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NECB > SEC Filings for NECB > Form 10-Q on 20-Nov-2012All Recent SEC Filings

Show all filings for NORTHEAST COMMUNITY BANCORP INC

Form 10-Q for NORTHEAST COMMUNITY BANCORP INC


20-Nov-2012

Quarterly Report


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

FORWARD-LOOKING STATEMENTS

This quarterly 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 that may affect the Company's results are discussed in the Company's Annual Report on Form 10-K under "Item 1A. Risk Factors." These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

CRITICAL ACCOUNTING POLICIES

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 collectability 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. As of July 21, 2011, the Office of the Comptroller of the Currency ("OCC") assumed responsibility from the Office of Thrift Supervision for the ongoing examination, supervision, and regulation of federal savings associations and rulemaking for all savings associations, state and federal. In addition, the supervision of savings and loan holding companies ("SLHCs"), such as the Company, and their non-depository subsidiaries transferred to the Board of Governors of the Federal Reserve System (the "Board") on July 21, 2011.

Due to the conversion of the Bank to a New York State-chartered savings bank on June 29, 2012, the Federal Deposit Insurance Corporation ("FDIC") and the New York State Department of Financial Services ("NYS") are now the Bank's primary regulator. As such, the FDIC and NYS, as an integral part of their examination process, periodically review our allowance for loan losses. The FDIC, NYS, and or the Board could require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examinations. A large loss or a series of losses 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 in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Deferred Income Taxes.We use the asset and liability method of 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.

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Third Quarter Performance Highlights

The Company suffered a net loss of $1.0 million for the quarter ended September 30, 2012 compared to net income of $467,000 for the same period in 2011 primarily due to increases in provision for loan losses and non-interest expenses and a decrease in net interest income, partially offset by an increase in non-interest income and a decrease in income taxes.

The increase in provision for loan losses was due to the establishment of $1.9 million in specific reserves against four multi-family, one mixed-use, and two non-residential mortgage loans. These specific reserves were established based on additional information received on the properties collateralizing the seven aforementioned mortgage loans (See the Non-Performing Assets section for more information on these loans).

The increase in non-interest expense was due to the expansion of our Massachusetts lending and branch operations. In connection with the expansion, the Company hired additional employees to support the lending and branch expansion, purchased additional equipment to support the expansion, and incurred additional expenses related to the support and supervision of the expansion.

As part of the Company's aggressive pursuit of expansion opportunities in Massachusetts, particularly in and around the I-495 corridor, we continue to look for other branch sites within our Massachusetts market area. In addition, the Company is also focusing on opportunities to increase its commercial real estate lending and commercial and industrial lending in Massachusetts in a manner consistent with our conservative underwriting standards.

Non-performing loans decreased by $6.4 million, or 31.4%, to $14.0 million as of September 30, 2012 from $20.4 million as of December 31, 2011. The decrease in non-performing loans is primarily attributable to the satisfaction of six non-performing multi-family and one non-residential mortgage loans and the upgrade of four construction mortgage loans to current status, partially offset by the addition of four non-performing multi-family mortgage loans and two non-performing non-residential mortgage loans.

We continue to monitor our loan portfolio closely and adjust the level of allowance for loan losses appropriately as updated information becomes available. In this regard, the Company's Special Assets Group reviews all non-performing loans, potential non-performing loans, and restructured loans each month. The monitoring of these loans by the Special Assets Group allows the Company to quickly respond to even modest changes in the loan portfolio's performance.

Comparison of Financial Condition at September 30, 2012 and December 31, 2011

Total assets decreased by $41.6 million, or 8.5%, to $447.7 million at September 30, 2012 from $489.3 million at December 31, 2011. The decrease in total assets was due to decreases of $33.3 million in cash and cash equivalents, $9.4 million in loans receivable, net, $3.0 million in securities held-to-maturity, $2.0 million in certificates of deposits at other financial institutions, $620,000 in real estate owned, $537,000 in accrued interest receivable, and $278,000 in Federal Home Loan Bank of New York ("FHLB") stock, partially offset by increases of $4.0 million in premises and equipment and $2.9 million in bank owned life insurance. The decrease in total assets primarily resulted from decreases of $34.6 million in deposits and $1.6 million in accounts payable and accrued expenses and the repayment of $5.0 million in FHLB advances, partially offset by an increase of $661,000 in advance payments by borrowers for taxes and insurance,

Cash and cash equivalents decreased by $33.3 million, or 40.3%, to $49.3 million at September 30, 2012 from $82.6 million at December 31, 2011 due primarily to the above mentioned decreases in deposits, accounts payable and accrued expenses, and the repayment of FHLB advances.

