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NFSB > SEC Filings for NFSB > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for NEWPORT BANCORP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for NEWPORT BANCORP INC


14-Aug-2013

Quarterly Report


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.

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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 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.

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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.

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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
                                                  Interest                                   Interest
                                    Average          and          Yield/       Average          and          Yield/
                                    Balance       Dividends        Cost        Balance       Dividends        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, 2012due 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.

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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).

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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
                                                         Interest                                   Interest
                                           Average          and          Yield/       Average          and          Yield/
                                           Balance       Dividends        Cost        Balance       Dividends        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.

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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.

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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 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 )

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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.

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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 . . .

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