UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2012
OR
o | 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: 0-51856
Newport Bancorp, Inc.
(Exact name of registrant as specified in its charter)
United States of America | 20-4465271 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
100 Bellevue Avenue, Newport, Rhode Island | 02840 | |
(Address of principal executive offices) | (Zip Code) | |
(401) 847-5500
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No o
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 o | Accelerated filer o | Non-accelerated filer o | Smaller Reporting Company ý |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
As of November 1, 2012 the registrant had 3,493,263 shares of common stock outstanding.
NEWPORT BANCORP, INC.
PART I. | FINANCIAL INFORMATION |
Item 1. | Financial Statements |
ASSETS
September 30, 2012 | December 31, 2011 | |||||||
(Unaudited) (Dollars in thousands, except share data) | ||||||||
Cash and due from banks | $ | 25,539 | $ | 19,739 | ||||
Short-term investments | 8,912 | 11,335 | ||||||
Cash and cash equivalents | 34,451 | 31,074 | ||||||
Securities held to maturity, at amortized cost | 33,735 | 36,220 | ||||||
Federal Home Loan Bank stock, at cost | 5,588 | 5,730 | ||||||
Loans | 370,700 | 352,201 | ||||||
Allowance for loan losses | (3,838 | ) | (3,709 | ) | ||||
Loans, net | 366,862 | 348,492 | ||||||
Premises and equipment | 13,702 | 14,706 | ||||||
Accrued interest receivable | 1,251 | 1,268 | ||||||
Net deferred tax asset | 2,809 | 2,809 | ||||||
Bank-owned life insurance | 11,366 | 11,088 | ||||||
Foreclosed real estate | 157 | 839 | ||||||
Prepaid FDIC insurance | 503 | 734 | ||||||
Other assets | 1,143 | 949 | ||||||
Total assets | $ | 471,567 | $ | 453,909 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Deposits | $ | 278,272 | $ | 264,769 | ||||
Long-term borrowings | 136,772 | 133,696 | ||||||
Accrued expenses and other liabilities | 3,909 | 3,790 | ||||||
Total liabilities | 418,953 | 402,255 | ||||||
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued | — | — | ||||||
Common stock, $.01 par value; 19,000,000 shares authorized; 4,878,349 shares issued | 49 | 49 | ||||||
Additional paid-in capital | 50,453 | 50,282 | ||||||
Retained earnings | 21,354 | 20,282 | ||||||
Unearned compensation (252,832 and 272,786 shares at September 30, 2012 and December 31, 2011, respectively) | (2,146 | ) | (2,413 | ) | ||||
Treasury stock, at cost (1,409,535 shares and 1,371,943 shares at September 30, 2012 and December 31, 2011, respectively) | (17,096 | ) | (16,546 | ) | ||||
Total stockholders’ equity | 52,614 | 51,654 | ||||||
Total liabilities and stockholders’ equity | $ | 471,567 | $ | 453,909 |
See accompanying notes to unaudited consolidated financial statements.
1 |
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(Unaudited) (Dollars in thousands, except share data) | ||||||||||||||||
Interest and dividend income: | ||||||||||||||||
Loans | $ | 4,492 | $ | 4,801 | $ | 13,483 | $ | 14,515 | ||||||||
Securities | 364 | 489 | 1,191 | 1,570 | ||||||||||||
Other interest-earning assets | 15 | 15 | 50 | 31 | ||||||||||||
Total interest and dividend income | 4,871 | 5,305 | 14,724 | 16,116 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 285 | 419 | 906 | 1,390 | ||||||||||||
Short-term borrowings | — | — | — | 3 | ||||||||||||
Long-term borrowings | 1,139 | 1,153 | 3,403 | 3,439 | ||||||||||||
Total interest expense | 1,424 | 1,572 | 4,309 | 4,832 | ||||||||||||
Net interest income | 3,447 | 3,733 | 10,415 | 11,284 | ||||||||||||
Provision for loan losses | 176 | 507 | 798 | 1,029 | ||||||||||||
Net interest income, after provision for loan losses | 3,271 | 3,226 | 9,617 | 10,255 | ||||||||||||
Non-interest income: | ||||||||||||||||
Customer service fees | 476 | 519 | 1,402 | 1,467 | ||||||||||||
Bank-owned life insurance | 90 | 92 | 278 | 286 | ||||||||||||
Miscellaneous | 26 | 39 | 40 | 56 | ||||||||||||
Total non-interest income | 592 | 650 | 1,720 | 1,809 | ||||||||||||
Non-interest expenses: | ||||||||||||||||
Salaries and employee benefits | 1,675 | 1,839 | 5,146 | 5,725 | ||||||||||||
Occupancy and equipment | 554 | 537 | 1,646 | 1,647 | ||||||||||||
Data processing | 445 | 406 | 1,247 | 1,167 | ||||||||||||
Professional fees | 147 | 147 | 483 | 433 | ||||||||||||
Marketing | 145 | 151 | 456 | 530 | ||||||||||||
FDIC insurance | 113 | 92 | 261 | 326 | ||||||||||||
Other general and administrative | 155 | 235 | 514 | 670 | ||||||||||||
Total non-interest expenses | 3,234 | 3,407 | 9,753 | 10,498 | ||||||||||||
Income before income taxes | 629 | 469 | 1,584 | 1,566 | ||||||||||||
Provision for income taxes | 212 | 191 | 512 | 548 | ||||||||||||
Net income and comprehensive income | $ | 417 | $ | 278 | $ | 1,072 | $ | 1,018 | ||||||||
Weighted-average shares outstanding: | ||||||||||||||||
Basic | 3,311,469 | 3,321,079 | 3,313,979 | 3,314,766 | ||||||||||||
Diluted | 3,364,158 | 3,331,446 | 3,348,655 | 3,369,618 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.13 | $ | .08 | $ | 0.32 | $ | .31 | ||||||||
Diluted | $ | 0.12 | $ | .08 | $ | 0.32 | $ | .30 |
See accompanying notes to unaudited consolidated financial statements.
2 |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands)
Additional | Total | |||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Unearned | Treasury | Stockholders’ | |||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Compensation | Stock | Equity | ||||||||||||||||||||||
Balance at December 31, 2010 | 4,878,349 | $ | 49 | $ | 50,435 | $ | 18,832 | $ | (2,864 | ) | $ | (16,749 | ) | $ | 49,703 | |||||||||||||
Net income | — | — | — | 1,018 | — | — | 1,018 | |||||||||||||||||||||
Share-based compensation – restricted stock | — | — | — | — | 168 | — | 168 | |||||||||||||||||||||
Share-based compensation – options | — | — | 192 | — | — | — | 192 | |||||||||||||||||||||
ESOP shares committed to be released (19,513 shares) | — | — | 69 | — | 195 | — | 264 | |||||||||||||||||||||
Balance at September 30, 2011 | 4,878,349 | $ | 49 | $ | 50,696 | $ | 19,850 | $ | (2,501 | ) | $ | (16,749 | ) | $ | 51,345 | |||||||||||||
Balance at December 31, 2011 | 4,878,349 | $ | 49 | $ | 50,282 | $ | 20,282 | $ | (2,413 | ) | $ | (16,546 | ) | $ | 51,654 | |||||||||||||
Net income | — | — | — | 1,072 | — | — | 1,072 | |||||||||||||||||||||
Share-based compensation – restricted stock | — | — | (5 | ) | — | 72 | — | 67 | ||||||||||||||||||||
Share-based compensation – options | — | — | 104 | — | — | — | 104 | |||||||||||||||||||||
Stock options exercised (4,308 shares) | — | — | — | — | — | 53 | 53 | |||||||||||||||||||||
ESOP shares committed to be released (19,513 shares) | — | — | 72 | — | 195 | — | 267 | |||||||||||||||||||||
Purchase of treasury shares (41,900 shares) | — | — | — | — | — | (603 | ) | (603 | ) | |||||||||||||||||||
Balance at September 30, 2012 | 4,878,349 | $ | 49 | $ | 50,453 | $ | 21,354 | $ | (2,146 | ) | $ | (17,096 | ) | $ | 52,614 |
See accompanying notes to unaudited consolidated financial statements.
