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EXCEL - IDEA: XBRL DOCUMENT - Newport Bancorp Inc | Financial_Report.xls |
EX-31.1 - EX-31.1 - Newport Bancorp Inc | ex31-1.htm |
EX-32.2 - EX-32.2 - Newport Bancorp Inc | ex32-2.htm |
EX-32.1 - EX-32.1 - Newport Bancorp Inc | ex32-1.htm |
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 March 31, 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 May 1, 2012, the registrant had 3,506,206 shares of common stock outstanding.
NEWPORT BANCORP, INC.
PART I. | FINANCIAL INFORMATION |
Item 1. | Financial Statements |
ASSETS
March 31, 2012 | December 31, 2011 | |||||||
(Unaudited) (Dollars in thousands, except per share data) | ||||||||
Cash and due from banks | $ | 21,058 | $ | 19,739 | ||||
Short-term investments | 18,646 | 11,335 | ||||||
Cash and cash equivalents | 39,704 | 31,074 | ||||||
Securities held to maturity, at amortized cost | 36,860 | 36,220 | ||||||
Federal Home Loan Bank stock, at cost | 5,588 | 5,730 | ||||||
Loans | 357,222 | 352,201 | ||||||
Allowance for loan losses | (3,679 | ) | (3,709 | ) | ||||
Loans, net | 353,543 | 348,492 | ||||||
Premises and equipment, net | 14,507 | 14,706 | ||||||
Accrued interest receivable | 1,241 | 1,268 | ||||||
Net deferred tax asset | 2,809 | 2,809 | ||||||
Bank-owned life insurance | 11,187 | 11,088 | ||||||
Foreclosed real estate | 587 | 839 | ||||||
Prepaid FDIC insurance | 665 | 734 | ||||||
Other assets | 844 | 949 | ||||||
Total assets | $ | 467,535 | $ | 453,909 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
| ||||||||
Deposits | $ | 273,080 | $ | 264,769 | ||||
Long-term borrowings | 138,724 | 133,696 | ||||||
Accrued expenses and other liabilities | 3,536 | 3,790 | ||||||
Total liabilities | 415,340 | 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 | 50,333 | 50,282 | ||||||
Retained earnings | 20,684 | 20,282 | ||||||
Unearned compensation (266,281 and 272,786 shares at | ||||||||
March 31, 2012 and December 31, 2011, respectively) | (2,322 | ) | (2,413 | ) | ||||
Treasury stock, at cost (1,372,143 and 1,371,943 shares at | ||||||||
March 31, 2012 and December 31, 2011, respectively) | (16,549 | ) | (16,546 | ) | ||||
Total stockholders’ equity | 52,195 | 51,654 | ||||||
Total liabilities and stockholders’ equity | $ | 467,535 | $ | 453,909 | ||||
See accompanying notes to unaudited consolidated financial statements.
1 |
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
(Unaudited) (Dollars in thousands, except per share data) | ||||||||
Interest and dividend income: | ||||||||
Loans | $ | 4,559 | $ | 4,852 | ||||
Securities | 433 | 572 | ||||||
Other interest-earning assets | 18 | 7 | ||||||
Total interest and dividend income | 5,010 | 5,431 | ||||||
Interest expense: | ||||||||
Deposits | 318 | 494 | ||||||
Short-term borrowings | — | 3 | ||||||
Long-term borrowings | 1,131 | 1,139 | ||||||
Total interest expense | 1,449 | 1,636 | ||||||
Net interest income | 3,561 | 3,795 | ||||||
Provision for loan losses | 281 | 315 | ||||||
Net interest income, after provision for loan losses | 3,280 | 3,480 | ||||||
Non-interest income: | ||||||||
Customer service fees | 437 | 443 | ||||||
Bank-owned life insurance | 99 | 102 | ||||||
Miscellaneous | 7 | 9 | ||||||
Total non-interest income | 543 | 554 | ||||||
Non-interest expenses: | ||||||||
Salaries and employee benefits | 1,774 | 1,951 | ||||||
Occupancy and equipment | 528 | 575 | ||||||
Data processing | 402 | 395 | ||||||
Professional fees | 153 | 134 | ||||||
Marketing | 147 | 194 | ||||||
FDIC insurance | 76 | 128 | ||||||
Other general and administrative | 154 | 215 | ||||||
Total non-interest expenses | 3,234 | 3,592 | ||||||
Income and other comprehensive income before income taxes | 589 | 442 | ||||||
Provision for income taxes | 187 | 141 | ||||||
Net income and other comprehensive income | $ | 402 | $ | 301 | ||||
Weighted-average shares outstanding: | ||||||||
Basic | 3,313,081 | 3,308,619 | ||||||
Diluted | 3,328,762 | 3,321,534 | ||||||
Earnings per share: | ||||||||
Basic | $ | 0.12 | $ | 0.09 | ||||
Diluted | $ | 0.12 | $ | 0.09 |
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 | — | — | — | 301 | — | — | 301 | |||||||||||||||||||||
Share-based compensation – restricted stock | — | — | — | — | 55 | — | 55 | |||||||||||||||||||||
