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NFSB > SEC Filings for NFSB > Form 10-Q on 13-May-2013All Recent SEC Filings

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Form 10-Q for NEWPORT BANCORP INC


13-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Management's discussion and analysis of financial condition at March 31, 2013 and results of operations for the three months ended March 31, 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 2012 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.

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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 our critical accounting policies to be those related to the allowance for loan losses and the valuation of our net deferred tax asset. The Company's critical accounting policies have not changed since December 31, 2012.

Comparison of Financial Condition at March 31, 2013 and December 31, 2012

Total assets at March 31, 2013 were $430.6 million, a decrease of $18.8 million, or 4.2%, 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 $15.7 million, or 43.7%, and a decline in securities held to maturity of $2.9 million, or 12.9%, provided funding for an $8.2 million decrease in deposits and an $11.5 million decrease in long-term borrowings.

The net loan portfolio increased by $1.1 million, or 0.3%, during the first quarter of 2013. The loan portfolio increase was attributable to an increase in one-to-four family residential mortgage loans (an increase of $1.7 million, or 0.8%), and construction loans (an increase of $2.5 million, or 60.5%), partially offset by decreases in home equity loans and lines (a decrease of $732,000, or 4.3%), and commercial and multi-family residential mortgage loans (a decrease of $2.4 million, or 2.2%).

Deposit balances decreased by $8.2 million, or 2.8%. The decrease in deposits occurred in NOW/Demand accounts (a decrease of $8.6 million, or 6.6%), and time deposit accounts (a decrease of $2.1 million, or 2.7%), partially offset by an increase in money market accounts (an increase of $2.0 million, or 4.4%), and savings accounts (an increase of $561,000, or 1.5%).

Borrowings, consisting of FHLB advances and one repurchase agreement totaling $15.0 million, decreased $11.5 million, or 11.2%, to $91.3 million at March 31, 2013, due to FHLB advances that matured during the quarter, compared to an outstanding balance of $102.8 million at December 31, 2012.

Total stockholders' equity at March 31, 2013 was $54.0 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 Months Ended March 31, 2013 and 2012

General. Net income decreased by $261,000, or 64.9%, to $141,000 for the three months ended March 31, 2013, compared to $402,000 for the three months ended March 31, 2012. The decrease was primarily due to a decrease in net interest income, an increase in non-interest expenses and an increase in the provision for income taxes, partially offset by a decrease in the provision for loan losses.

Net Interest Income. Net interest income was $3.4 million and $3.6 million for the quarters ended March 31, 2013 and 2012, respectively. 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 interest expense from long-term borrowings. The Company's first quarter 2013 interest rate spread decreased to 3.32% from 3.39% for the first quarter of 2012, a decrease of 7 basis points.

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The following table summarizes average balances and average yields and costs for the three months ended March 31, 2013 and 2012.

                                                                              Three Months Ended March 31,
                                                                   2013                                           2012
                                                 Average         Interest          Yield/       Average         Interest          Yield/
                                                 Balance       and Dividends        Cost        Balance       and Dividends        Cost
                                                                                 (Dollars in thousands)

Assets:
Interest-earning assets:
  Loans                                         $ 356,151     $         4,136         4.65 %   $ 348,867     $         4,559         5.23 %
  Securities                                       21,077                 274         5.20        36,623                 433         4.73
  Other interest-earning assets                    11,419                  15         0.53        15,232                  18         0.47
   Total interest-earning assets                  388,647               4,425         4.55       400,722               5,010         5.00

  Bank-owned life insurance                        11,218                                         11,125
  Noninterest-earning assets                       36,825                                         44,088
   Total assets                                 $ 436,690                                      $ 455,935

Liabilities and equity:
Interest-bearing liabilities:
  Interest-bearing demand deposits              $  76,411                  50         0.26     $  72,428                  57         0.31
  Savings accounts                                 39,029                   8         0.08        32,736                   3         0.04
  Money market accounts                            46,319                  28         0.24        49,873                  32         0.26
  Certificates of deposit                          74,707                 201         1.08        70,043                 226         1.29
   Total interest-bearing deposits                236,466                 287         0.49       225,080                 318         0.57

  Borrowings                                       95,982                 738         3.08       134,009               1,131         3.38
   Total interest-bearing liabilities             332,448               1,025         1.23       359,089               1,449         1.61

  Demand deposits                                  45,883                                         39,437
  Noninterest-bearing liabilities                   4,623                                          5,186
   Total liabilities                              382,954                                        403,712

  Stockholders' equity                             53,736                                         52,223
   Total liabilities and stockholders' equity   $ 436,690                                      $ 455,935

  Net interest income                                         $         3,400                                $         3,561
  Interest rate spread                                                                3.32 %                                         3.39 %
  Net interest margin                                                                 3.50 %                                         3.55 %
Average interest-earning assets to
 average interest-bearing liabilities                                               116.90 %                                       111.59 %

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Total interest and dividend income decreased $585,000, or 11.7%, between the two periods primarily due to a decrease in interest earned on loans and securities. Interest earned on loans decreased $423,000, or 9.3%, for the three months ended March 31, 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 2.1% to $356.2 million for the three months ended March 31, 2013 from $348.9 million for the three months ended March 31, 2012, while the yield earned on loans decreased to 4.65% for 2013 from 5.23% for 2012. Interest earned on securities decreased $159,000 due to the decrease in the average balance of securities to $21.1 million for the three months ended March 31, 2013 from $36.6 million for the three months ended March 31, 2012, partially offset by the 47 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 quarter of 2012. Interest earned on other-interest earning assets decreased slightly by $3,000 for the three months ended March 31, 2013 from the three months ended March 31, 2012, due to the decrease in the average balance of other interest-earning assets.

