 4,650     $ 5,591     $ 6,035     $ 16,276     $ 508,784     $ 525,060     $ 200  

NOTE 8 – Other-Than-Temporary Impairment Losses

The following table summarizes gross unrealized losses and fair value, aggregated by investment category and length of time the investments have been in a continuous unrealized loss position, at December 31, 2010:

 
 
Less than 12 Months
   
12 Months or Longer
   
Total
 
 
 
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
 
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
 
 
(In Thousands)
 
Debt securities issued by states of the
                                   
     United States and political subdivisions
                                   
     of the states
  $ 12,649     $ 768     $ 3,084     $ 566     $ 15,733     $ 1,334  
Debt securities issued by the U.S. Treasury
                                               
     and other U.S. government corporations
                                               
     and agencies
    1,704       46       ---       ---       1,704       46  
Mortgage-backed securities
    1,321       9       1,571       307       2,892       316  
               Total temporarily impaired securities
  $ 15,674     $ 823     $ 4,655     $ 873     $ 20,329     $ 1,696  

Management has assessed the securities which are classified as available-for-sale and in an unrealized loss position at December 31, 2010 and determined the decline in fair value below amortized cost to be temporary, except for those securities described below.  In making this determination management considered the period of time the securities were in a loss position, the percentage decline in comparison to the securities’ amortized cost, the financial condition of the issuer and the Company’s ability and intent to hold these securities until their fair value recovers to their amortized cost.  Management believes the decline in fair value is primarily related to the current interest rate environment and not to the credit deterioration of the individual issuer, except for those securities described below.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market conditions warrant such evaluation. The investment securities portfolio is generally evaluated for other-than-temporary impairment under ASC 320-10, “Investments – Debt and Equity Securities.”  However, certain purchased beneficial interests, including non-agency mortgage-backed securities and pooled trust preferred securities are evaluated using ASC 325-40, “Beneficial Interests in Securitized Financial Assets.”

For those debt securities for which the fair value of the security is less than its amortized cost and the Company does not intend to sell such security and it is more likely than not that it will not be required to sell such security prior to the recovery of its amortized cost basis less any credit losses, ASC 320-10 requires that the credit component of the other-than-temporary impairment losses be recognized in earnings while the noncredit component is recognized in other comprehensive loss, net of related taxes.

 
14


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 nine months ended December 31, 2010 is as follows:

   
Total
 
   
(In Thousands)
 
Balance, April 1, 2010
  $ 63  
Additions for the credit component on debt securities
       
  in which other-than-temporary impairment was
       
  not previously recognized
    ---  
         
Balance, December 31, 2010
  $ 63  
 
For the nine months ended December 31, 2010, securities with other-than-temporary impairment losses related to credit that were recognized in earnings consisted of non-agency mortgage-backed securities. In accordance with ASC 320-10, the Company estimated the portion of loss attributable to credit using a discounted cash flow model.  Significant inputs for the non-agency mortgage-backed securities included the estimated cash flows of the underlying collateral based on key assumptions, such as default rate, loss severity and prepayment rate. Assumptions used can vary widely from loan to loan, and are influenced by such factors as loan interest rate, geographical location of the borrower, borrower characteristics and collateral type.  The present value of the expected cash flows was compared to the Company’s holdings to determine the credit-related impairment loss.  Based on the expected cash flows derived from the model, the Company expects to recover the remaining unrealized losses on non-agency mortgage-backed securities.  Significant assumptions used in the valuation of non-agency mortgage-backed securities were as follows as of December 31, 2010.

   
Weighted
      Range  
   
Average
   
Minimum
   
Maximum
 
Prepayment rates
    13.7 %     8.2 %     19.8 %
Default rates
    4.3       0.8       8.3  
Loss severity
    48.7       36.3       67.1  

NOTE 9 – Fair Value Measurement Disclosures

The following table presents the fair value disclosures of assets and liabilities in accordance with ASC 820-10 which became effective for the Company’s consolidated financial statements on April 1, 2008.  The fair value hierarchy established by this guidance is based on observable and unobservable inputs participants use to price an asset or liability.  ASC 820-10 has prioritized these inputs into the following fair value hierarchy:

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that are available at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

 
15



Level 3 Inputs – Unobservable inputs for determining the fair value of the asset or liability and are based on the entity’s own assumptions about the assumptions that market participants would use to price the asset or liability.

