UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to _____________

Commission file number: 0-51852

Northeast Community Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

United States of America   06-1786701
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

 

325 Hamilton Avenue, White Plains, New York   10601
(Address of principal executive offices)   (Zip Code)

 

 

(914) 684-2500
(Registrant’s telephone number, including area code)

 

 

N/A
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large Accelerated Filer  ¨ Accelerated Filer  ¨
Non-accelerated Filer  ¨ Smaller Reporting Company  x
(Do not check if a smaller reporting company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of August 8, 2014, there were 12,376,202 shares of the registrant’s common stock outstanding.

 
 

NORTHEAST COMMUNITY BANCORP, INC.

Table of Contents

 

        Page No.
Part I—Financial Information
         
Item 1.   Consolidated Financial Statements (Unaudited)    
         
    Consolidated Statements of Financial Condition at June 30, 2014 and December 31, 2013   1
         
    Consolidated Statements of Income for the Three and Six Months Ended June 30, 2014 and 2013   2
         
    Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013   3
         
    Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2014 and 2013   4
         
    Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013   5
         
    Notes to Consolidated Financial Statements   6
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   22
         
Item 3.   Quantitative and Qualitative Disclosures about Market Risk   35
         
Item 4.   Controls and Procedures   36
         
Part II—Other Information
         
Item 1.   Legal Proceedings   37
         
Item 1A.   Risk Factors   37
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   38
         
Item 3.   Defaults Upon Senior Securities   38
         
Item 4.   Mine Safety Disclosures   38
         
Item 5.   Other Information   38
         
Item 6.   Exhibits   38
         
    Signatures   39

 

 
Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

 

   June 30,   December 31, 
   2014   2013 
   (In thousands, 
   except share and per share data) 
ASSETS
Cash and amounts due from depository institutions  $4,805   $3,794 
Interest-bearing deposits   32,842    27,737 
Cash and cash equivalents   37,647    31,531 
           
Certificates of deposit   2,142    2,142 
Securities available-for-sale   90    113 
Securities held-to-maturity (fair value of $7,795 and $8,739, respectively)   7,506    8,444 
Loans receivable, net of allowance for loan losses of $3,930   382,042    367,825 
     and $4,015, respectively          
Premises and equipment, net   11,931    12,234 
Federal Home Loan Bank of New York stock, at cost   1,627    1,594 
Bank owned life insurance   20,799    20,490 
Accrued interest receivable   1,456    1,267 
Goodwill   749    749 
Intangible assets   314    345 
Other real estate owned   4,014    3,985 
Other assets   5,087    7,506 
Total assets  $475,404   $458,225 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities          
Deposits:          
Non-interest bearing  $28,278   $28,310 
Interest bearing   315,284    296,899 
Total deposits   343,562    325,209 
           
Advance payments by borrowers for taxes and insurance   3,201    3,987 
Federal Home Loan Bank advances   20,934    21,000 
Accounts payable and accrued expenses   4,431    3,861 
Total liabilities   372,128    354,057 
Stockholders’ equity:          
           
Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued        
Common stock, $0.01 par value;          
19,000,000 shares authorized; 13,225,000 shares issued;          
outstanding: 12,376,202 and 12,566,952 shares, respectively   132    132 
Additional paid-in capital   57,047    57,083 
Unearned Employee Stock Ownership Plan (“ESOP”) shares   (2,981)   (3,111)
Retained earnings   54,810    54,428 
Treasury stock – at cost, 848,798 and 658,048 shares, respectively   (5,681)   (4,291)
Accumulated other comprehensive loss   (51)   (73)
Total stockholders’ equity   103,276    104,168 
Total liabilities and stockholders’ equity  $475,404   $458,225 

 

See Notes to Unaudited Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2014   2013   2014   2013 
   (In thousands, except share and per share data) 
INTEREST INCOME:                    
Loans  $4,789   $4,677   $9,480   $9,323 
Interest-earning deposits   5    2    9    6 
Securities – taxable   74    84    147    183 
                     
Total Interest Income   4,868    4,763    9,636    9,512 
INTEREST EXPENSE:                    
Deposits   812    730    1,566    1,458 
Borrowings   33    45    98    146 
Total Interest Expense   845    775    1,664    1,604 
Net Interest Income   4,023    3,988    7,972    7,908 
PROVISION (CREDIT) FOR LOAN LOSSES   (217)   (423)   (217)   (363)
Net Interest Income after Provision                    
(Credit) for Loan Losses   4,240    4,411    8,189    8,271 
NON-INTEREST INCOME:                    
Other loan fees and service charges   130    122    236    340 
Earnings on bank owned life insurance   155    162    308    319 
Investment advisory fees   196    176    399    354 
Other   6    6    11    10 
Total Non-Interest Income   487    466    954    1,023 
NON-INTEREST EXPENSES:                    
Salaries and employee benefits   2,095    1,990    4,353    4,335 
Occupancy expense   356    346    777    740 
Equipment   136    150    296    331 
Outside data processing   291    283    544    560 
Advertising   10    20    21    30 
Impairment loss on goodwill       334        334 
Other real estate owned expense   37    173    112    259 
FDIC insurance premiums   121    83    248    113 
Other   1,015    978    1,854    1,846 
Total Non-Interest Expenses   4,061    4,357    8,205    8,548 
Income before Provision for Income Taxes   666    520    938    746 
PROVISION FOR INCOME TAXES   210    139    267    158 
Net Income  $456   $381   $671   $588 
Net Income per Common Share - Basic  $0.04   $0.03   $0.06   $0.05 
Weighted Average Number of Common                    
Shares Outstanding – Basic   12,094    12,318    12,145    12,314 
Dividends Declared per Common Share  $0.03   $0.03   $0.06   $0.06 

 

See Notes to Unaudited Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

   Three Months   Six Months 
   Ended June 30,   Ended June 30, 
   (In thousands) 
                 
   2014   2013   2014   2013 
Net income  $456   $381   $671   $588 
Other comprehensive income:                    
Unrealized loss on securities available-for-sale arising during the period   (2)       (2)    
Defined benefit pension:                    
Reclassification adjustments out of accumulated                    
other comprehensive loss:                    
Amortization of prior service cost (1)   5    5    11    10 
Amortization of actuarial (gain) loss (1)   (1)   9    (2)   18 
Actuarial gains arising during period   15    69    30    138 
Total   17    83    37    166 
Income tax effect (2)   (7)   (34)   (15)   (67)
Total other comprehensive income   10    49    22    99 
                     
Total comprehensive income  $466   $430   $693   $687 

 

(1)Amounts are included in salaries and employees benefits in the unaudited consolidated statements of income as part of net periodic pension cost. See Note 10 for further information.

