Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results
of Operations
|
Forward-Looking
Statements
This
report contains forward-looking statements that are based on assumptions
and may
describe future plans, strategies and expectations of Northeast Community
Bancorp, Inc. (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 Northeast Community Bank’s (the “Bank”) market area, changes in real
estate market values in the Bank’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 Registration
Statement on Form S-1, as amended, under the heading “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.
General
The
Bank
is a community-oriented financial institution dedicated to serving the financial
services needs of consumers and businesses within its market area and its
lending territory. We attract deposits from the general public and use such
funds primarily to originate multifamily residential real estate loans, mixed
use real estate loans and nonresidential real estate loans. We also
originate a limited amount of consumer loans. In addition, we operate
a loan production office in Wellesley, Massachusetts.
Overview
Net
income for the three and six months ended June 30, 2007, was $10.6 million
and
$11.0 million, respectively, substantial increases over the $350,000 and
$759,000, respectively, recorded for the same prior year
periods. However, these increases were largely due to the sale of the
branch office at 1353-55 First Avenue, New York, New York. The sale
of the branch office provided a pre-tax gain of $19.0 million or a net gain
of
$10.7 million after providing for $8.3 million in income
taxes. The sale also provided an increase in total assets of $19.0
million represented by increases of $9.1 million in cash and $16.3 million
in
loans receivable partially offset by decreases of $6.2 million in property
and
equipment and $263,000 in other assets. The sale provided an increase
in total liabilities of $8.3 million related to the accrual of income taxes
on
the sale gain.
Comparison
of Financial Condition at June 30, 2007 and December 31,
2006
Total
assets increased by $17.9 million, or 6.2%, to $306.3 million at June 30,
2007
from $288.4 million at December 31, 2006. Cash and cash equivalents
increased by $4.7 million, or 12.6%, to $41.4 million at June 30, 2007, from
$36.7 million at December 31, 2006. The increase was primarily the
result of the $9.1 million proceeds received from the sale of the Bank’s branch
office building located at 1353-55 First Avenue and the $4.0 million in
short-term Federal Home Loan Bank borrowings. Securities held to
maturity decreased by $18.0 million, or 65.3%, to $9.5 million at June 30,
2007
from $27.5 million at December 31, 2006, due primarily to repayment and
maturities of $23.0 million, which exceeded purchases of $5.0
million. The funds were redeployed primarily to fund increased loan
originations.
Loans
receivable increased by $37.0 million, or 18.4%, to $238.3 million at June
30,
2007 from $201.3 million at December 31, 2006, due to loan originations of
$54.3
million exceeding loan repayments of $17.0 million. Included in loan
originations is the $16.3 million present value of the promissory note the
Bank
received in connection with the sale of the Bank’s branch office building
located at 1353-55 First Avenue.
Premises
and equipment decreased by
$6.4 million, or 57.9%, to $4.7 million at June 30, 2007, from $11.1 million
at
December 31, 2006, due primarily to the sale of our First Avenue property,
which
had a cost basis of $6.1 million.
Deposit
balances decreased by $5.9
million, or 3.1%, to $182.7 million at June 30, 2007 from $188.6 million
at
December 31, 2006. The decrease in deposits occurred in all deposit
types, with certificates of deposits decreasing by $2.9 million, or 2.7%,
regular savings decreasing by $2.5 million, or 4.2%, interest bearing checking
and
money
market accounts decreasing by $490,000 or 2.3%, and non-interest bearing
accounts decreasing by $42,000, or 2.9%. The decrease was primarily
attributed to the continuing intense interest rate competition in all markets
in
which we operate and our strategy of offering interest rates on our deposit
accounts that are in the middle of the market.
Short-term
borrowings from the Federal
Home Loan Bank of New York increased to $4.0 million at June 30, 2007 reflecting
a decision to increase short-term liquidity.
Other
liabilities increased by $8.5
million, or 736.0%, to $9.6 million at June 30, 2007 from $1.1 million at
December 31, 2006. The increase was due to an increase of $7.8
million in accrued income taxes, largely the result of the $19.0 million
gain
from the disposition of the Bank’s branch office building located at 1353-55
First Avenue, and an increase of $700,000 in other liabilities.
Stockholders’
equity
increased by $11.1
million, or 11.5%, to $107.9 million at June 30, 2007, from $96.8 million
at
December 31, 2006. This increase was primarily the result of $11.0
million in net income.
Comparison
of Operating Results for the Three Months Ended June 30, 2007 and
2006
General. Net
income increased by $10.3 million, or 2,935.1%, to $10.6 million for the
three
months ended June 30, 2007 from $350,000 for the three months ended June
30,
2006. The increase was primarily the result of the $19.0 million gain
($10.7 million net of income taxes) from the disposition of the Bank’s branch
office building located at 1353-55 First Avenue.