The following summarizes assets measured at fair value on a recurring basis for the period ending December 31, 2010:

     
 
Fair Value Measurements at Reporting Date Using:
 
 
       
Quoted Prices in
   
Significant
   
Significant
 
 
       
Active Markets for
   
Other Observable
   
Unobservable
 
 
       
Identical Assets
   
Inputs
   
Inputs
 
 
 
Total
   
Level 1
   
Level 2
   
Level 3
 
 
 
(in thousands)
 
                         
Securities available-for-sale
  $ 59,079     $ 5,618     $ 53,461     $ ---  

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 December 31, 2010, for which a nonrecurring change in fair value has been recorded.

 
 
Fair Value Measurements at Reporting Date Using:
 
 
       
Quoted Prices in
   
Significant
   
Significant
 
 
       
Active Markets for
   
Other Observable
   
Unobservable
 
 
       
Identical Assets
   
Inputs
   
Inputs
 
 
 
Total
   
Level 1
   
Level 2
   
Level 3
 
 
 
(in thousands)
 
                         
Impaired loans
  $ 5,360     $ ---     $ 3,433     $ 1,927  
Other real estate owned
    2,906       ---       ---       2,906  
                                 
Total
  $ 8,266     $ ---     $ 3,433     $ 4,833  
 
Included in the balance of other real estate owned at December 31, 2010 is $1.3 million which represents a commercial property owned by a limited liability corporation in which the Company is a 60% owner.

   
Fair Value Measurements
 
   
Using Significant
 Unobservable Inputs
 
   
Level 3
 
   
Impaired Loans
 
   
(in thousands)
 
Beginning balance March 31, 2010
  $ 1,282  
  Net transfers into Level 3
    3,551  
Ending balance, December 31, 2010
  $ 4,833  

 


 
16


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

 
 
December 31, 2010
   
March 31, 2010
 
 
 
Carrying
   
Estimated
   
Carrying
   
Estimated
 
 
 
Amount
   
Fair Value
   
Amount
   
Fair Value
 
 
 
(In Thousands)
 
Financial assets:
                       
     Cash and cash equivalents
  $ 44,780     $ 44,780     $ 38,982     $ 38,982  
     Interest-bearing time deposits with other banks
    99       99       99       99  
     Available-for-sale securities
    59,079       59,079       63,979       63,979  
     Federal Home Loan Bank stock
    4,396       4,396       4,396       4,396  
     Loans, net
    520,347       524,875       515,504       518,387  
     Accrued interest receivable
    2,488       2,488       2,768       2,768  
                                 
Financial liabilities:
                               
     Deposits
    533,892       539,090       517,572       521,382  
     Advanced payments by borrowers for taxes and insurance
    2,123       2,123       1,171       1,171  
     FHLB advances
    35,617       37,312       56,860       59,041  
     Securities sold under agreements to repurchase
    28,692       28,698       23,460       23,465  
     Subordinated debentures
    3,916       1,363       3,910       1,390  

Item 2.
Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

The following analysis discusses changes in the financial condition and results of operations at and for the three and nine months ended December 31, 2010 and 2009, and should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and the notes thereto, appearing in Part I, Item 1 of this document.

