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 June 30, 2013

 

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           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 August 1, 2013 the registrant had 3,547,372 shares of common stock outstanding.

 
 

NEWPORT BANCORP, INC.

Table of Contents

 

        Page
No.
Part I.   Financial Information
         
Item 1.   Consolidated Financial Statements (Unaudited)   1
         
    Consolidated Balance Sheets at June 30, 2013 and December 31, 2012 (Unaudited)   1
         
    Consolidated Statements of Net Income and Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012 (Unaudited)   2
         
    Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2013 and 2012 (Unaudited)   3
         
    Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (Unaudited)   4
         
    Notes to Unaudited Consolidated Financial Statements   5-18
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   18-28
         
Item 3.   Quantitative and Qualitative Disclosures about Market Risk   28-29
         
Item 4.   Controls and Procedures   29
         
Part II.   Other Information
         
Item 1.   Legal Proceedings   29
         
Item 1A.   Risk Factors   29
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   30
         
Item 3.   Defaults Upon Senior Securities   30
         
Item 4.   Mine Safety Disclosures   30
         
Item 5.   Other Information   30
         
Item 6.   Exhibits   30
         
    Signatures   31
 
PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS

ASSETS

    June 30,
2013 		    December 31,
2012 		 
    (Unaudited)
(Dollars in thousands) 		 
             
Cash and due from banks   $ 17,182     $ 20,311  
Short-term investments     1,695       15,732  
Cash and cash equivalents     18,877       36,043  
                 
Securities held to maturity, at amortized cost     17,085       22,307  
Federal Home Loan Bank stock, at cost     5,356       5,588  
Loans     360,200       359,069  
Allowance for loan losses     (3,911 )     (4,031 )
Loans, net     356,289       355,038  
                 
Premises and equipment     13,039       13,489  
Accrued interest receivable     1,082       1,118  
Net deferred tax asset     2,848       2,848  
Bank-owned life insurance     11,214       11,456  
Foreclosed real estate     160       —  
Prepaid FDIC insurance     —       423  
Other assets     662       1,103  
                 
Total assets   $ 426,612     $ 449,413  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits   $ 281,045     $ 289,674  
Long-term borrowings     87,346       102,797  
Accrued expenses and other liabilities     3,582       3,787  
Total liabilities     371,973       396,258  
                 
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     50,187       50,085  
Retained earnings     22,548       21,843  
Unearned compensation (195,134 and 208,143 shares at                
    June 30, 2013 and December 31, 2012, respectively)     (1,951 )     (2,081 )
Treasury stock, at cost (1,333,627 shares and 1,378,627 shares)                
    at June 30, 2013 and December 31, 2012, respectively)     (16,194 )     (16,741 )
Total stockholders’ equity     54,639       53,155  
Total liabilities and stockholders’ equity   $ 426,612     $ 449,413  

 

See accompanying notes to unaudited consolidated financial statements.

1

CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME

 

    Three Months Ended
June 30, 		    Six Months Ended
June 30, 		 
    2013     2012     2013     2012  
    (Unaudited)
(Dollars in thousands, except per share data) 		 
                         
Interest and dividend income:                                
Loans   $ 4,052     $ 4,432     $ 8,188     $ 8,991  
Securities     237       394       511       827  
Other interest-earning assets     10       17       25       35  
Total interest and dividend income     4,299       4,843       8,724       9,853  
                                 
Interest expense:                                
Deposits     275       302       562       621  
Short-term borrowings     2       —       2       —  
Long-term borrowings     692       1,134       1,430       2,264  
Total interest expense     969       1,436       1,994       2,885  
                                 
Net interest income     3,330       3,407       6,730       6,968  
Provision for loan losses     14       341       14       622  
                                 
Net interest income, after provision for loan losses     3,316       3,066       6,716       6,346  
                                 
Non-interest income:                                
Customer service fees     519       489       933       926  
Bank-owned life insurance     91       89       185       188  
Miscellaneous     1       7       14       14  
Total non-interest income     611       585       1,132       1,128  
                                 
Non-interest expenses:                                
Salaries and employee benefits     1,524       1,697       3,099       3,471  
Occupancy and equipment     571       564       1,117       1,092  
Data processing     408       400       832       802  
Professional fees     123       183       235       336  
Merger expenses     98       —       628       —  
Marketing     88       164       217       311  
FDIC insurance     71       72       137       148  
Other general and administrative     165       205       316       359  
Total non-interest expenses     3,048       3,285       6,581       6,519  
                                 
Income before income taxes     879       366       1,267       955  
                                 
Provision for income taxes     315       113       562       300  
                                 
Net income and comprehensive income   $ 564     $ 253     $ 705     $ 655  
                                 
Weighted-average shares outstanding:                                
Basic     3,343,084       3,317,471       3,323,102       3,315,234  
Diluted     3,443,387       3,353,128       3,423,240       3,340,903  
                                 
Earnings per share:                                
Basic   $ .17     $ .08     $ .21     $ .20  
Diluted   $ .16     $ .08     $ .21     $ .20  

 

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, 2011     4,878,349     $ 49     $ 50,282     $ 20,282     $ (2,413 )   $ (16,546 )   $ 51,654  
                                                         
Comprehensive income     —       —       —       655       —       —       655  
Share-based compensation –
  restricted stock 		    —       —       (4 )     —       48       —       44  
Share-based compensation  – options     —       —       69       —       —       —       69  
Stock options exercised (1,982 shares)     —       —       —       —       —       25       25  
ESOP shares committed to be
  released (13,009 shares) 		    —       —       43       —       130       —       173  
Purchase of treasury shares (5,900 shares)     —       —       —       —       —       (81 )     (81 )
Balance at June 30, 2012     4,878,349     $ 49     $ 50,390     $ 20,937     $ (2,235 )   $ (16,602 )   $ 52,539  
Balance at December 31, 2012     4,878,349     $ 49     $ 50,085     $ 21,843     $ (2,081 )   $ (16,741 )   $ 53,155  
Comprehensive income     —       —       —       705       —       —       705  
Stock options exercised (45,000 shares)     —       —       16       —       —       547       563  
ESOP shares committed to be released
  (13,009 shares) 		    —       —       86       —       130       —       216  
Balance at June 30, 2013     4,878,349     $ 49     $ 50,187     $ 22,548     $ (1,951 )   $ (16,194 )   $ 54,639  

 

See accompanying notes to unaudited consolidated financial statements.