Total interest expense decreased $424,000 to $1.0 million for the three months ended March 31, 2013 from $1.4 million for the three months ended March 31, 2012, due to a 38 basis point decrease in the total average cost of interest-bearing liabilities, including an 8 basis point decrease in the total average cost of interest-bearing deposits. The reductions in interest expense related to interest-bearing deposits were seen in demand deposit accounts (a decrease of $7,000, and 5 basis points in the average cost), money market accounts (a decrease of $4,000, and 2 basis points in the average cost), and certificate of deposit accounts (a decrease of $25,000, and 21 basis points in the average cost), partially offset by an increase in savings accounts (an increase of $5,000, and 5 basis points in the average cost). The cost of total borrowings for the three months ended March 31, 2013 totaled $738,000 and decreased $393,000, or 34.7%, from the three months ended March 31, 2012, due to a $38.0 million decrease in the average balance to $96.0 million from $134.0 million, and a 30 basis point decrease in the average cost.

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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, 2013
                                                        Compared to the
                                               Three Months Ended March 31, 2012
                                                      Increase (Decrease)
                                                             Due to
                                          Volume                 Rate               Net
                                                     (Dollars in thousands)
Interest Income:
  Loans                                $         574         $        (997 )       $ (423 )
  Securities                                    (408 )                 249           (159 )
  Other interest-earning assets                  (13 )                  10             (3 )
  Total interest-earning assets                  153                  (738 )         (585 )

Interest Expense:
  Deposits                                        86                  (117 )          (31 )
  Borrowings                                    (299 )                 (94 )         (393 )
  Total interest-bearing liabilities            (213 )                (211 )         (424 )
  Change in net interest income        $         366         $        (527 )       $ (161 )

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. There was no loan loss provision for the quarter ended March 31, 2013, compared to $281,000 for the quarter ended March 31, 2012. The provision for the first quarter of 2013 decreased compared to the provision for the first quarter 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, offset by loan growth and an increase in allocated reserves for loans that have been restructured. At March 31, 2013 there were $21.8 million of classified and criticized loans compared to $21.3 million of such loans at December 31, 2012. At March 31, 2013, loans classified as special mention totaled $11.5 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 $10.3 million at March 31, 2013,compared to $10.9 million at December 31, 2012. Total classified and criticized loans represent 6.0% of the Company's total gross loans at March 31, 2013, compared to 5.0% at March 31, 2012. There were no changes in the methodology of calculating the allowance for loan losses from the first quarter of 2012 through the first quarter of 2013. The allowance for loan losses to total loans was 1.10%, 1.12% and 1.03% for the periods ended March 31, 2013, December 31, 2012 and March 31, 2012, respectively.

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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.

                                                                              March 31,      December 31,       March 31,
                                                                                2013             2012             2012
                                                                                        (Dollars in thousands)
Nonaccrual loans:
   One-to-four family residential                                            $         -     $         518     $     1,133
   Commercial and multi-family                                                     1,887             1,586           1,656
   Equity loans and lines of credit                                                    -                56             182
   Total nonaccrual loans                                                          1,887             2,160           2,971
Foreclosed real estate                                                                 -                 -             587
   Total non-performing assets                                                     1,887             2,160           3,558
Performing troubled debt restructurings                                            2,995             3,116               -
   Total non-performing assets and performing troubled debt restructurings   $     4,842     $       5,276     $     3,558
Total non-performing loans to total loans                                           0.52 %            0.60 %          0.84 %
Total non-performing assets to total assets                                         0.44 %            0.48 %          0.76 %

Non-performing assets were $1.9 million at March 31, 2013, a decrease of $273,000, from December 31, 2012. There were $3.6 million of non-performing assets at March 31, 2012. The decrease in non-performing loans is a result of loan payoffs.

Net loan charge-offs totaling $48,000 and $311,000 were recognized during the quarters ended March 31, 2013 and 2012, respectively.

Non-interest Income. Non-interest income for the first quarter of 2013 totaled $521,000, a decrease of $22,000, or 4.1%, compared to the first quarter of 2012. The decrease in non-interest income between the periods is primarily due to a $23,000 decrease in net fees earned on checking accounts and a $5,000 decrease in bank-owned life insurance income, partially offset by a $6,000 increase in miscellaneous income.

Non-interest Expense. Total non-interest expense increased to $3.5 million for the quarter ended March 31, 2013 from $3.2 million for the quarter ended March 31, 2012, an increase of $299,000, or 9.2%. The increase between periods is attributable primarily to expenses of $530,000 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 quarter of 2013 compared to the first quarter of 2012, resulting in a lower expense in deposit insurance coverage.

Income Taxes.The provision for income taxes for the three months ended March 31, 2013 was $247,000 compared to $187,000 for the three months ended March 31, 2012. The effective tax rate for the first quarter of 2013 was 63.7%, versus 31.7% for the 2012 period. The increase in the effective tax rate is due to $360,000 of non-tax deductible merger-related expenses recorded in the first quarter of 2013 as a result of the Agreement and Plan of Merger entered into by the Company on March 5, 2013.

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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 March 31, 2013, cash and cash equivalents totaled $20.3 million. On March 31, 2013, we had $76.3 million of borrowings outstanding with the Federal Home Loan Bank of Boston and we had the ability to borrow an additional $78.9 million from the Federal Home Loan Bank of Boston.

At March 31, 2013, we had $27.5 million in loan commitments outstanding, which consisted of $7.3 million of real estate loan commitments, $14.1 million in unused equity loans and lines of credit, $2.9 million in construction loan commitments and $2.4 million in commercial lines of credit commitments. Certificates of deposit due within one year of March 31, 2013 totaled $37.4 million, or 50.8% 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 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, 2013, we are 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, 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 March 31, 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.

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