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NECB > SEC Filings for NECB > Form 10-K on 12-Apr-2013All Recent SEC Filings

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

Form 10-K for NORTHEAST COMMUNITY BANCORP INC


12-Apr-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 FDIC 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 allowance for loan losses as a critical accounting policy.

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 impaired 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. In addition, the NYDFS and FDIC, as an integral part of their examination process, periodically reviews our allowance for loan losses. The NYDFS and FDIC could require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their 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.

Index

Sale of New York City Branch Office

On June 29, 2007, the Company completed the sale of its branch office building located at 1353-55 First Avenue, New York, New York (the "Property"). The sale price for the Property was $28.0 million. At closing, the Company received $10.0 million in cash and an $18.0 million zero coupon promissory note recorded at its then present value of $16.3 million. The Note, as restructured, including expenses and interest, was paid off on November 4, 2011.

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. We have temporarily relocated our First Avenue branch office to 1470 First Avenue while 1353-55 First Avenue is being renovated.

Balance Sheet Analysis

Overview. Total assets at December 31, 2012 decreased by $45.1 million, or 9.2%, to $444.2 million from total assets of $489.3 million at December 31, 2011. The decrease was primarily due to decreases of $33.3 million in cash and cash equivalents, $17.1 million in loans receivable, net, $4.1 million in investment securities held-to-maturity, $2.2 million in certificates of deposits at other financial institutions, $523,000 in accrued interest receivable, $278,000 in Federal Home Loan Bank stock, and $227,000 in goodwill, offset by increases of $4.0 million in premises and equipment, $3.7 million in real estate owned, $3.1 million in bank owned life insurance, and $2.1 million in other assets.

These decreases primarily resulted from decreases of $35.5 million in deposits, $5.0 million in Federal Home Loan Bank advances, and $1.5 million in accounts payable and accrued expenses, partially offset by an increase of $163,000 in advance payments by borrowers for taxes and insurance. As of December 31, 2012, the Company, on a consolidated basis, had stockholders equity of $103.8 million, or 23.4% of assets.

In 2010, we proactively reduced mortgage origination levels for mixed-use and non-residential real estate loans, based on our unwillingness to offer rates and terms on loan products that, in our opinion, do not accurately reflect the risk associated with particular loan types in the current economic and real estate environment. During the second half of 2011 and into 2012, we began increasing our origination of loans secured by real-estate. In 2012, we commenced originating construction loans secured by multi-family or non-residential properties as an accommodation to maintain and/or develop relationships with our deposit and loan customers for the first time since 2009.

In addition, during the third quarter of 2012 we chose not to renew $19.5 million in Insured Cash Sweep ("ICS") reciprocal money market deposits and lowered our interest rates on deposit products in an effort to decrease high cost deposits. The Bank also paid off a $5.0 million Federal Home Loan Bank of New York advance to reduce its high cost of funds.

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 industrial and consumer loans. At December 31, 2012, loans receivable, net, totaled $333.8 million, a decrease of $17.1 million, or 4.9%, from total loans receivable, net, of $350.9 million at December 31, 2011.

The largest segment of our real estate loans is multi-family residential loans. As of December 31, 2012, these loans totaled $178.6 million, or 52.9% of our total loan portfolio, compared to $189.3 million, or 52.9% of our total loan portfolio at December 31, 2011. As of December 31, 2012, mixed-use loans totaled $41.9 million, or 12.4% of our total loan portfolio, compared to $51.2 million, or 14.3% of our total loan portfolio at December 31, 2011. Non-residential real estate loans totaled $82.3 million, or 24.4% of our total loan portfolio at December 31, 2012, compared to $83.6 million, or 23.4% of our total loan portfolio at December 31, 2011. At December 31, 2012 and 2011, one- to four-family residential real estate loans totaled $7.8 million and $627,000, or 2.3% and 0.2% of our total loan portfolio, respectively. The decrease in multi-family and mixed use loans resulted primarily from management's conservative underwriting and increased competition.