3 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
(Unaudited) (In thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,072 | $ | 1,018 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 798 | 1,029 | ||||||
Accretion of securities | (161 | ) | (115 | ) | ||||
Write-down on foreclosed real estate | — | 25 | ||||||
Loss on sale of foreclosed real estate | 2 | — | ||||||
Amortization of net deferred loan fees | (487 | ) | (262 | ) | ||||
Depreciation and amortization of premises and equipment | 703 | 724 | ||||||
Share-based compensation and ESOP allocation | 438 | 624 | ||||||
Deferred income tax benefit | — | (210 | ) | |||||
Income from bank-owned life insurance | (278 | ) | (286 | ) | ||||
Net change in: | ||||||||
Accrued interest receivable | 17 | 24 | ||||||
Prepaid FDIC insurance | 231 | 308 | ||||||
Other assets | (194 | ) | 311 | |||||
Accrued expenses and other liabilities | 119 | (173 | ) | |||||
Net cash provided by operating activities | 2,260 | 3,017 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of securities held to maturity | (7,998 | ) | — | |||||
Principal payments received on securities held to maturity | 10,644 | 7,542 | ||||||
Redemption of Federal Home Loan stock | 142 | — | ||||||
Net loan (originations) principal payments | (18,906 | ) | 3,106 | |||||
Proceeds from sales of foreclosed real estate | 905 | 171 | ||||||
Additions to premises and equipment | (114 | ) | (1,067 | ) | ||||
Proceeds from sale of premises and equipment | 415 | — | ||||||
Net cash provided (used) by investing activities | (14,912 | ) | 9,752 | |||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 13,503 | 5,931 | ||||||
Net decrease in borrowings with maturities of three months or less | — | (3,000 | ) | |||||
Proceeds from borrowings with maturities in excess of three months | 5,000 | 10,500 | ||||||
Repayment of borrowings with maturities in excess of three months | (1,924 | ) | (6,009 | ) | ||||
Stock options exercised | 53 | — | ||||||
Purchase of treasury stock | (603 | ) | — | |||||
Net cash provided by financing activities | 16,029 | 7,422 | ||||||
Net change in cash and cash equivalents | 3,377 | 20,191 | ||||||
Cash and cash equivalents at beginning of period | 31,074 | 9,375 | ||||||
Cash and cash equivalents at end of period | $ | 34,451 | $ | 29,566 | ||||
Supplementary information: | ||||||||
Interest paid on deposit accounts | $ | 907 | $ | 1,488 | ||||
Interest paid on borrowings | 3,414 | 3,456 | ||||||
Income taxes paid, net of refunds | 569 | 503 | ||||||
Transfers from loans to foreclosed real estate | 225 | 350 |
See accompanying notes to unaudited consolidated financial statements.
4 |
NEWPORT BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial statements include the accounts of Newport Bancorp, Inc. (the “Company”), its wholly-owned subsidiary, Newport Federal Savings Bank (the “Bank” or “Newport Federal”) and the Bank’s wholly-owned subsidiary, Newport Federal Investments, Inc. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Newport Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2011. The results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
NOTE 2 – EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2012, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This ASU amends the disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholder’s equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. There was no impact to the consolidated financial results as the amendments relate only to changes in financial statement presentation.
On January 1, 2012, the Company adopted the FASB ASU 2011-03, Transfers and Servicing (Topic 860), Reconsideration of Effective Control for Repurchase Agreements. This Update provides additional guidance which affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendment removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. Adopting the Update did not have a significant impact on the Company’s consolidated financial statements.
On January 1, 2012, the Company adopted the FASB ASU 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This ASU clarifies and expands the disclosures pertaining to unobservable inputs used in Level 3 fair value measurements. The guidance also requires, for public companies, disclosure of the level within the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. The amendments in this ASU are to be applied prospectively. Relevant additional disclosures have been provided in Note 7 to the accompanying consolidated financial statements.
5 |
NOTE 3 –SECURITIES HELD TO MATURITY
The amortized cost and estimated fair value of securities held to maturity, with gross unrealized gains, follows:
Gross | ||||||||||||
Amortized | Unrealized | Fair | ||||||||||
Cost | Gains | Value | ||||||||||
(In thousands) | ||||||||||||
September 30, 2012 | ||||||||||||
U.S. Government obligations | $ | 7,998 | $ | — | $ | 7,998 | ||||||
Government-sponsored enterprise | ||||||||||||
residential mortgage-backed securities | 25,737 | 2,785 | 28,522 | |||||||||
Total | $ | 33,735 | $ | 2,785 | $ | 36,520 | ||||||
December 31, 2011 | ||||||||||||
Government-sponsored enterprise | ||||||||||||
residential mortgage-backed securities | $ | 36,220 | $ | 3,028 | $ | 39,248 |
At September 30, 2012, the U.S. Government obligations mature within one year.
At September 30, 2012 and December 31, 2011, all securities held to maturity were pledged to secure repurchase agreements (see Note 8).
There were no securities with gross unrealized losses at September 30, 2012 and December 31, 2011.
6 |
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a summary of the balances of loans at September 30, 2012 and December 31, 2011:
September 30, | December 31, | |||||||
2012 | 2011 | |||||||
(In thousands) | ||||||||
Mortgage loans: | ||||||||
One-to-four family residential | $ | 232,361 | $ | 207,773 | ||||
Equity loans and lines of credit | 17,950 | 19,597 | ||||||
Commercial and multi-family residential | 116,326 | 119,486 | ||||||
Construction | 3,699 | 5,016 | ||||||
370,336 | 351,872 | |||||||
Other loans: | ||||||||
Commercial loans | 1,218 | 1,116 | ||||||
Consumer loans | 305 | 399 | ||||||
Total loans | 371,859 | 353,387 | ||||||
Less: Allowance for loan losses | (3,838 | ) | (3,709 | ) | ||||
Net deferred loan fees | (1,159 | ) | (1,186 | ) | ||||
Loans, net | $ | 366,862 | $ | 348,492 |
7 |
The following table provides further information pertaining to the allowance for loan losses and impaired loans:
One-to-Four | Equity Loans | Commercial | ||||||||||||||||||||||
Family | and Lines | and | Other | |||||||||||||||||||||
Residential | of Credit | Multi-Family | Construction | Loans | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Three months ended September 30, 2012 | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Balance at beginning of period | $ | 1,123 | $ | 137 | $ | 2,326 | $ | 52 | $ | 31 | $ | 3,669 | ||||||||||||
Provision for loans losses | 36 | (3 | ) | 132 | 18 | (7 | ) | 176 | ||||||||||||||||
Loans charged-off | — | — | (34 | ) | — | — | (34 | ) | ||||||||||||||||
Recoveries of loans | ||||||||||||||||||||||||
previously charged-off | — | — | 27 | — | — | 27 | ||||||||||||||||||
Balance at end of period | $ | 1,159 | $ | 134 | $ | 2,451 | $ | 70 | $ | 24 | $ | 3,838 | ||||||||||||
Nine months ended September 30, 2012 | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Balance at beginning of period | $ | 1,070 | $ | 147 | $ | 2,373 | $ | 94 | $ | 25 | $ | 3,709 | ||||||||||||
Provision for loans losses | 89 | 12 | 722 | (24 | ) | (1 | ) | 798 | ||||||||||||||||
Loans charged-off | — | (25 | ) | (697 | ) | — | — | (722 | ) | |||||||||||||||
Recoveries of loans | ||||||||||||||||||||||||
previously charged-off | — | — | 53 | — | — | 53 | ||||||||||||||||||
Balance at end of period | $ | 1,159 | $ | 134 | $ | 2,451 | $ | 70 | $ | 24 | $ | 3,838 | ||||||||||||
Three months ended September 30, 2011 | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Balance at beginning of period | $ | 1,032 | $ | 161 | $ | 2,372 | $ | 97 | $ | 25 | $ | 3,687 | ||||||||||||
Provision for loans losses | 89 | 10 | 365 | 8 | 35 | 507 | ||||||||||||||||||
Loans charged-off | (79 | ) | (21 | ) | (389 | ) | — | (37 | ) | (526 | ) | |||||||||||||
Balance at end of period | $ | 1,042 | $ | 150 | $ | 2,348 | $ | 105 | $ | 23 | $ | 3,668 | ||||||||||||
Nine months ended September 30, 2011 | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Balance at beginning of period | $ | 1,028 | $ | 173 | $ | 2,353 | $ | 89 | $ | 29 | $ | 3,672 | ||||||||||||