Net
Interest Income. Net interest income
increased by $182,000, or 7.0%, to $2.8 million for the three months ended
June
30, 2007 from $2.6 million for the three months ended June 30,
2006. The increase in net interest income resulted primarily from the
increased average balance of net interest-earning assets of $27.4 million,
partially offset by a 44 basis point decrease in our net interest rate spread
to
3.32% for the three months ended June 30, 2007 from 3.76% for the three months
ended June 30, 2006. The net interest margin decreased 5 basis points
to 4.20% for the three months ended June 30, 2007 from 4.25% for the three
months ended June 30, 2006. The decrease in the interest rate spread
and net interest margin in the second quarter of 2007 over the same period
in
2006 was due mainly to the cost of our interest-bearing liabilities increasing
to a greater degree than the increase in the yield earned on our
interest-earning assets. The decrease in the net interest margin was
mitigated somewhat by the increase in net interest-earning assets.
The
following table summarizes average balances and average yields and costs
of
interest-earning assets and interest-bearing liabilities for the three months
ended June 30, 2007 and 2006.
|
|
Three
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Yield/
Cost
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Yield/
Cost
|
|
|
|
(Dollars
in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
213,182
|
|
|
$ |
3,441
|
|
|
|
6.46 |
% |
|
$ |
201,853
|
|
|
$ |
3,151
|
|
|
|
6.24 |
% |
Securities
- taxable
|
|
|
16,233
|
|
|
|
196
|
|
|
|
4.83
|
|
|
|
12,217
|
|
|
|
120
|
|
|
|
3.93
|
|
Other
interest-earning assets
|
|
|
36,963
|
|
|
|
489
|
|
|
|
5.29
|
|
|
|
31,849
|
|
|
|
413
|
|
|
|
5.19
|
|
Total
interest-earning assets
|
|
|
266,378
|
|
|
|
4,126
|
|
|
|
6.20
|
|
|
|
245,919
|
|
|
|
3,684
|
|
|
|
5.99
|
|
Allowance
for loan losses
|
|
|
(1,204 |
) |
|
|
|
|
|
|
|
|
|
|
(1,200 |
) |
|
|
|
|
|
|
|
|
Noninterest-earning
assets
|
|
|
24,510
|
|
|
|
|
|
|
|
|
|
|
|
11,467
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
289,684
|
|
|
|
|
|
|
|
|
|
|
$ |
256,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand
|
|
$ |
20,705
|
|
|
$ |
27
|
|
|
|
0.52 |
% |
|
$ |
20,898
|
|
|
$ |
16
|
|
|
|
0.31 |
% |
Savings
and club accounts
|
|
|
59,236
|
|
|
|
103
|
|
|
|
0.70
|
|
|
|
69,353
|
|
|
|
121
|
|
|
|
0.70
|
|
Certificates
of deposit
|
|
|
104,941
|
|
|
|
1,202
|
|
|
|
4.58
|
|
|
|
101,642
|
|
|
|
935
|
|
|
|
3.68
|
|
Total
interest-bearing deposits
|
|
|
184,882
|
|
|
|
1,332
|
|
|
|
2.88
|
|
|
|
191,893
|
|
|
|
1,072
|
|
|
|
2.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
|
88
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
interest-bearing liabilities
|
|
|
184,970
|
|
|
|
1,332
|
|
|
|
2.88
|
|
|
|
191,893
|
|
|
|
1,072
|
|
|
|
2.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
|
|
1,291
|
|
|
|
|
|
|
|
|
|
|
|
15,867
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
5,909
|
|
|
|
|
|
|
|
|
|
|
|
4,259
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
192,170
|
|
|
|
|
|
|
|
|
|
|
|
212,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
97,514
|
|
|
|
|
|
|
|
|
|
|
|
44,167
|
|
|
|
|
|
|
|
|
|
Total
liabilities and Stockholders’
equity
|
|
$ |
289,684
|
|
|
|
|
|
|
|
|
|
|
$ |
256,186
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
2,794
|
|
|
|
|
|
|
|
|
|
|
$ |
2,612
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
|
|
|
|
3.32 |
% |
|
|
|
|
|
|
|
|
|
|
3.76 |
% |
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
4.20 |
% |
|
|
|
|
|
|
|
|
|
|
4.25 |
% |
Net
interest-earning assets
|
|
$ |
81,408
|
|
|
|
|
|
|
|
|
|
|
$ |
54,026
|
|
|
|
|
|
|
|
|
|
Average
interest-earning assets to
average
interest-bearing liabilities
|
|
|
144.01 |
% |
|
|
|
|
|
|
|
|
|
|
128.15 |
% |
|
|
|
|
|
|
|
|
Interest
income increased by $442,000, or 12.0%, to $4.1 million for the three months
ended June 30, 2007, from $3.7 million for the three months ended June 30,
2006. Interest income on loans increased by $290,000, or 9.2%, to
$3.44 million for the three months ended June 30, 2007 from $3.15 million
for
the three months ended June 30, 2006. The average balance of the loan
portfolio increased by $11.3 million to $213.2 million for the three months
ended June 30, 2007 from $201.9 million for the three months ended June 30,
2006. The average yield on loans increased 22 basis points to 6.46%
for the three months ended June 30, 2007 from 6.24% for the three months
ended
June 30, 2006.