Share-based compensation – options | — | — | 63 | — | — | — | 63 | |||||||||||||||||||||
ESOP shares committed to be released (6,504 shares) | — | — | 22 | — | 65 | — | 87 | |||||||||||||||||||||
Balance at March 31, 2011 | 4,878,349 | $ | 49 | $ | 50,520 | $ | 19,133 | $ | (2,744 | ) | $ | (16,749 | ) | $ | 50,209 | |||||||||||||
Balance at December 31, 2011 | 4,878,349 | $ | 49 | $ | 50,282 | $ | 20,282 | $ | (2,413 | ) | $ | (16,546 | ) | $ | 51,654 | |||||||||||||
Net income | — | — | — | 402 | — | — | 402 | |||||||||||||||||||||
Share-based compensation – restricted stock | — | — | (4 | ) | — | 26 | — | 22 | ||||||||||||||||||||
Share-based compensation – options | — | — | 36 | — | — | — | 36 | |||||||||||||||||||||
ESOP shares committed to be released (6,504 shares) | — | — | 19 | — | 65 | — | 84 | |||||||||||||||||||||
Purchase of treasury shares (200 shares) | — | — | — | — | — | (3 | ) | (3 | ) | |||||||||||||||||||
Balance at March 31, 2012 | 4,878,349 | $ | 49 | $ | 50,333 | $ | 20,684 | $ | (2,322 | ) | $ | (16,549 | ) | $ | 52,195 | |||||||||||||
See accompanying notes to unaudited consolidated financial statements.
3 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
(Unaudited) (Dollars in thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 402 | $ | 301 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 281 | 315 | ||||||
Accretion of securities | (51 | ) | (52 | ) | ||||
Gain on sale of foreclosed real estate | (22 | ) | — | |||||
Amortization of net deferred loan fees | (203 | ) | (68 | ) | ||||
Depreciation and amortization of premises and equipment | 236 | 253 | ||||||
Share-based compensation and ESOP allocation | 142 | 205 | ||||||
Income from bank-owned life insurance | (99 | ) | (102 | ) | ||||
Net change in: | ||||||||
Accrued interest receivable | 27 | (31 | ) | |||||
Prepaid FDIC insurance | 69 | 122 | ||||||
Other assets | 105 | 102 | ||||||
Accrued expenses and other liabilities | (254 | ) | (334 | ) | ||||
Net cash provided by operating activities | 633 | 711 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of securities held to maturity | (3,997 | ) | — | |||||
Principal payments received on securities held to maturity | 3,408 | 3,355 | ||||||
Redemption of Federal Home Loan stock | 142 | — | ||||||
Net loan originations | (5,129 | ) | (123 | ) | ||||
Proceeds from sales of foreclosed real estate | 274 | — | ||||||
Additions to premises and equipment | (37 | ) | (731 | ) | ||||
Net cash provided (used) by investing activities | (5,339 | ) | 2,501 | |||||
Cash flows from financing activities: | ||||||||
Net increase (decrease) in deposits | 8,311 | (69 | ) | |||||
Net decrease in borrowings with maturities of three months or less | — | (1,200 | ) | |||||
Proceeds from borrowings with maturities in excess of three months | 5,028 | 8,000 | ||||||
Repayment of borrowings with maturities in excess of three months | — | (7,059 | ) | |||||
Purchase of treasury stock | (3 | ) | — | |||||
Net cash provided (used) by financing activities | 13,336 | (328 | ) | |||||
Net change in cash and cash equivalents | 8,630 | 2,884 | ||||||
Cash and cash equivalents at beginning of period | 31,074 | 9,375 | ||||||
Cash and cash equivalents at end of period | $ | 39,704 | $ | 12,259 | ||||
Supplementary information: | ||||||||
Interest paid on deposit accounts | $ | 318 | $ | 548 | ||||
Interest paid on borrowings | 1,133 | 1,149 | ||||||
Income taxes paid, net of refunds | 1 | 20 | ||||||
Transfers from loans to foreclosed real estate | — | 265 |
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 months ended March 31, 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 and losses, follows:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
March 31, 2012 | ||||||||||||||||
U.S. Government obligation | $ | 3,997 | $ | — | $ | (1 | ) | $ | 3,996 | |||||||
Government-sponsored enterprise | ||||||||||||||||
residential mortgage-backed securities | 32,863 | 2,826 | — | 35,689 | ||||||||||||
Total | $ | 36,860 | $ | 2,826 | $ | (1 | ) | $ | 39,685 | |||||||
December 31, 2011 | ||||||||||||||||
Government-sponsored enterprise | ||||||||||||||||
residential mortgage-backed securities | $ | 36,220 | $ | 3,028 | $ | — | $ | 39,248 |
At March 31, 2012, the U.S. Government obligation matures within one year.