Index

Although we discontinued in 2010 the purchase of participation interests in construction loans secured by multi-family, mixed-use and non-residential properties, we purchased participation interests in these types of properties prior to 2010. At December 31, 2012, we had no outstanding construction loan participation interests purchased as a result of three construction loan participations that we purchased in August 2007 having subsequently converted into permanent loans in 2012. These three loans had an aggregate outstanding balance of $5.8 million at December 31, 2012 and are included in our non-residential real estate loans totaling $82.3 million. The outstanding balance of construction loan participation interests purchased totaled $9.1 million or 2.5% of our total loan portfolio at December 31, 2011.

At December 31, 2012, our originated construction loan portfolio totaled $841,000, net of loans in process of $5.2 million, or 0.3% of our total loan portfolio. We had no originated construction loans at December 31, 2011.

At December 31, 2012, our commercial and industrial loan portfolio totaled $48.7 million in committed loans, with $26.3 million drawn against such commitments, compared to $35.9 million in committed loans, with $23.7 million drawn against such commitments at December 31, 2011.

We also originate several types of consumer loans consisting of personal consumer loans, 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 $77,000 and represented 0.02% of total loans at December 31, 2012 compared to $68,000, or 0.02%, of total loans at December 31, 2011.

Index

The following table sets forth the composition of our loan portfolio at the dates indicated.

                                                                                           At December 31,
                                           2012                       2011                       2010                       2009                       2008
                                   Amount       Percent       Amount       Percent       Amount       Percent       Amount       Percent       Amount       Percent
                                                                                        (Dollars in thousands)
Real estate:
Residential Real Estate:
One- to four-family               $   7,761         2.30 %   $     627         0.18 %   $     211         0.06 %   $     244         0.06 %   $     275         0.08 %
Multi-family(1)                     178,644        52.88       189,253        52.93       190,042        51.15       201,059        51.30       186,199        51.11
Mixed-use(1)                         41,895        12.40        51,229        14.33        55,244        14.87        59,779        15.25        58,317        16.00
Total residential real estate
loans                               228,300        67.58       241,109        67.43       245,497        66.08       261,082        66.61       244,791        67.19

Non-residential real estate (1)      82,312        24.37        83,602        23.38       100,925        27.16       105,194        26.84       102,785        28.21
Total real estate                   310,612        91.95       324,711        90.81       346,422        93.24       366,276        93.45       347,576        95.40

Construction loans                      841         0.25         9,065         2.54        12,913         3.48        15,121         3.86         9,025         2.48
Commercial and industrial loans      26,274         7.78        23,725         6.64        12,140         3.27        10,400         2.65         7,620         2.09

Consumer:
Overdraft lines of credit                34         0.01            44         0.01            48         0.01            60         0.02            57         0.02
Passbook loans                           28         0.01            24         0.01            15         0.00            90         0.02            57         0.01
Consumer loans                           15            -             -            -             -            -             -            -             -            -
Total consumer loans                     77         0.02            68         0.02            63         0.01           150         0.04           114         0.03
Total loans                         337,804       100.00 %     357,569       100.00 %     371,538       100.00 %     391,947       100.00 %     364,335       100.00 %

Net deferred loan costs                 629                        722                        907                      1,052                      1,146
Allowance for losses                 (4,646 )                   (7,397 )                   (7,647 )                   (6,733 )                   (1,865 )
Loans, net                        $ 333,787                  $ 350,894                  $ 364,798                  $ 386,266                  $ 363,616

(1) Includes equity lines of credit that we originate on properties on which we hold the first mortgage.

Index

The following table sets forth certain information at December 31, 2012 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, 2012
                                                         Non-           Commercial
                                    Residential       Residential          and                             Consumer
                                    Real Estate       Real Estate       Industrial      Construction      and other        Total
                                       Loans             Loans            Loans             Loans           Loans          Loans
                                                                           (In thousands)
One year or less                   $      39,376     $      17,798     $     19,792     $         451     $       62     $  77,479
More than one year to five years         162,702            49,120            4,556                 -             15       216,393
More than five years                      26,222            15,394            1,926               390              -        43,932
   Total                           $     228,300     $      82,312     $     26,274     $         841     $       77     $ 337,804

The following table sets forth the dollar amount of all loans at December 31, 2012 that are due after December 31, 2013 and have either fixed or adjustable interest rates.