Interest
income on securities increased by $76,000, or 63.3%, to $196,000 for the
three
months ended June 30, 2007 from $120,000 for the three months ended June
30,
2006. The increase was primarily due to an increase in average
balance of securities to $16.2 million from $12.2 million and an increase
in the
average yield on securities of 90 basis points to 4.83% for the three months
ended June 30, 2007 from 3.93% for the three months ended June 30,
2006.
Interest
on other interest-earning assets increased $76,000, or 18.4%, to $489,000
for
the three months ended June 30, 2007 from $413,000 for the three months ended
June 30, 2006. The increase was primarily the result of a 10 basis
point increase in the yield to 5.29% for the three months ended June 30,
2007
from 5.19% for the three months ended June 30, 2006, plus an increase in
average
balance of other interest-earning assets to $37.0 million for the three months
ended June 30, 2007 as compared to $31.8 million for the three months ended
June
30, 2006. The increased average balance of other interest-earning
assets was due to the deployment of the stock conversion proceeds.
Interest
expense increased $260,000, or 24.3%, to $1.3 million for the three months
ended
June 30, 2007 from $1.1 million for the three months ended June 30,
2006. The increase in interest expense was due to generally higher
deposit rates and a shift of $3.3 million of average deposits from lower
interest rate passbook savings into higher interest rate certificate of
deposits, which had the effect of raising the average interest cost by 65
basis
points to 2.88% for the three months ended June 30, 2007 from 2.23% for the
three months ended June 30, 2006. During this period, the cost of our
certificate of deposits increased 90 basis points to 4.58% for the three
months
ended June 30, 2007 from 3.68% for the three months ended June 30,
2006. Interest expense on our other deposit products decreased by
$7,000, or 5.1%, due to a $10.3 million, or 11.4% decrease in average balance
partially offset by an average cost decrease in the rate of interest paid
on
these deposits of 4 basis points to 0.65% for the three months ended June
30,
2007 from 0.61% for the three months ended June 30, 2006.
Provision
for Loan Losses. The allowance for loan losses
increased by $338,000 to $1.5 million at June 30, 2007 as a result of a
provision for loan losses of $338,000 during the three months ended June
30,
2007. The primary reason for this increase was the growth of the
Bank’s loan portfolio and the increase in non-performing loans. The
allowance for loan losses as of June 30, 2007 represented 0.64% of total
loans,
compared to 0.59% of total loans as of June 30, 2006. See
additional discussing in the comparison of operating results for the six-month
period.
There
were no charge-offs or recoveries during the three months ended June 30,
2007
and 2006, and there was no provision for loan losses for the three months
ended
June 30, 2006.
Non-interest
Income. Non-interest income increased
$19.0 million, or 15,984.9%, to $19.1 million for the three months ended
June
30, 2007 from $119,000 for the three months ended June 30, 2006. The
increase was the result of the $19.0 million gain from the disposition of
the
Bank’s branch office building located at 1353-55 First Avenue, New York, New
York. In addition, we earned $89,000 on our investment in bank-owned
life insurance, which was purchased after June 30, 2006.
Non-interest
Expense. Non-interest expense
increased $629,000, or 29.8%, to $2.7 million for the three months ended
June
30, 2007 from $2.1 million for the three months ended June 30,
2006. The increase resulted primarily from increases of $388,000 in
salaries and employee benefits, $174,000 in other noninterest expense, $33,000
in net occupancy expense, $20,000 in equipment expense, and $14,000 in outside
data processing.
The
increase in salaries and employee benefits of $388,000, or 34.2%, to $1.5
million in 2007 from $1.1 million in 2006 was due to a $161,000
mid-year goal attainment payment made to employees, a $140,000 severance
agreement made with a long-time officer, and the ESOP implemented in connection
with our initial public offering. Other non-interest expense
increased by $174,000, or 37.2%, to $642,000 in 2007 from $468,000 in 2006
due
mainly to expenses associated with being a public company.
Occupancy
expense increased by $33,000, or 13.6%, to $275,000 in 2007 from $242,000
in
2006 due to expenses related to the relocation of our 1353-55 First Avenue
office. Equipment expense increased by $20,000, or 18.7%, to $127,000
in 2007 from $107,000 in 2006 due to the purchase and/or upgrade of various
equipment and computer software. Outside data processing increased by
$14,000, or 9.9%, to $155,000 in 2007 from $141,000 in 2006 due to increased
processing cost of our ATM network.