Forward-Looking Statements

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions.  Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions.  By identifying these forward-looking statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed under “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K and Part II, Item 1A of this Report on Form 10-Q, as well as the following factors:  interest rates, general economic conditions, legislation and regulations, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, accounting principles and guidelines, and our ability to recognize enhancements related to our acquisition within expected time frames.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

 
17




Except as required by applicable law and regulation, the Company does not undertake – and specifically disclaims any obligation – to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Comparison of Financial Condition at December 31, 2010 and March 31, 2010

Assets

Total assets were $678.1 million at December 31, 2010, an increase of $3.1 million compared to $675.1 million at March 31, 2010. The increase in total assets was primarily due to a $5.8 million increase in cash and cash equivalents and a $4.8 million increase in net loans, partially offset by a $4.9 million decrease in investments, a $1.3 million decrease in other assets and a $1.2 million decrease in other real estate owned.

Liabilities

Total liabilities were $608.4 million at December 31, 2010, an increase of $1.2 million compared to $607.2 million at March 31, 2010.  The increase in total liabilities was caused primarily by a $16.3 million increase in total deposits, a $5.2 million increase in repurchase agreements and a $1.0 million increase in advance payments by borrowers for taxes and insurance, partially offset by the $21.2 million decrease in FHLB advances.  At December 31, 2010, deposits are comprised of savings accounts totaling $72.9 million, money market deposit accounts totaling $98.7 million, demand and NOW accounts totaling $75.6 million, and certificates of deposits totaling $286.7 million.  The Company’s core deposits, which the Company considers to be all deposits except for certificates of deposits, increased to 46.3% of total deposits at December 31, 2010 from 44.6% at March 31, 2010.

Stockholders’ Equity

Total stockholders’ equity increased $1.8 million to $69.7 million at December 31, 2010 from $67.9 million at March 31, 2010.  The increase was primarily caused by net income of $2.4 million, partially offset by dividends paid of $416,000 and a decrease in accumulated other comprehensive income of $494,000.

Comparison of Operating Results for the Three Months Ended December 31, 2010 and 2009

General

The Company’s results of operations depend primarily on net interest and dividend income, which is the difference between the interest and dividend income earned on its interest-earning assets, such as loans and securities, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings.  The Company also generates noninterest income, primarily from fees and service charges.  Gains on sales of securities and increases in cash surrender value of life insurance policies are additional sources of noninterest income.  The Company’s noninterest expense primarily consists of employee compensation and benefits, occupancy and equipment expense, FDIC insurance assessments, advertising and promotion, data processing, professional fees and other operating expense.

 
18



Net Income

For the three months ended December 31, 2010, the Company reported net income of $910,000, compared to $856,000 for the year ago period.  Basic and diluted income per share for the quarter ended December 31, 2010 were $0.15 each, compared to $0.14 each for the quarter ended December 31, 2009.

Net Interest and Dividend Income

Net interest and dividend income for the three months ended December 31, 2010 and 2009 totaled $5.4 million and $5.0 million, respectively.  The increase in net interest income caused the Company’s net interest margin to increase to 3.47% for the three months ended December 31, 2010 from 3.19% for the three months ended December 31, 2009.  The increase for the quarter was primarily due to a 45 basis point decrease in the rate paid on interest-bearing liabilities and an increase in average interest-earning assets of $4.9 million, partially offset by a $1.7 million increase in average interest-bearing liabilities and a 12 basis point decrease in the yield received on interest-bearing assets.  The changes to the yield on average interest-earning assets and the rate paid on average interest-bearing liabilities caused the Company’s interest rate spread to increase from 2.92% for the quarter ended December 31, 2009 to 3.25% for the quarter ended December 31, 2010.

Interest and dividend income amounted to $8.1 million and $8.4 million for the three months ended December 31, 2010 and 2009, respectively.  Average interest-earning assets were $629.7 million for the quarter ended December 31, 2010 compared to $624.8 million for the quarter ended December 31, 2009.  The increase in average interest-earning assets was caused primarily by a $26.3 million increase in average net loans, partially offset by a $10.7 million decrease in federal funds sold and a $10.7 million decrease in investment securities.  The yield earned on average interest-earning assets decreased 12 basis points to 5.19% for the three months ended December 31, 2010 from 5.31% for the three months ended December 31, 2009.

