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| NECB > SEC Filings for NECB > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
Overview
Income. Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Other significant sources of pre-tax income are prepayment penalties on multi-family, mixed-use and non-residential real estate loans and service charges - mostly from service charges on deposit accounts - and fees for various services.
Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Expenses. The noninterest expenses we incur in operating our business consist of salary and employee benefits expenses, occupancy and equipment expenses, advertising expenses, federal insurance premiums and other miscellaneous expenses.
Salary and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes and expenses for health insurance, retirement plans and other employee benefits.
Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, ATM and data processing expenses, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using the straight-line method based on the useful lives of the related assets, which range from three to 40 years. Leasehold improvements are amortized over the shorter of the useful life of the asset or term of the lease.
Advertising expenses include expenses for print, promotions, third-party marketing services and premium items.
Federal insurance premiums are payments we make to the Federal Deposit Insurance Corporation for insurance of our deposit accounts.
Other expenses include expenses for professional services, office supplies, postage, telephone, insurance, charitable contributions, regulatory assessments and other miscellaneous operating expenses.
Critical Accounting Policies
We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the following to be our critical accounting policies: allowance for loan losses and deferred income taxes.
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover probable credit losses in the loan portfolio at the statement of financial condition date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance on a quarterly basis and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectibility of the loan portfolio.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses. The Office of Thrift Supervision could require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings. For additional discussion, see note 1 of the notes to the consolidated financial statements included elsewhere in this filing.
Deferred Income Taxes. We use the asset and liability method of accounting for income taxes as prescribed in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. A valuation allowance would result in additional income tax expense in the period, which would negatively affect earnings.
Sale of New York City Branch Office
In June 2007, the Bank completed the sale of its branch office building located at 1353-55 First Avenue, New York, New York. The purchase price for the building was $28.0 million. The Bank received $10.0 million in cash at closing and an $18.0 million zero coupon promissory note recorded at its then present value of $16.3 million (the "Original Note"). The Original Note was payable in two $9.0 million installments due on the first and second anniversaries of the Original Note. On July 31, 2008, as payment of the first installment due under the Original Note, the Bank received $2.0 million in cash and a new $7.0 million note bearing interest at 7% per annum and payable over a five-month period ending on December 31, 2008 (the "New Note"). On December 31, 2008, the Original Note and the remaining $1.9 million balance on the New Note were rolled into a new $10.9 million note payable on July 31, 2009 (the "Combined Note"). The Combined Note is secured by 100% of the interests in the companies owning the Property. In addition, the Combined Note is secured by a pocket mortgage on the Property, which is held in escrow by the Bank. This note is not treated as a loan or extension of credit subject to the regulatory limits on loans to one borrower.
The sale of the branch office resulted in a pre-tax gain of $19.0 million, or a net gain of $10.8 million after providing for $8.2 million in income taxes. The sale also provided an increase in total assets of $19.0 million represented by increases of $9.1 million in cash and $16.3 million in loans receivable partially offset by decreases of $6.2 million in property and equipment and $263,000 in other assets. The sale resulted in the accrual of $8.2 million of income taxes on the sale gain.
In connection with the sale of the branch office building, the Bank entered into a 99-year lease agreement to enable the Bank to retain a branch office at 1353-55 First Avenue. This lease will be effective upon the completion of the renovation of the property (projected to be in 2011). We have temporarily relocated our First Avenue branch office to 1470 First Avenue while 1353-55 First Avenue is being renovated.
Acquisition of the Business Assets of Hayden Financial Group LLC
On November 16, 2007, the Bank acquired the operating assets of Hayden Financial Group LLC ("Hayden"), an investment advisory firm located in Connecticut, at a cost of $2.0 million. The Bank paid $1.3 million at closing, and $700,000 will be paid in four annual installments of $175,000. The acquisition of these business assets has enabled the Bank to expand the services it provides to include investment advisory and financial
planning services to the then-existing Hayden customer base as well as future customers through a networking arrangement with a registered broker-dealer and investment adviser. In connection with this transaction, we acquired intangible assets related to customer relationships of $710,000 and goodwill of $1,310,000 and booked a note payable with a present value of $625,000. The intangible asset has been determined to have an 11.7-year life and, absent impairment issues, will be amortized to operations over that period using the straight-line method. Both the intangible assets and goodwill will be subject to impairment review on no less than an annual basis. The note is payable in four annual installments, one on each succeeding note anniversary date, of $175,000. The note was initially recorded at $625,000, assuming a 4.60% discount rate. The note payable balance at December 31, 2008 was $481,000 and note discount accreted during 2008 totaled $29,000. The acquired business is being operated as a division of the Bank and, during 2008, generated total revenues of approximately $878,000 and pre-tax income of approximately $17,000.
Balance Sheet Analysis
Overview. Total assets at December 31, 2008, increased $80.3 million, or 23.4%, to $424.2 million from total assets of $343.9 million at December 31, 2007. The increase was primarily due to an increase of $80.5 million in loans receivable, net. The increase in loans was funded with increases of $40.0 million in Federal Home Loan Bank advances, $35.5 million in deposits, and $3.7 million in advance payments by borrowers for taxes and insurance. As of December 31, 2008, the Company, on a consolidated basis, had stockholders equity of $110.5 million, or 26.05% of assets.