Income
Taxes. Income tax expense increased $7.9 million, or
2,938.7%, to $8.2 million for the three months ended June 30, 2007, from
$271,000 for the three months ended June 30, 2006. The increase
resulted primarily from the $18.2 million increase in pre-tax income in 2007
compared to 2006. The effective tax rate was 43.7% for the three
months ended June 30, 2007, compared to 43.6% for the same period in
2006.
Comparison
of Operating Results for the Six Months Ended June 30, 2007 and
2006
General. Net
income increased by $10.3 million, or 1,351.0%, to $11.0 million for the
six
months ended June 30, 2007 from $759,000 for the six months ended June 30,
2006. The increase was primarily the result of the $19.0 million gain
($10.7 million net of income taxes) from the disposition of the Bank’s branch
office building located at 1353-55 First Avenue.
Net
Interest Income. Net interest income
increased by $225,000, or 4.3%, to $5.5 million for the six months ended
June
30, 2007 from $5.3 million for the six months ended June 30,
2006. The increase in net interest income resulted primarily from the
increased average balance of net interest-earning assets of $33.1 million,
partially offset by a 72 basis point decrease in net interest rate spread
to
3.28% for the six months ended June 30, 2007 from 4.00% for the six months
ended
June 30, 2006. The net interest margin decreased 28 basis points to
4.13% in the current six-month period from 4.41% in the prior
period. The decrease in the interest rate spread and net interest
margin in the current six-month period of 2007 over the same period in 2006
was
due mainly to the cost of our interest-bearing liabilities increasing to
a
greater degree than the increase in the yield earned on our interest earning
assets.
The
following table summarizes average balances and average yields and costs
of
interest-earning assets and interest-bearing liabilities for the six months
ended June 30, 2007 and 2006.
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Yield/
Cost
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Yield/
Cost
|
|
|
|
(Dollars
in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
207,726
|
|
|
$ |
6,622
|
|
|
|
6.38 |
% |
|
$ |
199,447
|
|
|
$ |
6,313
|
|
|
|
6.33 |
% |
Securities
- taxable
|
|
|
23,243
|
|
|
|
568
|
|
|
|
4.89
|
|
|
|
12,489
|
|
|
|
256
|
|
|
|
4.10
|
|
Other
interest-earning assets
|
|
|
34,285
|
|
|
|
905
|
|
|
|
5.28
|
|
|
|
26,452
|
|
|
|
660
|
|
|
|
4.99
|
|
Total
interest-earning assets
|
|
|
265,254
|
|
|
|
8,095
|
|
|
|
6.10
|
|
|
|
238,388
|
|
|
|
7,229
|
|
|
|
6.06
|
|
Allowance
for loan losses
|
|
|
(1,202 |
) |
|
|
|
|
|
|
|
|
|
|
(1,200 |
) |
|
|
|
|
|
|
|
|
Noninterest-earning
assets
|
|
|
24,821
|
|
|
|
|
|
|
|
|
|
|
|
10,789
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
288,873
|
|
|
|
|
|
|
|
|
|
|
$ |
247,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand
|
|
$ |
20,529
|
|
|
$ |
52
|
|
|
|
0.51 |
% |
|
$ |
21,401
|
|
|
$ |
31
|
|
|
|
0.29 |
% |
Savings
and club accounts
|
|
|
59,794
|
|
|
|
206
|
|
|
|
0.69
|
|
|
|
70,492
|
|
|
|
216
|
|
|
|
0.61
|
|
Certificates
of deposit
|
|
|
105,144
|
|
|
|
2,358
|
|
|
|
4.49
|
|
|
|
99,840
|
|
|
|
1,728
|
|
|
|
3.46
|
|
Total
interest-bearing deposits
|
|
|
185,467
|
|
|
|
2,616
|
|
|
|
2.82
|
|
|
|
191,733
|
|
|
|
1,975
|
|
|
|
2.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
|
44
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.00
|
|
Total
interest-bearing liabilities
|
|
|
185,511
|
|
|
|
2,616
|
|
|
|
2.82
|
|
|
|
191,733
|
|
|
|
1,975
|
|
|
|
2.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
|
|
1,272
|
|
|
|
|
|
|
|
|
|
|
|
8,658
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
4,736
|
|
|
|
|
|
|
|
|
|
|
|
3,589
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
191,519
|
|
|
|
|
|
|
|
|
|
|
|
203,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
97,354
|
|
|
|
|
|
|
|
|
|
|
|
43,997
|
|
|
|
|
|
|
|
|
|
Total
liabilities and Stockholders’
equity
|
|
$ |
288,873
|
|
|
|
|
|
|
|
|
|
|
$ |
247,977
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
5,479
|
|
|
|
|
|
|
|
|
|
|
$ |
5,254
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
|
|
|
|
3.28 |
% |
|
|
|
|
|
|
|
|
|
|
4.00 |
% |
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
4.13 |
% |
|
|
|
|
|
|
|
|
|
|
4.41 |
% |
Net
interest-earning assets
|
|
$ |
79,743
|
|
|
|
|
|
|
|
|
|
|
$ |
46,655
|
|
|
|
|
|
|
|
|
|
Average
interest-earning assets to
average
interest-bearing liabilities
|
|
|
142.99 |
% |
|
|
|
|
|
|
|
|
|
|
124.33 |
% |
|
|
|
|
|
|
|
|
Interest
income increased by $866,000, or 12.0%, to $8.1 million for the six months
ended
June 30, 2007, from $7.2 million for the six months ended June 30,
2006. Interest income on loans increased by $309,000, or 4.9%, to
$6.6 million for the six months ended June 30, 2007 from $6.3 million for
the
six months ended June 30, 2006. The average balance of the loan
portfolio increased by $8.3 million to $207.7 million for the six months
ended
June 30, 2007 from $199.4 million for the six months ended June 30,
2006. The average yield on loans increased 5 basis points to 6.38%
for the six months ended June 30, 2007 from 6.33% for the six months ended
June
30, 2006.