Interest expense for the quarters ended December 31, 2010 and 2009 was $2.7 million and $3.3 million, respectively.  Average interest-bearing liabilities grew $1.7 million during the quarter ended December 31, 2010 from $554.6 million to $556.3 million primarily due to a $7.5 million increase in average interest-bearing deposits and a $12.1 million increase in average repurchase agreements, partially offset by a $17.9 million decrease in FHLB advances.  The average rate paid on interest-bearing liabilities decreased to 1.94% for the quarter ended December 31, 2010 from 2.39% for the year ago period, due primarily to the decrease in rates paid on certificates of deposit, money market deposit accounts and securities sold under agreements to repurchase, and a decrease in FHLB advances which generally have higher rates.  The average rate paid on certificates of deposit decreased from 2.85% for the quarter ended December 31, 2009 to 2.53% for the current year quarter as market rates have decreased for this type of deposit.

Provision for Loan Losses

The provision for loan losses for the quarters ended December 31, 2010 and 2009 were $359,000 and $623,000, respectively.  The additions to the allowance for loan losses reflected continued growth in the commercial loan portfolio and the challenging economic climate.

 
19



Noninterest Income

For the quarter ended December 31, 2010, noninterest income was $546,000 compared to $902,000 for the quarter ended December 31, 2009.  Affecting noninterest income for the three months ended December 31, 2010 was an $80,000 gain on sale of loans.  Affecting noninterest income for the three months ended December 31, 2009 was a $413,000 gain on sale of securities, primarily due to the gain on sale of auction rate securities.

Noninterest Expense

Noninterest expense for each of the quarters ended December 31, 2010 and 2009 was $4.2 million.  The Company’s efficiency ratio improved from 70.7% for the quarter ended December 31, 2009 to 70.4% for the current year quarter.

Provision for Income Taxes
 
The Company recorded income tax expense of $496,000 and $255,000 for the quarters ended December 31, 2010 and 2009, respectively, with effective tax rates of 35.3% and 23.0%, respectively.  The lower effective tax rate for the three months ended December 31, 2009 is due to the $376,000 gain on sale of auction rate securities not being taxable.

Comparison of Operating Results for the Nine Months Ended December 31, 2010 and 2009

Net Income

For the nine months ended December 31, 2010, the Company reported net income of $2.4 million, compared to $976,000 for the year ago period.  Basic and diluted income per share for the nine months ended December 31, 2010 were $0.41 each, compared to $0.16 each for the nine months ended December 31, 2009.

Net Interest and Dividend Income

Net interest and dividend income for the nine months ended December 31, 2010 and 2009 totaled $16.5 million and $13.6 million, respectively.  The increase in net interest income caused the Company’s net interest margin to increase to 3.52% for the nine months ended December 31, 2010 from 3.03% for the nine months ended December 31, 2009.  The increase for the period was primarily due to a 57 basis point decrease in the rate paid on interest-bearing liabilities and an increase in average interest-earning assets of $28.0 million, partially offset by a $23.0 million increase in average interest-bearing liabilities.  Changes to the yield on average interest-earning assets and the rate paid on average interest-bearing liabilities caused the Company’s interest rate spread to increase from 2.75% for the nine months ended December 31, 2009 to 3.30% for the nine months ended December 31, 2010.

Interest and dividend income amounted to $25.0 million and $24.1 million for the nine months ended December 31 2010 and 2009, respectively.  Average interest-earning assets were $630.2 million for the nine months ended December 31, 2010; an increase of $28.0 million, or 4.6%, compared to $602.2 million for the nine months ended December 31, 2009.  The increase in average interest-earning assets was caused primarily by a $47.6 million increase in average net loans, partially offset by a $15.0 million decrease in federal funds sold and a $4.7 million decrease in investment securities.  The yield earned on average interest-earning assets decreased slightly to 5.32% for the nine months ended December 31, 2010 from 5.33% for the nine months ended December 31, 2009.