Securities held-to-maturity decreased by $3.0 million, or 18.9%, to $13.1 million at September 30, 2012 from $16.1 million at December 31, 2011 due primarily to repayments of $3.0 million. Certificates of deposits at other financial institutions decreased by $2.0 million, or 75.5%, to $648,000 at September 30, 2012 from $2.6 million at December 31, 2011 due to the maturity and redemption of various certificates of deposits.

Loans receivable, net, decreased by $9.4 million, or 2.7%, to $341.5 million at September 30, 2012 from $350.9 million at December 31, 2011 due primarily to loan repayments totaling $49.4 million that exceeded loan originations totaling $41.7 million and a decrease of $1.7 million in the allowance for loan losses.

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FHLB stock decreased by $278,000, or 17.0%, to $1.4 million at September 30, 2012 from $1.6 million at December 31, 2011 due primarily to a decrease in the amount of FHLB stock that we are required to hold as a result of decreases in FHLB advances and the mortgage loan portfolio.

Accrued interest receivable decreased by $537,000, or 35.8%, to $962,000 at September 30, 2012 from $1.5 million at December 31, 2011 due to a decrease in the yield and balance of the mortgage loan portfolio. Bank owned life insurance increased by $2.9 million, or 17.6%, to $19.7 million at September 30, 2012 from $16.7 million at December 31, 2011 due to purchases of additional Bank owned life insurance and accrued earnings during 2012.

Real estate owned decreased by $620,000 due to a reclassification of a foreclosed property from real estate owned to premises and equipment. Concurrently, premises and equipment increased by $4.0 million, or 45.5%, to $13.0 million at September 30, 2012 from $8.9 million at December 31, 2011 due to the acquisition of two branch sites in Massachusetts, the addition of a Headquarters annex, and the reclassification of a foreclosed property.

Deposits decreased by $34.6 million, or 9.8%, to $319.0 million at September 30, 2012 from $353.6 million at December 31, 2011. The decrease in deposits was primarily attributable to decreases of $45.6 million in our NOW and money market accounts and $3.3 million in certificates of deposits, offset by increases of $8.3 million in non-interest bearing accounts and $6.0 million in our regular savings accounts.

The decrease in our NOW and money market accounts was primarily due to the withdrawal of $22.7 million by a municipality from money market accounts in June 2012.

Advance payments by borrowers for taxes and insurance increased by $661,000, or 19.7%, to $4.0 million at September 30, 2012 from $3.4 million at December 31, 2011 due primarily to accumulating balances paid into escrow accounts by our borrowers.

FHLB advances decreased by $5.0 million, or 25.0%, to $15.0 million at September 30, 2012 from $20.0 million at December 31, 2011 due primarily to the maturity and repayment of certain FHLB advances.

Accounts payable and accrued expenses decreased by $1.6 million, or 31.0%, to $3.6 million at September 30, 2012 from $5.2 million at December 31, 2011 due to the payment of the Company's 2011 income taxes and the pay-off during the March 31, 2012 quarter of a note payable that was reclassified as accounts payable of $175,000 at December 31, 2011.

Stockholders' equity decreased by $1.0 million to $106.1 million at September 30, 2012, from $107.1 million at December 31, 2011. This decrease was primarily the result of comprehensive loss of $609,000 and cash dividends declared of $518,000, partially offset by expense of $111,000 for the ESOP for the period.

Comparison of Operating Results for the Three Months Ended September 30, 2012 and 2011

General.Net income decreased by $1.5 million, or 314.1%, to a net loss of $1.0 million for the quarter ended September 30, 2012, from net income of $467,000 for the quarter ended September 30, 2011. The decrease was primarily the result of increases of $1.5 million in provision for loan losses and $1.1 million in non-interest expenses and a decrease of $118,000 in net interest income, partially offset by an increase of $185,000 in non-interest income and a decrease of $1.1 million in income taxes.

Net Interest Income. Net interest income decreased by $118,000, or 2.8%, to $4.2 million for the three months ended September 30, 2012 from $4.3 million for the three months ended September 30, 2011. The decrease in net interest income resulted primarily from a decrease of $633,000 in interest income that exceeded a decrease of $515,000 in interest expense.

The decrease in net interest income was also due to a decrease of $4.4 million in average net interest-earning assets that resulted from decreases of $35.0 million in average loans, securities, and other interest-earning assets that exceeded decreases of $30.6 million in average interest-bearing deposits and borrowings. The decrease in average loans, securities, and other interest-earning assets was due to loan repayments exceeding loan originations and the repayment of investment securities. The decrease in average interest-bearing deposits and borrowings was due to a decrease of $21.3 million in average interest-bearing deposits as a result of an effort by the Company to decrease reliance on higher cost certificates of deposit and the repayment of FHLB advances and other borrowed money.