Interest
income on securities increased by $312,000, or 121.9%, to $568,000 for the
six
months ended June 30, 2007 from $256,000 for the six months ended June 30,
2006. The increase was primarily due to an increase in the average
yield on securities of 79 basis points to 4.89% for the six months ended
June
30, 2007 from 4.10% for the six months ended June 30, 2006, plus an increase
in
the average balance of securities from $12.5 million in the 2006 period to
$23.2
million in the 2007 period.
Interest
on other interest-earning assets increased $245,000, or 37.1%, to $905,000
for
the six months ended June 30, 2007 from $660,000 for the six months ended
June
30, 2006. The increase was primarily as a result of a 29 basis point
increase in the yield on such assets to 5.28% for the six months ended June
30,
2007 from 4.99% for the six months ended June 30, 2006 and an increase in
the
average balance of other interest-earning assets to $34.3 million for the
six
months ended June 30, 2007 as compared to $26.5 million for the six months
ended
June 30, 2006. The increased average balance of other
interest-earning assets was due to the deployment of the stock conversion
proceeds.
Interest
expense increased $641,000, or 32.5%, to $2.6 million for the six months
ended
June 30, 2007 from $2.0 million for the six months ended June 30,
2006. The increase in interest expense was due to generally higher
deposit rates and a shift of $5.3 million of average deposits from lower
interest rate passbook savings into higher interest rate certificate of
deposits, which had the effect of raising the average interest cost by 76
basis
points to 2.82% for the six months ended June 30, 2007 from 2.06% for the
six
months ended June 30, 2006. During this period, the cost of our
certificates of deposit increased 103 basis points to 4.49% for the six months
ended June 30, 2007 from 3.46% for the six months ended June 30,
2006. Interest expense on our other deposit products increased by
$11,000, or 4.5%, due to an average cost increase in the rate of interest
paid
on these deposits of 10 basis points to 0.64% for the six months ended June
30,
2007 from 0.54% for the six months ended June 30, 2006, partially offset
by a
$11.6 million decrease in average balance.
Provision
for Loan Losses. The
allowance for loan
losses increased by $338,000 to $1.5 million at June 30, 2007 as a result
of a
provision for loan losses of $338,000 during the six months ended June 30,
2007. The primary reason for this increase was the growth of the
Bank’s loan portfolio and the increase in non-performing loans. The
allowance for loan losses as of June 30, 2007 represented 0.64% of total
loans
compared to 0.59% of total loans as of June 30, 2006.
There
were no charge-offs or recoveries
during the six months ended June 30, 2007 and 2006, and there was no provision
for loan losses for the six months ended June 30, 2006.
The
following table provides information with respect to our non-performing assets
at the dates indicated.
|
|
At
June
30, 2007
|
|
|
At
December
31, 2006
|
|
|
|
(Dollars
in thousands)
|
|
Non-accrual
loans
|
|
$ |
1,484
|
|
|
$ |
-
|
|
Loans
90 days or more delinquent and accruing
|
|
|
409
|
|
|
|
2
|
|
Other
non-performing loans
|
|
|
-
|
|
|
|
-
|
|
Total
non-performing loans
|
|
$ |
1,893
|
|
|
$ |
2
|
|
|
|
|
|
|
|
|
|
|
Troubled
debt restructurings
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Troubled
debt restructurings and
total
non-performing assets
|
|
$ |
1,893
|
|
|
$ |
2
|
|
|
|
|
|
|
|
|
|
|
Total
non-performing loans to total loans
|
|
|
0.79 |
% |
|
|
0.00 |
% |
Total
non-performing loans to total assets
|
|
|
0.62 |
% |
|
|
0.00 |
% |
Total
non-performing assets and troubled
debt
restructurings to total assets
|
|
|
0.62 |
% |
|
|
0.00 |
% |
At
June 30, 2007, we had two
non-residential mortgage loans totaling $1.2 million that were classified
as
substandard and that are non-accruing. We are in the process of
foreclosing on these two properties. Based upon collateral appraisals
and our inspections of the condition of the properties securing these loans,
$235,000 in specific loan loss reserves were established.