 

(2)Amounts are included in provision for income taxes in the unaudited consolidated statements of income.

 

See Notes to Unaudited Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 

Six Months Ended June 30, 2014 and 2013 (in thousands, except share and per share data)

   Common
Stock
   Additional
Paid- in
Capital
   Unearned
ESOP
Shares
   Retained
Earnings
   Treasury
Stock
   Accumulated
Other
Comprehensive
Loss
   Total
Equity
 
Balance at December 31, 2012  $132   $57,178   $(3,370)  $53,893   $(3,712)  $(272)  $103,849 
Net income               588            588 
Other comprehensive income                       99    99 
Cash dividend declared ($0.06 per share)               (302)           (302)
ESOP shares earned       (55)   130                75 
Balance – June 30, 2013  $132   $57,123   $(3,240)  $54,179   $(3,712)  $(173)  $104,309 
                                    
Balance at December 31, 2013  $132   $57,083   $(3,111)  $54,428   $(4,291)  $(73)  $104,168 
Net income               671            671 
Other comprehensive income                       22    22 
Purchase of 190,750 shares of treasury stock                   (1,390)       (1,390)
Cash dividend declared ($0.06 per share)               (289)           (289)
ESOP shares earned       (36)   130                94 
Balance – June 30, 2014  $132   $57,047   $(2,981)  $54,810   $(5,681)  $(51)  $103,276 

 

See Notes to Unaudited Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   Six Months Ended 
   June 30, 
   2014   2013 
   (In thousands) 
Cash Flows from Operating Activities:          
Net income  $671   $588 
Adjustments to reconcile net income to net cash provided by operating activities:          
Net amortization (accretion) of securities premiums and discounts, net   (18)   37 
Provision (credit) for loan losses   (217)   (363)
Depreciation   370    389 
Net amortization of deferred loan fees and costs   75    73 
Amortization of intangible assets   31    31 
Deferred income tax expense   (105)   770 
Impairment loss on goodwill       334 
Retirement plan expense       149 
Loss on sale of other real estate owned       51 
Earnings on bank owned life insurance   (308)   (319)
ESOP compensation expense   94    75 
Increase in accrued interest receivable   (189)   (88)
(Increase) decrease in other assets   2,504    (8)
Increase in accounts payable and accrued expenses   613    758 
Net Cash Provided by Operating Activities   3,521    2,477 
Cash Flows from Investing Activities:          
Net (increase) decrease in loans   (14,075)   1,221 
Proceeds from sale of other real estate owned       399 
Principal repayments on securities available-for-sale   21    6 
Principal repayments on securities held-to-maturity   956    1,937 
Proceeds from maturities of certificates of deposit       249 
Net purchase of FHLB of NY stock   (33)   481 
Capitalized cost of real estate owned   (29)    
Purchases of premises and equipment   (67)   (22)
Net Cash (Used In) Provided by Investing Activities   (13,227)   4,271 
Cash Flows from Financing Activities:          
Net increase (decrease) in deposits   18,353    (5,635)
Proceeds from FHLB of NY advances   12,934     
Repayment of FHLB of NY advances   (13,000)   (10,000)
Purchase of treasury stock   (1,390)    
Increase in advance payments by borrowers for taxes and insurance   (786)   (927)
Cash dividends paid   (289)   (302)
Net Cash Provided by (Used in) Financing Activities   15,822    (16,864)
Net Increase (Decrease) in Cash and Cash Equivalents   6,116    (10,116)
Cash and Cash Equivalents - Beginning   31,531    49,242 
Cash and Cash Equivalents - Ending  $37,647   $39,126 
SUPPLEMENTARY CASH FLOWS INFORMATION          
Income taxes paid (refunded)  $(1,806)  $4 
Interest paid  $1,664   $1,604 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES          
Dividends declared and not paid  $144   $150 

 

See Notes to Unaudited Consolidated Financial Statements

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NORTHEAST COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – BASIS OF PRESENTATION

 

Northeast Community Bancorp, Inc. (the “Company”) is a federally-chartered corporation organized as a mid-tier holding company for Northeast Community Bank (the “Bank”), in conjunction with the Bank’s reorganization from a mutual savings bank to the mutual holding company structure on July 5, 2006. The Bank is a New York State-chartered savings bank and completed its conversion from a federally-chartered savings bank effective as of the close of business on June 29, 2012. The accompanying unaudited consolidated financial statements include the accounts of the Company, the Bank and the Bank’s wholly owned subsidiaries, New England Commercial Properties, LLC (“NECP”) and NECB Financial Services Group, LLC. NECB Financial Services Group was formed by the Bank in the second quarter of 2012 as a complement to the Bank’s existing investment advisory and financial planning services division, Hayden Wealth Management. As of the filing of this Form 10-Q, NECB Financial Services Group has not conducted any business. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The accompanying unaudited consolidated financial statements were prepared in accordance with generally accepted accounting principles for interim financial information as well as instructions for Form 10-Q. Accordingly, they do not include all of the information or footnotes necessary for the presentation of financial position, results of operations, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the full year or any other interim period. The December 31, 2013 consolidated statement of financial condition data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP. That data, along with the interim financial information presented in the unaudited consolidated statements of financial condition, income, comprehensive income, stockholders’ equity, and cash flows should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain recorded amounts and disclosures. Accordingly, actual results could differ from those estimates. The most significant estimate pertains to the allowance for loan losses. In preparing these consolidated financial statements, the Company evaluated the events that occurred after June 30, 2014 and through the date these consolidated financial statements were issued.

