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NECB > SEC Filings for NECB > Form 10-Q on 15-May-2013All Recent SEC Filings

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

Form 10-Q for NORTHEAST COMMUNITY BANCORP INC


15-May-2013

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 allowance for loan losses to be 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.

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 and NYS 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 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

Table of Contents

First Quarter Performance Highlights

The Company's earnings for the quarter ended March 31, 2013 decreased by $45,000 compared to the same period in 2012 primarily due to increases in non-interest expense and provision for loan losses, offset by increases in net interest income and non-interest income and a decrease in the provision for income taxes. The increase in non-interest expense was due to the expansion of our Massachusetts branch operations with the opening of two new branch sites in Framingham and Quincy, the hiring of additional employees to staff the new branches, and the purchase of additional equipment and services to support the expansion.

Despite operating in a challenging low interest rate environment, the Company improved its net interest income in 2013 compared to 2012, with an increase in our interest rate spread and net interest margin to 3.72% and 3.97%, respectively.

Although non-performing loans increased by $3.9 million to $7.9 million as of March 31, 2013 from $4.0 million as of December 31, 2012 due to the addition of seven mortgage loans totaling $4.6 million, our non-performing loans decreased by $11.4 million to $7.9 million as of March 31, 2013 from $19.3 million as of March 31, 2012. The decrease in non-performing loans from March 31, 2012 to March 31, 2013 was due to the satisfaction of seven mortgage loans totaling $3.8 million, the conversion from non-performing to performing status of five mortgage loans totaling $8.9 million, and the conversion to real estate owned of two mortgage loans totaling $5.0 million, partially offset by the addition of eleven non-performing mortgage loans totaling $6.3 million.

We will continue to monitor our loan portfolio closely and adjust the level of allowance for loan losses appropriately as updated information becomes available.

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

Total assets decreased by $15.7 million, or 3.5%, to $428.6 million at March 31, 2013 from $444.2 million at December 31, 2012. The decrease in total assets was due to decreases of $24.3 million in cash and cash equivalents, $918,000 in securities held-to-maturity, $450,000 in Federal Home Loan Bank of New York ("FHLB") stock, $249,000 in certificates of deposits at other financial institutions, and $239,000 in premises and equipment, partially offset by increases of $10.2 million in loans receivable, net, and $157,000 in bank owned life insurance.

The decrease in total assets resulted primarily from decreases of $10.0 million in FHLB advances and $6.4 million in deposits, partially offset by an increase of $592,000 in advance payments by borrowers for taxes and insurance, and $141,000 in stockholders' equity.

Cash and cash equivalents decreased by $24.3 million, or 49.3%, to $25.0 million at March 31, 2013 from $49.2 million at December 31, 2012 due primarily to decreases of $6.4 million in deposits and repayment of $10.0 million in FHLB advances, and an increase of $10.2 million in loans receivable, net, offset by increases of $592,000 in advance payments by borrowers for taxes and insurance.

Securities held-to-maturity decreased by $918,000, or 7.7%, to $11.1 million at March 31, 2013 from $12.0 million at December 31, 2012 due entirely to repayments of $918,000. Certificates of deposits at other financial institutions decreased by $249,000, or 62.4%, to $150,000 at March 31, 2013 from $399,000 at December 31, 2012 due to the maturity and redemption of various certificates of deposits.

Loans receivable, net, increased by $10.2 million, or 3.0%, to $343.9 million at March 31, 2013 from $333.8 million at December 31, 2012 due primarily to loan originations totaling $19.4 million that exceeded loan repayments totaling $9.2 million.

FHLB stock decreased by $450,000, or 33.2%, to $905,000 at March 31, 2013 from $1.4 million at December 31, 2012 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.

Premises and equipment decreased by $239,000, or 1.9%, to $12.7 million at March 31, 2013 from $12.9 million at December 31, 2012 due primarily to depreciation.

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Bank owned life insurance increased by $157,000, or 0.8%, to $20.0 million at March 31, 2013 from $19.9 million at December 31, 2012 due primarily to accrued earnings during the March 31, 2013 quarter.

Deposits decreased by $6.4 million, or 2.0%, to $311.7 million at March 31, 2013 from $318.1 million at December 31, 2012. The decrease in deposits was primarily attributable to decreases of $2.8 million in our non-interest bearing accounts, $2.7 million in our regular savings accounts, and $1.4 million in our NOW and money market accounts, offset by an increase of $465,000 in certificates of deposits. The decrease in deposits was due to the Company's decision to reduce interest rates that resulted in an outflow of deposits that exceeded the deposit inflow, primarily in certificates of deposit, due to the opening of the two new branches in Framingham and Quincy, Massachusetts.