Loans. Our primary lending activity is the origination of loans secured by real estate. We originate real estate loans secured by multi-family residential real estate, mixed-use real estate and non-residential real estate. To a much lesser extent, we originate commercial and consumer loans and purchase participation interests in construction loans. At December 31, 2008, loans receivable, net, totaled $363.6 million, an increase of $80.5 million, or 28.4%, from total loans receivable, net, of $283.1 million at December 31, 2007. The promissory notes that the Bank received in connection with the sale of the Bank's branch office building located at 1353-55 First Avenue, which had a $10.7 million and $16.9 million balance at December 31, 2008 and 2007, respectively, are included in the non-residential segment of our real estate loan portfolio for both 2008 and 2007.
The largest segment of our real estate loans is multi-family residential loans. As of December 31, 2008, these loans totaled $186.2 million, or 51.1% of our total loan portfolio, compared to $138.8 million, or 49.0% of our total loan portfolio at December 31, 2007. As of December 31, 2008, mixed-use loans totaled $58.3 million, or 16.0% of our total loan portfolio, compared to $52.6 million, or 18.5% of our total loan portfolio at December 31, 2007. Non-residential real estate loans totaled $102.8 million, or 28.2% of our total loan portfolio at December 31, 2008, compared to $79.3 million, or 28.0% of our total loan portfolio at December 31, 2007. At December 31, 2008 and 2007, one- to four-family residential real estate loans totaled $275,000 and $304,000, or 0.1% and 0.1% of our total loan portfolio, respectively.
At December 31, 2008, our commercial loan portfolio totaled $22.8 million in committed loans, with $7.6 million drawn against such commitments, compared to $5.5 million in committed loans, with $3.0 million drawn against such commitments at December 31, 2007. In both 2008 and 2007 we also purchased participation interests in construction loans secured by multi-family, mixed-use and non-residential properties. We perform our own underwriting analysis on each of our participation interests before purchasing such loans. The outstanding balance of construction loan participation interests purchased totaled $9.0 million, or 2.5% of our total loan portfolio at December 31, 2008 compared to $9.5 million or 3.3% of our total loan portfolio at December 31, 2007.
In addition, we also originate several types of consumer loans secured by savings accounts or certificates of deposit (share loans) and overdraft protection for checking accounts which is linked to statement savings accounts and has the ability to transfer funds from the statement savings account to the checking account when needed to cover overdrafts. Consumer loans totaled $114,000 and represented 0.03% of total loans at December 31, 2008 compared to $88,000, or 0.03%, of total loans at December 31, 2007.
The following table sets forth the composition of our loan portfolio at the dates indicated.
At December 31,
2008 2007 2006 2005 2004
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Real estate:
Residential Real
Estate:
One- to four-family $ 275 0.08 % $ 304 0.11 % $ 405 0.20 % $ 587 0.31 % $ 837 0.49 %
Multi-family (1) 186,199 51.11 138,767 48.95 110,389 54.76 100,360 52.43 99,400 58.93
Mixed-use (1) 58,317 16.00 52,559 18.54 42,576 21.12 43,919 22.94 38,287 22.70
Total residential real
estate loans 244,791 67.19 191,630 67.60 153,370 76.08 144,866 75.68 138,524 82.12
Non-residential real
estate (1) 102,785 28.21 79,305 27.98 47,802 23.71 46,219 24.14 29,785 17.66
Total real estate 347,576 95.40 270,935 95.58 201,172 99.79 191,085 99.82 168,309 99.78
Construction loans 9,025 2.48 9,456 3.34 - - - - - -
Commercial loans 7,620 2.09 2,977 1.05 - - - - - -
Consumer:
Overdraft lines of
credit 57 0.02 69 0.02 71 0.04 83 0.04 96 0.06
Passbook loans 57 0.01 19 0.01 348 0.17 268 0.14 270 0.16
Total consumer loans 114 0.03 88 0.03 419 0.21 351 0.18 366 0.22
Total loans 364,335 100.00 % 283,456 100.00 % 201,591 100.00 % 191,436 100.00 % 168,675 100.00 %
Net deferred loan
costs 1,146 1,166 915 660 215
Allowance for losses (1,865 ) (1,489 ) (1,200 ) (1,200 ) (1,200 )
Loans, net $ 363,616 $ 283,133 $ 201,306 $ 190,896 $ 167,690
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The following table sets forth certain information at December 31, 2008 regarding the dollar amount of loans repricing or maturing during the periods indicated. The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated maturity are reported as due in one year or less.
At December 31, 2008
Residential Consumer and
Real Estate Non-Residential Real Commercial Construction other Total
Loans Estate Loans Loans Loans Loans Loans
(In thousands)
One year or less $ 57,162 $ 43,111 $ 6,878 $ 9,025 $ 114 $ 116,290
More than one year to
five years 182,295 59,674 742 - - 242,711
More than five years 5,334 - - - - 5,334
Total $ 244,791 $ 102,785 $ 7,620 $ 9,025 $ 114 $ 364,335
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The following table sets forth the dollar amount of all loans at December 31, 2008 that are due after December 31, 2009 and have either fixed or adjustable interest rates.