 

Loans

 

Loans are stated at unpaid principal balances plus net deferred loan origination costs less an allowance for loan losses. Interest on loans receivable is recorded on the accrual basis. An allowance for uncollected interest is established on loans where management has determined that the borrowers may be unable to meet contractual principal and/or interest obligations or where interest or principal is 90 days or more past due, unless the loans are well secured and in the process of collection. When a loan is placed on nonaccrual, an allowance for uncollected interest is established and charged against current income. Thereafter, interest income is not recognized unless the financial condition and payment record of the borrower warrant the recognition of interest income. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six consecutive months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Interest on loans that have been restructured is accrued according to the renegotiated terms, unless on non-accrual. Net loan origination fees and costs are deferred and amortized into income over the contractual lives of the related loans by use of the level yield method. Past due status of loans is based upon the contractual due date.

 

Allowance for Loan Losses

 

The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the statement of financial condition date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.

 

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors.

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NOTE 1 – BASIS OF PRESENTATION (Continued)

 

Allowance for Loan Losses (Continued)

 

This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. Risk characteristics associated with the types of loans the Company underwrites are as follows:

 

Multi-family, Mixed-use and Non-residential Real Estate Loans. Loans secured by multi-family, mixed-use, and non-residential real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in multi-family, mixed-use and non-residential real estate lending is the current and potential cash flow of the property and the borrower’s demonstrated ability to operate that type of property. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy.

 

Commercial and Industrial Loans. Unlike residential mortgage loans, which are generally made on the basis of a borrower’s ability to make repayment from the operation and cash flow from the real property whose value tends to be more ascertainable, commercial and industrial loans are of higher risk and tend to be made on the basis of a borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial and industrial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

 

Construction Loans. Construction financing is generally considered to involve a higher degree of risk of loss than long-term loans secured by improved, occupied real estate due to: (1) the increased difficulty at the time the loan is made of estimating the building costs and the selling price of the property to be built; (2) the increased difficulty and costs of monitoring the loan; (3) the higher degree of sensitivity to increases in market rates of interest; and (4) the increased difficulty of working out loan problems. The Company sought to minimize these risks by limiting the amount of construction loans outstanding at any time, by limiting our construction loans to borrowers who have in effect pre-sold their construction project, and by limiting our construction loans to multi-family and single family projects.

 

Consumer Loans. We offer personal loans, loans secured by passbook savings accounts, certificates of deposit accounts or statement savings accounts, and overdraft protection for checking accounts. We do not believe these loans represent a significant risk of loss to the Company.

 

The allowance for loan losses consists of specific and general reserves. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, a specific allowance is established or a partial charge-off is taken when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment records, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis.

 

The Company does not evaluate individual one-to-four family residential real estate and consumer loans for impairment, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring (“TDR”).

 

The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral or discounted cash flows.

 

For loans secured by real estate, estimated fair values are determined primarily through in-house or third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values might be discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

 

For loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

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NOTE 1 – BASIS OF PRESENTATION (Continued)

 

Allowance for Loan Losses (Continued)

 

The general component covers pools of loans by loan class including loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate and consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates, adjusted for qualitative factors. These qualitative risk factors include:

 

  1. Changes in policies and procedures in underwriting standards and collections.

  2. Changes in economic conditions.

  3. Changes in nature and volume of lending.

  4. Experience of origination team.

  5. Changes in past due loan volume and severity of classified assets.

  6. Quality of loan review system.

  7. Collateral values in general throughout lending territory.

  8. Concentrations of credit.

  9. Competition, legal and regulatory issues.

 

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

 

The allowance for loan losses calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial, residential and consumer loans. Credit quality risk ratings include regulatory classifications of pass, special mention, substandard, doubtful and loss. Loans criticized as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.

 

Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

 

The allowance calculation for each pool of loans is also based on the loss factors that reflect the Company’s historical charge-off experience adjusted for current economic conditions applied to loan groups with similar characteristics or classifications in the current portfolio. To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process which allows for a periodic review of its loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type of collateral and financial condition of the borrowers. The Company’s Chief Executive Officer is ultimately responsible for the timely and accurate risk rating of the loan portfolio.

 

Loans whose terms are modified are classified as TDRs if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a TDR generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date. Adversely classified, non-accrual TDRs may be returned to accrued status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. All TDR loans are classified as impaired.

 

In addition, banking regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the allowance for loan losses is adequate as of June 30, 2014.

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NOTE 1 – BASIS OF PRESENTATION (Continued)

 

Goodwill

 

Goodwill totaled $749,000 at June 30, 2014 and December 31, 2013 and consists of goodwill acquired in the business combination completed by the Company in November 2007. The Company tests goodwill during the fourth quarter of each year for impairment, or more frequently if certain indicators are present or changes in circumstances suggest that impairment may exist. The Company utilizes a two-step approach. The first step requires a comparison of the carrying value of the reporting unit to the fair value of the unit. The Company estimates the fair value of the reporting unit through internal analyses and external valuation, which utilizes an income approach based on the present value of future cash flows. If the carrying value of the reporting unit exceeds its fair value, impairment exists and the Company will perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, if necessary, compares the implied fair value of a reporting unit’s goodwill with its carrying value.

 

The implied fair value of goodwill is determined in the same manner that the amount of goodwill recognized in a business combination is determined. The Company allocates the fair value of the reporting unit to all of the assets and liabilities of that unit, including identifiable intangible assets, as if the reporting unit had been acquired in a business combination. Any excess of the value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. No impairment charges were recorded for the three- and six-month periods ended June 30, 2014. During the second quarter of 2013, the Company determined that an adjustment to the goodwill impairment previously recorded in 2012 was necessary. As a result, an additional impairment charge of $334,000 was recognized during the second quarter of 2013.