Provision for loans losses | 106 | 48 | 828 | 16 | 31 | 1,029 | ||||||||||||||||||
Loans charged-off | (92 | ) | (71 | ) | (833 | ) | — | (37 | ) | (1,033 | ) | |||||||||||||
Balance at end of period | $ | 1,042 | $ | 150 | $ | 2,348 | $ | 105 | $ | 23 | $ | 3,668 |
8 |
One-to-Four | Equity Loans | Commercial | ||||||||||||||||||||||
Family | and Lines | and | Other | |||||||||||||||||||||
Residential | of Credit | Multi-Family | Construction | Loans | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
September 30, 2012 | ||||||||||||||||||||||||
Amount of allowance for loan losses | ||||||||||||||||||||||||
for loans deemed to be impaired | $ | 73 | $ | 8 | $ | 201 | $ | — | $ | — | $ | 282 | ||||||||||||
Amount of allowance for loan losses | ||||||||||||||||||||||||
for loans not deemed to be impaired | 1,086 | 126 | 2,250 | 70 | 24 | 3,556 | ||||||||||||||||||
Total allowance for loan losses | $ | 1,159 | $ | 134 | $ | 2,451 | $ | 70 | $ | 24 | $ | 3,838 | ||||||||||||
Recorded investment in: | ||||||||||||||||||||||||
Loans deemed to be impaired | $ | 521 | $ | 57 | $ | 4,426 | $ | — | $ | — | $ | 5,004 | ||||||||||||
Loans deemed not to be impaired | 231,840 | 17,893 | 111,900 | 3,699 | 1,523 | 366,855 | ||||||||||||||||||
Total | $ | 232,361 | $ | 17,950 | $ | 116,326 | $ | 3,699 | $ | 1,523 | $ | 371,859 | ||||||||||||
December 31, 2011 | ||||||||||||||||||||||||
Amount of allowance for loan losses | ||||||||||||||||||||||||
for loans deemed to be impaired | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Amount of allowance for loan losses | ||||||||||||||||||||||||
for loans not deemed to be impaired | 1,070 | 147 | 2,373 | 94 | 25 | 3,709 | ||||||||||||||||||
Total allowance for loan losses | $ | 1,070 | $ | 147 | $ | 2,373 | $ | 94 | $ | 25 | $ | 3,709 | ||||||||||||
Recorded investment in: | ||||||||||||||||||||||||
Loans deemed to be impaired | $ | 1,052 | $ | — | $ | 2,403 | $ | — | $ | — | $ | 3,455 | ||||||||||||
Loans deemed not to be impaired | 206,721 | 19,597 | 117,083 | 5,016 | 1,515 | 349,932 | ||||||||||||||||||
Total | $ | 207,773 | $ | 19,597 | $ | 119,486 | $ | 5,016 | $ | 1,515 | $ | 353,387 |
9 |
The following is a summary of past due and non-accrual loans at September 30, 2012 and December 31, 2011:
Greater than | ||||||||||||||||||||
30-59 Days | 60-89 Days | 90 Days | Total | Loans on | ||||||||||||||||
Past Due | Past Due | Past Due | Past Due | Non-accrual | ||||||||||||||||
September 30, 2012 | (In thousands) | |||||||||||||||||||
Mortgage loans: | ||||||||||||||||||||
One-to-four family residential | $ | 547 | $ | — | $ | — | $ | 547 | $ | 521 | ||||||||||
Equity loans and lines of credit | — | — | — | — | 57 | |||||||||||||||
Commercial and multi-family residential | — | 384 | 1,518 | 1,902 | 3,420 | |||||||||||||||
Total | $ | 547 | $ | 384 | $ | 1,518 | $ | 2,449 | $ | 3,998 | ||||||||||
December 31, 2011 | ||||||||||||||||||||
Mortgage loans: | ||||||||||||||||||||
One-to-four family residential | $ | 149 | $ | 690 | $ | 446 | $ | 1,285 | $ | 1,052 | ||||||||||
Equity loans and lines of credit | 57 | 150 | — | 207 | — | |||||||||||||||
Commercial and multi-family residential | 199 | — | 858 | 1,057 | 858 | |||||||||||||||
Total | $ | 405 | $ | 840 | $ | 1,304 | $ | 2,549 | $ | 1,910 |
At September 30, 2012 and December 31, 2011, there were no loans greater than ninety days past due and still accruing interest.
The following is a summary of troubled debt restructurings for the three months ended June 30, 2012.
Pre-Modification | Post-Modification | |||||||||||
Outstanding | Outstanding | |||||||||||
Number of | Recorded | Recorded | ||||||||||
Contracts | Investment | Investment | ||||||||||
(Dollars in thousands) | ||||||||||||
Commercial and multi-family residential | 5 | $ | 1,008 | $ | 1,008 |
The following is a summary of troubled debt restructurings for the three months ended September 30, 2012. There were no troubled debt restructurings during the first quarter of 2012 and the nine months ended September 30, 2011.
Pre-Modification | Post-Modification | |||||||||||
Outstanding | Outstanding | |||||||||||
Number of | Recorded | Recorded | ||||||||||
Contracts | Investment | Investment | ||||||||||
(Dollars in thousands) | ||||||||||||
One-to-four family residential | 2 | $ | 521 | $ | 521 | |||||||
Equity loans and lines of credit | 1 | 57 | 57 | |||||||||
Commercial and multi-family residential | 2 | 1,428 | 1,425 |
10 |
Rate reductions ranging from 1.75% to 3.25% for periods of approximately 2 years to 7.5 years were granted for six commercial real estate mortgage loans. The other commercial real estate mortgage loan was modified to extend the maturity terms of the existing loan to October 2012. Rate reductions ranging from 1.50% to 1.99% were granted on two one-to-four family residential mortgage and on one home equity loan. Maturity terms were extended by approximately 15 months and 18 months for one one-to-four family residential mortgage loan and one home equity loan, respectively. Management performs a discounted cash flow calculation to determine the amount of impairment reserve required on each of the troubled debt restructurings. Any reserve required is recorded through the provision for loan losses.
There were no troubled debt restructures that defaulted in the first twelve months after restructure during the three and nine months ended September 30, 2012.
A summary of impaired loans at the dates indicated follows:
September 30, 2012 | December 31, 2011 | |||||||||||||||
Recorded Investment | Unpaid Principal Balance | Recorded Investment | Unpaid Principal Balance | |||||||||||||
(In thousands) | ||||||||||||||||
Impaired loans without a valuation allowance: | ||||||||||||||||
Mortgage loans: | ||||||||||||||||
One-to-four family residential | $ | — | $ | — | $ | 1,052 | $ | 1,053 | ||||||||
Commercial and multi-family residential | 2,397 | 2,692 | 2,403 | 2,480 | ||||||||||||
Total | $ | 2,397 | $ | 2,692 | $ | 3,455 | $ | 3,533 |
September 30, 2012 | ||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | ||||||||||
(In thousands) | ||||||||||||
Impaired loans with a valuation allowance: | ||||||||||||
Mortgage loans: | ||||||||||||
One-to-four family residential | $ | 521 | $ | 521 | $ | 73 | ||||||
Equity loans and lines of credit | 57 | 57 | 8 | |||||||||
Commercial and multi-family residential | 2,029 | 2,029 | 201 | |||||||||
Total | $ | 2,607 | $ | 2,607 | $ | 282 |
There were no impaired loans with a valuation allowance at December 31, 2011.
11 |
The following is a summary of the average recorded investment and interest income recognized on impaired loans for the periods indicated:
Three Months Ended September 30, 2012 | Nine Months Ended September 30, 2012 | |||||||||||||||||||||||
Average Recorded Investment | Interest Income Recognized | Interest Income Recognized on Cash Basis | Average Recorded Investment | Interest Income Recognized | Interest Income Recognized on Cash Basis | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Mortgage loans: | ||||||||||||||||||||||||
One-to-four family residential | $ | 977 | $ | 37 | $ | 43 | $ | 1,064 | $ | 43 | $ | 43 | ||||||||||||
Equity loans and lines of credit | 76 | 3 | 3 | 105 | 3 | 3 | ||||||||||||||||||
Commercial and multi-family residential | 4,296 | 34 | 61 | 3,646 | 61 | 61 | ||||||||||||||||||
Total | $ | 5,349 | $ | 74 | $ | 107 | $ | 4,815 | $ | 107 | $ | 107 | ||||||||||||
Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2011 | |||||||||||||||||||||||
Average Recorded Investment | Interest Income Recognized | Interest Income Recognized on Cash Basis | Average Recorded Investment | Interest Income Recognized | Interest Income Recognized on Cash Basis | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Mortgage loans: | ||||||||||||||||||||||||
One-to-four family residential | $ | 295 | $ | 11 | $ | 11 | $ | 172 | $ | 11 | $ | 11 | ||||||||||||
Equity loans and lines of credit | 7 | — | — | 2 | — | — | ||||||||||||||||||
Commercial and multi-family residential | 1,162 | 27 | 27 | 601 | 32 | 32 | ||||||||||||||||||
Total | $ | 1,464 | $ | 38 | $ | 38 | $ | 775 | $ | 43 | $ | 43 |
Credit Quality Information:
The Company utilizes a nine grade internal loan rating system for multi-family mortgages, commercial mortgages, construction mortgages and commercial loans as follows:
Loans rated 1 – 4: Loans in these categories are considered “pass” rated loans with low to average risk.