Advance payments by borrowers for taxes and insurance increased by $592,000, or 16.8%, to $4.1 million at March 31, 2013 from $3.5 million at December 31, 2012 due primarily to an increase in the loan portfolio and the resulting accumulating balances paid into escrow accounts by borrowers.

FHLB advances decreased by $10.0 million, or 66.7%, to $5.0 million at March 31, 2013 from $15.0 million at December 31, 2012 due to the maturity and repayment of two $5.0 million FHLB advances.

Stockholders' equity increased by $141,000, or 0.1%, to $104.0 million at March 31, 2013, from $103.8 million at December 31, 2012. This increase was primarily the result of comprehensive income of $257,000 and the amortization of $35,000 for the ESOP for the period, partially offset by cash dividends declared of $151,000.

Comparison of Operating Results for the Three Months Ended March 31, 2013 and 2012

General.Net income decreased by $45,000, or 17.9%, to $207,000 for the quarter ended March 31, 2013, from $252,000 for the quarter ended March 31, 2012. The decrease was primarily the result of increases of $113,000 in non-interest expense and $60,000 in provision for loan losses, partially offset by increases of $51,000 in net interest income and $30,000 in non-interest income and a decrease of $47,000 in the provision for income taxes.

Net Interest Income. Net interest income increased by $51,000, or 1.3%, to $3.92 million for the three months ended March 31, 2013 from $3.87 million for the three months ended March 31, 2012. The increase in net interest income was due primarily to a decrease of $346,000 in interest expense that exceeded a decrease of $295,000 in interest income for the comparable period in 2012 and increases in the net interest spread and the net interest margin.

The net interest spread increased by 71 basis points to 3.72% for the three months ended March 31, 2013 from 3.01% for the three months ended March 31, 2012. The net interest margin increased by 67 basis points between these periods to 3.97% for the quarter ended March 31, 2013 from 3.30% for the quarter ended March 31, 2012. The increase in the interest rate spread and the net interest margin in the first quarter of 2013 compared to the same period in 2012 was due to an increase in the yield on our interest-earning assets coupled with a decrease in the cost of our interest-bearing liabilities.

In this regard, the yield on our interest-earning assets increased by 51 basis points to 4.81% for the three months ended March 31, 2013 from 4.30% for the three months ended March 31, 2012 and the cost of our interest-bearing liabilities decreased by 19 basis points to 1.09% for the three months ended March 31, 2013 from 1.28% for the three months ended March 31, 2012. The increase in the yield on our interest-earning assets was due to a decrease in other interest-earning assets, resulting in a shift in the composition of interest-earning assets whereby higher yielding loans receivable represented a larger percentage of total interest-earning assets in the March 31, 2013 quarter compared to the March 31, 2012 quarter. The increase in the yield on our interest-earning assets was also due to a decrease in our non-performing assets by $11.4 million, or 59%, to $7.9 million as of March 31, 2013 from $19.3 million as of March 31, 2012.

The decrease in the cost of our interest-bearing liabilities was due to the low interest rate environment in 2012 which continued into the first quarter of 2013 resulting in a decrease in the cost of our interest-bearing deposits as deposits continued to re-price to lower interest rates.

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The following table summarizes average balances and average yields and costs of interest-earning assets and interest-bearing liabilities for the three months ended March 31, 2013 and 2012.

                                                                                   Three Months Ended March 31,
                                                                          2013                                      2012
                                                                         Interest                                  Interest
                                                           Average          and         Yield/       Average          and         Yield/
                                                           Balance       Dividends       Cost        Balance       Dividends       Cost
                                                                                      (Dollars in thousands)
Assets:
Interest-earning assets:
  Loans                                                   $ 344,597     $     4,646        5.39 %   $ 360,830     $     4,893        5.42 %
  Securities (including FHLB stock)                          12,993              99        3.05        17,495             138        3.16
  Other interest-earning assets                              37,494               3        0.03        91,188              12        0.05
   Total interest-earning assets                            395,084           4,748        4.81       469,513           5,043        4.30
Allowance for loan losses                                    (4,323 )                                  (7,214 )
Non-interest-earning assets                                  49,922                                    35,086
   Total assets                                           $ 440,683                                 $ 497,385

Liabilities and equity:
Interest-bearing liabilities:
  Interest-bearing demand                                 $  61,857     $        50        0.32     $ 119,307     $       251        0.84
  Savings and club accounts                                  83,241             109        0.52        87,582             198        0.90
  Certificates of deposit                                   148,011             569        1.54       140,677             583        1.66
   Total interest-bearing deposits                          293,109             728        0.99       347,566           1,032        1.19

Borrowings                                                   11,278             101        3.58        19,115             143        2.99
   Total interest-bearing liabilities                       304,387             829        1.09       366,681           1,175        1.28

Noninterest-bearing demand                                   23,667                                    16,498
Other liabilities                                             7,132                                     6,737
   Total liabilities                                        335,186                                   389,916