 

NOTE 2 – EARNINGS PER SHARE

 

Basic earnings per common share is calculated by dividing the net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is computed in a manner similar to basic earnings per common share except that the weighted average number of common shares outstanding is increased to include the incremental common shares (as computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. Common stock equivalents may include restricted stock awards and stock options. Anti-dilutive shares are common stock equivalents with weighted-average exercise prices in excess of the weighted-average market value for the periods presented. The Company has not granted any restricted stock awards or stock options and had no potentially dilutive common stock equivalents during the six-month periods ended June 30, 2014 and 2013. Unallocated common shares held by the Employee Stock Ownership Plan (“ESOP”) are not included in the weighted-average number of common shares outstanding for purposes of calculating both basic and diluted earnings per common share until they are committed to be released.

 

NOTE 3 – EMPLOYEE STOCK OWNERSHIP PLAN

 

As of December 31, 2013 and June 30, 2014, the ESOP trust held 518,420 shares of the Company’s common stock, which represents all allocated and unallocated shares held by the ESOP. As of December 31, 2013, the Company had allocated 181,447 shares to participants, and an additional 25,921 shares had been committed to be released. As of June 30, 2014, the Company had allocated 207,368 shares to participants, and an additional 12,960 shares had been committed to be released.

 

The Company recognized compensation expense of $47,000 and $39,000 during the three-month periods ended June 30 2014 and 2013, respectively, and $94,000 and $75,000 during the six-month periods ended June 30, 2014 and 2013, respectively, which equals the fair value of the ESOP shares when they became committed to be released.

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Note 4 – Outside director retirement plan (“drp”)

 

Net periodic pension cost for the Company’s DRP is as follows:

 

   Three Months   Six Months 
   Ended June 30,   Ended June 30, 
   (In thousands) 
                 
   2014   2013   2014   2013 
Service cost  $18   $18   $36   $36 
Interest cost   10    11    20    21 
Amortization of prior service cost   5    5    11    11 
Amortization of actuarial (gain) loss   (1)   9    (2)   18 
Total  $32   $43   $65   $86 

 

This plan is an unfunded, non-contributory defined benefit pension plan covering all non-employee directors meeting eligibility requirements as specified in the plan document.

 

NOTE 5 – INVESTMENTS

 

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

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (In thousands) 
June 30, 2014                
Securities available-for-sale:                    
  Mortgage-backed securities – residential:                    
     Federal Home Loan Mortgage Corporation  $44   $1   $   $45 
     Federal National Mortgage Association   45            45 
        Total  $89   $1   $   $90 
                     
Securities held-to-maturity:                    
   Mortgage-backed securities – residential:                    
       Government National Mortgage Association  $5,727   $213   $   $5,940 
       Federal Home Loan Mortgage Corporation   224    7        231 
       Federal National Mortgage Association   143    2        145 
       Collateralized mortgage obligations-GSE   1,412    67        1,479 
         Total  $7,506   $289   $   $7,795 

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NOTE 5 – INVESTMENTS (Continued)

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (In thousands) 
December 31, 2013                    
Securities available-for-sale:                    
  Mortgage-backed securities – residential:                    
     Federal Home Loan Mortgage Corporation  $63   $2   $   $65 
     Federal National Mortgage Association   47    1        48 
        Total  $110   $3   $   $113 
                     
Securities held-to-maturity:                    
   Mortgage-backed securities – residential:                    
       Government National Mortgage Association  $6,426   $215   $   $6,641 
       Federal Home Loan Mortgage Corporation   238    7        245 
       Federal National Mortgage Association   155    6        161 
       Collateralized mortgage obligations-GSE   1,624    67        1,691 
       Other   1            1 
         Total  $8,444   $295   $   $8,739 

 

Contractual final maturities of mortgage-backed securities available-for-sale were as follows:

 

   June 30, 2014 
   Amortized Cost   Fair Value 
   (In thousands) 
Due after five but within ten years  $7   $7 
Due after ten years   82    83 
           
         Total  $89   $90 

 

Contractual final maturities of mortgage-backed securities held-to-maturity were as follows:

 

   June 30, 2014 
   Amortized Cost   Fair Value 
   (In thousands) 
Due after one but within five years  $77   $78 
Due after five but within ten years   136    139 
Due after ten years   7,293    7,578 
           
         Total  $7,506   $7,795 

 

The maturities shown above are based upon contractual final maturity. Actual maturities will differ from contractual maturities due to scheduled monthly repayments and due to the underlying borrowers having the right to prepay their obligations.

 

NOTE 6 – FAIR VALUE DISCLOSURES

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company’s securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets and liabilities on a non-recurring basis, such as impaired loans and other real estate owned. U.S. GAAP has established a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

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NOTE 6 – FAIR VALUE DISCLOSURES (Continued)

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
   
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
   
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

 

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. For financial assets measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy used are as follows:

 

       (Level 1)   (Level 2)     
       Quoted Prices   Significant     
       in Active   Other   (Level 3) 
       Markets for   Observable   Significant 
Description  Total   Identical Assets   Inputs   Unobservable Inputs 
June 30, 2014:  (In thousands) 
Recurring:                    
  Mortgage-backed securities - residential:                    
     Federal Home Loan Mortgage Corporation  $45   $   $45   $ 
     Federal National Mortgage Association   45        45     
                Total  $90   $   $90   $ 
 Nonrecurring:                    
     Impaired loans  $4,026   $   $   $4,026 
                     
December 31, 2013:                    
Recurring:                    
Mortgage-backed securities - residential:                    
     Federal Home Loan Mortgage Corporation  $65   $   $65   $ 
     Federal National Mortgage Association   48        48     
                Total  $113   $   $113   $ 
Nonrecurring:                    
     Impaired loans  $789   $   $   $789 