Loans rated 5: Loans in this category are considered “watch” loans. Loans classified as watch are pass rated loans that management is monitoring more closely but remain acceptable credit.
Loans rated 6: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.
Loans rated 7: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.
Loans rated 8: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
12 |
Loans rated 9: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.
On a quarterly basis, or more often if needed, the Company formally reviews the ratings on all multi-family residential real estate, commercial real estate, construction and commercial loans. Annually, the Company engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its review process.
Information pertaining to the Company’s loans by risk rating follows:
Commercial and | ||||||||||||||||
Multi-family | ||||||||||||||||
Residential | Commercial | |||||||||||||||
Mortgages | Construction | Loans | Total | |||||||||||||
(In thousands) | ||||||||||||||||
September 30, 2012 | ||||||||||||||||
Loans rated 1 - 4 | $ | 88,041 | $ | 907 | $ | 1,014 | $ | 89,962 | ||||||||
Loans rated 5 | 18,159 | 2,792 | 176 | 21,127 | ||||||||||||
Loans rated 6 | 7,688 | — | 28 | 7,716 | ||||||||||||
Loans rated 7 | 2,438 | — | — | 2,438 | ||||||||||||
Loans rated 8 | — | — | — | — | ||||||||||||
Loans rated 9 | — | — | — | — | ||||||||||||
$ | 116,326 | $ | 3,699 | $ | 1,218 | $ | 121,243 | |||||||||
December 31, 2011 | ||||||||||||||||
Loans rated 1 - 4 | $ | 88,036 | $ | 1,210 | $ | 922 | $ | 90,168 | ||||||||
Loans rated 5 | 15,470 | 3,806 | 150 | 19,426 | ||||||||||||
Loans rated 6 | 10,250 | — | 44 | 10,294 | ||||||||||||
Loans rated 7 | 5,730 | — | — | 5,730 | ||||||||||||
Loans rated 8 | — | — | — | — | ||||||||||||
Loans rated 9 | — | — | — | — | ||||||||||||
$ | 119,486 | $ | 5,016 | $ | 1,116 | $ | 125,618 |
The Company utilizes a rating scale of pass, special mention, substandard or doubtful for one-to-four family mortgages and equity loans and lines of credit. On a quarterly basis, or more often if needed, the Company reviews the ratings of these loans and makes adjustments as deemed necessary. At September 30, 2012, residential one-to-four family mortgage loans rated substandard amounted to $521,000 and equity loans and lines of credit rated substandard amounted to $57,000. At December 31, 2011, one-to-four family residential mortgage loans rated substandard amounted to $1.1 million. All other one-to-four family residential real estate and equity loans and lines of credit were classified as pass at September 30, 2012 and December 31, 2011.
NOTE 5 – COMMITMENTS
Outstanding loan commitments totaled $28.0 million at September 30, 2012, as compared to $24.9 million as of December 31, 2011. Loan commitments consist of commitments to originate new loans as well as the outstanding unused portions of lines of credit.
NOTE 6 – EARNINGS PER SHARE
Basic earnings per share (“EPS”) represents net income available to common stockholders divided by the weighted-average number of shares of common stock outstanding during the period. If rights to dividends on unvested options/awards are non-forfeitable, these unvested awards/options are considered outstanding in the computation of basic earnings per share. Diluted EPS reflects additional common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents (stock options and unvested restricted stock) were issued during the period. Treasury shares and unallocated ESOP shares are not deemed outstanding for earnings per share calculations.
13 |
Earnings per common share have been computed based on the following:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In thousands) | ||||||||||||||||
Net income applicable to common stock | $ | 417 | $ | 278 | $ | 1,072 | $ | 1,018 | ||||||||
Weighted average number of common shares issued | 4,878 | 4,878 | 4,878 | 4,878 | ||||||||||||
Less: Weighted average treasury shares | (1,388 | ) | (1,390 | ) | (1,378 | ) | (1,390 | ) | ||||||||
Less: Weighted average unallocated ESOP shares | (218 | ) | (244 | ) | (225 | ) | (251 | ) | ||||||||
Add: Weighted average unvested restricted stock | ||||||||||||||||
plan shares with non-forfeitable dividend rights | 39 | 77 | 39 | 78 | ||||||||||||
Weighted average number of common shares outstanding | ||||||||||||||||
used to calculate basic earnings per common share | 3,311 | 3,321 | 3,314 | 3,315 | ||||||||||||
Effect of dilutive stock options | 53 | 10 | 35 | 55 | ||||||||||||
Weighted average number of common shares outstanding | ||||||||||||||||
used to calculate diluted earnings per common share | 3,364 | 3,331 | 3,349 | 3,370 |
Options for 422,581 and 440,594 shares of common stock were not included in the computation of diluted EPS because they were anti-dilutive for the three and nine month periods ended September 30, 2012, respectively. Options for 477,467 and 432,982 shares of common stock were not included in the computation of diluted EPS because they were anti-dilutive for the three and nine month periods ended September 30, 2011, respectively.
NOTE 7 – FAIR VALUES OF ASSETS AND LIABILITIES
The Company groups its assets and liabilities measured or disclosed at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The following methods and assumptions were used by the Company in estimating fair value disclosures:
Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximate fair values.
14 |
Securities held to maturity: All fair value measurements are obtained from a third-party pricing service and are not adjusted by management. Fair values are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.
FHLB stock: The carrying value of Federal Home Loan Bank of Boston (“FHLB”) stock approximates fair value based on the redemption provisions of the FHLB.
Loans: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms, adjusted for credit risk.
Accrued interest: The carrying amounts of accrued interest approximate fair values.
Deposits: The fair values for non-certificate accounts are, by definition, equal to the amount payable on demand at the reporting date which is the carrying amount. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Long-term borrowings: Fair values of long-term debt are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.
Off-balance-sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The estimated fair values of off-balance-sheet instruments are immaterial.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
There were no assets or liabilities measured at fair value on a recurring basis at September 30, 2012 and December 31, 2011.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
The Company may be required, from time to time, to measure certain assets on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. There were no liabilities measured at fair value on a non-recurring basis at September 30, 2012 and December 31, 2011.
The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets carried at fair value on a non-recurring basis as of September 30, 2012 and December 31, 2011. The losses represent the amounts recorded during 2012 and 2011 on the assets held at September 30, 2012 and December 31, 2011, respectively.
15 |
Total Losses | ||||||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||
At September 30, 2012 | September 30, | September 30, | ||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | 2012 | 2011 | 2012 | 2011 | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Impaired loans | $ | — | $ | — | $ | 730 | $ | 34 | $ | 525 | $ | 636 | $ | 1,032 | ||||||||||||||
Foreclosed real estate | — | — | 157 | — | 25 | 61 | 25 | |||||||||||||||||||||
$ | — | $ | — | $ | 887 | $ | 34 | $ | 550 | $ | 697 | $ | 1,057 | |||||||||||||||
Total Losses | ||||||||||||||||
At December 31, 2011 | Year Ended | |||||||||||||||
Level 1 | Level 2 | Level 3 | December 31, 2011 | |||||||||||||
(In thousands) | ||||||||||||||||
Impaired loans | $ | — | $ | — | $ | 858 | $ | 80 | ||||||||
Foreclosed real estate | — | — | 839 | 413 | ||||||||||||
$ | — | $ | — | $ | 1,697 | $ | 493 |
Losses on impaired loans and foreclosed real estate are based on the appraised value of the underlying collateral, adjusted for selling costs, and may be discounted based on management's estimates of changes in market conditions from time of valuation.
Summary of Fair Value of Financial Instruments
The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.