3

CONSOLIDATED STATEMENTS OF CASH FLOWS

    Six Months Ended
June 30, 		 
    2013     2012  
    (Unaudited)
(Dollars in thousands) 		 
Cash flows from operating activities:                
Net income   $ 705     $ 655  
Adjustments to reconcile net income to net cash provided by operating activities:                
Provision for loan losses     14       622  
Accretion of securities     (84 )     (103 )
Loss on sales of foreclosed real estate     —       10  
Amortization of net deferred loan fees     (181 )     (368 )
Depreciation and amortization of premises and equipment     457       470  
Share-based compensation and ESOP allocation     216       286  
Income from bank-owned life insurance     (185 )     (188 )
Net change in:                
Accrued interest receivable     36       55  
Prepaid FDIC insurance     423       142  
Other assets     441       (223 )
Accrued expenses and other liabilities     (205 )     (285 )
Net cash provided by operating activities     1,637       1,073  
                 
Cash flows from investing activities:                
Purchases of securities held to maturity     —       (7,995 )
Principal payments received on securities held to maturity     5,306       7,009  
Redemption of Federal Home Loan stock     232       142  
Net loan originations     (1,244 )     (15,783 )
Proceeds from bank-owned life insurance     427       —  
Proceeds from sales of foreclosed real estate     —       304  
Additions to premises and equipment     (7 )     (82 )
Net cash provided (used) by investing activities     4,714       (16,405 )
                 
Cash flows from financing activities:                
Net increase (decrease) in deposits     (8,629 )     6,993  
Proceeds from long-term borrowings     —       5,052  
Repayment of long-term borrowings     (15,451 )     —  
Stock options exercised     563       25  
Purchase of treasury stock     —       (81 )
Net cash (used) provided by financing activities     (23,517 )     11,989  
                 
Net change in cash and cash equivalents     (17,166 )     (3,343 )
Cash and cash equivalents at beginning of period     36,043       31,074  
Cash and cash equivalents at end of period   $ 18,877     $ 27,731  
                 
Supplementary information:                
Interest paid on deposit accounts   $ 563     $ 625  
Interest paid on borrowings     1,478       2,267  
Income taxes paid, net of refunds     387       469  
Transfers from loans to foreclosed real estate     160       193  

 

See accompanying notes to unaudited consolidated financial statements.

4

NEWPORT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – PROPOSED MERGER ANNOUNCEMENT

 

On March 5, 2013, Newport Bancorp, Inc. (the “Company”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SI Financial Group, Inc. (“SI Financial”), the holding company of Savings Institute Bank and Trust Company, pursuant to which the Company will merge with and into SI Financial, with SI Financial as the surviving entity (the “Merger”). In addition, Newport Federal Savings Bank (the “Bank” or “Newport Federal”) will merge with and into Savings Institute Bank and Trust Company. Under the terms of the Merger Agreement, at the effective time of the Merger, each share of Company common stock will be converted into the right to receive either $17.55 in cash or 1.5129 shares of SI Financial common stock in exchange for each share of Company common stock held by them, subject to proration procedures so that 50 percent of the outstanding shares of Company common stock is converted into SI Financial common stock and the balance is converted into cash consideration.

 

The Merger Agreement contains certain provisions under which the Merger Agreement may be terminated. If the Merger Agreement is terminated under certain circumstances, the Company has agreed to pay SI Financial a termination fee of $2.45 million.

 

The completion of the Merger is subject to customary closing conditions, including regulatory approval and approval of stockholders of the Company and SI Financial. The Company’s shareholders will vote upon a proposal to approve and adopt the Merger Agreement at the Company’s annual meeting of shareholders. The annual meeting of shareholders will be held at 2:30 p.m., local time, on August 15, 2013 at the International Tennis Hall of Fame, 194 Bellevue Avenue, Newport, Rhode Island.

 

SI Financial is headquartered in Willimantic, CT and had total assets of $953.2 million at December 31, 2012.

 

NOTE 2 – BASIS OF PRESENTATION

 

The accompanying unaudited consolidated interim financial statements include the accounts of Newport Bancorp, Inc. (the “Company”), its wholly-owned subsidiary, the Bank 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, 2012. The results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

5

NOTE 3 –SECURITIES HELD TO MATURITY

 

The amortized cost and estimated fair value of securities, with gross unrealized gains and losses, follows:

 

          Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
    (In thousands)  
June 30, 2013                                
    Government-sponsored enterprise                                
       residential mortgage-backed securities   $ 17,085     $ 1,306     $ —     $ 18,391  
                                 
December 31, 2012                                
                                 
    Government-sponsored enterprise                                
       residential mortgage-backed securities   $ 22,307     $ 2,199     $ —     $ 24,506  

 

At June 30, 2013 and December 31, 2012, certain mortgage-backed securities were pledged to secure repurchase agreements (see Note 10).

6

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

 

There were no changes during the three and six month periods ended June 30, 2013 in the Company’s loan policies, including those pertaining to non-accrual loans, troubled debt restructurings and the allowance for loan losses methodology.

 

The following is a summary of the balances of loans at June 30, 2013 and December 31, 2012:

 

    June 30,     December 31,  
    2013     2012  
    (In thousands)  
Mortgage loans:                
One-to-four family residential   $ 234,151     $ 228,428  
Equity loans and lines of credit     15,996       16,995  
Commercial and multi-family residential     104,189       109,372  
Construction     5,795       4,117  
      360,131       358,912  
Other loans:                
Commercial loans     906       998  
Consumer loans     353       311  
           Total loans     361,390       360,221  
                 
Less:  Allowance for loan losses     (3,911 )     (4,031 )
           Net deferred loan fees     (1,190 )     (1,152 )
                 
                     Loans, net   $ 356,289     $ 355,038  

7

The following table provides further information pertaining to the allowance for loan losses:

 

    One-to-Four     Equity Loans     Commercial                    
    Family     and Lines     and Multi-Family           Other        
    Residential     of Credit     Residential     Construction     Loans     Total  
    (In thousands)  
                                     
Three months ended June 30, 2013                                                
Allowance for loan losses:                                                
Balance at beginning of period   $ 1,219     $ 129     $ 2,490     $ 125     $ 20     $ 3,983  
     Provision (credit) for loans losses     20       (2 )     10       (13 )     (1 )     14  
     Loans charged-off     —       —       (93 )     —       —       (93 )
     Recoveries of loans                                                
        previously charged-off     —       —       7       —       —       7  
Balance at end of period   $ 1,239     $ 127     $ 2,414     $ 112     $ 19     $ 3,911  
                                                 