At March 31, 2012 and December 31, 2011, certain securities were pledged to secure repurchase agreements (see Note 8).
Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows. There were no securities with gross unrealized losses at December 31, 2011.
Less Than Twelve Months | Over Twelve Months | |||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Fair | Unrealized | Fair | |||||||||||||
Losses | Value | Losses | Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
March 31, 2012 | ||||||||||||||||
U.S. Government obligation | $ | 1 | $ | 3,996 | $ | — | $ | — | ||||||||
6 |
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a summary of the balances of loans at March 31, 2012 and December 31, 2011:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
(Dollars in thousands) | ||||||||
Mortgage loans: | ||||||||
One-to-four family residential | $ | 214,519 | $ | 207,773 | ||||
Equity loans and lines of credit | 18,745 | 19,597 | ||||||
Commercial and multi-family residential | 119,947 | 119,486 | ||||||
Construction | 3,279 | 5,016 | ||||||
356,490 | 351,872 | |||||||
Other Loans: | ||||||||
Commercial loans | 1,490 | 1,116 | ||||||
Consumer loans | 385 | 399 | ||||||
Total loans | 358,365 | 353,387 | ||||||
Less: Allowance for loan losses | (3,679 | ) | (3,709 | ) | ||||
Net deferred loan fees | (1,143 | ) | (1,186 | ) | ||||
Loans, net | $ | 353,543 | $ | 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 | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Three months ended March 31, 2012 | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Balance at beginning of period | $ | 1,070 | $ | 147 | $ | 2,373 | $ | 94 | $ | 25 | $ | 3,709 | ||||||||||||
Provision for loans losses | 6 | 17 | 289 | (36 | ) | 5 | 281 | |||||||||||||||||
Loans charged-off | — | (25 | ) | (300 | ) | — | — | (325 | ) | |||||||||||||||
Recoveries of loans | ||||||||||||||||||||||||
previously charged-off | — | — | 14 | — | — | 14 | ||||||||||||||||||
Balance at end of period | $ | 1,076 | $ | 139 | $ | 2,376 | $ | 58 | $ | 30 | $ | 3,679 | ||||||||||||
Three months ended March 31, 2011 | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Balance at beginning of period | $ | 1,028 | $ | 173 | $ | 2,353 | $ | 89 | $ | 29 | $ | 3,672 | ||||||||||||
Provision for loans losses | 25 | (7 | ) | 289 | 10 | (2 | ) | 315 | ||||||||||||||||
Loans charged-off | (3 | ) | — | (258 | ) | — | — | (261 | ) | |||||||||||||||
Balance at end of period | $ | 1,050 | $ | 166 | $ | 2,384 | $ | 99 | $ | 27 | $ | 3,726 | ||||||||||||
March 31, 2012 | ||||||||||||||||||||||||
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 | 1,076 | 139 | 2,376 | 58 | 30 | 3,679 | ||||||||||||||||||
Total allowance for loan losses | $ | 1,076 | $ | 139 | $ | 2,376 | $ | 58 | $ | 30 | $ | 3,679 | ||||||||||||
Recorded investment in: | ||||||||||||||||||||||||
Loans deemed to be impaired | $ | 1,134 | $ | 182 | $ | 3,199 | $ | — | $ | — | $ | 4,515 | ||||||||||||
Loans deemed not to be impaired | 213,385 | 18,563 | 116,748 | 3,279 | 1,875 | 353,850 | ||||||||||||||||||
Total | $ | 214,519 | $ | 18,745 | $ | 119,947 | $ | 3,279 | $ | 1,875 | $ | 358,365 | ||||||||||||
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 | ||||||||||||
8 |
The following is a summary of past due and non-accrual loans at March 31, 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 | ||||||||||||||||
March 31, 2012 | (Dollars in thousands) | |||||||||||||||||||
Mortgage loans: | ||||||||||||||||||||
One-to-four family residential | $ | 251 | $ | — | $ | 1,133 | $ | 1,384 | $ | 1,133 | ||||||||||
Equity loans and lines of credit | — | — | 182 | 182 | 182 | |||||||||||||||
Commercial and multi-family residential | — | 1,354 | 858 | 2,212 | 1,656 | |||||||||||||||
Total | $ | 251 | $ | 1,354 | $ | 2,173 | $ | 3,778 | $ | 2,971 | ||||||||||
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 March 31, 2012 and December 31, 2011, there were no loans greater than ninety days past due and still accruing interest.