Stockholders' equity                                        105,497                                   107,469
   Total liabilities and Stockholders' equity             $ 440,683                                 $ 497,385
Net interest income                                                     $     3,919                               $     3,868
Interest rate spread                                                                       3.72                                      3.01
Net interest margin                                                                        3.97                                      3.30
Net interest-earning assets                               $  90,697                                 $ 102,832
Interest-earning assets to interest-bearing liabilities      129.80 %                                  128.04 %

Total interest income decreased by $295,000, or 5.8%, to $4.7 million for the three months ended March 31, 2013, from $5.0 million for the three months ended March 31, 2012. Interest income on loans decreased by $247,000, or 5.0%, to $4.7 million for the three months ended March 31, 2013 from $4.9 million for the three months ended March 31, 2012 as a result of a decrease of 3 basis points in the average yield on loans to 5.39% for the three months ended March 31, 2013 from 5.42% for the three months ended March 31, 2012. The decrease in interest income and the average yield on loans was due to the pay-off of numerous higher yielding mortgage loans and the refinancing and/or re-pricing to lower interest rates of numerous mortgage loans in our loan portfolio. The decrease in interest income was also due to a decrease of $16.2 million, or 4.5%, in the average balance of the loan portfolio to $344.6 million for the three months ended March 31, 2013 from $360.8 million for the three months ended March 31, 2012. The decrease in the average balance of the loan portfolio was due to repayments outpacing originations and charge-offs, net of recoveries, of $8.5 million in loans in 2012.

Interest income on securities decreased by $39,000, or 28.3%, to $99,000 for the three months ended March 31, 2013 from $138,000 for the three months ended March 31, 2012. The decrease was primarily due to a decrease of $4.5 million, or 25.7%, in the average balance of securities to $13.0 million for the three months ended March 31, 2013 from $17.5 million for the three months ended March 31, 2012. 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 a decrease of 11 basis points in the average yield on securities to 3.05% for the three months ended March 31, 2013 from 3.16% for the three months ended March 31, 2012. The decline in the yield was due to the re-pricing of the yield of our adjustable rate investment securities and a decrease in FHLB stock yield from 4.5% at March 31, 2012 to 4.0% at March 31, 2013.

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Interest income on other interest-earning assets (consisting solely of interest-earning deposits) decreased by $9,000, or 75.0%, to $3,000 for the three months ended March 31, 2013 from $12,000 for the three months ended March 31, 2012. The decrease was primarily due to a decrease of $53.7 million, or 58.9%, in the average balance of other interest-earning assets to $37.5 million for the three months ended March 31, 2013 from $91.2 million for the three months ended March 31, 2012. The decrease was also due to a decrease of 2 basis points in the average yield on other interest-earning assets to 0.03% for the three months ended March 31, 2013 from 0.05% for the three months ended March 31, 2012.

The decrease in the average balance of other interest-earning assets was due to decreases in cash and cash equivalents and certificates of deposits at other financial institutions. The decline in the yield was due to the maturity of higher yielding certificates of deposits at other financial institutions.

Total interest expense decreased by $346,000, or 29.4%, to $829,000 for the three months ended March 31, 2013 from $1.2 million for the three months ended March 31, 2012. Interest expense on deposits decreased by $304,000, or 29.5%, to $728,000 for the three months ended March 31, 2013 from $1.0 million for the three months ended March 31, 2012. The decrease in the interest expense on deposits was a result of our decision to reduce our interest rates offered on our deposits in order to improve our net interest spread and net interest margin to increase profitability. This resulted in a decrease of 20 basis points in the average interest cost of deposits to 0.99% for the three months ended March 31, 2013 from 1.19% for the three months ended March 31, 2012.

The decrease in interest expense on deposits was also due to a decrease of $54.5 million, or 15.7%, in the average balance of interest-bearing deposits to $293.1 million for the three months ended March 31, 2013 from $347.6 million for the three months ended March 31, 2013. The decrease in the average balance of interest-bearing deposits was due to decreases in the average balance of our interest-bearing demand deposits and interest-bearing savings and club accounts, offset by increases in the average balance of our interest-bearing certificates of deposits. The decrease in the average balances of our interest-bearing demand deposits and interest-bearing savings and club accounts was due to the Company's decision to reduce our interest rates offered on our deposits. The increase in the average balance of our interest-bearing certificates of deposit was due to the opening of two new branches in Framingham and Quincy, Massachusetts during 2012.

The interest expense of our interest-bearing demand deposits decreased by $201,000, or 80.1%, to $50,000 for the three months ended March 31, 2013 from $251,000 for the three months ended March 31, 2012. The decrease in interest expense in our interest-bearing demand deposits was due to our decision to reduce our interest rates in interest-bearing demand deposits that resulted in a 52 basis point decrease in the average interest cost to 0.32% for the three months ended March 31, 2013 from 0.84% for the three months ended March 31, 2012. The decrease in interest expense on our interest-bearing demand deposits was also due to a decrease of $57.5 million, or 48.2%, in the average balance of our interest-bearing demand deposits to $61.9 million for the three months ended March 31, 2013 from $119.3 million for the three months ended March 31, 2012.

