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NECB > SEC Filings for NECB > Form 10-Q on 14-Nov-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


14-Nov-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 regulators. 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.

Intangibles - Goodwill and Other. Accounting Standard Codification (ASC) Topic 350, Intangibles - Goodwill and Other, requires that goodwill is not amortized to expense, but rather that it be assessed or tested for impairment at least annually. Impairment write-downs are charged to results of operations in the period in which the impairment is determined. If certain events occur which might indicate goodwill has been impaired, the goodwill is tested for impairment when such events occur. The Company recorded goodwill of $1.3 million in connection with the Hayden Financial Group acquisition in 2007. Other acquired intangible assets with finite lives, such as customer lists, are required to be amortized over the estimated lives. These intangibles are generally amortized using the straight line method over the estimated useful lives of ten years.

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The Company identified an impairment on its outstanding goodwill as a result of its most recent testing conducted in December 2012. As a result, the Company recorded an impairment charge of $227,000 in 2012. During the second quarter of 2013, the Company determined that an adjustment to the goodwill impairment of $227,000 previously recorded in 2012 was necessary. As a result, the Company recognized an additional impairment charge of $334,000 during the second quarter of 2013. The impairment was caused primarily by the expected decrease in other revenue from this division resulting from a reduction in personnel.

Third Quarter Performance Highlights

The Company's earnings for the quarter ended September 30, 2013 increased by $1.4 million compared to the same period in 2012 primarily due to a credit to the allowance for loan losses in the 2013 period and a decrease in non-interest expenses, partially offset by a decrease in net interest income, a decrease in non-interest income, and an increase in the provision (benefit) for income taxes. The credit to the allowance for loan losses in 2013 was due to a decrease in the balance of non-performing loans.

Non-performing loans decreased by $1.7 million, or 41.6%, to $2.3 million as of September 30, 2013 from $4.0 million as of December 31, 2012. The decrease in non-performing loans was due to the identification, monitoring, and resolution of several non-performing loans that were paid-off or became performing as of, or prior to, September 30, 2013. We will continue to monitor our loan portfolio closely and adjust the level of allowance for loan losses appropriately as updated information becomes available.

The decrease in non-interest expense was due primarily to a decrease in expenses related to salaries and employee benefits in 2013 as the Company continues its efforts to control such expenses by reducing staff in various departments, including the mortgage brokerage department, the wealth management department, and branch operations.

Our interest rate spread decreased to 3.45% for the three months ended September 30, 2013 from 3.93% for the three months ended September 30, 2012 and our net interest margin decreased to 3.69% for the three months ended September 30, 2013 from 4.17% for the three months ended September 30, 2012.

Due to market conditions, we discontinued purchasing participation interests in construction loans in 2009. 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. Recently, we have expanded our construction lending department and currently expect that our origination of construction loans for multi-family, mixed-use and non-residential buildings will increase.

Comparison of Financial Condition at September 30, 2013 and December 31, 2012

Total assets decreased by $11.1 million, or 2.5%, to $433.1 million at September 30, 2013 from $444.2 million at December 31, 2012. The decrease in total assets was due to decreases of $18.6 million in cash and cash equivalents, $2.9 million in securities held-to-maturity, $731,000 in other assets, $481,000 in Federal Home Loan Bank of New York ("FHLB") stock, $450,000 in other real estate owned, $517,000 in premises and equipment, and $334,000 in goodwill, partially offset by increases of $11.7 million in loans receivable, net, $747,000 in certificates of deposits at other financial institutions, $480,000 in bank owned life insurance, and $116,000 in accrued interest receivable. The decrease in total liabilities primarily resulted from decreases of $10.0 million in FHLB advances and $2.2 million in deposits, partially offset by an increase of $365,000 in advance payments by borrowers for taxes and insurance.

Cash and cash equivalents decreased by $18.6 million, or 37.9%, to $30.6 million at September 30, 2013 from $49.2 million at December 31, 2012 due primarily to the above mentioned increases in loans receivable, certificates of deposits at other financial institutions, and advance payments by borrowers for taxes and insurance, net of decreases in securities held-to-maturity, FHLB stock, deposits, and FHLB advances.

Securities held-to-maturity decreased by $3.0 million, or 24.6%, to $9.0 million at September 30, 2013 from $12.0 million at December 31, 2012 due primarily to repayments of $3.0 million. Certificates of deposits at other financial institutions increased by $747,000, or 187.2%, to $1.1 million at September 30, 2013 from $399,000 at December 31, 2012 due to the purchase of four certificates of deposits.