 
20



Interest expense for the nine months ended December 31, 2010 and 2009 was $8.5 million and $10.5 million, respectively.  Average interest-bearing liabilities grew $23.0 million during the nine months ended December 31, 2010 from $537.1 million to $560.1 million primarily due to a $23.5 million increase in average interest-bearing deposits and a $13.4 million increase in average repurchase agreements, partially offset by a $13.9 million decrease in FHLB advances.  The average rate paid on interest-bearing liabilities decreased to 2.02% for the nine months ended December 31, 2010 from 2.59% for the year ago period, due primarily to the decrease in rates paid on certificates of deposit, money market deposit accounts and securities sold under agreements to repurchase, and a decrease in the average balances of FHLB advances which generally have higher rates.  The average rate paid on certificates of deposit decreased from 3.05% for the nine months ended December 31, 2009 to 2.52% for the current year period as market rates have decreased for this type of deposit.

Provision for Loan Losses

The provisions for loan losses for the nine months ended December 31, 2010 and 2009 were $1.7 million and $2.0 million, respectively.  The additions to the allowance for loan losses reflected the continued challenging economic climate.

Noninterest Income
 
For the nine months ended December 31, 2010, noninterest income was $2.1 million compared to $2.2 million for the nine months ended December 31, 2009.  The Company recognized $259,000 and $297,000 of gains on sale of securities and loans, respectively, in the nine months ended December 31, 2010 compared to $511,000 and $8,000, respectively, for the nine months ended December 31, 2009.

Noninterest Expense
 
Noninterest expense for the nine months ended December 31, 2010 and 2009 was $13.1 million and $12.7 million, respectively.  During the nine months ended December 31, 2010 the Company recorded a $373,000 increase in other real estate owned expense which included $308,000 in write-downs of other real estate owned.

Provision for Income Taxes
 
The Company recorded income tax expense of $1.4 million and $116,000 for the nine months ended December 31 2010 and 2009, respectively.  The effective tax rate was 36.0% and 10.6% for the nine months ended December 31, 2010 and 2009, respectively.  The lower effective tax rate for the nine months ended December 31, 2009 is due to the $379,000 gain on sale of auction rate securities and the $175,000 gain on sale of the Company’s advisory and investment services division being non-taxable.


 
21


Liquidity and Capital Resources

The term liquidity refers to the ability of the Company to meet current and future short-term financial obligations.  The Company further defines liquidity as the ability to generate adequate amounts of cash to fund loan originations, deposit withdrawals and operating expenses.  Liquidity management is both a daily and long-term function of business management.  The Bank’s primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-related securities, funds provided by operations and borrowings.  The Bank can borrow funds from the Federal Home Loan Bank based on eligible collateral of loans and securities.  The Bank had Federal Home Loan Bank borrowings as of December 31, 2010 of $35.6 million, with unused borrowing capacity of $40.1 million.

The Company’s primary investing activities are the origination of loans and the purchase of mortgage and investment securities.  During the nine months ended December 31, 2010 and 2009 the Company originated loans, net of principal paydowns, of approximately $5.7 million and $(1.9) million, respectively. Purchases of investment securities totaled $32.1 million and $34.0 million for the nine months ended December 31, 2010 and 2009, respectively.

Loan repayment and maturing investment securities are a relatively predictable source of funds.  However, deposit flows, calls of investment securities and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace.  These factors reduce the predictability of the timing of these sources of funds.  Total deposits were $533.9 million at December 31, 2010, a $16.3 million increase from the $517.6 million balance at March 31, 2010.

At December 31, 2010, the Company had outstanding commitments to originate $22.9 million of loans, and available home equity and unadvanced lines of credit and construction loans of approximately $50.1 million.  In addition, the Company had $3.1 million of commercial letters of credit.  Management of the Bank anticipates that the Bank will have sufficient funds to meet its current loan commitments.  Retail certificates of deposit scheduled to mature in one year or less totaled $133.0 million, or 24.9% of total deposits at December 31, 2010.  The Company relies on competitive rates, customer service and long-standing relationships with customers to retain deposits.  Based on the Company’s experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict future terms and conditions upon renewal, a significant portion of such deposits will remain with the Company.