September 30, 2012 | ||||||||||||||||||||
Carrying | Fair Value | |||||||||||||||||||
Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 34,451 | $ | 34,451 | $ | — | $ | — | $ | 34,451 | ||||||||||
Securities held to maturity | 33,735 | 7,998 | 28,522 | — | 36,520 | |||||||||||||||
FHLB stock | 5,588 | — | — | 5,588 | 5,588 | |||||||||||||||
Loans, net | 366,862 | — | — | 381,747 | 381,747 | |||||||||||||||
Accrued interest receivable | 1,251 | — | — | 1,251 | 1,251 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 278,272 | — | — | 279,171 | 279,171 | |||||||||||||||
Long-term borrowings | 136,772 | — | — | 140,152 | 140,152 | |||||||||||||||
Accrued interest payable | 400 | — | — | 400 | 400 |
16 |
December 31, 2011 | ||||||||
Carrying | Fair | |||||||
Amount | Value | |||||||
(In thousands) | ||||||||
Financial assets: | ||||||||
Cash and cash equivalents | $ | 31,074 | $ | 31,074 | ||||
Securities held to maturity | 36,220 | 39,248 | ||||||
FHLB stock | 5,730 | 5,730 | ||||||
Loans, net | 348,492 | 367,043 | ||||||
Accrued interest receivable | 1,268 | 1,268 | ||||||
Financial liabilities: | ||||||||
Deposits | 264,769 | 265,716 | ||||||
Long-term borrowings | 133,696 | 136,690 | ||||||
Accrued interest payable | 413 | 413 |
NOTE 8 – SECURED BORROWINGS AND ASSETS PLEDGED AS COLLATERAL
FHLB borrowings at September 30, 2012 and December 31, 2011 amounted to $96.8 million and $93.7 million, respectively. All FHLB borrowings are secured by a blanket lien on certain qualified collateral, defined principally as 75% of the carrying value of first mortgage loans on owner-occupied residential property, 50% of the carrying value of certain pledged commercial mortgages and 65% of the carrying value of certain pledged multi-family real estate loans. At September 30, 2012 and December 31, 2011, the carrying amount of assets qualifying as collateral for FHLB advances amounted to $222.5 million and $205.4 million, respectively.
During 2008, the Company entered into a repurchase agreement for $15,000,000 at a rate of 2.58%. This agreement matures in November 2013 and is callable on a quarterly basis.
During 2007, the Company entered into a repurchase agreement for $25,000,000 at a rate of 3.36%, subject to adjustment if 3-month LIBOR exceeds 5.05%. In November 2009 the rate became fixed at 3.36%. This agreement matures in November 2012 and is callable on a quarterly basis.
The amounts of securities collateralizing these repurchase agreements are classified as securities held to maturity and the obligation to repurchase securities sold is reflected as a liability in the consolidated balance sheets. Government-sponsored enterprise residential mortgage-backed securities and U.S. Government obligations pledged to secure these agreements have a carrying value of $33.7 million and $36.2 million and a fair value of $36.5 million and $39.2 million at September 30, 2012 and December 31, 2011, respectively. These securities are held-to-maturity and cannot be sold until the liability that they are pledged against has been paid. In addition, at September 30, 2012 and December 31, 2011, due from banks pledged to secure these agreements amounted to $10.0 million and $6.0 million, respectively.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Management’s discussion and analysis of the financial condition and results of operations at September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto, appearing in Part I, Item 1 of this quarterly report on Form 10-Q.
17 |
Forward-Looking Statements
This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in real estate market values in the Company’s market area, and changes in relevant accounting principles and guidelines. Additional factors are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 under “Item 1A – Risk Factors.” These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. As discussed in the Company’s 2011 Annual Report on Form 10-K, the Company considers the allowance for loan losses and the valuation of the net deferred tax asset to be our critical accounting policies. The Company’s critical accounting policies have not changed since December 31, 2011.
Comparison of Financial Condition at September 30, 2012 and December 31, 2011
Total assets at September 30, 2012 were $471.6 million, an increase of $17.7 million, or 3.9%, compared to $453.9 million at December 31, 2011. The increase in assets was primarily concentrated in net loans and cash and cash equivalents, partially offset by decreases in securities and premises and equipment.
Cash and cash equivalents increased by $3.4 million, or 10.9%, due to principal payments received on mortgage-backed securities and an increase in deposits and borrowings.
The net loan portfolio increased by $18.4 million, or 5.3%, during the first nine months of 2012. The loan portfolio increase was attributable to an increase in residential mortgages (an increase of $24.6 million, or 11.8%), partially offset by decreases in home equity loans and lines (a decrease of $1.6 million, or 8.4%), commercial mortgages (a decrease of $3.2 million, or 2.6%) and construction loans (a decrease of $1.3 million, or 26.3%).
During the first nine months of 2012, deposit balances increased by $13.5 million, or 5.1%. The increase in deposits occurred in NOW/Demand accounts (an increase of $15.2 million, or 13.5%) and savings accounts (an increase of $4.6 million, or 14.2%), partially offset by decreases in money market accounts (a decrease of $2.4 million, or 5.0%) and time deposit accounts (a decrease of $3.9 million, or 5.5%).
The decrease in premises and equipment is attributable to normal depreciation and amortization and the sale of the former Westerly, Rhode Island branch, with a carrying value of $415,000, resulting in a gain of $15,000.
Borrowings, consisting of FHLB advances and two repurchase agreements totaling $40.0 million, increased $3.1 million, or 2.3%, to $136.8 million at September 30, 2012, compared to an outstanding balance of $133.7 million at December 31, 2011.
Total stockholders’ equity at September 30, 2012 was $52.6 million compared to $51.7 million at December 31, 2011. The increase was primarily attributable to net income and stock-based compensation credits, partially offset by share buybacks under the Company’s stock repurchase plan.
18 |
Comparison of Operating Results for the Three and Nine Months Ended September 30, 2012 and 2011
General. Net income increased by $139,000, or 50.0%, to $417,000 for the three months ended September 30, 2012, compared to $278,000 for the three months ended September 30, 2011. The increase was primarily due to decreases in the provision for loan losses and non-interest expenses, partially offset by a decrease in net interest income.
Net income increased by $54,000, or 5.3%, to $1.1 million for the nine months ended September 30, 2012, compared to $1.0 million for the nine months ended September 30, 2011. The increase was primarily due to decreases in the provision for loan losses and non-interest expenses, partially offset by a decrease in net interest income.
Net Interest Income. Net interest income was $3.4 million and $3.7 million for the quarters ended September 30, 2012 and September 30, 2011, respectively. The decrease in net interest income is due to a decrease in the interest earned on loans and securities, partially offset by a decrease in the expense from deposits and borrowings. The Company’s third quarter 2012 interest rate spread decreased to 3.14% from 3.55% for the third quarter of 2011, a decrease of 41 basis points.
Net interest income for the nine months ended September 30, 2012 was $10.4 million, which was $869,000, or 7.7%, less than net interest income of $11.3 million for the nine months ended September 30, 2011. The decrease in net interest income is due to a decrease in the interest earned on loans and securities, partially offset by a decrease in expense from deposits and borrowings. For the nine months ended September 30, 2012, the interest rate spread decreased to 3.21% from 3.52% for the nine months ended September 30, 2011, a decrease of 31 basis points.
19 |
The following table summarizes average balances and annualized average yields and costs for the three months ended September 30, 2012 and 2011.
Three Months Ended September 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Average Balance | Interest and Dividends | Yield/ Cost | Average Balance | Interest and Dividends | Yield/ Cost | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 365,364 | $ | 4,492 | 4.92 | % | $ | 352,999 | $ | 4,801 | 5.44 | % | ||||||||||||
Securities | 35,973 | 364 | 4.05 | 40,966 | 489 | 4.77 | ||||||||||||||||||
Other interest-earning assets | 13,122 | 15 | 0.46 | 6,176 | 15 | 0.97 | ||||||||||||||||||
Total interest-earning assets | 414,459 | 4,871 | 4.70 | 400,141 | 5,305 | 5.30 | ||||||||||||||||||
Bank-owned life insurance | 11,306 | 10,931 | ||||||||||||||||||||||
Other noninterest-earning assets | 45,840 | 45,392 | ||||||||||||||||||||||
Total assets | $ | 471,605 | $ | 456,464 | ||||||||||||||||||||
Liabilities and equity: | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 78,160 | 56 | 0.29 | $ | 71,097 | 106 | 0.60 | ||||||||||||||||
Savings accounts | 36,104 | 7 | 0.08 | 30,893 | 8 | 0.10 | ||||||||||||||||||
Money market accounts | 45,174 | 28 | 0.25 | 49,993 | 57 | 0.46 | ||||||||||||||||||
Certificates of deposit | 68,251 | 194 | 1.14 | 71,414 | 248 | 1.39 | ||||||||||||||||||
Total interest-bearing deposits | 227,689 | 285 | 0.50 | 223,397 | 419 | 0.75 | ||||||||||||||||||
Borrowings | 138,196 | 1,139 | 3.30 | 136,848 | 1,153 | 3.37 | ||||||||||||||||||
Total interest-bearing liabilities | 365,885 | 1,424 | 1.56 | 360,245 | 1,572 | 1.75 | ||||||||||||||||||
Demand deposits | 47,465 | 40,906 | ||||||||||||||||||||||
Other noninterest-bearing liabilities | 5,283 | 3,809 | ||||||||||||||||||||||
Total liabilities | 418,633 | 404,960 | ||||||||||||||||||||||
Stockholders’ equity | 52,972 | 51,504 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 471,605 | $ | 456,464 | ||||||||||||||||||||
Net interest income | $ | 3,447 | $ | 3,733 | ||||||||||||||||||||
Interest rate spread | 3.14 | % | 3. 55% | |||||||||||||||||||||
Net interest margin | 3.33 | % | 3.73 | % | ||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 113.28 | % | 111.07 | % | ||||||||||||||||||||
Total interest and dividend income decreased $434,000, or 8.2%, between the two periods primarily due to a decrease in interest earned on loans and securities. Interest earned on loans decreased $309,000, or 6.4%, for the three months ended September 30, 2012 due to a decrease in the average yield earned on loans, partially offset by an increase in the average balance of loans. Average loans increased 3.5% to $365.4 million for the three months ended September 30, 2012 from $353.0 million for the three months ended September 30, 2011, and the yield earned on loans decreased to 4.92% for the three months ended September 30, 2012 from 5.44% for the three months ended September 30, 2011. Interest earned on securities decreased $125,000 due to the decrease in the average balance of securities to $36.0 million for the three months ended September 30, 2012 from $41.0 million for the three months ended September 30, 2011, in addition to the 72 basis point decrease in the average yield earned on securities. Interest earned on other-interest earning assets remained unchanged for three months ended September 30, 2012 from the three months ended September 30, 2011.