The average yield on our interest-earning assets decreased by 18 basis points to 4.95% for the three months ended September 30, 2012 from 5.13% for the three months ended September 30, 2011 and the cost of our interest-bearing liabilities decreased by 52 basis points to 1.02% for the three months ended September 30, 2012 from 1.54% for the three months ended September 30, 2011. The decrease in the yield on our interest-earning assets and the cost of our interest-bearing liabilities was due to the low interest rate environment in 2011 which continued into the third quarter of 2012.

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The net interest spread increased by 34 basis points to 3.93% for the three months ended September 30, 2012 from 3.59% for the three months ended September 30, 2011. The net interest margin increased by 22 basis points between these periods from 3.95% for the quarter ended September 30, 2011 to 4.17% for the quarter ended September 30, 2012. The increase in the interest rate spread and the net interest margin in the third quarter of 2012 compared to the same period in 2011 was due to a decrease in the average cost of our interest-bearing liabilities that exceeded the decrease in the average yield on our interest-earning assets and an increase in the ratio of average interest-earning assets to interest-bearing liabilities.

The following table summarizes average balances and average yields and costs of interest-earning assets and interest-bearing liabilities for the three months ended September 30, 2012 and 2011.

                                                                                 Three Months Ended September 30,
                                                                          2012                                      2011
                                                                         Interest                                  Interest
                                                           Average          and         Yield/       Average          and         Yield/
                                                           Balance       Dividends       Cost        Balance       Dividends       Cost
                                                                                      (Dollars in thousands)
Assets:
Interest-earning assets:
Loans                                                     $ 353,314     $     4,817        5.45 %   $ 372,688     $     5,378        5.77 %
Securities (including FHLB stock)                            15,176             116        3.06        23,864             186        3.12
Other interest-earning assets                                30,822               7        0.09        37,793               9        0.10
Total interest-earning assets                               399,312           4,940        4.95       434,345           5,573        5.13
Allowance for loan losses                                    (3,828 )                                  (7,730 )
Non-interest-earning assets                                  42,841                                    33,233
Total assets                                              $ 438,325                                 $ 459,848

Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand                                   $  72,713     $        63        0.35 %   $  77,754     $       168        0.86 %
Savings and club accounts                                    87,541             117        0.53        61,995             108        0.70
Certificates of deposit                                     127,736             454        1.42       169,522             851        2.01
Total interest-bearing deposits                             287,990             634        0.88       309,271           1,127        1.46

Borrowings                                                   15,000             139        3.71        24,357             161        2.64
Total interest-bearing liabilities                          302,990             773        1.02       333,628           1,288        1.54

Noninterest-bearing demand                                   20,806                                    12,896
Other liabilities                                             7,087                                     6,111
Total liabilities                                           330,883                                   352,635

Stockholders' equity                                        107,442                                   107,213
Total liabilities and Stockholders' equity                $ 438,325                                 $ 459,848
Net interest income                                                     $     4,167                               $     4,285
Interest rate spread                                                                       3.93 %                                    3.59 %
Net interest margin                                                                        4.17 %                                    3.95 %
Net interest-earning assets                               $  96,322                                 $ 100,717
Interest-earning assets to interest-bearing liabilities      131.79 %                                  130.19 %

Total interest income decreased by $633,000, or 11.4%, to $4.9 million for the three months ended September 30, 2012, from $5.6 million for the three months ended September 30, 2011. Interest income on loans decreased by $561,000, or 10.4%, to $4.8 million for the three months ended September 30, 2012 from $5.4 million for the three months ended September 30, 2011 as a result of a decrease of 32 basis points in the average yield on loans to 5.45% for the three months ended September 30, 2012 from 5.77% for the three months ended September 30, 2011. The decrease in interest income and the average yield on loans was due to the pay-off of higher yielding mortgage loans and the refinancing and/or re-pricing to lower interest rates of mortgage loans in our loan portfolio. The decrease in interest income was also due to a decrease of $19.4 million, or 5.2%, in the average balance of the loan portfolio to $353.3 million for the three months ended September 30, 2012 from $372.7 million for the three months ended September 30, 2011 as repayments outpaced originations.

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Interest income on securities decreased by $70,000, or 37.6%, to $116,000 for the three months ended September 30, 2012 from $186,000 for the three months ended September 30, 2011. The decrease was primarily due to a decrease of $8.7 million, or 36.4%, in the average balance of securities to $15.2 million for the three months ended September 30, 2012 from $23.9 million for the three months ended September 30, 2011. The decrease in the average balance was due to the principal repayments on investment securities and a decrease in FHLB New York stock. The decrease in interest income on securities was also due to the re-pricing of the yield of our adjustable rate investment securities and the decline in interest rates from September 30, 2011 to September 30, 2012. As a result, the average yield on securities decreased by 6 basis points to 3.06% for the three months ended September 30, 2012 from 3.12% for the three months ended September 30, 2011.