The interest expense of our interest-bearing savings and club deposits decreased by $89,000, or 45.0%, to $109,000 for the three months ended March 31, 2013 from $198,000 for the three months ended March 31, 2012. The decrease in interest expense in our interest-bearing savings and club deposits resulted from our decision to reduce our interest rates in interest-bearing savings and club deposits that resulted in a 38 basis point decrease in the average interest cost to 0.52% for the three months ended March 31, 2013 from 0.90% for the three months ended March 31, 2012. The decrease in interest expense on our interest-bearing savings and club deposits was also due to a decrease of $4.3 million, or 5.0%, in the average balance of our interest-bearing savings and club deposits to $83.2 million for the three months ended March 31, 2013 from $87.5 million for the three months ended March 31, 2012.

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The interest expense of our interest-bearing certificates of deposit decreased by $14,000, or 2.4%, to $569,000 for the three months ended March 31, 2013 from $583,000 for the three months ended March 31, 2012. The decrease in interest expense in our interest-bearing certificates of deposit was due to the re-pricing of interest-bearing certificates of deposit to lower interest rates upon maturity and our decision to reduce our interest rates in interest-bearing certificates of deposits. This resulted in a 12 basis point decrease in the average interest cost to 1.54% for the three months ended March 31, 2013 from 1.66% for the three months ended March 31, 2012. The decrease in interest expense on our interest-bearing certificates of deposit was offset by an increase of $7.3 million, or 5.2%, in the average balance of our interest-bearing certificates of deposit to $148.0 million for the three months ended March 31, 2013 from $140.7 million for the three months ended March 31, 2012. The increase in the average balance of our interest-bearing certificates of deposit was due to the opening of two new branches in Framingham and Quincy, Massachusetts during 2012.

Interest expense on borrowings decreased by $42,000, or 29.4%, to $101,000 for the three months ended March 31, 2013 from $143,000 for the three months ended March 31, 2012. The decrease was primarily due to a decrease of $7.8 million, or 41.0%, in the average balance of borrowed money to $11.3 million for the three months ended March 31, 2013 from $19.1 million for the three months ended March 31, 2012, offset by an increase of 59 basis points in the average interest cost to 3.58% for the three months ended March 31, 2013 from 2.99% for the three months ended March 31, 2012. The increase in the average interest cost was due to the maturity and repayment of lower cost FHLB advances.

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 March 31, 2013 and 2012.

                                                                                     Three Months
                                                                                    Ended March 31,
                                                                                  2013             2012
                                                                                (Dollars in thousands)
Allowance at beginning of period                                              $      4,646       $  7,397
Provision for loan losses                                                               60              -
Charge-offs                                                                              -           (316 )
Recoveries                                                                               -              5
Net charge-offs                                                                          -           (311 )
Allowance at end of period                                                    $      4,706       $  7,086

Allowance to nonperforming loans                                                     59.51 %        36.72 %
Allowance to total loans outstanding at the end of the period                         1.35 %         1.97 %
Net charge-offs (recoveries) to average loans outstanding during the period           0.00 %         0.09 %

The allowance to nonperforming loans ratio increased to 59.51% at March 31, 2013 from 36.72% at March 31, 2012 due primarily to a decrease in nonperforming loans to $7.9 million in March 31, 2013 from $19.3 million at March 31, 2012. The decrease in nonperforming loans was due to the identification, monitoring and resolution of several nonperforming loans that were paid-off and/or charge off between March 31, 2012 and March 31, 2013.

The allowance for loan losses was $4.7 million at March 31, 2013, $4.6 million at December 31, 2012, and $7.1 million at March 31, 2012. We recorded a provision for loan losses of $60,000 for the three-month period ended March 31, 2013 compared to no provision for loan losses for the three-month period ended March 31, 2012 due to an increase in the loan portfolio of $10.2 million, or 3.0%, to $343.9 million at March 31, 2013 from $333.8 million at December 31, 2012, offset by an increase of $4.2 million, or 20.3%, to $24.9 million at March 31, 2013 from $20.7 million at December 31, 2012 in loans that were individually evaluated for impairment. We did not record any provision for loan losses for the March 31, 2012 quarter due to a decrease of $1.1 million, or 5.6%, in non-performing loans to $19.3 million as of March 31, 2012 from $20.4 million as of December 31, 2011.

We recorded no charge-offs during the three months ended March 31, 2013 compared to charge-offs of $316,000 against two non-performing multi-family mortgage loan . . .

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