9 |
Further information pertaining to impaired loans follows:
March 31, 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 | $ | 1,134 | $ | 1,159 | $ | 1,052 | $ | 1,053 | ||||||||
Equity loans and lines of credit | 182 | 182 | — | — | ||||||||||||
Commercial and multi-family residential | 3,199 | 3,579 | 2,403 | 2,480 | ||||||||||||
Total | $ | 4,515 | $ | 4,920 | $ | 3,455 | $ | 3,533 |
Three Months Ended March 31, 2012 | ||||||||||||
Average Recorded Investment | Interest Income Recognized | Interest Income Recognized on Cash Basis | ||||||||||
(In thousands) | ||||||||||||
Mortgage loans: | ||||||||||||
One-to-four family residential | $ | 1,115 | $ | 6 | $ | 6 | ||||||
Equity loans and lines of credit | 114 | — | — | |||||||||
Commercial and multi-family residential | 2,602 | 23 | 23 | |||||||||
Total | $ | 3,831 | $ | 29 | $ | 29 |
At March 31, 2012 and December 31, 2011, there were no additional funds committed to be advanced in connection with impaired loans. For the quarter ended March 31, 2011, the average recorded investment in impaired loans amounted to $241,000. For the three months ended March 31, 2011, the Company did not recognize any interest income on impaired loans.
Credit Quality Information:
The Company utilizes a nine grade internal loan rating system for commercial and multi-family residential 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.
10 |
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.
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 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
March 31, 2012 | ||||||||||||||||
Loans rated 1 - 4 | $ | 85,259 | $ | 1,603 | $ | 1,306 | $ | 88,168 | ||||||||
Loans rated 5 | 18,142 | 1,676 | 146 | 19,964 | ||||||||||||
Loans rated 6 | 10,108 | — | 38 | 10,146 | ||||||||||||
Loans rated 7 | 6,438 | — | — | 6,438 | ||||||||||||
Loans rated 8 | — | — | — | — | ||||||||||||
Loans rated 9 | — | — | — | — | ||||||||||||
$ | 119,947 | $ | 3,279 | $ | 1,490 | $ | 124,716 | |||||||||
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 residential 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 March 31, 2012, residential one-to-four family mortgage loans rated substandard amounted to $1.1 million and equity loans and lines of credit rated substandard amounted to $182,000. 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 March 31, 2012 and December 31, 2011.
NOTE 5 – COMMITMENTS
Outstanding loan commitments totaled $32.8 million at March 31, 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.
11 |
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.
Earnings per common share have been computed based on the following:
Three Months Ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
(In thousands) | ||||||||
Net income applicable to common stock | $ | 402 | $ | 301 | ||||
Weighted average number of common shares issued | 4,878 | 4,878 | ||||||
Less: Weighted average treasury shares | (1,372 | ) | (1,390 | ) | ||||
Less: Weighted average unallocated ESOP shares | (231 | ) | (257 | ) | ||||
Add: Weighted average unvested restricted stock | ||||||||
plan shares with non-forfeitable dividend rights | 38 | 78 | ||||||
Weighted average number of common shares outstanding | ||||||||
used to calculate basic earnings per common share | 3,313 | 3,309 | ||||||
Effect of dilutive stock options | 16 | 13 | ||||||
Weighted average number of common shares outstanding | ||||||||
used to calculate diluted earnings per common share | 3,329 | 3,322 |
Options for 468,149 and 474,919 shares of common stock were not included in the computation of diluted EPS because they were anti-dilutive for the three months ended March 31, 2012 and 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.
12 |
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.
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 Measured at Fair Value on a Recurring Basis
There were no assets or liabilities measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011.
Assets 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-cost-or-market accounting or write-downs of individual assets. There were no liabilities measured at fair value on a non-recurring basis at March 31, 2012 and December 31, 2011.
13 |
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 March 31, 2012 and December 31, 2011. The losses represent the amounts recorded during 2012 and 2011 on the assets held at March 31, 2012 and December 31, 2011, respectively.