We
also had a mixed-use mortgage loan
totaling $284,000 that was classified as substandard and
non-accruing. Subsequent to June 30, 2007, we obtained title to the
property through foreclosure proceedings. Ultimately, we do not
anticipate a loss on the disposition of this parcel of real estate
owned.
At
June
30, 2007, we had one multi-family mortgage loan totaling $409,000 that was
more
than 90 days delinquent and still accruing. We classified this loan
as special mention because the borrower has agreed to a loan workout payment
schedule. We do not anticipate a loss on this loan.
Non-interest
Income. Non-interest income increased
$19.1 million, or 8,228.9%, to $19.3 million for the six months ended June
30,
2007 from $232,000 for the six months ended June 30, 2006. The
increase was primarily the result of the $19.0 million gain from the disposition
of the Bank’s branch office building located at 1353-55 First
Avenue. In addition, we earned $177,000 on our investment in
bank-owned life insurance, which was purchased after June 30, 2006.
Non-interest
Expense. Non-interest expense
increased $853,000, or 20.6%, to $5.0 million for the six months ended June
30,
2007 from $4.1 million for the six months ended June 30, 2006. The
increase resulted primarily from increases of $464,000 in salaries and employee
benefits, $255,000 in other noninterest expense, and $64,000 in equipment
expense.
The
increase in salaries and employee benefits of $464,000, or 21.2%, to $2.7
million in 2007 from $2.2 million in 2006 was due to a $161,000 mid-year
goal
attainment payment made to employees, a $140,000 severance agreement made
with a
long-time officer, and the ESOP implemented in connection with our initial
public offering. Other non-interest expense increased by $255,000, or
27.6%, to $1.2 million in 2007 from $924,000 in 2006 due mainly to expenses
associated with being a public company.
Equipment
expense increased by $64,000, or 31.5%, to $267,000 in 2007 from $203,000
in
2006 due to the purchase and/or upgrade of various equipment and computer
software.
Income
Taxes. Income tax
expense increased $7.9
million, or 1,352.4%, to $8.5 million for the six months ended June 30, 2007,
from $582,000 for the six months ended June 30, 2006. The increase
resulted from the $18.1 million increase in pre-tax income in 2007 compared
to
2006. The effective tax rate was 43.4% for the six months ended June
30, 2007, compared to 43.4% for the same period in 2006.
Liquidity
Management. Liquidity is the ability
to meet current and future financial obligations of a short-term
nature. Our primary sources of funds consist of deposit inflows, loan
repayments, maturities and sales of securities, and borrowings from the Federal
Home Loan Bank of New York. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition.
We
regularly adjust our investments in
liquid assets based upon our assessment of: (1) expected loan
demands; (2) expected deposit flows; (3) yields available on interest-earning
deposits and securities; and (4) the objectives of our asset/liability
management policy.
Our
most liquid assets are cash and
cash equivalents. The levels of these assets depend on our operating,
financing, lending, and investing activities during any given
period. Cash and cash equivalents totaled $41.4 million at June 30,
2007 and consist primarily of deposits at other financial institutions and
miscellaneous cash items. Securities classified as available for sale
and whose fair value exceeds our cost provide an additional source of
liquidity. Total securities classified as available for sale were
$356,000 at June 30, 2007.
At
June 30, 2007, we had $17.1 million
in loan commitments outstanding, consisting of $11.2 million of real estate
loan
commitments, $3.3 million in unused real estate equity lines of credit, $1.6
million in unused loans in process, $750,000 in unused commercial business
lines
of credit, and $211,000 in consumer lines of credit. Certificates of
deposit due within one year of June 30, 2007 totaled $66.6
million. This represented 65.1% of certificates
of deposit at June 30, 2007. We believe the large percentage of
certificates of deposit that mature within one year reflects customers’
hesitancy to invest their funds for long periods in the current interest
rate
environment. If these maturing deposits do not remain with us, we
will be required to seek other sources of funds, including other certificates
of
deposit and borrowings. Depending on market conditions, we may be
required to pay higher rates on such deposits or other borrowings than we
currently pay on the certificates of deposit due on or before June 30,
2008. We believe, however, based on past experience, a significant
portion of our certificates of deposit will remain with us. We have
the ability to attract and retain deposits by adjusting the interest rates
offered.