Interest income on other interest-earning assets (consisting solely of interest-earning deposits) decreased by $2,000, or 22.2% to $7,000 for the three months ended September 30, 2012 from $9,000 for the three months ended September 30, 2011. The decrease was due to a decrease of 1 basis point in the average yield on other interest-earning assets to 0.09% for the three months ended September 30, 2012 from 0.10% for the three months ended September 30, 2011 and a decrease of $7.0 million, or 18.5%, in the average balance of interest-earning assets to $30.8 million for the three months ended September 30, 2012 from $37.8 million for the three months ended September 30, 2011. The decline in the yield was due to the maturity of higher yielding certificates of deposits at other financial institutions. The decrease in the average balance of other interest-earning assets was due to decreases in cash and cash equivalents and certificates of deposit at other financial institutions.

Total interest expense decreased by $515,000, or 40.0%, to $773,000 for the three months ended September 30, 2012 from $1.3 million for the three months ended September 30, 2011. Interest expense on deposits decreased by $493,000, or 43.7%, to $634,000 for the three months ended September 30, 2012 from $1.1 million for the three months ended September 30, 2011. During this same period, the average cost of deposits decreased by 58 basis points to 0.88% for the three months ended September 30, 2012 from 1.46% for the three months ended September 30, 2011.

Due to an effort by the Company to decrease reliance on higher cost certificates of deposit by shifting deposits to lower cost savings and holiday club deposits, the average balance of certificates of deposit decreased by $41.8 million, or 24.7%, to $127.7 million for the three months ended September 30, 2012 from $169.5 million for the three months ended September 30, 2011. As a result of the decrease in the average balance of certificates of deposit, interest expense on our certificates of deposit decreased by $397,000, or 46.7%, to $454,000 for the three months ended September 30, 2012 from $851,000 for the three months ended September 30, 2011. The decrease in interest expense on our certificates of deposit was also due to a decrease of 59 basis points in the average cost of our certificates of deposit to 1.42% for the three months ended September 30, 2012 from 2.01% for the three months ended September 30, 2011.

The shift in deposits caused the interest expense on our savings and holiday club deposits to increase by $9,000, or 8.3%, to $117,000 for the three months ended September 30, 2012 from $108,000 for the three months ended September 30, 2011. The increase was due to an increase of $25.5 million, or 41.2%, in the average balance of savings and holiday club deposits to $87.5 million for the three months ended September 30, 2012 from $62.0 million for the three months ended September 30, 2011. The increase in the interest expense of our savings and holiday club deposits was offset by a decrease of 17 basis points in the cost of our savings and holiday club deposits to 0.53% for the three months ended September 30, 2012 from 0.70% for the three months ended September 30, 2011.

The decrease in interest expense for deposits was also due to a decrease in our interest-bearing demand deposits' interest expense of $105,000, or 62.5%, to $63,000 for the three months ended September 30, 2012 from $168,000 for the three months ended September 30, 2011. The decrease was due to a decrease of $5.0 million, or 6.5%, in the average balance of interest-bearing demand deposits to $72.7 million for the three months ended September 30, 2012 from $77.8 million for the three months ended September 30, 2011. The decrease was also due to a decrease of 51 basis points in the cost of our interest-bearing demand deposits to 0.35% for the three months ended September 30, 2012 from 0.86% for the three months ended September 30, 2011.

Interest expense on borrowings decreased by $22,000, or 13.7%, to $139,000 for the three months ended September 30, 2012 from $161,000 for the three months ended September 30, 2011. The decrease was primarily due to a decrease of $9.4 million, or 38.4%, in the average balance of borrowed money to $15.0 million for the three months ended September 30, 2012 from $24.4 million for the three months ended September 30, 2011. Offsetting the decrease in interest expense on borrowings was an increase of 107 basis points in the cost of borrowed money to 3.71% for the three months ended September 30, 2012 from 2.64% for the three months ended September 30, 2011 due primarily to the maturity and repayment of lower costing FHLB advances from 2011 to 2012.

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Provision for Loan Losses. The following table summarizes the activity in the allowance for loan losses and provision for loan losses for the three months ended September 30, 2012 and 2011.

                                                                        Three Months
                                                                     Ended September 30,
                                                                     2012             2011
                                                                   (Dollars in thousands)
Allowance at beginning of period                                 $       3,867       $ 7,600
Provision for loan losses                                                1,912           393
Charge-offs                                                                 85            28
Recoveries                                                                  11             4
. . .
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