Total Losses | ||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||
March 31, | ||||||||||||||||||||
Level 1 | Level 2 | Level 3 | 2012 | 2011 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
March 31, 2012 | ||||||||||||||||||||
Impaired loans | $ | — | $ | — | $ | 923 | $ | 325 | $ | — | ||||||||||
Foreclosed real estate | — | — | 587 | — | 261 | |||||||||||||||
$ | — | $ | — | $ | 1,510 | $ | 325 | $ | 261 | |||||||||||
Year Ended | ||||||||||||||||
At December 31, 2011 | December 31, 2011 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total Losses | |||||||||||||
(In thousands) | ||||||||||||||||
December 31, 2011 | ||||||||||||||||
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.
14 |
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.
March 31, 2012 | ||||||||||||||||||||
Carrying | Fair Value | |||||||||||||||||||
Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 39,704 | $ | 39,704 | $ | — | $ | — | $ | 39,704 | ||||||||||
Securities held to maturity | 36,860 | 3,996 | 35,689 | — | 39,685 | |||||||||||||||
FHLB stock | 5,588 | — | — | 5,588 | 5,588 | |||||||||||||||
Loans, net | 353,543 | — | — | 370,595 | 370,595 | |||||||||||||||
Accrued interest receivable | 1,241 | — | — | 1,241 | 1,241 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 273,080 | — | — | 274,039 | 274,039 | |||||||||||||||
Long-term borrowings | 138,724 | — | — | 141,657 | 141,657 | |||||||||||||||
Accrued interest payable | 410 | — | — | 410 | 410 |
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 March 31, 2012 and December 31, 2011 amounted to $99.0 million and $93.7 million, respectively. All FHLB borrowings are secured by a blanket lien on certain qualified collateral, as defined by the FHLB and consisting of first mortgage loans on owner-occupied residential property, and certain pledged commercial mortgages and multi-family real estate loans. At March 31, 2012 and December 31, 2011, the carrying amount of assets qualifying as collateral for FHLB advances amounted to $206.4 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.
15 |
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 $36.9 million and $36.2 million and a fair value of $39.7 million and $39.2 million at March 31, 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 March 31, 2012 and December 31, 2011, due from banks pledged to secure these agreements amounted to $6.0 million.
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 March 31, 2012 and for the three months ended March 31, 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.
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 2011 Annual Report on Form 10-K 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.
16 |
Comparison of Financial Condition at March 31, 2012 and December 31, 2011
Total assets at March 31, 2012 were $467.5 million, an increase of $13.6 million, or 3.0%, compared to $453.9 million at December 31, 2011. The increase in assets was primarily concentrated in cash and cash equivalents and net loans.
Cash and cash equivalents increased by $8.6 million, or 27.8%, due to an increase in deposits and borrowings, partially offset by the loan growth.
The net loan portfolio increased by $5.1 million, or 1.4%, during the first three months of 2012. The loan portfolio increase was attributable to increases in one-to-four family residential mortgages ($6.7 million, or 3.3%), commercial and multi-family residential mortgages ($461,000, or 0.4%) and commercial loans ($374,000, or 33.5%), offset by decreases in home equity loans and lines ($852,000, or 4.4%) and construction loans ($1.7 million, or 34.6%).
During the three months ended March 31, 2012, deposit balances increased by $8.3 million, or 3.1%. The increase in deposits occurred in NOW/Demand accounts ($7.3 million, or 6.5%), savings accounts ($1.7 million, or 5.2%). These increases were partially offset by decreases in money market accounts ($270,000, or 0.6%) and time deposit accounts ($392,000, or 0.6%).
Borrowings, consisting of FHLB advances and two repurchase agreements totaling $40.0 million, increased $5.0 million, or 3.8%, to $138.7 million at March 31, 2012, compared to an outstanding balance of $133.7 million at December 31, 2011.
Total stockholders’ equity at March 31, 2012 was $52.2 million compared to $51.7 million at December 31, 2011. The increase was primarily attributable to net income and stock-based compensation credits.
Comparison of Operating Results for the Three Months Ended March 31, 2012 and 2011
General. Net income increased by $101,000, or 33.6%, to $402,000 for the three months ended March 31, 2012, compared to $301,000 for the three months ended March 31, 2011. The increase was primarily due to a decrease in non-interest expenses, offset by decreases in net interest income and non-interest income.