 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

 

   Quantitative Information about Level 3 Fair Value Measurements
              
   Fair Value
Estimate
   Valuation  Unobservable  Range
(in thousands)  Estimate   Techniques  Input  (Weighted Average Rate)
June 30, 2014:             
Impaired loans  $ 4,026   Appraisal of collateral (1)  Appraisal adjustments (2)  9.22%
          Liquidation expenses (2)  0.52%-11.08% (3.38%)
               
               
December 31, 2013:              
Impaired loans  $789   Appraisal of collateral (1)  Appraisal adjustments (2)  0.00%
           Liquidation expenses (2)  3.00% (3.00%)

 

(1)Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.
(2)Appraisals may be adjusted by management for qualitative factors such as economic conditions and aged appraisals. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

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NOTE 6 – FAIR VALUE DISCLOSURES (Continued)

 

The carrying amounts and fair values of the Company’s financial instruments are summarized below:

 

           Fair Value at 
           June 30, 2014 
           Quoted
Prices in
Active
Markets for
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
(In thousands)  Carrying
Amount
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
Financial Assets                         
Cash and cash equivalents  $37,647   $37,647   $37,647   $   $ 
Certificates of deposit   2,142    2,142        2,142     
Securities available-for-sale   90    90        90     
Securities held-to-maturity   7,506    7,795        7,795     
Loans receivable   382,042    389,439            389,439 
FHLB of New York stock   1,627    1,627        1,627     
Accrued interest receivable   1,456    1,456        1,456     
                          
Financial Liabilities                         
Deposits   343,562    347,233        347,233     
FHLB of New York advances   20,934    20,936        20,936     
Accrued interest payable   2    2        2     
                          

 

           Fair Value at 
           December 31, 2013 
           Quoted
Prices in
Active
Markets for
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
(In thousands)  Carrying
Amount
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
Financial Assets                         
Cash and cash equivalents  $31,531   $31,531   $31,531   $   $ 
Certificates of deposit   2,142    2,142        2,142     
Securities available-for-sale   113    113        113     
Securities held-to-maturity   8,444    8,739        8,739     
Loans receivable   367,825    374,820            374,820 
FHLB of New York stock   1,594    1,594        1,594     
Accrued interest receivable   1,267    1,267        1,267     
                          
Financial Liabilities                         
Deposits   325,209    328,654        328,654     
FHLB of New York advances   21,000    21,016        21,016     
Accrued interest payable   2    2        2     

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NOTE 6 – FAIR VALUE DISCLOSURES (Continued)

 

The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at June 30, 2014 and December 31, 2013:

 

Cash and Cash Equivalents, Certificates of Deposit and Accrued Interest Receivable and Payable

 

For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

 

Securities

 

Fair values for securities available-for-sale and held-to-maturity are determined utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other things.

 

Loans

 

Fair values are estimated for portfolios of loans with similar financial characteristics. The total loan portfolio is first divided into performing and non-performing categories. Performing loans are then segregated into adjustable and fixed rate interest terms. Fixed rate loans are segmented by type, such as construction, other loans secured by real estate, commercial and industrial loans, and consumer. Certain types, such as commercial loans and consumer loans, are further segmented by maturity and type of collateral.

 

For performing loans, fair value is calculated by discounting scheduled future cash flows through estimated maturity using a market rate that reflects the credit and interest-rate risks inherent in the loans. The discounted value of the cash flows is reduced by a credit risk adjustment based on internal loan classifications. For non-performing loans, fair value is calculated by discounting the estimated future cash flows from the remaining carrying value at a market rate. For impaired loans which the Company has measured and recorded impairment generally based on the fair value of the loan’s collateral, fair value is generally determined based upon independent third-party appraisal of the properties, or discounted cash flows based upon the expected proceeds. These assets are typically included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

 

FHLB of New York Stock

 

The carrying amount of the FHLB of New York stock approximates its fair value, and considers the limited marketability of this security.

 

Deposit Liabilities

 

The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, money market accounts, interest checking accounts, and savings accounts is equal to the amount payable on demand. Time deposits are segregated by type, size, and remaining maturity. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is based on rates currently offered in the market.

 

FHLB of New York Advances

 

The fair value of the FHLB advances is estimated based on the discounted value of future contractual payments. The discount rate is equivalent to the estimated rate at which the Company could currently obtain similar financing.

 

Off-Balance- Sheet Financial Instruments

 

The fair value of commitments to extend credit is estimated based on an analysis of the interest rates and fees currently charged to enter into similar transactions, considering the remaining terms of the commitments and the credit-worthiness of the potential borrowers. At June 30, 2014 and December 31, 2013, the estimated fair values of these off-balance-sheet financial instruments were immaterial.

 

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.

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NOTE 6 – FAIR VALUE DISCLOSURES (Continued)

 

Off-Balance- Sheet Financial Instruments (Continued)

 

The above information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

 

NOTE 7 – LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES

 

The following is an analysis of the allowance for loan losses and related information concerning loan balances:

 

   June 30,   December 31, 
   2014   2013 
   (In thousands) 
Residential real estate:          
One-to-four family  $12,100   $11,752 
Multi-family   189,998    188,923 
Mixed-use   53,972    50,467 
    Total residential real estate   256,070    251,142 
Non-residential real estate   78,186    81,985 
Construction   20,964    6,568 
Commercial and industrial   29,954    31,345 
Consumer   158    161 
           
Total Loans   385,332    371,201 
           
Allowance for loan losses   (3,930)   (4,015)
Deferred loan costs, net   640    639 
           
Net Loans  $382,042   $367,825 

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NOTE 7 – LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES (Continued)

 

At and for the Six Months Ended June 30, 2014 (in thousands)

 