Six months ended June 30, 2013                                                
Allowance for loan losses:                                                
Balance at beginning of period   $ 1,212     $ 134     $ 2,589     $ 76     $ 20     $ 4,031  
     Provision (credit) for loans losses     27       (7 )     (41 )     36       (1 )     14  
     Loans charged-off     —       —       (160 )     —       —       (160 )
     Recoveries of loans                                                
        previously charged-off     —       —       26       —       —       26  
Balance at end of period   $ 1,239     $ 127     $ 2,414     $ 112     $ 19     $ 3,911  
                                                 
Three months ended June 30, 2012                                                
Allowance for loan losses:                                                
Balance at beginning of period   $ 1,076     $ 139     $ 2,376     $ 58     $ 30     $ 3,679  
     Provision (credit) for loans losses     47       (2 )     301       (6 )     1       341  
     Loans charged-off     —       —       (363 )     —       —       (363 )
     Recoveries of loans                                                
        previously charged-off     —       —       12       —       —       12  
Balance at end of period   $ 1,123     $ 137     $ 2,326     $ 52     $ 31     $ 3,669  
                                                 
Six months ended June 30, 2012                                                
Allowance for loan losses:                                                
Balance at beginning of period   $ 1,070     $ 147     $ 2,373     $ 94     $ 25     $ 3,709  
     Provision (credit) for loans losses     53       15       590       (42 )     6       622  
     Loans charged-off     —       (25 )     (663 )     —       —       (688 )
     Recoveries of loans                                                
        previously charged-off     —       —       26       —       —       26  
Balance at end of period   $ 1,123     $ 137     $ 2,326     $ 52     $ 31     $ 3,669  

8

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 Multi-Family           Other        
    Residential     of Credit     Residential     Construction     Loans     Total  
    (In thousands)  
June 30, 2013                                                
Amount of allowance for  loan losses                                                
   for loans deemed to be impaired   $ 70     $ 7     $ 182     $ —     $ —     $ 259  
                                                 
Amount of allowance for  loan losses                                                
   for loans not deemed to be impaired     1,169       120       2,232       112       19       3,652  
Total allowance for loan losses   $ 1,239     $ 127     $ 2,414     $ 112     $ 19     $ 3,911  
                                                 
Recorded investment in:                                                
    Loans deemed to be impaired   $ 512     $ 56     $ 5,211     $ —     $ —     $ 5,779  
    Loans deemed not to be impaired     233,639       15,940       98,978       5,795       1,259       355,611  
Total   $ 234,151     $ 15,996     $ 104,189     $ 5,795     $ 1,259     $ 361,390  
                                                 
December 31, 2012                                                
Amount of allowance for  loan losses                                                
   for loans deemed to be impaired   $ 72     $ 7     $ 203     $ —     $ —     $ 282  
                                                 
Amount of allowance for  loan losses                                                
   for loans not deemed to be impaired     1,140       127       2,386       76       20       3,749  
Total allowance for loan losses   $ 1,212     $ 134     $ 2,589     $ 76     $ 20     $ 4,031  
                                                 
Recorded investment in:                                                
    Loans deemed to be impaired   $ 518     $ 56     $ 5,176     $ —     $ —     $ 5,750  
    Loans deemed not to be impaired     227,910       16,939       104,196       4,117       1,309       354,471  
Total   $ 228,428     $ 16,995     $ 109,372     $ 4,117     $ 1,309     $ 360,221  

9

The following is a summary of past due and non-accrual loans at June 30, 2013 and December 31, 2012:

 

                90 Days              
    30-59 Days     60-89 Days     or More     Total     Loans on  
    Past Due     Past Due     Past Due     Past Due     Non-accrual  
June 30, 2013   (In thousands)  
                               
Mortgage loans:                                        
  One-to-four family residential   $ 500     $ —     $ —     $ 500     $ —  
  Equity loans and lines of credit     89       —       —       89       —  
  Commercial and multi-family residential     608       —       733       1,341       1,639  
          Total   $ 1,197     $ —     $ 733     $ 1,930     $ 1,639  
                                         
December 31, 2012                                        
                                         
Mortgage loans:                                        
  One-to-four family residential   $ 1,075     $ —     $ —     $ 1,075     $ 518  
  Equity loans and lines of credit     —       —       —       —       56  
  Commercial and multi-family residential     —       —       1,209       1,209       1,586  
          Total   $ 1,075     $ —     $ 1,209     $ 2,284     $ 2,160  

 

At June 30, 2013 and December 31, 2012, there were no loans greater than ninety days past due and still accruing interest.

 

Further information pertaining to impaired loans follows:

 

    June 30, 2013     December 31, 2012  
    Recorded
Investment 		    Unpaid
Principal
Balance 		    Recorded
Investment 		    Unpaid
Principal
Balance 		 
    (In thousands)  
Impaired loans without a valuation allowance:                                
  Mortgage loans:                                
     Commercial and multi-family residential   $ 2,840     $ 3,156     $ 2,781     $ 2,970  

 

    June 30, 2013     December 31, 2012  
    Recorded
Investment 		    Unpaid
Principal
Balance 		    Related
Allowance 		    Recorded
Investment 		    Unpaid
Principal
Balance 		    Related
Allowance 		 
                (In thousands)              
Impaired loans with a valuation allowance:                                                
  Mortgage loans:                                                
     One-to-four family residential   $ 512     $ 512     $ 70     $ 518     $ 518     $ 72  
     Equity loans and lines of credit     56       56       7       56       56       7  
     Commercial and multi-family residential     2,371       2,371       182       2,395       2,395       203  
Total   $ 2,939     $ 2,939     $ 259     $ 2,969     $ 2,969     $ 282  

10

The following is a summary of the average recorded investment and interest income recognized on impaired loans for the periods indicated:

 

    Three Months Ended June 30, 2013     Six Months Ended June 30, 2013  
    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   $ 638     $ 7     $ —     $ 586     $ 15     $ —  
     Equity loans and lines of credit     145       2       —       107       2       —  
     Commercial and multi-family residential     4,910       21       21       4,919       132       42  
Total   $ 5,693     $ 30     $ 21     $ 5,612     $ 149     $ 42  

 

    Three Months Ended June 30, 2012     Six Months Ended June 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   $ 1,129     $ —     $ —     $ 1,123     $ 6     $ 6  
     Equity loans and lines of credit     134       —       —       125       —       —  
     Commercial and multi-family residential     3,824       5       5       3,300       28       23  
Total   $ 5,087     $ 5     $ 5     $ 4,548     $ 34     $ 29  

 

There were no additional funds committed to be advanced in connection with impaired loans at June 30, 2013 and December 31, 2012.