20 |
Total interest expense decreased $148,000 to $1.4 million for the three months ended September 30, 2012 from $1.6 million for the three months ended September 30, 2011, due to a 19 basis point decrease in the total average cost of interest-bearing liabilities, including a 25 basis point decrease in the total average cost of interest-bearing deposits. The reductions in interest expense related to interest-bearing deposits were seen in interest-bearing demand deposit accounts (a decrease of $50,000, or 31 basis points in the average cost), savings accounts (a decrease of $1,000, or 2 basis points in the average cost), money market accounts (a decrease of $29,000, or 21 basis points in the average cost), and certificate of deposit accounts (a decrease of $54,000, or 25 basis points in the average cost). The cost of total borrowings for the three months ended September 30, 2012 totaled $1.1 million and decreased $14,000, or 1.2%, from the three months ended September 30, 2011, due to a 7 basis point decrease in the average cost, offset by a $1.3 million increase in the average balance to $138.2 million from $136.8 million.
21 |
The following table summarizes average balances and annualized average yields and costs for the nine months ended September 30, 2012 and 2011.
Nine Months Ended September 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Average Balance | Interest and Dividends | Yield/ Cost | Average Balance | Interest and Dividends | Yield/ Cost | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 358,243 | $ | 13,483 | 5.02 | % | $ | 355,131 | $ | 14,515 | 5.45 | % | ||||||||||||
Securities | 36,273 | 1,191 | 4.38 | 43,097 | 1,570 | 4.86 | ||||||||||||||||||
Other interest-earning assets | 15,453 | 50 | 0.43 | 6,165 | 31 | 0.67 | ||||||||||||||||||
Total interest-earning assets | 409,969 | 14,724 | 4.79 | 404,393 | 16,116 | 5.31 | ||||||||||||||||||
Bank-owned life insurance | 11,216 | 10,838 | ||||||||||||||||||||||
Other noninterest-earning assets | 43,143 | 38,061 | ||||||||||||||||||||||
Total assets | $ | 464,328 | $ | 453,292 | ||||||||||||||||||||
Liabilities and equity: | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 76,005 | 170 | 0.30 | $ | 71,890 | 373 | 0.69 | ||||||||||||||||
Savings accounts | 34,453 | 21 | 0.08 | 30,315 | 36 | 0.16 | ||||||||||||||||||
Money market accounts | 47,456 | 91 | 0.26 | 51,617 | 252 | 0.65 | ||||||||||||||||||
Certificates of deposit | 69,386 | 624 | 1.20 | 70,172 | 729 | 1.39 | ||||||||||||||||||
Total interest-bearing deposits | 227,300 | 906 | 0.53 | 223,994 | 1,390 | 0.83 | ||||||||||||||||||
Borrowings | 136,994 | 3,403 | 3.31 | 136,542 | 3,442 | 3.36 | ||||||||||||||||||
Total interest-bearing liabilities | 364,294 | 4,309 | 1.58 | 360,536 | 4,832 | 1.79 | ||||||||||||||||||
Demand deposits | 42,575 | 37,990 | ||||||||||||||||||||||
Other noninterest-bearing liabilities | 4,831 | 3,850 | ||||||||||||||||||||||
Total liabilities | 411,700 | 402,376 | ||||||||||||||||||||||
Stockholders’ equity | 52,628 | 50,916 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 464,328 | $ | 453,292 | ||||||||||||||||||||
Net interest income | $ | 10,415 | $ | 11,284 | ||||||||||||||||||||
Interest rate spread | 3.21 | % | 3.52 | % | ||||||||||||||||||||
Net interest margin | 3.39 | % | 3.72 | % | ||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 112.54 | % | 112.16 | % | ||||||||||||||||||||
Total interest and dividend income decreased $1.4 million, or 8.6%, between the nine-month periods primarily due to a decrease in interest earned on loans and securities. Interest earned on loans decreased $1.0 million, or 7.1%, for the nine months ended September 30, 2012 due to a decrease in the average yield earned on loans, partially offset by an increase in the average balance of loans. Average loans increased 0.9% to $358.2 million for the nine months ended September 30, 2012 from $355.1 million for the nine months ended September 30, 2011. The yield earned on loans decreased to 5.02% for the nine months ended September 30, 2012 from 5.45% for the nine months ended September 30, 2011. Interest earned on securities decreased $379,000 due to the decrease in the average balance of securities to $36.3 million for the nine months ended September 30, 2012 from $43.1 million for the nine months ended September 30, 2011, in addition to the 48 basis point decrease in the average yield earned on securities. Interest earned on other-interest earning assets increased to $50,000 for the nine months ended September 30, 2012 from $31,000 for the nine months ended September 30, 2011, primarily due to the increase in the average balance of other interest-earning assets.
22 |
Total interest expense decreased $523,000 to $4.3 million for the nine months ended September 30, 2012 from $4.8 million for the nine months ended September 30, 2011, due to a 21 basis point decrease in the total average cost of interest-bearing liabilities, including a 30 basis point decrease in the total average cost of interest-bearing deposits. The reductions in interest expense related to interest-bearing deposits were seen in interest-bearing demand deposit accounts (a decrease of $203,000, or 39 basis points in the average cost), savings accounts (a decrease of $15,000, or 8 basis points in the average cost), money market accounts (a decrease of $161,000, or 39 basis points in the average cost), and certificate of deposit accounts (a decrease of $105,000, or 19 basis points in the average cost). The cost of total borrowings for the nine months ended September 30, 2012 totaled $3.4 million and decreased $39,000, or 1.1%, from the nine months ended September 30, 2011, primarily due to 5 basis point decrease in the average cost.
23 |
Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rates (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). Changes due to both volume and rate have been allocated proportionately to the volume and rate changes. The net column represents the sum of the prior columns.