    Residential
Real
Estate
   Non-
residential
Real
Estate
   Construction   Commercial
and
Industrial
   Consumer   Unallocated   Total 
Allowance for loan losses:                                   
Beginning balance  $2,556   $896   $97   $456   $   $10   $4,015 
Charge-offs   (392)   (41)                   (433)
Recoveries       565                    565 
Provision (credit)   459    (632)   64    (98)       (10)   (217)
Ending balance  $2,623   $788   $161   $358   $   $   $3,930 
Ending balance:  individually evaluated for impairment  $   $160   $   $   $   $   $160 
                                    
Ending balance:  collectively evaluated for impairment  $2,623   $628   $161   $358   $   $   $3,770 
                                    
Loans receivable:                                   
Ending balance  $256,070   $78,186   $20,964   $29,954   $158   $   $385,332 
                                    
Ending balance:  individually                                   
evaluated for impairment  $9,256   $10,997   $   $2,511   $   $   $22,764 
                                    
Ending balance:  collectively evaluated for impairment  $246,814   $67,189   $20,964   $27,443   $158   $   $362,568 

 

 

For the Three Months Ended June 30, 2014 (in thousands)

 

    Residential
Real
Estate
   Non-
residential
Real
Estate
   Construction   Commercial
and
Industrial
   Consumer   Unallocated   Total 
Allowance for loan losses:                                   
Beginning balance  $2,588   $1,012   $135   $401   $   $69   $4,205 
Charge-offs   (392)   (6)                   (398)
Recoveries       340                    340 
Provision (credit)   427    (558)   26    (43)       (69)   (217)
Ending balance  $2,623   $788   $161   $358   $   $   $3,930 

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NOTE 7 – LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES (Continued)

 

For the Six Months Ended June 30, 2013 (in thousands)

 

    Residential
Real
Estate
   Non-
residential
Real
Estate
   Construction   Commercial
and
Industrial
   Consumer   Unallocated   Total 
Allowance for loan losses:                                   
Beginning balance  $3,216   $996   $   $434   $   $   $4,646 
Charge-offs       (105)                   (105)
Recoveries   23    4                    27 
Provision   (435)   (26)   75    23            (363)
Ending balance  $2,804   $869   $75   $457   $   $   $4,205 

 

 

For the Three Months Ended June 30, 2013 (in thousands)

 

    Residential
Real
Estate
   Non-
residential
Real
Estate
   Construction   Commercial
and
Industrial
   Consumer   Unallocated   Total 
Allowance for loan losses:                                   
Beginning balance  $3,261   $984   $   $461   $   $   $4,706 
Charge-offs       (105)                   (105)
Recoveries   23    4                    27 
Provision   (480)   (14)   75    (4)           (423)
Ending balance  $2,804   $869   $75   $457   $   $   $4,205 

 

At December 31, 2013 (in thousands)

 

    Residential
Real Estate
   Non-
residential
Real Estate
   Construction   Commercial
and
Industrial
   Consumer   Unallocated   Total 
Allowance for loan losses:                                   
Ending balance - Total  $2,556   $896   $97   $456   $   $10   $4,015 
                                    
Ending balance:  individually evaluated for impairment  $   $   $   $   $   $   $ 
                                    
Ending balance:  collectively evaluated for impairment  $2,556   $896   $97   $456   $   $10   $4,015 
                                    
Loans receivable:                                   
Ending balance - Total  $251,142   $81,985   $6,568   $31,345   $161   $   $371,201 
Ending balance:  individually                                   
evaluated for impairment  $8,629   $11,488   $   $   $   $   $20,117 
                                    
Ending balance:  collectively evaluated for impairment  $242,513   $70,497   $6,568   $31,345   $161   $   $351,084 

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NOTE 7 – LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES (Continued)

 

The following is a summary of impaired loans at June 30, 2014 and December 31, 2013:

 

   June 30, 2014   December 31, 2013 
       Unpaid           Unpaid     
   Recorded   Principal   Related   Recorded   Principal   Related 
   Investment   Balance   Allowance   Investment   Balance   Allowance 
                         
   (In thousands) 
With no related allowance recorded:                              
Residential real estate-Multi-family  $9,256   $10,271   $   $8,629   $9,259   $ 
Non-residential real estate   8,938    11,955        11,488    14,739     
Commercial and industrial   2,511    2,511                 
          Subtotal  $20,705   $24,737   $   $20,117   $23,998   $ 
                               
With an allowance recorded:                              
Non-residential real estate  $2,059   $2,059   $160   $   $   $ 
          Subtotal  $2,059   $2,059   $160   $   $   $ 
                               
Total:                              
Residential real estate-Multi-family  $9,256   $10,271   $   $8,629   $9,259   $ 
Non-residential real estate   10,997    14,014    160    11,488    14,739     
Commercial and industrial   2,511    2,511                 
          Total  $22,764   $26,796   $160   $20,117   $23,998   $ 

 

   Three Months   Six Months 
   Ended June 30, 2014   Ended June 30, 2014 
                 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
                 
   (In thousands) 
With no related allowance recorded:                    
Residential real estate-Multi-family  $8,952   $46   $8,845   $94 
Non-residential real estate   9,237    65    9,311    75 
Commercial and industrial   1,256        837     
          Subtotal  $19,445   $111   $18,993   $169 
                     
With an allowance recorded:                    
Non-residential real estate  $2,055   $6   $2,046   $22 
          Subtotal  $2,055   $6   $2,046   $22 
                     
Total:                    
Residential real estate-Multi-family  $8,952   $46   $8,845   $94 
Non-residential real estate   11,292    71    11,357    97 
Commercial and industrial   1,256        837     
          Total  $21,500   $117   $21,039   $191 

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NOTE 7 –LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES (Continued)

 

   Three Months   Six Months 
   Ended June 30, 2013   Ended June 30, 2013 
                 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
                 
   (In thousands) 
With no related allowance recorded (1):                    
Residential real estate-Multi-family  $10,954   $96   $10,727   $260 
Non-residential real estate   11,286    39    10,282    39 
Commercial and industrial   1,842    20    1,945    49 
                  Total  $24,082   $155   $22,954   $348 

 

(1)There were no impaired loans with related allowance recorded outstanding at June 30, 2013 or December 31, 2012.