 

The following is a summary of troubled debt restructurings for the three months ended March 31, 2013 and June 30, 2013:

 

          Pre-Modification     Post-Modification  
          Outstanding     Outstanding  
    Number of     Recorded     Recorded  
    Contracts     Investment     Investment  
    (Dollars in thousands)  
Three Months Ended June 30, 2013                        
Commercial and multi-family residential     2     $ 548     $ 548  
                         
Three Months Ended March 31, 2013                        
Commercial and multi-family residential     1     $ 740     $ 740  

 

11

For all loans noted above the maturity term was extended for less than one year. Management performs a discounted cash flow calculation to determine the amount of impairment reserve required on all troubled debt restructurings. Any reserve required is recorded through the provision for loan losses.

 

The following tables present loans modified in a troubled debt restructuring within the previous twelve months for which there was a payment default, defined as 30 days past due, during the six months ended June 30, 2013:

 

    Number of     Recorded  
    Contracts     Investment  
     (Dollars in thousands)  
                 
Commercial and multi-family residential     2     $ 1,092  

 

There were no troubled debt restructurings that defaulted during the three and six months ended June 30, 2013, and for which the default was within one year of the restructure date.

 

Credit Quality Information:

 

The Company utilizes a nine-grade internal loan rating system for commercial and multi-family residential loans, construction loans and commercial loans as follows:

 

Loans rated 1 – 4 are considered “pass” loans with low to average risk.

 

Loans rated 5 are considered “watch” loans. Loans classified as watch are “pass” loans that management is monitoring more closely but remain acceptable credit.

 

Loans rated 6 are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

 

Loans rated 7 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 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 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 commercial and multi-family residential, 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.

12

Information pertaining to the Company’s loans by risk rating follows:

 

    Commercial and                    
    Multi-family                    
    Residential     Construction     Commercial     Total  
    (In thousands)  
June 30, 2013                                
                                 
Loans rated 1 - 4   $ 74,446     $ 794     $ 857     $ 76,097  
Loans rated 5     8,744       5,001       35       13,780  
Loans rated 6     10,623       —       14       10,637  
Loans rated 7     10,376       —       —       10,376  
Loans rated 8     —       —       —       —  
Loans rated 9     —       —       —       —  
    $ 104,189     $ 5,795     $ 906     $ 110,890  
                                 
December 31, 2012                                
                                 
Loans rated 1 - 4   $ 78,391     $ 1,343     $ 976     $ 80,710  
Loans rated 5     10,252       2,774       —       13,026  
Loans rated 6     10,395       —       22       10,417  
Loans rated 7     10,334       —       —       10,334  
Loans rated 8     —       —       —       —  
Loans rated 9     —       —       —       —  
    $ 109,372     $ 4,117     $ 998     $ 114,487  

 

The Company utilizes a rating scale of pass, special mention, substandard or doubtful for one-to-four family residential loans 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 June 30, 2013, residential one-to-four family residential loans rated substandard amounted to $512,000 and equity loans and lines of credit rated substandard amounted to $56,000. At December 31, 2012, residential one-to-four family residential loans rated substandard amounted to $518,000 and equity loans and lines of credit rated substandard amounted to $56,000. All other one-to-four family residential loans and equity loans and lines of credit were classified as pass at June 30, 2013 and December 31, 2012.

 

 

NOTE 5 – COMMITMENTS

 

Outstanding loan commitments totaled $29.5 million at June 30, 2013, as compared to $21.8 million as of December 31, 2012. 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     Six Months Ended  
    June 30,     June 30,  
    2013     2012     2013     2012  
    (In thousands)  
                         
Net income applicable to common stock   $ 564     $ 253     $ 705     $ 655  
                                 
Weighted average number of common shares issued     4,878       4,878       4,878       4,878  
Less:  Weighted average treasury shares     (1,337 )     (1,373 )     (1,353 )     (1,372 )
Less:  Weighted average unallocated ESOP shares     (198 )     (224 )     (202 )     (228 )
Add:  Weighted average unvested restricted stock                                
   plan shares with non-forfeitable dividend rights     —       36       —       37  
Weighted average number of common shares outstanding                                
   used to calculate basic earnings per common share     3,343       3,317       3,323       3,315  
                                 
Effect of dilutive stock options     100       36       100       26  
Weighted average number of common shares outstanding                                
   used to calculate diluted earnings per common share     3,443       3,353       3,423       3,341  

  

There were no anti-dilutive shares for each of the three and six-month periods ended June 30, 2013 and 2012.

 

NOTE 7 – EQUITY INCENTIVE PLAN

 

The following table presents the activity for the Company’s 2007 Equity Incentive Plan as of and for the six months ended June 30, 2013.

 

    Stock Options  
                Weighted        
                Average        
          Weighted     Remaining        
          Average     Contractual     Aggregate  
    Number     Exercise     Term     Intrinsic  
    of Shares     Price     (Years)     Value  
    (In thousands)  
                         
Outstanding at beginning of period     469,767     $ 12.50       5.07          
Granted     —       —       —          
Exercised shares     (45,000 )     12.50       4.94          
                                 
Outstanding at end of period     424,767     $ 12.50       4.57     $ 1,929  
                                 
Options exercisable at end of period     424,767     $ 12.50       4.57     $ 1,929  

14

NOTE 8 – EMPLOYEE STOCK OWNERSHIP PLAN

 

Shares held by the Employee Stock Ownership Plan (“ESOP”) consist of the following:

 

    June 30,  
    2013  
       
Allocated     167,476  
Committed to be allocated     26,018  
Unallocated     195,134  
         
      388,628  

 

The fair value of unallocated ESOP shares was $3,325,000 at June 30, 2013.

 

Total compensation expense recognized in connection with the ESOP for the three and six month periods ended June 30, 2013 and 2012 was $110,000 and $216,000, respectively and $89,000 and $173,000, respectively.

 

NOTE 9 – FAIR VALUES OF ASSETS AND LIABILITIES

 

The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

 

Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. 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. For example, Level 2 assets and liabilities may include debt securities with quoted prices that are traded less frequently than exchange-traded instruments or mortgage loans held for sale, for which the fair value is based on what the securitization market is currently offering for mortgage loans with similar characteristics.

 

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.

 

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.

15

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 June 30, 2013 and December 31, 2012.

 

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 at fair value 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 June 30, 2013 and December 31, 2012.