As of December 31, 2010, the Company and the Bank met all capital adequacy requirements to which they were subject.

(dollars in thousands)
                 
 
       
New England Bancshares, Inc.
 
 
 
Required
   
Amount
   
Ratio
 
Tier 1 Capital
    4 %   $ 51,762       7.73 %
Total Risk-Based Capital
    8 %   $ 57,239       12.04 %
Tier 1 Risk-Based Capital
    4 %   $ 51,762       10.89 %



 
22


The Bank’s actual capital amounts and ratios as of December 31, 2010 are presented in the following table.
                                     
                           
To Be Well
 
                           
Capitalized Under
 
               
For Capital
   
Prompt Corrective
 
   
Actual
   
Adequacy Purposes
   
Action Provisions
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
(Dollar amounts in thousands)
                                   
                                     
Total Capital (to Risk Weighted Assets)
  $ 57,337       12.10 %   $ 37,915       >8.0 %   $ 47,393       >10.0 %
Tier 1 Capital (to Risk Weighted Assets)
    51,860       10.94       18,957        >4.0       28,436       >6.0  
Tier 1 Capital (to Average Assets)
    51,860       7.76       26,726       >4.0       33,408       >5.0  
 
Management is not aware of any known trends, events or uncertainties that will have or are reasonably likely to have a material effect on the Company’s or the Bank’s liquidity, capital or operations, nor is management aware of any current recommendations by regulatory authorities which, if implemented, would have a material effect on the Company’s or the Bank’s liquidity, capital or operations.

Off-Balance Sheet Arrangements

In the normal course of operations, the Bank engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in its financial statements.  These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk.  Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit and letters of credit.

For the nine months ended December 31, 2010, the Bank did not engage in off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk Management

The Bank manages the interest rate sensitivity of its interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment.  Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits.  As a result, sharp increases in interest rates may adversely affect the Bank’s earnings while decreases in interest rates may beneficially affect its earnings.  To reduce the potential volatility of its earnings, the Bank has sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread.  Also, the Bank attempts to manage its interest rate risk through: its investment portfolio; an increased focus on commercial and multi-family and commercial real estate lending, which emphasizes the origination of shorter-term adjustable-rate loans; and efforts to originate adjustable-rate residential mortgage loans.  In addition, the Bank sells a portion of its originated long-term, fixed-rate one- to four-family residential loans in the secondary market.  The Bank currently does not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments.

 
23


The Bank has an Asset/Liability Committee, which includes members of both the board of directors and management, to communicate, coordinate and control all aspects involving asset/liability management.  The committees establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

Net Interest Income Simulation Analysis

The Bank analyzes its interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income simulation.  The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest sensitive.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period.

The Bank’s goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income.  Interest income simulations are completed quarterly and presented to the Asset/Liability Committee.  The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions.  The numerous assumptions used in the simulation processes are reviewed by the Asset/Liability Committee on a quarterly basis.  Changes to these assumptions can significantly affect the results of the simulation.  The simulations incorporate assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates.  The simulation analyses incorporate managements’ current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.

The simulation analyses are only an estimate of the Bank’s interest rate risk exposure at a particular point in time.  The Bank continually reviews the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.


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 of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
24



PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings.

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business.  Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Company’s financial condition or results of operations.

Item 1A.  Risk Factors.

The following risk factor represents a material update and addition to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2010 (“Form 10-K”).  The risk factor below should be read in conjunction with the risk factors and other information disclosed in our Form 10-K.  The risks described below and in our Form 10-K are not the only risks facing the Company.  Additional risks not presently known to the Company, or that we currently deem immaterial, may also adversely affect the Company’s business, financial condition or results of operations.

Financial reform legislation recently enacted will, among other things, create a new Consumer Financial Protection Bureau, tighten capital standards and result in new laws and regulations that are expected to increase our costs of operations.