                                   Fixed Rates      Adjustable Rates        Total
                                                   (In thousands)
Residential real estate:
 One- to four-family              $       2,370     $           5,342     $   7,712
 Multi-family                            12,816               139,016       151,832
 Mixed-use                                    -                29,380        29,380
Non-residential real estate               7,197                57,317        64,514
Construction loans                            -                   390           390
Commercial and industrial loans           6,482                     -         6,482
Consumer and other loans                     15                     -            15
   Total                          $      28,880     $         231,445     $ 260,325

Index

The following table shows loan origination, purchase and sale activity during the periods indicated.

                                              2012          2011          2010          2009          2008
                                                                     (In thousands)
Total loans at beginning of period          $ 357,569     $ 371,538     $ 391,947     $ 364,335     $ 283,456
Loans originated:
 Residential real estate:
  One- to four-family                           9,385           450             -             -             -
  Multi-family                                 30,745        34,505         5,210        22,423        70,450
  Mixed-use                                     5,863         1,550             -         7,922         6,616
 Non-residential real estate                   14,597         7,043           420         6,920        42,954
 Construction loans                             5,996             -             -             -             -
 Commercial and industrial loans                5,701         8,728         2,558         3,026         4,794
 Consumer and other loans                          16             -             -            35            87
   Total loans originated                      72,303        52,276         8,188        40,326       124,901
Construction loan participation purchased           -             -             -         5,198         5,406
Permanent loan participation purchased              -             -             -             -         2,971
Deduct:
 Loan principal repayments                     83,579        62,527        25,979        17,583        44,034
 Charge offs                                    8,489         1,375         2,618         2,446            35
 Loan sales                                         -             -             -             -         7,045
Total deductions                               92,068        63,902        28,597        20,029        51,114
Other increases (decreases), net                    -        (2,343 )           -         2,117        (1,285 )
Total loans at end of period                $ 337,804     $ 357,569     $ 371,538     $ 391,947     $ 364,335

Securities. Our securities portfolio consists primarily of residential mortgage-backed securities. Securities decreased by $4.1 million, or 25.4%, from $16.2 million at December 31, 2011, to $12.1 million at December 31, 2012. The decrease was primarily due to maturities and repayments of $4.1 million.

The following table sets forth the amortized cost and fair values of our securities portfolio at the dates indicated.

                                                                             At December 31,
                                                      2012                         2011                         2010
                                             Amortized        Fair        Amortized        Fair        Amortized        Fair
                                               Cost          Value          Cost          Value          Cost          Value
                                                                              (In thousands)
Securities available for sale:
 Mortgage-backed securities- residential    $       125     $    129     $       145     $    149     $       157     $    162

Securities held to maturity:
 Mortgage-backed securities - residential   $    11,987     $ 12,561     $    16,099     $ 16,662     $    19,858     $ 20,342

At December 31, 2012 and December 31, 2011, we had no investments in a single company or entity that had an aggregate book value in excess of 10% of our consolidated equity.

Index

The following table sets forth the stated final maturities and weighted average yields of debt securities at December 31, 2012. Certain mortgage-backed securities have adjustable interest rates and will re-price annually within the various maturity ranges. These re-pricing schedules are not reflected in the table below. At December 31, 2012, mortgage-backed securities with adjustable rates totaled $9.7 million.

                                                                    More than                     More than
                                        One Year                   One Year to                  Five Years to                  More than
                                         or Less                    Five Years                    Ten Years                    Ten Years                      Total
                                               Weighted                     Weighted                      Weighted                     Weighted                     Weighted
                                 Carrying       Average      Carrying       Average        Carrying       Average       Carrying       Average       Carrying       Average
                                   Value         Yield         Value         Yield          Value          Yield          Value         Yield          Value         Yield
                                                                                            (Dollars in thousands)
Securities available for sale:
 Mortgage-backed securities             $-             - %   $       -              - %   $        -              - %   $     129           2.37 %   $     129           2.37 %