 

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 June 30, 2013 and December 31, 2012. The losses represent the amounts recorded during 2013 and 2012 on the assets held at June 30, 2013 and December 31, 2012, respectively.

16

                      Total Losses  
                      Three Months  Ended     Six Months  Ended  
    At June 30, 2013     June 30,     June 30,  
    Level 1     Level 2     Level 3     2013     2012     2013     2012  
    (In thousands)  
                                           
Impaired loans   $ —     $ —     $ 533     $ 60     $ 302     $ 128     $ 627  
Foreclosed real estate     —       —       160       32       61       32       61  
    $ —     $ —     $ 693     $ 92     $ 363     $ 160     $ 688  

 

                      Year Ended  
    At December 31, 2012     December 31, 2012  
    Level 1     Level 2     Level 3     Total Losses  
    (In thousands)  
                         
Impaired loans   $ —     $ —     $ 1,145     $ 295  
    $ —     $ —     $ 1,145     $ 295  

 

Losses on impaired loans are reflected in the provision for loan losses and 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. Foreclosed assets were adjusted to fair value using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties. The loss on foreclosed assets represents adjustments in valuation recorded during the time period indicated and not for losses incurred on sales.

 

Summary of Fair Value of Financial Instruments

 

The estimated fair values, and related carrying 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.

 

    June 30, 2013  
    Carrying     Fair Value  
    Amount     Level 1     Level 2     Level 3     Total  
          (In thousands)        
Financial assets:                                        
   Cash and cash equivalents   $ 18,877     $ 18,877     $ —     $ —     $ 18,877  
   Securities held to maturity     17,085       —       18,391       —       18,391  
   FHLB stock     5,356       —       —       5,356       5,356  
   Loans, net     356,289       —       —       377,857       377,857  
   Accrued interest receivable     1,082       —       —       1,082       1,082  
                                         
Financial liabilities:                                        
   Deposits     281,045       —       —       282,152       282,152  
   Long-term borrowings     87,346       —       —       89,321       89,321  
   Accrued interest payable     225       —       —       225       225  

17

    December 31, 2012  
    Carrying     Fair Value  
    Amount     Level 1     Level 2     Level 3     Total  
          (In thousands)        
Financial assets:                                        
   Cash and cash equivalents   $ 36,043     $ 36,043     $ —     $ —     $ 36,043  
   Securities held to maturity     22,307       —       24,506       —       24,506  
   FHLB stock     5,588       —       —       5,588       5,588  
   Loans, net     355,038       —       —       381,745       381,745  
   Accrued interest receivable     1,118       —       —       1,118       1,118  
                                         
Financial liabilities:                                        
   Deposits     289,674       —       —       290,210       290,210  
   Long-term borrowings     102,797       —       —       105,811       105,811  
   Accrued interest payable     296       —       —       296       296  

 

 

NOTE 10 – SECURED BORROWINGS AND ASSETS PLEDGED AS COLLATERAL

 

FHLB borrowings at June 30, 2013 and December 31, 2012 amounted to $72.3 million and $87.8 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 June 30, 2013 and December 31, 2012, the carrying amount of assets qualifying as collateral for FHLB advances amounted to $219.8 million and $218.4 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.

 

The securities collateralizing this repurchase agreement 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 pledged to secure this agreement have a carrying value of $17.1 million and $22.3 million and a fair value of $18.4 million and $24.5 million at June 30, 2013 and December 31, 2012, respectively. These mortgage-backed securities are held to maturity and cannot be sold. In addition, the Company had $4.0 million in cash pledged as collateral to secure this agreement at June 30, 2013 and December 31, 2012.

 

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 June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 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 Annual Report on Form 10-K for the year ended December 31, 2012 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.

18

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 2012 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, 2012.

 

Comparison of Financial Condition at June 30, 2013 and December 31, 2012

 

Total assets at June 30, 2013 were $426.6 million, a decrease of $22.8 million, or 5.1%, compared to $449.4 million at December 31, 2012. The decrease in assets was concentrated in cash and cash equivalents and securities held to maturity, as funds were used to pay down long-term borrowings and fund deposit outflows.

 

Cash and cash equivalents decreased by $17.2 million, or 47.6%, and securities held to maturity declined $5.2 million, or 23.4%, providing funding for an $8.6 million decrease in deposits and a $15.5 million decrease in long-term borrowings.

 

The net loan portfolio increased by $1.3 million, or 0.4%, during the first half of 2013. The loan portfolio increase was attributable to an increase in one-to-four family residential mortgage loans (an increase of $5.7 million, or 2.5%), and construction loans (an increase of $1.7 million, or 40.8%), partially offset by decreases in home equity loans and lines (a decrease of $999,000, or 5.9%), and commercial mortgage loans (a decrease of $5.2 million, or 4.7%).

 

For the six months ended June 30, 2013, deposit balances decreased by $8.6 million, or 3.0%. The decrease in deposits occurred in NOW/Demand accounts (a decrease of $2.9 million, or 2.2%), money market accounts (a decrease of $3.5 million, or 7.8%) and time deposit accounts (a decrease of $2.4 million, or 3.2%), partially offset by a slight increase in savings accounts (an increase of $149,000, or 0.4%). As interest rates continue to be at an all-time low, customers are placing their deposits with alternative resources, earning higher interest yields.

 

Borrowings, consisting of FHLB advances and one repurchase agreement totaling $15.0 million, decreased $15.5 million, or 15.0%, to $87.3 million at June 30, 2013, due to FHLB advances that matured during the first six months of 2013, compared to an outstanding balance of $102.8 million at December 31, 2012.

 

Total stockholders’ equity at June 30, 2013 was $54.6 million compared to $53.2 million at December 31, 2012. The increase in stockholders’ equity was primarily attributable to net income and exercised stock options.

 

Comparison of Operating Results for the Three and Six Months Ended June 30, 2013 and 2012

 

General. Net income increased by $311,000, or 122.9%, to $564,000 for the three months ended June 30, 2013, compared to $253,000 for the three months ended June 30, 2012. The increase was primarily due to decreases in the non-interest expenses and the provision for loan losses, partially offset by a decrease in net interest income.

 

Net income increased by $50,000, or 7.6%, to $705,000 for the six months ended June 30, 2013, compared to $655,000 for the six months ended June 30, 2012. The increase was primarily due to a decrease in the provision for loan losses.

19

Net Interest Income . Net interest income was $3.3 million and $3.4 million for the quarters ended June 30, 2013 and June 30, 2012, 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 expense from deposits and borrowings. The Company’s second quarter 2013 interest rate spread increased to 3.30% from 3.11% for the second quarter of 2012, an increase of 19 basis points.