Loans receivable, net, increased by $11.7 million, or 3.5%, to $345.5 million at September 30, 2013 from $333.8 million at December 31, 2012 due primarily to loan originations totaling $48.8 million which exceeded loan repayments and charge-offs totaling $37.1 million. FHLB stock decreased by $481,000, or 35.5%, to $874,000 at September 30, 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.

Bank owned life insurance increased by $480,000, or 2.4%, to $20.3 million at September 30, 2013 from $19.9 million at December 31, 2012 due to accrued earnings during 2013. Real estate owned decreased by $450,000, or 10.5%, to $3.8 million at September 30, 2013 from $4.3 million at December 31, 2012 due to the sale of a foreclosed property. Premises and equipment decreased by $517,000, or 4.0%, to $12.4 million at September 30, 2013 from $12.9 million at December 31, 2012 due primarily to depreciation. Other assets decreased by $731,000, or 9.3%, to $7.1 million at September 30, 2013 from $7.8 million at December 31, 2012 due to a refund of the FDIC prepaid insurance and reductions in current and deferred tax assets and prepaid insurance.

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Deposits decreased by $2.2 million, or 0.7%, to $316.0 million at September 30, 2013 from $318.1 million at December 31, 2012. The decrease in deposits was primarily attributable to decreases of $1.1 million in non-interest bearing accounts, $833,000 in regular savings accounts, and $370,000 in NOW and money market accounts, partially offset by an increase of $173,000 in certificates of deposits.

Advance payments by borrowers for taxes and insurance increased by $365,000, or 10.4%, to $3.9 million at September 30, 2013 from $3.5 million at December 31, 2012 due primarily to an increase in the mortgage loan portfolio. The increase in the mortgage loan portfolio was due to increases of $4.7 million, or 11.2%, in the mixed-use mortgage loan portfolio to $46.6 million at September 30, 2013 from $41.9 million at December 31, 2012 and $3.8 million, or 451.1%, in the construction mortgage loan portfolio to $4.6 million at September 30, 2013 from $841,000 at December 31, 2012.

FHLB advances decreased by $10.0 million, or 66.7%, to $5.0 million at September 30, 2013 from $15.0 million at December 31, 2012 due primarily to the maturity and repayment of certain FHLB advances.

Stockholders' equity increased by $783,000 to $104.6 million at September 30, 2013, from $103.8 million at December 31, 2012. This increase was primarily the result of comprehensive income of $1.1 million and the amortization of $118,000 for the ESOP for the period, partially offset by cash dividends declared of $453,000.

Comparison of Operating Results for the Three Months Ended September 30, 2013 and 2012

General. Earnings increased by $1.4 million, or 138.1%, to net income of $381,000 for the quarter ended September 30, 2013, from a net loss of $1.0 million for the quarter ended September 30, 2012. The increase was primarily the result of a credit to the allowance for loan losses of $191,000 during the 2013 period compared to a provision for loan losses of $1.9 million in the 2012 period and a decrease of $1.0 million in non-interest expenses, offset by a decrease of $583,000 in net interest income, a decrease of $230,000 in non-interest income, and an increase of $991,000 in income taxes.

Net Interest Income. Net interest income decreased by $583,000, or 14.0%, to $3.6 million for the three months ended September 30, 2013 from $4.2 million for the three months ended September 30, 2012. The decrease in net interest income resulted primarily from a decrease of $561,000 in interest income coupled with an increase of $22,000 in interest expense.

The net interest spread decreased by 48 basis points to 3.45% for the three months ended September 30, 2013 from 3.93% for the three months ended September 30, 2012. The net interest margin decreased by 48 basis points between these periods from 4.17% for the quarter ended September 30, 2012 to 3.69% for the quarter ended September 30, 2013. The decrease in the interest rate spread and the net interest margin in the third quarter of 2013 compared to the same period in 2012 was due to a decrease in the yield on our interest-earning assets coupled with an increase in the cost of our interest-bearing liabilities.

The average yield on our interest-earning assets decreased by 44 basis points to 4.51% for the three months ended September 30, 2013 from 4.95% for the three months ended September 30, 2012 and the cost of our interest-bearing liabilities increased by 4 basis points to 1.06% for the three months ended September 30, 2013 from 1.02% for the three months ended September 30, 2012. The decrease in the yield on our interest-earning assets was due to decreases in the yield on loans receivable, securities, and other interest-earning assets. The increase in the cost of our interest-bearing liabilities was due to the offering of competitive interest rates to generate deposits in connection with the opening of two new branches in Framingham and Quincy, Massachusetts during the latter part of the third quarter of 2012, offset by the our decision to reduce the interest rates offered on our deposits during the second quarter of 2013.