Net Interest Income. Net interest income for the three months ended March 31, 2012 was $3.6 million, a $234,000, or 6.2%, decrease from $3.8 million for the three months ended March 31, 2011. The decrease in net interest income was primarily due to a decrease in the interest earned on loans and securities, partially offset by a decrease in expense from deposits and borrowings. The Company’s first quarter 2012 interest rate spread decreased to 3.39% from 3.51% in the first quarter of 2011, a decrease of 12 basis points.
17 |
The following table summarizes average balances and average yields and costs for the three months ended March 31, 2012 and 2011.
Three Months Ended March 31, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Average Balance | Interest and Dividends | Yield/ Cost | Average Balance | Interest and Dividends | Yield/ Cost | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 348,867 | $ | 4,559 | 5.23 | % | $ | 356,335 | $ | 4,852 | 5.45 | % | ||||||||||||
Securities | 36,623 | 433 | 4.73 | 45,480 | 572 | 5.03 | ||||||||||||||||||
Other interest-earning assets | 15,232 | 18 | 0.47 | 6,223 | 7 | 0.45 | ||||||||||||||||||
Total interest-earning assets | 400,722 | 5,010 | 5.00 | 408,038 | 5,431 | 5.32 | ||||||||||||||||||
Bank-owned life insurance | 11,125 | 10,744 | ||||||||||||||||||||||
Noninterest-earning assets | 44,088 | 32,577 | ||||||||||||||||||||||
Total assets | $ | 455,935 | $ | 451,359 | ||||||||||||||||||||
Liabilities and equity: | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 72,428 | 57 | 0.31 | $ | 72,596 | 139 | 0.77 | ||||||||||||||||
Savings accounts | 32,736 | 3 | 0.04 | 29,543 | 15 | 0.20 | ||||||||||||||||||
Money market accounts | 49,873 | 32 | 0.26 | 52,735 | 102 | 0.77 | ||||||||||||||||||
Certificates of deposit | 70,043 | 226 | 1.29 | 69,368 | 238 | 1.37 | ||||||||||||||||||
Total interest-bearing deposits | 225,080 | 318 | 0.57 | 224,242 | 494 | 0.88 | ||||||||||||||||||
Borrowings | 134,009 | 1,131 | 3.38 | 136,772 | 1,142 | 3.34 | ||||||||||||||||||
Total interest-bearing liabilities | 359,089 | 1,449 | 1.61 | 361,014 | 1,636 | 1.81 | ||||||||||||||||||
Demand deposits | 39,437 | 36,181 | ||||||||||||||||||||||
Noninterest-bearing liabilities | 5,186 | 3,800 | ||||||||||||||||||||||
Total liabilities | 403,712 | 400,995 | ||||||||||||||||||||||
Stockholders’ equity | 52,223 | 50,364 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 455,935 | $ | 451,359 | ||||||||||||||||||||
Net interest income | $ | 3,561 | $ | 3,795 | ||||||||||||||||||||
Interest rate spread | 3.39 | % | 3.51 | % | ||||||||||||||||||||
Net interest margin | 3.55 | % | 3.72 | % | ||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 111.59 | % | 113.03 | % | ||||||||||||||||||||
Total interest and dividend income decreased $421,000, or 7.8%, between the two periods primarily due to a decrease in interest earned on loans and securities. Interest earned on loans decreased $293,000, or 6.0%, for the three months ended March 31, 2012 due to a decrease in the average balance and average yield earned on loans. Average loans decreased 2.1% to $348.9 million for the three months ended March 31, 2012 from $356.3 million for the three months ended March 31, 2011, and the yield earned on loans decreased to 5.23% for the three months ended March 31, 2012 from 5.45% for the three months ended March 31, 2011. Interest earned on securities decreased $139,000 due to the decrease in the average balance of securities to $36.6 million for the three months ended March 31, 2012 from $45.5 million for the three months ended March 31, 2011, in addition to the 30 basis points decrease in the average yield earned on securities. Interest earned on other-interest earning assets increased to $18,000 for three months ended March 31, 2012 from $7,000 for the three months ended March 31, 2011, due to the increase in the average balance of other interest-earning assets.
18 |
Total interest expense decreased $187,000 to $1.4 million for the three months ended March 31, 2012 from $1.6 million for the three months ended March 31, 2011, due to a 20 basis point decrease in the total average cost of interest-bearing liabilities, including a 31 basis point decrease in the total average cost of interest-bearing deposits. The largest reductions in interest expense related to interest-bearing deposits were seen in demand deposit accounts (a decrease of $82,000, or 46 basis points in the average cost), money market accounts (a decrease of $70,000, or 51 basis points in the average cost), and savings accounts (a decrease of $12,000, or 16 basis points in the average cost) and certificate of deposit accounts (a decrease of $12,000, or 8 basis points in the average cost). The cost of total borrowings for the three months ended March 31, 2012 totaled $1.1 million and decreased $11,000, or 1.0%, from the three months ended March 31, 2011, due to a $2.8 million decrease in the average balance to $134.0 million from $136.8 million, offset by a 4 basis point increase in the average cost.