 

Net interest income for the six months ended June 30, 2013 was $6.7 million, which was $238,000, or 3.4%, less than net interest income of $7.0 million for the six months ended June 30, 2012. 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 six months ended June 30, 2013, the interest rate spread increased to 3.31% from 3.25% for the six months ended June 30, 2012, an increase of 6 basis points.

 

 

 

 

20

The following table summarizes average balances and average yields and costs for the three months ended June 30, 2013 and 2012.

 

    Three Months Ended June 30,  
    2013     2012  
    Average
Balance 		    Interest
and
Dividends 		    Yield/
Cost 		    Average
Balance 		    Interest
and
Dividends 		    Yield/
Cost 		 
    (Dollars in thousands)  
Assets:                                                
Interest-earning assets:                                                
   Loans   $ 356,740     $ 4,052       4.54 %   $ 360,419     $ 4,432       4.92 %
   Securities     18,435       237       5.14       36,227       394       4.35  
   Other interest-earning assets     6,857       10       0.58       18,031       17       0.38  
     Total interest-earning assets     382,032       4,299       4.50       414,677       4,843       4.67  
                                                 
Bank-owned life insurance     11,154                       11,216                  
Noninterest-earning assets     35,072                       39,470                  
     Total assets   $ 428,258                     $ 465,363                  
                                                 
Liabilities and equity:                                                
Interest-bearing liabilities:                                                
   Interest-bearing demand deposits   $ 75,854       40       0.21     $ 77,405       57       0.29  
   Savings accounts     38,530       8       0.08       34,499       6       0.08  
   Money market accounts     42,864       25       0.23       47,346       31       0.26  
   Certificates of deposit     73,492       202       1.10       69,876       208       1.19  
     Total interest-bearing deposits     230,740       275       0.48       229,126       302       0.53  
                                                 
Borrowings     91,693       694       3.03       138,763       1,134       3.27  
     Total interest-bearing liabilities     322,433       969       1.20       367,889       1,436       1.56  
                                                 
Demand deposits     46,690                       40,769                  
Noninterest-bearing liabilities     4,660                       4,020                  
     Total liabilities     373,783                       412,678                  
                                                 
   Stockholders’ equity     54,475                       52,685                  
     Total liabilities and stockholders’ equity   $ 428,258                     $ 465,363                  
                                                 
   Net interest income           $ 3,330                     $ 3,407          
   Interest rate spread                     3.30 %                     3.11 %
   Net interest margin                     3.49 %                     3.29 %
   Average interest-earning assets to
      average interest-bearing liabilities 		                    118.48 %                     112.72 %
                                                 

 

Total interest and dividend income decreased $544,000, or 11.2%, between the two three-month periods due to a decrease in interest earned on both loans and securities. Interest earned on loans decreased $380,000, or 8.6%, for the three months ended June 30, 2013 due to a decrease in the average yield earned on loans and a decrease in the average balance of loans. Average loans decreased 1.0% to $356.7 million for the three months ended June 30, 2013 from $360.4 million for the three months ended June 30, 2012, while the yield earned on loans decreased to 4.54% for the three months ended June 30, 2013 from 4.92% for the three months ended June 30, 2012 due to a declining long-term interest rate environment. Interest earned on securities decreased $157,000 due to the decrease in the average balance of securities to $18.4 million for the three months ended June 30, 2013 from $36.2 million for the three months ended June 30, 2012, partially offset by the 79 basis point increase in the average yield earned on securities, due to the maturity of a low yielding short-term U.S. Treasury security purchased during the first half of 2012. Interest earned on other-interest earning assets decreased by $7,000 for the three months ended June 30, 2013 from the three months ended June 30, 2012, due to the decrease in the average balance of other interest-earning assets.

21

Total interest expense decreased $467,000 to $1.0 million for the three months ended June 30, 2013 from $1.4 million for the three months ended June 30, 2012, due to a 36 basis point decrease in the total average cost of interest-bearing liabilities, including a 24 basis point decrease in the total average cost of borrowings. The cost of total borrowings for the three months ended June 30, 2013 totaled $694,000, a decrease of $440,000, or 38.7%, from the three months ended June 30, 2012. This decrease was due to a $47.1 million decrease in the average balance to $91.7 million from $138.8 million. The reductions in interest expense related to interest-bearing deposits were seen in demand deposit accounts (a decrease of $17,000, and 8 basis points in the average cost), money market accounts (a decrease of $6,000, and 3 basis points in the average cost), and certificate of deposit accounts (a decrease of $6,000, and 9 basis points in the average cost), partially offset by an increase in savings accounts (an increase of $1,000, and no change in the average cost).

 

 

22

The following table summarizes average balances and average yields and costs for the six months ended June 30, 2013 and 2012.

 

    Six Months Ended June 30,  
    2013     2012  
    Average
Balance 		    Interest
and
Dividends 		    Yield/
Cost 		    Average
Balance 		    Interest
and
Dividends 		    Yield/
Cost 		 
    (Dollars in thousands)  
Assets:                                                
Interest-earning assets:                                                
   Loans   $ 356,447     $ 8,188       4.59 %   $ 354,643     $ 8,991       5.07 %
   Securities     19,748       511       5.18       36,425       827       4.54  
   Other interest-earning assets     9,126       25       0.55       16,631       35       0.42  
     Total interest-earning assets     385,321       8,724       4.53       407,699       9,853       4.83  
                                                 
Bank-owned life insurance     11,186                       11,171                  
Noninterest-earning assets     35,944                       41,779                  
     Total assets   $ 432,451                     $ 460,649                  
                                                 
Liabilities and equity:                                                
Interest-bearing liabilities:                                                
   Interest-bearing demand deposits   $ 76,131       90       0.24     $ 74,916       114       0.30  
   Savings accounts     38,778       16       0.08       33,618       14       0.08  
   Money market accounts     44,582       53       0.24       48,610       63       0.26  
   Certificates of deposit     74,096       403       1.09       69,959       430       1.23  
     Total interest-bearing deposits     233,587       562       0.48       227,103       621       0.55  
                                                 
Borrowings     93,825       1,432       3.05       136,386       2,264       3.32  
     Total interest-bearing liabilities     327,412       1,994       1.22       363,489       2,885       1.59  
                                                 
Demand deposits     46,289                       40,103                  
Noninterest-bearing liabilities     4,642                       4,603                  
     Total liabilities     378,343                       408,195                  
                                                 