Securities held to maturity:
Mortgage-backed securities $- - % $ 49 2.72 % $ 182 2.23 % $ 11,756 3.54 % $ 11,987 3.52 %

Index

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, prior to 2010 but resumed in 2011 to a small extent, non-broker certificates of deposit gathered through two nationwide certificate of deposit listing services. The non-broker certificates of deposits were accepted from banks, credit unions, non-profit organizations and certain corporations in amounts greater than $75,000 and less than $250,000. Although we curtailed the use of the certificate of deposit listing services in 2010, we resumed the use of these services in 2011 by obtaining $10.0 million in non-broker certificates of deposits. In an effort to reduce reliance on these higher cost funds, the Company allowed these non-broker certificates of deposits to mature without renewal in 2012. As a result, these non-broker certificates of deposits have been reduced to $746,000, or 0.2% of total deposits, at December 31, 2012, compared to $11.5 million, or 3.3% of total deposits at December 31, 2011.

Deposits decreased by $35.5 million, or 10.0%, in the year ended December 31, 2012. The decrease in deposits was primarily attributable to efforts by the Company to decrease reliance on short term rate sensitive NOW and money market deposits and increase reliance on noninterest bearing demand deposits and long term certificates of deposits. This resulted in a decrease of $44.7 million in NOW and money market deposit accounts, offset by increases of $7.9 million in noninterest bearing demand deposits, $5.3 million in certificates of deposits, and $3.9 million in savings accounts.

The following table sets forth the balances of our deposit products at the dates indicated.

                                                                      At December 31,
                                                 2012                       2011                       2010
                                         Amount       Percent       Amount       Percent       Amount       Percent
                                                                   (Dollars in thousands)

NOW and money market deposit accounts   $  62,868         19.8 %   $ 115,411         32.6 %   $  83,839         25.7 %
Savings accounts                           84,404         26.5        80,548         22.8        55,898         17.1
Noninterest bearing demand deposits        22,932          7.2        15,046          4.3         9,839          3.0
Certificates of deposit                   147,916         46.5       142,631         40.3       177,254         54.2
  Total                                 $ 318,120        100.0 %   $ 353,636        100.0 %   $ 326,830        100.0 %

At December 31, 2012, the Company had $981,000 in Certificate of Deposit Account Registry Service ("CDARS") reciprocal certificates of deposits and no Insured Cash Sweep ("ICS") reciprocal money market deposits that were fully-insured brokered deposits as defined in the FDIC call report instructions. At December 31, 2011, the Company had no CDARS reciprocal deposits and $19.5 million in ICS reciprocal deposits. The CDARS certificates of deposits and the ICS money market deposits were obtained from two separate retail depositors and then transferred into the CDARS and ICS Networks in order to obtain full FDIC insurance coverage for our customers. These types of deposits are known in the CDARS and ICS Networks as reciprocal deposits, which the Company considers as core deposits and not brokered deposits.

The following table indicates the amount of certificates of deposit with balances over $100,000 by time remaining until maturity as of December 31, 2012. We do not solicit jumbo certificates of deposit nor do we offer special rates for jumbo certificates. The minimum deposit to open a certificate of deposit ranges from $500 to $2,500.

                                                   Certificates
                 Maturity Period                    of Deposit
                                                  (In thousands)
                 Three months or less             $         3,598
                 Over three through six months              6,926
                 Over six through twelve months            24,088
                 Over twelve months                        44,801
                   Total                          $        79,413

Index

Borrowings.We may utilize borrowings from a variety of sources to supplement our supply of funds for loans and investments and to meet deposit withdrawal requirements. Advances from the Federal Home Loan Bank of New York ("FHLB") decreased to $15.0 million as of December 31, 2012 from $20.0 million FHLB advances outstanding as of December 31, 2011.

The contractual maturities of FHLB advances at December 31, 2012 are as follows:

                                                          Weighted
                                                           Average
                                                          Interest
                                             Amount         Rate
                   Advances maturing in:
                   One year or less         $ 10,000          3.70 %
                   After one to two years      5,000          3.64 %
                                            $ 15,000          3.68 %

. . .

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