Fixed Rates Adjustable Rates Total
(In thousands)
Residential real estate:
One- to four-family $ 132 $ - $ 132
Multi-family 6,597 136,266 142,863
Mixed-use 4,061 40,573 44,634
Non-residential real estate 2,976 56,698 59,674
Construction loans - - -
Commercial loans 742 - 742
Consumer and other loans - - -
Total $ 14,508 $ 233,537 $ 248,045
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The following table shows loan origination, purchase and sale activity during the periods indicated.
2008 2007 2006 2005 2004
(In thousands)
Total loans at beginning
of period $ 283,456 $ 201,591 $ 191,436 $ 168,675 $ 155,557
Loans originated:
Residential real estate:
One- to four-family - - - - -
Multi-family 70,450 43,376 19,409 24,551 34,939
Mixed-use 6,616 16,098 7,304 9,794 11,801
Non-residential real
estate 42,954 24,451 9,010 23,831 6,957
Construction loans - - - - -
Commercial loans 4,794 3,012 - - -
Consumer and other loans 87 17 80 - 63
Total loans originated 124,901 86,954 35,803 58,176 53,760
Construction loan
participation purchased 5,406 11,695 - - -
Permanent loan
participation purchased 2,971 - - - -
Loan from sale of
building - 16,341 - - -
Deduct:
Loan principal
repayments 44,069 32,109 25,648 35,415 40,642
Loan sales 7,045 1,505 - - -
Total deductions 51,114 33,614 25,648 35,415 40,642
Other increases (1,285 ) 489 - - -
Total loans at end of
period $ 364,335 $ 283,456 $ 201,591 $ 191,436 $ 168,675
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Securities. Our securities portfolio consists primarily of mortgage-backed securities. Securities decreased $935,000, or 29.3%, from $3.2 million at December 31, 2007, to $2.3 million at December 31, 2008. The decrease was primarily due to maturities and repayments of $882,000.
The following table sets forth the amortized cost and fair values of our securities portfolio at the dates indicated.
At December 31,
2008 2007 2006
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(In thousands)
Securities available
for sale:
Fannie Mae common
stock $ 4 $ 1 $ 4 $ 46 $ 4 $ 72
Mortgage-backed
securities 183 181 273 274 281 283
Total $ 187 182 $ 277 $ 320 $ 285 $ 355
Securities held to
maturity:
U.S. Government and
agency securities $ - $ - $ - $ - $ 22,904 $ 22,904
Mortgage-backed
securities 2,078 2,050 2,875 2,890 4,551 4,564
Total $ 2,078 $ 2,050 $ 2,875 $ 2,890 $ 27,455 $ 27,468
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At December 31, 2008, we had no investments in a single company or entity that had an aggregate book value in excess of 10% of our equity.
The following table sets forth the stated maturities and weighted average yields of debt securities at December 31, 2008. Certain mortgage-backed securities have adjustable interest rates and will re-price annually within the various maturity ranges. These repricing schedules are not reflected in the table below. At December 31, 2008, mortgage-backed securities with adjustable rates totaled $2.2 million.
More than More than
One Year One Year to Five Years to More than
or Less Five Years Ten Years Ten Years Total
Carrying Weighted Carrying Weighted Carrying Weighted Carrying Weighted Carrying Weighted
Value Average Yield Value Average Yield Value Average Yield Value Average Yield Value Average Yield
(Dollars in thousands)
Securities available for
sale:
Fannie Mae common stock $ 1 0.00 % $ - - $ - - $ - - $ 1 0.00 %
Mortgage-backed
securities - - - - - - 181 4.83 % 181 4.83
Total securities
available for sale $ 1 0.00 % $ - - $ - - $ 181 4.83 % $ 182 4.73 %
Securities held to
maturity:
Mortgage-backed
securities $ - - $ 15 8.25 % $ 339 4.88 % $ 1,724 4.82 % $ 2,078 4.85 %
Total securities held to
maturity $ - - $ 15 8.25 % $ 339 4.88 % $ 1,724 4.82 % $ 2,078 4.85 %
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Deposits. Our primary source of funds is retail deposit accounts which are comprised of savings accounts, demand deposits and certificates of deposit held primarily by individuals and businesses within our primary market area and non-broker certificates of deposit gathered through two nationwide certificate of deposit listing services. The non-broker certificates of deposits are accepted from banks, credit unions, non-profit organizations and certain corporations in amounts greater then $75,000 and less then $100,000.
Deposits increased by $35.5 million, or 15.7%, in the year ended December 31, 2008. The increase in deposits is primarily attributable to the Bank's use of two nationwide certificate of deposit listing services. At December 31, 2008, the Bank had a total of $63.6 million in certificates of deposits that had been obtained through the two nationwide certificate of deposits listing services. Also contributing to the increase in deposits was the Bank's offering of competitive interest rates in our retail branches.
The following table sets forth the balances of our deposit products at the dates indicated.
At December 31,
2008 2007 2006
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Now and money market
. . .
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