 

The following table provides information about delinquencies in our loan portfolio at the dates indicated.

 

Age Analysis of Past Due Loans as of June 30, 2014 (in thousands)

 

    30-59 Days
Past Due
   60 – 89
Days Past
Due
   Greater
Than 90
Days
   Total Past
Due
   Current   Total Loans
Receivable
   Recorded
Investment
> 90 Days
and
Accruing
 
                             
Residential real estate:                                   
One- to four-family  $   $   $   $   $12,100   $12,100   $ 
Multi-family   695        2,387    3,082    186,916    189,998     
Mixed-use   226        1,928    2,154    51,818    53,972     
Non-residential real estate   8,034        984    9,018    69,168    78,186     
Construction loans                   20,964    20,964     
Commercial and industrial loans           2,511    2,511    27,443    29,954     
Consumer                   158    158     
Total loans  $8,955   $   $7,810   $16,765   $368,567   $385,332   $ 

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NOTE 7 – LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES (Continued)

 

Age Analysis of Past Due Loans as of December 31, 2013 (in thousands)

 

    30-59 Days
Past Due
   60 – 89
Days Past
Due
   Greater
Than 90
Days
   Total Past
Due
   Current   Total Loans
Receivable
   Recorded
Investment
> 90 Days
and
Accruing
 
                             
Residential real estate:                            
One- to four-family  $   $   $   $   $11,752   $11,752   $ 
Multi-family                   188,923    188,923     
Mixed-use       2,210        2,210    48,257    50,467     
Non-residential real estate           2,372    2,372    79,613    81,985     
Construction loans                   6,568    6,568     
Commercial and industrial loans                   31,345    31,345     
Consumer                   161    161     
Total loans  $   $2,210   $2,372   $4,582   $366,619   $371,201   $ 

 

The following tables provide certain information related to the credit quality of the loan portfolio.

Credit Risk Profile by Internally Assigned Grade at June 30, 2014 (in thousands)

 

    Residential
Real Estate
   Non-residential
Real Estate
   Construction   Commercial
and Industrial
   Consumer   Total 
Grade:                              
  Pass  $251,060   $68,339   $20,964   $26,864   $158   $367,385 
  Special Mention       829        579        1,408 
  Substandard   5,010    9,018        2,511        16,539 
Total  $256,070   $78,186   $20,964   $29,954   $158   $385,332 

 

Credit Risk Profile by Internally Assigned Grade at December 31, 2013 (in thousands)

 

    Residential
Real Estate
   Non-residential
Real Estate
   Construction   Commercial
and Industrial
   Consumer   Total 
Grade:                              
  Pass  $248,932   $71,659   $6,568   $25,733   $161   $353,053 
  Special Mention               5,612        5,612 
  Substandard   2,210    10,326                12,536 
Total  $251,142   $81,985   $6,568   $31,345   $161   $371,201 

 

The following table sets forth the composition of our nonaccrual loans at the dates indicated.

 

Loans Receivable on Nonaccrual Status as of June 30, 2014 and December 31, 2013 (in thousands)

 

   2014   2013 
         
Residential real estate  $5,010   $2,210 
Non-residential real estate   3,042    2,372 
Commercial and industrial loans   2,591    84 
Total  $10,643   $4,666 

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NOTE 7 – LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES (Continued)

 

There were no loans modified that were deemed TDRs during the six months ended June 30, 2014.

 

The following table shows the breakdown of loans modified in TDRs for the periods indicated:

 

   Three and Six Months Ended June 30, 
   2013 
       Recorded   Recorded 
       Investment   Investment 
   Number of   Prior to   After 
(dollars in thousands)  Modifications   Modification   Modification 
Real estate:               
Multi-family   1   $307   $307 
Non-residential   3    3,253    3,253 
        Total   4   $3,560   $3,560 

 

The multi-family mortgage loan had an original interest rate of 6.75% with an amortization of 25 years. We reduced the interest rate and converted the monthly payments to interest only for twenty months and then amortizing for 30 years, with a balloon payment after approximately five and one-half years from the modification date.

 

Two non-residential mortgage loans had an original interest rate of 6.75% with an amortization of 25 years. We reduced the interest rate and converted the monthly payments to interest only for twenty months and then amortizing for 30 years, with a balloon payment after approximately five and one-half years from the modification date.

 

One non-residential mortgage loan had an original interest rate of 6.75% with an amortization of 30 years. We reduced the interest rate and converted the monthly payments to interest only for nineteen months and then amortizing for 30 years, with a balloon payment after two years from the modification date.

 

There were no loans modified in troubled debt restructuring during the three and six months ended June 30, 2014. As of June 30, 2014, none of the loans that were modified during the previous twelve months had defaulted in the three and six month periods ended June 30, 2014. As of June 30, 2013, none of the loans that were modified during the previous twelve months had defaulted in the three and six month periods ended June 30, 2013.

 

NOTE 8 – EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

 

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists. The FASB’s objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date. For public entities, the guidance is effective for fiscal years beginning after December 15, 2013 and interim periods within those years. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors, which clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loans, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. For public entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

 

On May 28, 2014, the FASB and International Accounting Standards Board (“IASB”) issued ASU 2014-09, Revenue from Contracts with Customers. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The adoption of this standard effective April 1, 2017 is not expected to have a material impact on the Company’s consolidated financial statements.

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NOTE 9 – DIVIDEND RESTRICTION

 

NorthEast Community Bancorp MHC (the “MHC”) held 7,273,750 shares, or 58.8%, of the Company’s issued and outstanding common stock, and the minority public shareholders held 41.2% of outstanding stock, at June 30, 2014. The MHC filed notice with, and received approval from, the Federal Reserve Bank of Philadelphia to waive its right to receive cash dividends for the period from November 13, 2013 through November 12, 2014.