For the Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011 | ||||||||||||
Increase (Decrease) Due to | ||||||||||||
Volume | Rate | Net | ||||||||||
(In thousands) | ||||||||||||
Interest Income: | ||||||||||||
Loans | $ | 903 | $ | (1,212 | ) | $ | (309 | ) | ||||
Securities | (55 | ) | (70 | ) | (125 | ) | ||||||
Other interest-earning assets | 43 | (43 | ) | — | ||||||||
Total interest-earning assets | 891 | (1,325 | ) | (434 | ) | |||||||
Interest Expense: | ||||||||||||
Deposits | 54 | (188 | ) | (134 | ) | |||||||
Borrowings | 58 | (72 | ) | (14 | ) | |||||||
Total interest-bearing liabilities | 112 | (260 | ) | (148 | ) | |||||||
Change in net interest income | $ | 779 | $ | (1,065 | ) | $ | (286 | ) | ||||
For the Nine Months
Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011 | ||||||||||||
Increase (Decrease) Due to | ||||||||||||
Volume | Rate | Net | ||||||||||
(In thousands) | ||||||||||||
Interest Income: | ||||||||||||
Loans | $ | 202 | $ | (1,234 | ) | $ | (1,032 | ) | ||||
Securities | (233 | ) | (146 | ) | (379 | ) | ||||||
Other interest-earning assets | 39 | (20 | ) | 19 | ||||||||
Total interest-earning assets | 8 | (1,400 | ) | (1,392 | ) | |||||||
Interest Expense: | ||||||||||||
Deposits | 33 | (517 | ) | (484 | ) | |||||||
Borrowings | 18 | (57 | ) | (39 | ) | |||||||
Total interest-bearing liabilities | 51 | (574 | ) | (523 | ) | |||||||
Change in net interest income | $ | (43 | ) | $ | (826 | ) | $ | (869 | ) |
24 |
Provision for Loan Losses. The Company’s management reviews the level of the allowance for loan losses on a quarterly basis and establishes the provision for loan losses based upon the volume and types of lending, delinquency levels, loss experience, the amount of impaired and classified loans, economic conditions and other factors related to the collectability of the loan portfolio. The Company’s loan loss provision for the three months ended September 30, 2012 was $176,000 compared to $507,000 the three months ended September 30, 2011. The Company’s loan loss provision for the nine months ended September 30, 2012 was $798,000 compared to $1.0 million for the nine months ended September 30, 2011. The provision for the 2012 periods decreased compared to the provision for the 2011 periods due to changes in the loan portfolio mix, a decrease in non-impaired classified loans under watch by management and a decrease in charge-offs, partially offset by loan growth and an increase in allocated reserves for loans that have been restructured. At September 30, 2012 there were $15.1 million of classified and criticized loans compared to $17.1 million of such loans at December 31, 2011. At September 30, 2012, loans classified as special mention totaled $7.7 million, which consisted primarily of commercial and multi-family residential mortgages, compared to $10.3 million at December 31, 2011. Loans classified as substandard, including all impaired loans, totaled $7.4 million at September 30, 2012, compared to $6.8 million at December 31, 2011. The decrease in special mention loans is due to a shift in some of the 2011 special mention loans into the substandard and impaired category, resulting in the increase in the substandard and impaired loans at September 30, 2012. Total classified and criticized loans represent 4.1% of the Company’s total gross loans at September 30, 2012, compared to 4.4% at September 30, 2011.
There were no changes in the methodology of calculating the allowance for loan losses from the first nine months of 2011 through the first nine months of 2012. The percentages used to calculate the required reserves for the non-classified loan portfolio and substandard loans were consistent for the periods. The percentages used to calculate the required reserves for the watch and special mention loans were higher in the first nine months of 2012, when compared to the same period in 2011, due to an increase in the trend of charge-offs and delinquencies. The allowance for loan losses as a percentage of total loans was 1.04%, 1.05% and 1.03% at September 30, 2012, December 31, 2011 and September 30, 2011, respectively.
The following table provides information with respect to our non-performing assets at the dates indicated. There were no accruing loans past due 90 days or more at the dates indicated. All nonaccrual loans are impaired.
September 30, | December 31, | September 30, | ||||||||||
2012 | 2011 | 2011 | ||||||||||
(Dollars in thousands) | ||||||||||||
Nonaccrual loans: | ||||||||||||
Real estate – mortgage: | ||||||||||||
One-to-four family residential | $ | 521 | $ | 1,052 | $ | 550 | ||||||
Home equity loans and lines of credit | 57 | — | — | |||||||||
Commercial and multi-family | 3,420 | 858 | 1,143 | |||||||||
Total nonaccrual loans | 3,998 | 1,910 | 1,693 | |||||||||
Foreclosed real estate | 157 | 839 | 255 | |||||||||
Total non-performing assets | $ | 4,155 | $ | 2,749 | $ | 1,948 | ||||||
Total non-performing loans to total loans | 1.09 | % | 0.55 | % | 0.48 | % | ||||||
Total non-performing loans to total assets | 0.85 | % | 0.42 | % | 0.37 | % | ||||||
Total non-performing assets to total assets | 0.88 | % | 0.61 | % | 0.42 | % |
Non-performing assets were $4.2 million at September 30, 2012, an increase of $1.4 million from December 31, 2011. There were $1.9 million of non-performing assets at September 30, 2011. Non-performing loans have increased in the first half of 2012 as the deterioration in general economic conditions continues, including decreased real estate values, which have resulted in significant challenges for some residential and commercial borrowers. The economic downturn has also resulted in an increase in some loans that have been restructured.
At September 30, 2012, the Company had one property, valued at $157,000, classified as foreclosed real estate. Net loan charge-offs totaling $6,000 and $669,000 were recognized during the quarter and nine months ended September 30, 2012, respectively.
Non-interest Income. Non-interest income for the three months ended September 30, 2012 totaled $592,000, a decrease of $58,000, or 8.9%, compared to $650,000 for the three months ended September 30, 2011. The decrease in non-interest income for the third quarter of 2012 from the third quarter of 2011 is primarily attributable to a $43,000 decrease in customer services fees.
25 |
Non-interest income for the nine months ended September 30, 2012 totaled $1.7 million, a decrease of $89,000, or 4.9%, compared to $1.8 million for the nine months ended September 30, 2011. The decrease in non-interest income for the first nine months of 2012 compared to the same period in 2011 is primarily due to the $65,000 decrease in customer service fees.
Non-interest Expense. Non-interest expenses totaled $3.2 million for the quarter ended September 30, 2012 compared to $3.4 million for the quarter ended September 30, 2011. The $164,000 decrease in salaries and employee benefits and the $80,000 decrease in other general and administrative expenses in the third quarter of 2012 is the primary reason for the decrease in non-interest expenses.
For the nine months ended September 30, 2012, non-interest expenses totaled $9.8 million, a decrease of $745,000, or 7.1%, compared to the same period in 2011. The decrease in non-interest expenses for the first nine months of 2012 compared to the first nine months of 2011 is attributable to decreases in salaries and employee benefits, marketing costs, FDIC insurance costs and other general and administrative expenses, partially offset by increases in data processing fees and professional fees.
The decrease in salaries and benefits for both the three and nine month periods is primarily due to a decrease in salary costs and a reduction in the stock-based compensation expense associated with option grants and restricted stock awards. The accelerated method of expense recognition was adopted at the inception of the equity incentive plan on October 1, 2007, resulting in a higher stock-based compensation expense in the 2011 period compared to the 2012 period. The decrease in marketing costs is a result of a continued effort by management to reduce advertising and marketing expenses. The decrease in FDIC insurance was a result of the FDIC rulemaking that changed its assessment system for deposit insurance coverage from one based on domestic deposits to one based on consolidated total assets less tangible equity and revised the assessment rate schedule. The new rules, effective for the quarter ended June 30, 2011, resulted in a lower expense in deposit insurance coverage in the first nine months of 2012 compared to the first nine months of 2011. The decrease in other general and administrative expenses is primarily due to decreases in foreclosed real estate and stationery and office supply expenses. The increase in professional costs is due to an increase in legal expenses related to matters associated with problem loans.
Income Taxes. The provision for income taxes for the three months ended September 30, 2012 was $212,000 compared to $191,000 for the three months ended September 30, 2011. The increase in the tax provision is due to higher income before taxes in the 2012 period, offset by a decrease in the effective tax rate for the third quarter of 2012 to 33.7%, from 40.7% for the 2011 period. The higher effective tax rate for the 2011 period was a result of an additional tax provision of $36,000 recorded in the third quarter of 2011 due to the revised estimate of the available deduction for the donation made in 2006 to the charitable foundation, for which the carryforward expired in 2011.
The provision for income taxes for the nine months ended September 30, 2012 was $512,000, compared to $548,000 for the nine months ended September 30, 2011. The effective tax rate for the nine month period of 2012 was 32.3%, versus 35.0% for the 2011 period.
Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities and borrowings from the Federal Home Loan Bank of Boston. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.
26 |
Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At September 30, 2012, cash and cash equivalents totaled $34.5 million. On September 30, 2012, we had $96.8 million of borrowings outstanding with the Federal Home Loan Bank of Boston and we had the ability to borrow an additional $61.6 million from the Federal Home Loan Bank of Boston, subject to pledging requirements.
At September 30, 2012, we had $28.0 million in loan commitments outstanding, which consisted of $7.6 million of real estate loan commitments, $14.1 million in unused home equity lines of credit, $2.0 million in construction loan commitments and $3.4 million in commercial lines of credit commitments. Certificates of deposit due within one year of September 30, 2012 totaled $41.8 million, or 62.6% of certificates of deposit. This percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the recent interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2012. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
Capital Management. At September 30, 2012, Newport Federal was subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency (OCC), including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2012, we exceeded all of our regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines.
Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.
For the three months ended September 30, 2012, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Qualitative Aspects of Market Risk. The Company’s most significant form of market risk is interest rate risk. We manage the interest rate sensitivity of our 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 our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk emphasizes: adjusting the maturities of borrowings; adjusting the investment portfolio mix and duration; and periodically selling fixed-rate mortgage loans and available-for-sale investment securities.
We have an Asset Liability Management Committee to communicate, coordinate and control all aspects involving asset/liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.
Quantitative Aspects of Market Risk. We use an interest rate sensitivity analysis to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in net economic value of equity (EVE) of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Net EVE represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 400 basis point increase or 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. We measure interest rate risk by modeling the changes in EVE over a variety of interest rate scenarios.
27 |
The following table presents the change in our net EVE at August 31, 2012 (the most current information available), that would occur in the event of an immediate change in interest rates with no effect given to any steps that we might take to counteract that change. The Bank expects that its net EVE at September 30, 2012 is consistent with the table below.
Net EVE (Dollars in thousands) | Net EVE as % of Economic Value of Assets | |||||||||||||||||||
Basis Point (“bp”) Change in Rates | Amount | Change | % Change | EVE Ratio | Change (bp) | |||||||||||||||
400 | $ | 41,414 | $ | (17,579 | ) | (29.8 | ) | 9.40 | % | (263 | ) | |||||||||
300 | 46,808 | (12,185 | ) | (20.7 | ) | 10.33 | % | (170 | ) | |||||||||||
200 | 52,107 | (6,886 | ) | (11.7 | ) | 11.18 | % | (85 | ) | |||||||||||
100 | 56,502 | (2,491 | ) | (4.2 | ) | 11.80 | % | (23 | ) | |||||||||||
0 | 58,993 | — | — | 12.03 | % | — | ||||||||||||||
(100) | 52,889 | (6,104 | ) | (10.3 | ) | 10.71 | % | (132 | ) |
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.
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 and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, no change in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. | OTHER INFORMATION |
Item 1. | Legal Proceedings. |
From time to time, we may be party to various legal proceedings incident to our business. At September 30, 2012, we were not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
28 |
Item 1A. | Risk Factors. |
Risk factors that may affect future results were discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The Company’s evaluation of its risk factors has not changed materially since December 31, 2011.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
a) | Not applicable |
b) | Not applicable |
c) | The following table presents a summary of the Company’s share repurchases during the quarter ended September 30, 2012. |
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced program (1) | Maximum number of shares that may yet be purchased under the program (1) | ||||||||||||
July 2012 | — | $ | — | — | 155,170 | |||||||||||
August 2012 | 10,000 | 14.30 | 10,000 | 145,170 | ||||||||||||
September 2012 | 26,000 | 14.55 | 26,000 | 119,170 | ||||||||||||
Total | 36,000 | $ | 14.48 | 36,000 |
____________
(1) On November 18, 2011, the Company announced the commencement of a stock repurchase program to acquire up to 176,070 shares, or 5%, of the Company’s then outstanding common stock. Repurchases, which will be conducted through open market purchases or privately negotiated transactions, will be made from time to time, depending on market conditions and other factors. There is no guarantee as to the exact number of shares to be repurchased by the Company.
Item 3. | Defaults Upon Senior Securities. |
Not applicable
Item 5. | Other Information. |
None.
Item 6. | Exhibits. |
31.1 | Rule 13a-14(a)/15d-14(c) Certification of Chief Executive Officer* |
31.2 | Rule 13a-14(a)/15d-14(c) Certification of Chief Financial Officer* |
32.1 | Section 1350 Certifications* |
29 |
101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011, (ii) the Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2012 and 2011, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2012 and 2011, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011, and (v) the notes to the Consolidated Financial Statements.* |
* | This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
30 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Newport Bancorp, Inc. | ||
Date: November 9, 2012 | By: | /s/ Kevin M. McCarthy |
Kevin M. McCarthy | ||
President and Chief Executive Officer | ||
Date: November 9, 2012 | By: | /s/ Bruce A. Walsh |
Bruce A. Walsh | ||
Executive Vice President and Chief Financial Officer | ||
(Principal Financial and Chief Accounting Officer) | ||
31 |
Exhibit 31.1
CERTIFICATION
I, Kevin M. McCarthy, President and Chief Executive Officer of Newport Bancorp, Inc., certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Newport Bancorp, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: | November 9, 2012 | /s/ Kevin M. McCarthy |
Kevin M. McCarthy | ||
President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Bruce A. Walsh, Executive Vice President and Chief Financial Officer of Newport Bancorp, Inc., certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Newport Bancorp, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: | November 9, 2012 | /s/ Bruce A. Walsh |
Bruce A. Walsh | ||
Executive Vice President and Chief Financial Officer
|
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADDED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Newport Bancorp, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2012 as filed with the Securities and Exchange Commission (the “Report”), the undersigned hereby certify, pursuant to 18 U.S.C. § 1350, as added by § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. |
Date: | November 9, 2012 | /s/ Kevin M. McCarthy | |
Kevin M. McCarthy | |||
President and Chief Executive Officer | |||
Date: | November 9, 2012 | /s/ Bruce A. Walsh | |
Bruce A. Walsh | |||
Executive Vice President and Chief Financial Officer | |||
SECURED BORROWINGS AND COLLATERAL (Details Narrative) (USD $)
In Thousands, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
Dec. 31, 2008
|
Dec. 31, 2007
|
---|---|---|---|---|
Secured Borrowings And Collateral Details Narrative | ||||
FHLB borrowings | $ 96,800 | $ 93,700 | ||
FHLB borrowings collateral description | All FHLB borrowings are secured by a blanket lien on certain qualified collateral, defined principally as 75% of the carrying value of first mortgage loans on owner-occupied residential property, 50% of the carrying value of certain pledged commercial mortgages and 65% of the carrying value of certain pledged multi-family real estate loans. | All FHLB borrowings are secured by a blanket lien on certain qualified collateral, defined principally as 75% of the carrying value of first mortgage loans on owner-occupied residential property, 50% of the carrying value of certain pledged commercial mortgages and 65% of the carrying value of certain pledged multi-family real estate loans. | ||
Carrying amount of assets qualifying as collateral for FHLB advances | 222,500 | 205,400 | ||
Repurchase agreements | 15,000 | 25,000 | ||
Repurchase agreements, Interest rate (as a percent) | 2.58% | 3.36% | ||
Adjustment of interest rate if libor exceeds rate stated (as a percent) | 5.05% | |||
Carrying value of securities pledged - repurchase agreements | 33,700 | 36,200 | ||
Fair value of securities pledged - repurchase agreements | 36,500 | 39,200 | ||
Amount due from entity for which assets pledged | $ 10,000 | $ 6,000 |
LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 3) (USD $)
In Thousands, unless otherwise specified |
Sep. 30, 2012
|
---|---|
Number of Contracts | 5 |
Pre-Modification Outstanding Recorded Investment | $ 1,008 |
Post-Modification Outstanding Recorded Investment | 1,008 |
One-to-four family residential
|
|
Number of Contracts | 2 |
Pre-Modification Outstanding Recorded Investment | 521 |
Post-Modification Outstanding Recorded Investment | 521 |
Equity loans and lines of credit
|
|
Number of Contracts | 1 |
Pre-Modification Outstanding Recorded Investment | 57 |
Post-Modification Outstanding Recorded Investment | 57 |
Commercial and multi family residential
|
|
Number of Contracts | 2 |
Pre-Modification Outstanding Recorded Investment | 1,428 |
Post-Modification Outstanding Recorded Investment | $ 1,425 |
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
|
9 Months Ended |
---|---|
Sep. 30, 2012
|
|
Effect Of Recent Accounting Pronouncements | |
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS | NOTE 2 EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2012, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This ASU amends the disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholders equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. There was no impact to the consolidated financial results as the amendments relate only to changes in financial statement presentation.
On January 1, 2012, the Company adopted the FASB ASU 2011-03, Transfers and Servicing (Topic 860), Reconsideration of Effective Control for Repurchase Agreements. This Update provides additional guidance which affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendment removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. Adopting the Update did not have a significant impact on the Companys consolidated financial statements.
On January 1, 2012, the Company adopted the FASB ASU 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This ASU clarifies and expands the disclosures pertaining to unobservable inputs used in Level 3 fair value measurements. The guidance also requires, for public companies, disclosure of the level within the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. The amendments in this ASU are to be applied prospectively. Relevant additional disclosures have been provided in Note 7 to the accompanying consolidated financial statements. |