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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 September 30, 2013 and 2012.

                                                                                Three Months Ended September 30,
                                                                          2013                                     2012
                                                                         Interest                                 Interest
                                                           Average         and         Yield/       Average         and         Yield/
                                                           Balance      Dividends       Cost        Balance      Dividends       Cost

                                                                                     (Dollars in thousands)
Assets:
Interest-earning assets:
  Loans                                                   $ 339,682     $    4,304        5.07 %   $ 353,314     $    4,817        5.45 %
  Securities (including FHLB stock)                          10,629             72        2.75        15,176            116        3.06
  Other interest-earning assets                              38,483              3        0.02        30,822              7        0.09
   Total interest-earning assets                            388,794          4,379        4.51       399,312          4,940        4.95
Allowance for loan losses                                    (4,203 )                                 (3,828 )
Non-interest-earning assets                                  48,797                                   42,841
   Total assets                                           $ 433,388                                $ 438,325

Liabilities and equity:
Interest-bearing liabilities:
  Interest-bearing demand                                 $  63,666     $       60        0.38 %   $  72,713     $       63        0.35 %
  Savings and club accounts                                  82,630            112        0.54        87,541            117        0.53
  Certificates of deposit                                   147,862            577        1.56       127,736            454        1.42
   Total interest-bearing deposits                          294,158            749        1.02       287,990            634        0.88

Borrowings                                                    5,000             46        3.68        15,000            139        3.71
   Total interest-bearing liabilities                       299,158            795        1.06       302,990            773        1.02

Noninterest-bearing demand                                   22,769                                   20,806
Other liabilities                                             6,814                                    7,087
   Total liabilities                                        328,741                                  330,883

Stockholders' equity                                        104,647                                  107,442
   Total liabilities and
     Stockholders' equity                                 $ 433,388                                $ 438,325
Net interest income                                                     $    3,584                               $    4,167
Interest rate spread                                                                      3.45 %                                   3.93 %
Net interest margin                                                                       3.69 %                                   4.17 %
Net interest-earning assets                               $  89,636                                $  96,322
Interest-earning assets to interest-bearing liabilities      129.96 %                                 131.79 %

Total interest income decreased by $561,000, or 11.4%, to $4.4 million for the three months ended September 30, 2013, from $4.9 million for the three months ended September 30, 2012. Interest income on loans decreased by $513,000, or 10.6%, to $4.3 million for the three months ended September 30, 2013 from $4.8 million for the three months ended September 30, 2012. The decrease was primarily the result of a decrease of 38 basis points in the average yield on loans to 5.07% for the three months ended September 30, 2013 from 5.45% for the three months ended September 30, 2012. The decrease in interest income and the average yield on loans was also 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. This resulted in a decrease of $13.6 million, or 3.9%, in the average balance of the loan portfolio to $339.7 million for the three months ended September 30, 2013 from $353.3 million for the three months ended September 30, 2012 as repayments outpaced originations and charge-offs, net of recoveries.

Interest income on securities decreased by $44,000, or 37.9%, to $72,000 for the three months ended September 30, 2013 from $116,000 for the three months ended September 30, 2012. The decrease was primarily due to a decrease of $4.5 million, or 30.0%, in the average balance of securities to $10.6 million for the three months ended September 30, 2013 from $15.2 million for the three months ended September 30, 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 31 basis points in the average yield on securities to 2.75% for the three months ended September 30, 2013 from 3.06% for the three months ended September 30, 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 September 30, 2012 to 4.0% at September 30, 2013.

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Interest income on other interest-earning assets (consisting solely of interest-earning deposits) decreased by $4,000, or 57.1% to $3,000 for the three months ended September 30, 2013 from $7,000 for the three months ended September 30, 2012. The decrease was primarily due to a decrease of 7 basis points in the average yield on other interest-earning assets to 0.02% for the three months ended September 30, 2013 from 0.09% for the three months ended September 30, 2012, offset by an increase of $7.7 million, or 24.9%, in the average balance of interest-earning assets to $38.5 million for the three months ended September 30, 2013 from $30.8 million for the three months ended September 30, 2012. The decline in the yield was due to the maturity of higher yielding certificates of deposits at other financial institutions. The increase in the average balance of other interest-earning assets was due to decreases in the average balances of loans and increases in the average balances of deposits.