   Stockholders’ equity     54,108                       52,454                  
     Total liabilities and stockholders’
          equity 		  $ 432,451                     $ 460,649                  
                                                 
   Net interest income           $ 6,730                     $ 6,968          
   Interest rate spread                     3.31 %                     3.25 %
   Net interest margin                     1.75 %                     3.42 %
   Average interest-earning assets to
      average interest-bearing liabilities 		                    117.69 %                     112.16 %
                                                 

  

Total interest and dividend income decreased $1.1 million, or 11.5%, between the two six-month periods primarily due to a decrease in interest earned on loans and securities. Interest earned on loans decreased $803,000, or 8.9%, for the six months ended June 30, 2013 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 0.5% to $356.4 million for the six months ended June 30, 2013 from $354.6 million for the six months ended June 30, 2012. The yield earned on loans decreased to 4.59% for the six months ended June 30, 2013 from 5.07% for the six months ended June 30, 2012, due to a declining long-term interest rate environment. Interest earned on securities decreased $316,000 due to the decrease in the average balance of securities to $19.7 million for the six months ended June 30, 2013 from $36.4 million for the six months ended June 30, 2012, partially offset by a 64 basis point increase in the average yield earned on securities. Interest earned on other-interest earning assets decreased to $25,000 for six months ended June 30, 2013 from $35,000 for the six months ended June 30, 2012, primarily due to the decrease in the average balance of other interest-earning assets.

23

Total interest expense decreased $891,000 to $2.0 million for the six months ended June 30, 2013 from $2.9 million for the six months ended June 30, 2012, due to a 37 basis point decrease in the total average cost of interest-bearing liabilities, including a 27 basis point decrease in the total average cost of borrowings. The cost of total borrowings for the six months ended June 30, 2013 totaled $1.4 million, a decrease of $832,000, or 36.8%, from the six months ended June 30, 2012, also attributable to the $42.6 million decrease in the average balance of total borrowings. The reductions in interest expense related to interest-bearing deposits were seen in demand deposit accounts (a decrease of $24,000, and 6 basis points in the average cost), money market accounts (a decrease of $10,000, and 2 basis points in the average cost), and certificate of deposit accounts (a decrease of $27,000, and 14 basis points in the average cost). These reductions were partially offset by an increase in savings accounts (an increase of $2,000, and no change in basis points in the average cost). The decrease in the cost of deposits and borrowings was primarily due to a declining long-term interest rate environment and the decline in higher cost long-term FHLB advances. Also, contributing to the decline in borrowings was the maturity of a $25.0 million repurchase agreement in November of 2012.

 

 

24

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 June 30, 2013
Compared to the
Three Months Ended June 30, 2012 		 
    Increase (Decrease)
Due to 		 
    Volume     Rate     Net  
    (Dollars in thousands)  
Interest Income:                        
   Loans   $ (45 )   $ (335 )   $ (380 )
   Securities     (533 )     376       (157 )
   Other interest-earning assets     (43 )     36       (7 )
   Total interest-earning assets     (621 )     77       (544 )
                         
Interest Expense:                        
   Deposits     14       (41 )     (27 )
   Borrowings     (361 )     (79 )     (440 )
   Total interest-bearing liabilities     (347 )     (120 )     (467 )
   Change in net interest income   $ (274 )   $ 197     $ (77 )

 

    For the Six Months Ended June 30, 2013
Compared to the
Six Months Ended June 30, 2012 		 
    Increase (Decrease)
Due to 		 
    Volume     Rate     Net  
    (Dollars in thousands)    
Interest Income:                        
   Loans   $ 132     $ (935 )   $ (803 )
   Securities     (596 )     280       (316 )
   Other interest-earning assets     (31 )     21       (10 )
   Total interest-earning assets     (495 )     (634 )     (1,129 )
                         
Interest Expense:                        
   Deposits     46       (105 )     (59 )
   Borrowings     (661 )     (171 )     (832 )
   Total interest-bearing liabilities     (615 )     (276 )     (891 )
   Change in net interest income   $ 120     $ (358 )   $ (238 )

 

25

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 June 30, 2013 was $14,000 compared to $341,000 for the three months ended June 30, 2012. The Company’s loan loss provision for the six months ended June 30, 2013 was $14,000 compared to $622,000 for the six months ended June 30, 2012. The provision for the first half of 2013 decreased compared to the provision for the first half of 2012, due to changes in the loan portfolio mix, a decrease in non-performing loans as a result of loan payoffs and a decrease in charge-offs, partially offset by loan growth and an increase in allocated reserves for loans that have been restructured. At June 30, 2013 there were $21.5 million of classified and criticized loans compared to $21.3 million of such loans at December 31, 2012. At June 30, 2013, loans classified as special mention totaled $10.6 million, which consisted of commercial and multi-family real estate mortgages, compared to $10.4 million at December 31, 2012. Loans classified as substandard, including all impaired loans, totaled $10.9 million at June 30, 2013 and December 31, 2012. Total classified and criticized loans represent 6.0% of the Company’s total gross loans at June 30, 2013, compared to 4.9% at June 30, 2012. There were no changes in the methodology of calculating the allowance for loan losses from the first six months of 2012 through the first six months of 2013. The allowance for loan losses to total loans was 1.09%, 1.12% and 1.00% at June 30, 2013, December 31, 2012 and June 30, 2012, 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 presented.

 

    June 30,     December 31,     June 30,  
    2013     2012     2012  
    (Dollars in thousands)  
Nonaccrual loans:                  
     One-to-four family residential   $ —     $ 518     $ 1,133  
     Commercial and multi-family     1,639       1,586       4,935  
     Equity loans and lines of credit     —       56       57  
     Total nonaccrual loans     1,639       2,160       6,125  
Foreclosed real estate     160       —       715  
     Total non-performing assets     1,799       2,160       6,840  
Performing troubled debt restructurings     3,675       3,116       —  
     Total non-performing assets and performing
        troubled debt restructurings 		  $ 5,474     $ 5,276     $ 6,840  
Total non-performing loans to total loans     0.46 %     0.60 %     1.68 %
Total non-performing assets to total assets     0.42 %     0.48 %     1.47 %

 

Non-performing assets were $1.8 million at June 30, 2013, a decrease of $361,000, from December 31, 2012. There were $6.8 million of non-performing assets at June 30, 2012. The decrease in non-performing loans is a result of loan payoffs.