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 March 31, 2012 | ||||||||||||
Compared to the | ||||||||||||
Three Months Ended March 31, 2011 | ||||||||||||
Increase (Decrease) | ||||||||||||
Due to | ||||||||||||
Volume | Rate | Net | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest income: | ||||||||||||
Loans | $ | (100 | ) | $ | (193 | ) | $ | (293 | ) | |||
Securities | (106 | ) | (33 | ) | (139 | ) | ||||||
Other interest-earning assets | 10 | 1 | 11 | |||||||||
Total interest-earning assets | (196 | ) | (225 | ) | (421 | ) | ||||||
Interest expense: | ||||||||||||
Deposits | 13 | (189 | ) | (176 | ) | |||||||
Borrowings | (72 | ) | 61 | (11 | ) | |||||||
Total interest-bearing liabilities | (59 | ) | (128 | ) | (187 | ) | ||||||
Change in net interest income | $ | (137 | ) | $ | (97 | ) | $ | (234 | ) |
Provision for Loan Losses. The Bank’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 March 31, 2012 was $281,000 compared to $315,000 for the three months ended March 31, 2011. The provision for the first quarter of 2012 decreased compared to the provision for the first quarter of 2011, due to a decrease in the loan portfolio, partially offset by an increase in problem loans and charge-offs. There are $17.9 million of classified and criticized loans that are under watch by management. At March 31, 2012, loans classified as special mention totaled $10.1 million, which consisted of commercial and multi-family real estate mortgages, compared to $10.3 million at December 31, 2011. Loans classified as substandard, including all impaired loans, totaled $7.8 million at March 31, 2012, compared to $6.8 million at December 31, 2011. Total classified and criticized loans represent 5.0% of the Company’s total gross loans at March 31, 2012, compared to 4.2% at March 31, 2011. There were no changes in the methodology of calculating the allowance for loan losses from the first quarter of 2011 through the first quarter 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 quarter 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 to total loans was 1.03%, 1.05% and 1.04% at March 31, 2012, December 31, 2011 and March 31, 2011, respectively.
19 |
The following table provides information with respect to our non-performing assets at the dates indicated. There were no troubled debt restructurings or accruing loans past due 90 days or more at the dates indicated. All nonaccrual loans are impaired. There were no impaired loans which required a valuation reserve at the dates indicated.
March 31, | December 31, | March 31, | ||||||||||
2012 | 2011 | 2011 | ||||||||||
(Dollars in thousands) | ||||||||||||
Nonaccrual loans: | ||||||||||||
Real estate – mortgage: | ||||||||||||
One-to-four family residential | $ | 1,133 | $ | 1,052 | $ | 220 | ||||||
Home equity loans and lines of credit | 182 | — | — | |||||||||
Commercial and multi-family | 1,656 | 858 | — | |||||||||
Total nonaccrual loans | 2,971 | 1,910 | 220 | |||||||||
Foreclosed real estate | 587 | 839 | 365 | |||||||||
Total non-performing assets | $ | 3,558 | $ | 2,749 | $ | 585 | ||||||
Total non-performing loans to total loans | 0.84 | % | 0.55 | % | 0.06 | % | ||||||
Total non-performing loans to total assets | 0.64 | % | 0.42 | % | 0.05 | % | ||||||
Total non-performing assets to total assets | 0.76 | % | 0.61 | % | 0.13 | % |
Non-performing assets were $3.6 million at March 31, 2012, an increase of $809,000, from December 31, 2011. There were $585,000 of non-performing assets at March 31, 2011. Non-performing loans have increased in the first three months 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.
At March 31, 2012, the Company had a one-to-four family residential property valued at $522,000, and one multi-family real estate property, valued at $65,000, classified as foreclosed real estate. Net loan charge-offs totaling $311,000 and $261,000 were recognized during the quarters ended March 31, 2012 and 2011, respectively.
Non-interest Income. Non-interest income for the first quarter of 2012 totaled $543,000, a decrease of $11,000, or 2.0%, compared to the first quarter of 2011. The decrease in non-interest income between the two periods is primarily due to a $6,000 decrease in fees earned on checking accounts and decreases in bank-owned life insurance income and miscellaneous income.