Our
primary investing activities are
the origination of loans and the purchase of securities. Our primary
financing activities consist of activity in deposit accounts and Federal
Home
Loan Bank advances. At June 30, 2007, we had the ability to borrow
$12.0 million from the Federal Home Loan Bank of New York, which included
two
available overnight lines of credit of $6.0 million each. At June 30,
2007, we had $4.0 million in Federal Home Loan Bank short-term advances
outstanding. The overall level of interest rates affects deposit
flows, the interest rates and products offered by us and our local competitors
and other factors. We generally manage the pricing of our deposits to
be competitive and to maintain or increase our core deposit relationships
depending on our level of real estate loan commitments
outstanding. Occasionally, we offer promotional rates on certain
deposit products to attract deposits or to lengthen repricing time
frames.
Capital
Management. The
Bank is subject to
various regulatory capital requirements administered by the Office of Thrift
Supervision, including a risk-based capital measure. The risk-based capital
guidelines include both a definition of capital and a framework for calculating
risk-weighted assets by assigning balance sheet assets and off-balance sheet
items to broad risk categories. At June 30, 2007, the Bank exceeded
all of our regulatory capital requirements. The Bank is considered
“well capitalized” under regulatory guidelines.
Off-Balance
Sheet
Arrangements. In the normal course of operations, we
engage in a variety of financial transactions that, in accordance with U.S.
generally accepted accounting principles, are not recorded in our financial
statements. These transactions involve, to varying degrees, elements
of credit, interest rate and liquidity risk. Such transactions are
used primarily to manage customers’ requests for funding and take the form of
loan commitments, letters of credit and lines of credit.
For
the six months ended June 30, 2007
and the year ended December 31, 2006, we engaged in no off-balance sheet
transactions reasonably likely to have a material effect on our financial
condition, results of operations or cash flows.
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
Qualitative
Aspects of Market Risk. The Company’s most significant form
of market risk is interest rate risk. We manage the interest rate sensitivity
of
our interest-bearing liabilities and interest-earning assets in an effort
to
minimize the adverse effects of changes in the interest rate
environment. Deposit accounts typically react more quickly to changes
in market interest rates than mortgage loans because of the shorter maturities
of deposits. As a result, sharp increases in interest rates may
adversely affect our earnings while decreases in interest rates may beneficially
affect our earnings. To reduce the potential volatility of our
earnings, we have sought to improve the match between asset and liability
maturities and rates, while maintaining an acceptable interest rate
spread. Our strategy for managing interest rate risk
emphasizes: originating mortgage real estate loans that reprice to
market interest rates in three to five years; purchasing securities that
typically reprice within a three year time frame to limit exposure to market
fluctuations; and, where appropriate, offering higher rates on long term
certificates of deposit to lengthen the repricing time frame of our
liabilities. We currently do not participate in hedging programs,
interest rate swaps or other activities involving the use of derivative
financial instruments.
We
have an Asset/Liability Committee,
comprised of our chief executive officer, chief financial officer, chief
mortgage officer, chief retail banking officer and treasurer, whose function
is
to communicate, coordinate and control all aspects involving asset/liability
management. The committee establishes and monitors the volume,
maturities, pricing and mix of assets and funding sources with the objective
of
managing assets and funding sources to provide results that are consistent
with
liquidity, growth, risk limits and profitability goals.
Our
goal is to manage asset and
liability positions to moderate the effects of interest rate fluctuations
on net
interest income and net income.
Quantitative
Aspects of Market Risk. We use an interest rate sensitivity
analysis prepared by the Office of Thrift Supervision to review our level
of
interest rate risk. This analysis measures interest rate risk by
computing changes in net portfolio value of our cash flows from assets,
liabilities and off-balance sheet items in the event of a range of assumed
changes in market interest rates. Net portfolio value represents the
market value of portfolio equity and is equal to the market value of assets
minus the market value of liabilities, with adjustments made for off-balance
sheet items. These analyses assess the risk of loss in market
risk-sensitive instruments in the event of a sudden and sustained 100 to
300
basis point increase or 100 and 200 basis point decrease in market interest
rates with no effect given to any steps that we might take to counter the
effect
of that interest rate movement.
The
following table presents the change
in our net portfolio value at March 31, 2007 that would occur in the event
of an
immediate change in interest rates based on Office of Thrift Supervision
assumptions, with no effect given to any steps that we might take to counteract
that change. The Bank expects that its net portfolio value at June
30, 2007 is materially consistent with the table below.