 

Net loan charge-offs totaling $86,000 and $351,000 were recognized during the quarters ended June 30, 2013 and 2012, respectively. Net loan charge-offs totaling $134,000 and $662,000 were recognized during the six months ended June 30, 2013 and 2012, respectively.

 

Non-interest Income . Non-interest income for the three months ended June 30, 2013 totaled $611,000, an increase of $26,000, or 4.4%, compared to $585,000 for the three months ended June 30, 2012. The increase in non-interest income between the periods is primarily due to a $30,000 increase in net fees earned on checking accounts and a $2,000 increase in bank-owned life insurance income, partially offset by a $6,000 decrease in miscellaneous income.

 

Non-interest income for the first six months of 2013 totaled $1.1 million, an increase of $4,000, or 0.4%, compared to the first six months of 2012. The increase in non-interest income for the six months ended June 30, 2013 when compared to the same period in 2012 is primarily due to a $7,000 increase in net fees earned on checking accounts, partially offset by a $3,000 decrease in bank-owned life insurance income.

26

Non-interest Expense . Non-interest expenses totaled $3.0 million for the quarter ended June 30, 2013 compared to $3.3 million for the quarter ended June 30, 2012. The $237,000 decrease between periods is due to decreases in salaries and employee benefits, professional fees, marketing costs and other general and administrative costs, partially offset by an increase in merger expenses. Salaries and employee benefits decreased primarily due to a reduction in staffing levels and a reduction in benefit costs. Professional fees decreased due to the reduction of accruals for annual professional services that will not occur in 2013 but did in 2012, due to the impending merger. The decrease in marketing costs is the result of a continued effort by management to control advertising and marketing expenses. Other general and administrative costs decreased due to a reduction in foreclosed real estate expenses.

 

For the six months ended June 30, 2013, non-interest expenses totaled $6.6 million, an increase of $62,000, or 1.0%, compared to the same period in 2012. The increase between periods is attributable primarily to expenses of $628,000 related to the Agreement and Plan of Merger entered into by the Company on March 5, 2013. In addition, there were smaller increases in occupancy and equipment expense and data processing fees, and decreases in salaries and employee benefits, professional fees, marketing costs, FDIC insurance and other general and administrative costs. The increase in occupancy and equipment expense is due to a stormier winter during 2013 compared to the same period in 2012, which resulted in an increase of operating costs associated with the maintenance of the Bank’s branches. The decrease in salaries and benefits is primarily due to a reduction in pension costs and the conclusion of the stock-based compensation expense amortization in 2012 associated with option grants and restricted stock awards. The decrease in professional fees is due to the reduction in annual audit expenses. The decrease in marketing costs is the result of a continued effort by management to control advertising and marketing expenses. The decrease in FDIC insurance is due to the decrease in consolidated total assets less tangible equity in the first half of 2013 compared to the first half of 2012, resulting in a lower expense in deposit insurance coverage.

 

Income Taxes . The provision for income taxes for the three months ended June 30, 2013 was $315,000 compared to $113,000 for the three months ended June 30, 2012. The increase in the tax provision is due to higher income before taxes of $879,000 for the three months ended June 30, 2013, compared to net income before income taxes of $366,000 for the three months ended June 30, 2012. The effective tax rate for the second quarter of 2013 was 35.8%, versus 30.9% for the 2012 period. The increase in the effective tax rate is due to the non-tax deductible merger-related expenses recorded during the three months ended June 30, 2013.

 

The provision for income taxes for the six months ended June 30, 2013 was $562,000, compared to $300,000 for the six months ended June 30, 2012. The increase in the tax provision is due to higher income before taxes of $1.3 million for the six months ended June 30, 2013, compared to net income before income taxes of $955,000 million for the six months ended June 30, 2011. The effective tax rate for the six-month period of 2013 was 44.4%, versus 31.4% for the 2012 period. The increase in the effective tax rate is due to $468,000 of non-tax deductible merger-related expenses recorded in the first six months of 2013 as a result of the Agreement and Plan of Merger entered into by the Company on March 5, 2013.

 

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.

 

Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At June 30, 2013, cash and cash equivalents totaled $18.9 million. On June 30, 2013, we had $72.3 million of borrowings outstanding with the Federal Home Loan Bank of Boston and we had the ability to borrow an additional $85.1 million from the Federal Home Loan Bank of Boston.

27

At June 30, 2013, we had $29.5 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, $4.8 million in construction loan commitments and $2.3 million in commercial lines of credit commitments. Certificates of deposit due within one year of June 30, 2013 totaled $36.9 million, or 50.4% 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 June 30, 2014. 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 June 30, 2013, 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 June 30, 2013, 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 June 30, 2013, 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.

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The following table presents the change in our net EVE at May 31, 2013 (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 EVE at June 30, 2013 is consistent with the table below.

 

    Net EVE   Net EVE as % of
Portfolio Value of Assets
Basis Point (“bp”)
Change in Rates 		  Amount   Change   % Change   EVE Ratio   Change (bp)
    (Dollars in thousands)            
400   $ 46,830     $ (14,099 )     (23.1 )     11.79 %     (201 )
300     49,683       (11,246 )     (18.5 )     12.18 %     (161 )
200     53,888       (7,041 )     (11.6 )     12.86 %     (93 )
100     57,883       (3,046 )     (5.0 )     13.45 %     (35 )
0     60,929       —       —       13.80 %     —  
(100)     57,182       (3,747 )     (6.1 )     12.79 %     (101 )

 

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 June 30, 2013 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 June 30, 2013, 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 2012 Annual Report on Form 10-K. The Company’s evaluation of its risk factors has not changed materially since December 31, 2012.

29

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

 

a) Not applicable
b) Not applicable
c) Information regarding the Company’s stock repurchases program for the quarter ended June 30, 2013.

 

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)
April 2013   0   N/A   N/A   119,170
May 2013   0   N/A   N/A   119,170
June 2013   0   N/A   N/A   119,170
Total   0   N/A   N/A    

 

 

(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*

 

101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012, (ii) the Consolidated Statements of Net Income and Comprehensive Income for the three and six months ended June 30, 2013 and 2012, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2013 and 2012, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012, 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

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Newport Bancorp, Inc .
     
     
     
Date:  August 14, 2013 By: /s/ Kevin M. McCarthy
    Kevin M. McCarthy
    President and Chief Executive Officer
     
     
     
Date:  August 14, 2013 By: /s/ Bruce A. Walsh
    Bruce A. Walsh
    Executive Vice President and Chief Financial Officer
     (Principal Financial and Chief Accounting Officer)

 

31
 

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