Non-interest Expense. Total non-interest expense decreased to $3.2 million for the quarter ended March 31, 2012 from $3.6 million for the quarter ended March 31, 2011, a decrease of $358,000, or 10.0%. The decrease between periods is attributable to an overall decrease in salaries and employee benefits, occupancy and equipment expense, marketing costs, FDIC insurance expense and other general and administrative costs, offset by increases in data processing fees and professional services. The decrease in salaries and benefits is primarily due to 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 occupancy and equipment expense is due to a milder winter during the first three months of 2012 compared to the same period in 2011, which resulted in a decrease of operating costs associated with the maintenance of the Bank’s branches. 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 new FDIC rules 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 quarter of 2012 compared to the first quarter of 2011. The decrease in other general and administrative expenses is primarily due to a decrease in foreclosed real estate expenses due to the reduction in volume of foreclosed real estate assets.
20 |
Income Taxes. The provision for income taxes for the three months ended March 31, 2012 was $187,000 compared to $141,000 for the three months ended March 31, 2011. The effective tax rate for the first quarter of 2012 was 31.7%, versus 31.9% 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 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.
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 March 31, 2012, cash and cash equivalents totaled $39.7 million. At March 31, 2012, we had the ability to borrow a total of $47.2 million of additional advances from the Federal Home Loan Bank of Boston. On March 31, 2012, we had $99.0 million of advances outstanding.
At March 31, 2012, the Bank had $32.8 million in loan commitments outstanding, which consisted of $13.5 million of real estate loan commitments, $14.6 million in unused home equity lines of credit, $2.0 million in construction loan commitments and $2.7 million in commercial lines of credit commitments. Certificates of deposit due within one year of March 31, 2012 totaled $47.3 million, or 67.5% 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 current 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 March 31, 2013. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
Capital Management. At March 31, 2012, the Bank is 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 March 31, 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 March 31, 2012, the Company 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.
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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.
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 prepared by the OCC to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in net portfolio value 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 portfolio value 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 300 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 net portfolio value over a variety of interest rate scenarios.
The following table presents the change in our net portfolio value At December 31, 2011 (the most current information available), that would occur in the event of an immediate change in interest rates based on OCC assumptions, with no effect given to any steps that we might take to counteract that change. The Bank expects that its net portfolio value at March 31, 2012 is consistent with the table below.
Net Portfolio Value (Dollars in thousands) | Net Portfolio Value as % of Portfolio Value of Assets | |||||||||||||||||||
Basis Point (“bp”) Change in Rates | Amount | Change | % Change | NPV Ratio | Change (bp) | |||||||||||||||
300 | $ | 46,921 | $ | -12,392 | -21 | 10.28 | % | -209 | ||||||||||||
200 | 54,207 | -5,107 | -9 | 11.61 | % | -76 | ||||||||||||||
100 | 58,930 | -383 | -1 | 12.40 | % | 3 | ||||||||||||||
50 | 59,396 | 83 | 0 | 12.43 | % | 6 | ||||||||||||||
0 | 59,313 | – | – | 12.37 | % | – | ||||||||||||||
(50) | 57,425 | -1,888 | -3 | 11.98 | % | -40 | ||||||||||||||
(100) | 56,493 | -2,820 | -5 | 11.77 | % | -60 |
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The OCC uses certain assumptions in assessing the interest rate risk of savings associations. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others. 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 March 31, 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 March 31, 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.
Item 1A. | Risk Factors. |
Risk factors that may affect future results were discussed in the Company’s 2011 Annual Report on Form 10-K. 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 March 31, 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) | ||||||||||||
January 2012 | — | $ | — | — | 161,070 | |||||||||||
February 2012 | — | — | — | 161,070 | ||||||||||||
March 2012 | 200 | 12.96 | 200 | 160,870 | ||||||||||||
Total | 200 | $ | 12.96 | 200 |
(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.
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Item 3. | Defaults Upon Senior Securities. |
Not applicable
Item 4. | Mine Safety Disclosures |
None.
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 |
32.0 | Section 1350 Certifications |
101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, (ii) the Consolidated Statements of Income for the three months ended March 31, 2012 and 2011, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2012 and 2011, (iv) the Consolidated Statements of Cash Flows for the three months ended March 31, 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.
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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: May 11, 2012 | By: | /s/ Kevin M. McCarthy |
Kevin M. McCarthy | ||
President and Chief Executive Officer | ||
Date: May 11, 2012 | By: | /s/ Bruce A. Walsh |
Bruce A. Walsh | ||
Executive Vice President and Chief Financial Officer | ||
(Principal Financial and Chief Accounting Officer) | ||
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