|
|
|
Net
Portfolio Value
(Dollars
in thousands)
|
|
Net
Portfolio Value as % of
Portfolio
Value of Assets
|
Basic
Point (“bp”)
Change
in Rates
|
|
Amount
|
|
Change
|
|
%
Change
|
|
NPV
Ratio
|
|
Change
(bp)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
$
|
71,826
|
|
|
$
|
(3,607 |
) |
|
|
(5 |
)% |
|
|
27.14 |
% |
|
|
(44 |
) |
|
200
|
|
|
|
73,064
|
|
|
|
(2,369 |
) |
|
|
(3 |
) |
|
|
27.32
|
|
|
|
(27 |
) |
|
100
|
|
|
|
74,268
|
|
|
|
(1,165 |
) |
|
|
(2 |
) |
|
|
27.46
|
|
|
|
(12 |
) |
|
0
|
|
|
|
75,433
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27.58
|
|
|
|
-
|
|
|
(100 |
) |
|
|
76,313
|
|
|
|
880
|
|
|
|
1
|
|
|
|
27.61
|
|
|
|
3
|
|
|
(200 |
) |
|
|
76,870
|
|
|
|
1,437
|
|
|
|
2
|
|
|
|
27.54
|
|
|
|
(5 |
) |
We
and
the Office of Thrift Supervision use various assumptions in assessing interest
rate risk. These assumptions relate to interest rates, loan
prepayment rates, deposit decay rates and the market values of certain assets
under differing interest rate scenarios, among others. As with any
method of measuring interest rate risk, certain shortcomings are inherent
in the
methods of analyses presented in the foregoing tables. For example,
although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates,
while
interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a
change in interest rates, expected rates of prepayments on loans and early
withdrawals from certificates could deviate significantly from those assumed
in
calculating the table. Prepayment rates can have a significant impact
on interest income. Because of the large percentage of loans we hold,
rising or falling interest rates have a significant impact on the prepayment
speeds of our earning assets that in turn affect the rate sensitivity
position. When interest rates rise, prepayments tend to
slow. When interest rates fall, prepayments tend to
rise. Our asset sensitivity would be reduced if prepayments slow and
vice versa. While we believe these assumptions to be reasonable,
there can be no assurance that assumed prepayment rates will approximate
actual
future loan repayment activity.
The
Company’s management, including the Company’s principal executive officer and
principal financial officer, have evaluated the effectiveness of the Company’s
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”). Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of
the
period covered by this report, the Company’s disclosure controls and procedures
were effective for the purpose of ensuring that the information required
to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required
disclosure.
Not
applicable
From
time
to time, we may be party to various legal proceedings incident to our
business. At June 30, 2007, we were not a party to any pending legal
proceedings that we believe would have a material adverse effect on our
financial condition, results of operations or cash flows.
In
addition to the other information
set forth in this report, you should carefully consider the factors discussed
in
Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year
ended December 31, 2006, which could materially affect our business, financial
condition or future results. The risks described in our Annual Report
on Form 10-K are not the only risks that we face. Additional risks
and uncertainties not currently known to us or that we currently deem to
be
immaterial also may materially affect our business, financial condition and/or
operating results.
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
Item
3.
|
Defaults
Upon Senior
Securities
|
Not
applicable
Item
4.
|
Submission
Of Matters to a Vote of Security
Holders
|
The
Annual Meeting of Stockholders of
the Company was held on May 17, 2007. By a vote of 12,628,206 for, 0
against, 0 abstentions, the meeting was adjourned until June 5,
2007. The final results of the matters presented at the meeting are
as follows:
|
1.
|
The
following individuals were elected as directors, each for a three-year
term:
|
|
|
Votes
For
|
Votes
Withheld
|
|
|
|
|
|
Arthur
M. Levine
|
11,375,847
|
647,768
|
|
|
|
|
|
Kenneth
A. Martinek
|
11,355,537
|
668,078
|
|
|
|
|
|
John
F. McKenzie
|
11,397,226
|
626,389
|
|
2.
|
The
Northeast Community Bancorp, Inc. 2007 Equity Incentive Plan was
not
adopted based upon the following
vote:
|
Including
shares held by Northeast Community Bancorp, MHC:
For:
9,844,333; Against:
1,062,843; Abstain: 65,330
Not
including shares held by Northeast Community Bancorp, MHC:
For:
2,570,583; Against:
1,062,843; Abstain: 65,330
There
were a total of 1,051,109 broker non-votes relating to this matter.
|
3.
|
The
appointment of Beard Miller Company, LLP as independent registered
public
accounting firm for the Company for the fiscal year ending December
31,
2007 was ratified by stockholders by the following
vote:
|
For:
11,919,005; Against:
70,918; Abstain: 33,692
None
|
|
CEO
certification pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
|
|
CFO
certification pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
|
|
CEO
and CFO certification pursuant to Section 906 of the Sarbanes-Oxley
Act of
2002.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Northeast
Community Bancorp, Inc.
|
|
|
|
|
|
|
|
|
|
Date: August
14, 2007
|
By:
|
/s/
Kenneth A. Martinek
|
|
|
Kenneth
A. Martinek
|
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
Date: August
14, 2007
|
By:
|
/s/
Salvatore Randazzo
|
|
|
Salvatore
Randazzo
|
|
|
Executive
Vice President and Chief Financial
Officer
|
21