Total interest expense increased by $22,000, or 2.8%, to $795,000 for the three months ended September 30, 2013 from $773,000 for the three months ended September 30, 2012. Interest expense on deposits increased by $115,000, or 18.1%, to $749,000 for the three months ended September 30, 2013 from $634,000 for the three months ended September 30, 2012. The increase in the interest expense on deposits was a result of a shift in deposits from lower costing interest-bearing demand accounts and interest-bearing savings and club accounts to higher costing interest-bearing certificates of deposit. The increase in the interest expense on deposits was also a result of offering competitive interest rates to generate deposits in connection with the opening of two new branches in Framingham and Quincy, Massachusetts during the latter part of the third quarter of 2012. These two factors resulted in an increase of 14 basis points in the average cost of deposits to 1.02% for the three months ended September 30, 2013 from 0.88% for the three months ended September 30, 2012. These two factors also resulted in an increase of $6.2 million, or 2.1%, in the average balance of interest bearing deposits to $294.2 million for the three months ended September 30, 2013 from $288.0 million for the three months ended September 30, 2012.

The interest expense of our interest-bearing demand deposits decreased by $3,000, or 4.8%, to $60,000 for the three months ended September 30, 2013 from $63,000 for the three months ended September 30, 2012. The decrease in interest expense in our interest-bearing demand deposits was due to a shift in deposits to higher costing interest-bearing certificates of deposits, offset by the offering of competitive interest rates to generate deposits in connection with the opening of two new branches in Framingham and Quincy, Massachusetts during the latter part of the third quarter of 2012. This resulted in a decrease of $9.0 million, or 12.4%, in the average balance of our interest-bearing demand deposits to $63.7 million for the three months ended September 30, 2013 from $72.7 million for the three months ended September 30, 2012. This also resulted in a 3 basis point increase in the average interest cost to 0.38% for the three months ended September 30, 2013 from 0.35% for the three months ended September 30, 2012.

The interest expense of our interest-bearing savings and club deposits decreased by $5,000, or 4.3%, to $112,000 for the three months ended September 30, 2013 from $117,000 for the three months ended September 30, 2012. The decrease in interest expense in our interest-bearing savings and club deposits was due to a shift in deposits to higher costing interest-bearing certificates of deposits, offset by the offering of competitive interest rates to generate deposits in connection with the opening of two new branches in Framingham and Quincy, Massachusetts during the latter part of the third quarter of 2012. This resulted in a decrease of $4.9 million, or 5.6%, in the average balance of our interest-bearing savings and club deposits to $82.6 million for the three months ended September 30, 2013 from $87.5 million for the three months ended September 30, 2012. This also resulted in a 1 basis point increase in the average interest cost to 0.54% for the three months ended September 30, 2013 from 0.53% for the three months ended September 30, 2012.

The interest expense of our interest-bearing certificates of deposit increased by $123,000, or 27.1%, to $577,000 for the three months ended September 30, 2013 from $454,000 for the three months ended September 30, 2012. The increase in interest expense in our interest-bearing certificates of deposit was due to offering competitive interest rates in connection with the opening of two new branches in Framingham and Quincy, Massachusetts during the latter part of the third quarter of 2012. This resulted in an increase of $20.1 million, or 15.8%, in the average balance of our interest-bearing certificates of deposit to $147.9 million for the three months ended September 30, 2013 from $127.7 million for the three months ended September 30, 2012. The increase in interest expense of our interest-bearing certificates of deposit was also due to a 14 basis point increase in the average interest cost to 1.56% for the three months ended September 30, 2013 from 1.42% for the three months ended September 30, 2012.

Interest expense on borrowings decreased by $93,000, or 66.9%, to $46,000 for the three months ended September 30, 2013 from $139,000 for the three months ended September 30, 2012. The decrease was primarily due to a decrease of $10.0 million, or 66.7%, in the average balance of borrowed money to $5.0 million for the three months ended September 30, 2013 from $15.0 million for the three months ended September 30, 2012. The decrease in interest expense on borrowings was also due to a decrease of 3 basis points in the cost of borrowed money to 3.68% for the three months ended September 30, 2013 from 3.71% for the three months ended September 30, 2012 due primarily to the maturity and repayment of higher costing FHLB advances from 2012 to 2013.

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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, 2013 and 2012.

                                                                                     Three Months
                                                                                  Ended September 30,
                                                                                   2013            2012

                                                                                (Dollars in thousands)
Allowance at beginning of period                                              $        4,205      $ 3,867
Provision (credit) for loan losses                                                      (191 )      1,912
Charge-offs                                                                                -          (85 )
Recoveries                                                                                 -           11
. . .
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