On July 21, 2010 the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). This law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, 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 impacts of the Dodd-Frank Act may not be known for many months or years.

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 with more than $10 billion in assets. Banks with $10 billion or less in assets will continue to be examined for compliance with the consumer laws by their primary 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 Dodd-Frank Act requires minimum leverage (Tier 1) and risk based capital requirements for bank and savings and loan holding companies that are no less than those applicable to banks, which will exclude certain instruments that previously have been eligible for inclusion by bank holding companies as Tier 1 capital.

 
25


The new law provides that the Office of Thrift Supervision will cease to exist one year from the date of the new law’s enactment. The Office of the Comptroller of the Currency, which is currently the primary federal regulator for national banks, will become the primary federal regulator for federal thrifts. The Board of Governors of the Federal Reserve System will supervise and regulate all savings and loan holding companies that were formerly regulated by the Office of Thrift Supervision.

Effective one year after the date of enactment is a provision of the Dodd-Frank Act that eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.

The Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation deposit insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution, rather than deposits. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012.  The legislation also increases the required minimum reserve ratio for the Deposit Insurance Fund, from 1.15% to 1.35% of insured deposits, and directs the FDIC to offset the effects of increased assessments on depository institutions with less than $10 billion in assets.

The Dodd-Frank Act requires that the Company give stockholders a non-binding vote on any “golden parachute” payments, and also requires that the Company give stockholders a non-binding vote on executive compensation starting with the Company’s annual meeting to be held during fiscal year 2014.  The legislation also authorizes the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The Dodd-Frank Act 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.

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.


 
26


Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.

The Company repurchased 11,313 shares of its common stock in the quarter ended December 31, 2010 as follows:

                     
Maximum
 
               
Total
   
Number of
 
               
Number of
   
Shares that
 
               
Shares
   
May Yet Be
 
               
Purchased as
   
Purchased
 
         
Average
   
Part of Publicly
   
Under the
 
For the three months ended
 
Total shares
   
price paid
   
Announced Plans
   
Plans or
 
December 31, 2010
 
repurchased
   
per share
   
or Programs
   
Programs
 
                         
October
    5,913     $ 7.19       5,600       29,824  
November
    4,100       7.43       4,100       25,724  
December
    1,300       7.75       1,300       24,424  
Total
    11,313     $ 7.34       11,000       24,424  

 

On May 12, 2008, the Board of Directors approved a stock repurchase program, which authorized the repurchase of up to 304,924 shares of the Company’s outstanding shares of common stock.  Stock repurchases will be made from time to time and may be effected through open market purchases, block trades and in privately negotiated transactions.

Item 3.       Defaults Upon Senior Securities.

None.

Item 4.      (Removed and Reserved)

Item 5.      Other Information.

None.


 
27


Item 6.    Exhibits.

 
3.1
Articles of Incorporation of New England Bancshares, Inc. (1)
 
3.2
Bylaws of New England Bancshares, Inc. (2)
 
4.1
Specimen stock certificate of New England Bancshares, Inc.(2)
 
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
 
31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
 
32.1
Section 1350 Certification of Chief Executive Officer
 
32.2
Section 1350 Certification of Chief Financial Officer
                _____________________________
 
(1)
Incorporated by reference into this document from the Registration Statement on Form SB-2 (No. 333-128277) as filed on September 13, 2005.
 
(2)
Incorporated by reference into this document from Exhibit 3.1 to the Form 8-K as filed with the Securities and Exchange Commission on October 11, 2007.


SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


   
NEW ENGLAND BANCSHARES, INC.
     
     
Dated: February 10, 2011                   
 
By:/s/ Scott D. Nogles                                       
   
Scott D. Nogles
   
Chief Financial Officer
   
 (principal financial officer)
     
     
Dated: February 10, 2011                   
 
By:/s/ David J. O’Connor                                  
   
David J. O’Connor
   
Chief Executive Officer
     


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