 

The MHC has waived receipt of all past dividends paid by the Company through June 30, 2014, with the exception of the dividend for the quarter ended June 30, 2012. Because the MHC determined not to waive receipt of the dividend for the quarter ended June 30, 2012, the MHC received $218,000 in dividends in August 2012. The dividends waived are considered as a restriction on the retained earnings of the Company. As of June 30, 2014 and December 31, 2013, the aggregate retained earnings restricted for cash dividends waived were $5,674,000 and $5,237,000, respectively.

 

NOTE 10 – RECLASSIFICATION OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME

 

Amounts reclassified from Accumulated Other Comprehensive Income are as follows:

 

Details about Accumulated Other
Comprehensive Income Components
  Three Months
Ended June
30, 2014
   Six Months
Ended June
30, 2014
   Affected Line Item in the
Consolidated Statements of
Comprehensive Income (Loss)
   (In thousands)    
            
Amortization of defined benefit pension items:             
Prior service costs  $5 (1) $11 (1)   Salary and employee benefits
Actuarial loss   (1)(1)  (2)(1)   Salary and employee benefits
    4    9   Total before tax
    (1)   (2)  Provision for income taxes
Total reclassifications for the period  $3   $7   Net of taxes

 

(1)These accumulated other comprehensive income components are included in the computation of net periodic pension cost.

 

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.

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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 and valuation of goodwill to be a critical accounting policy. There have been no changes to our critical accounting policies and procedures during the six months ended June 30, 2014.

 

For additional information on our critical accounting policies, please refer to Note 1 of the consolidated financial statements included in our 2013 Annual Report on Form 10-K.

 

Second Quarter Performance Highlights

 

The Company’s earnings for the quarter ended June 30, 2014 increased by $75,000 compared to the same period in 2013 primarily due to an increase in net interest income, an increase in non-interest income, and a decrease in non-interest expense, partially offset by a credit in provision for loan losses that was less than the same period in 2013 and an increase in provision for income taxes. The Company had a credit of $217,000 in provision for loan losses during the June 30, 2014 quarter compared to a credit of $423,000 in provision for loan losses during the June 30, 2013 quarter.

 

Non-performing loans increased by $6.0 million, or 128.1%, to $10.6 million as of June 30, 2014 from $4.7 million as of December 31, 2013. The increase in non-performing loans was primarily due to the addition of five non-performing mortgage loans totaling $5.3 million and two non-performing commercial and industrial loans totaling $2.5 million, partially offset by the conversion from non-performing to performing status of one mortgage loan totaling $830,000, the satisfaction of one mortgage loan totaling $789,000, and the partial charge-off of $325,000 for one mortgage loan.

 

Our interest rate spread decreased to 3.55% for the three months ended June 30, 2014 from 3.92% for the three months ended June 30, 2013 and our net interest margin decreased to 3.77% for the three months ended June 30, 2014 from 4.16% for the three months ended June 30, 2013.

 

Our loans receivable, net, increased by $14.2 million, or 3.9%, to $382.0 million as of June 30, 2014 from $367.8 million at December 31, 2013 due primarily to increases of $14.4 million in construction mortgage loans, $3.5 million in mixed-use mortgage loans, $1.1 million in multi-family mortgage loans, and $348,000 in one-to-four family mortgage loans, offset by decreases of $3.8 million in non-residential mortgage loans, $1.4 million in commercial and industrial loans, and $3,000 in consumer loans.

 

Comparison of Financial Condition at June 30, 2014 and December 31, 2013

 

Total assets increased by $17.2 million, or 3.7%, to $475.4 million at June 30, 2014 from $458.2 million at December 31, 2013. The increase in total assets was due primarily to increases of $14.2 million in loans receivable, net, $6.1 million in cash and cash equivalents, $309,000 in bank owned life insurance, and $189,000 in accrued interest receivable, offset by decreases of $2.4 million in other assets, $938,000 in securities held-to-maturity, and $303,000 in premises and equipment. The increase in total assets was funded primarily from increases of $18.4 million in deposits and $570,000 in accounts payable and accrued expenses, partially offset by a decrease of $786,000 in advance payments by borrowers for taxes and insurance.

 

Loans receivable, net, increased by $14.2 million, or 3.9%, to $382.0 million at June 30, 2014 from $367.8 million at December 31, 2013 due primarily to loan originations totaling $66.1 million which exceeded loan repayments and charge-offs totaling $51.9 million. The increase in the mortgage loan portfolio was due to increases of $14.4 million, or 219.2%, in the construction mortgage loan portfolio to $21.0 million at June 30, 2014 from $6.6 million at December 31, 2013, $3.5 million, or 7.0%, in the mixed-use mortgage loan portfolio to $53.0 million at June 30, 2014 from $50.5 million at December 31, 2013, $1.1 million, or 0.6%, in the multi-family mortgage loan portfolio to $190.0 million at June 30, 2014 from $188.9 million at December 31, 2013, and $348,000, or 3.0%, in the one-to-four family mortgage loan portfolio to $12.1 million at June 30, 2014 from $11.8 million at December 31, 2013, partially offset by decreases of $3.8 million, or 4.6%, in the non-residential mortgage loan portfolio to $78.2 million at June 30, 2014 from $82.0 million at December 31, 2013, $1.4 million, or 4.4%, in the commercial and industrial loan portfolio to $30.0 million at June 30, 2014 from $31.3 million at December 31, 2013, and $3,000, or 1.6%, in the consumer loan portfolio to $158,000 at June 30, 2014 from $161,000 at December 31, 2013.

 

The increase in the construction mortgage loan portfolio was due to the Company’s entry in 2012 in the Massachusetts construction market through the origination of construction loans secured by the construction of multi-family and single family properties and the Company’s entry during the latter part of 2013 into the New York State construction market through the origination of construction loans secured by the construction of multi-family properties located in New York State.

 

Cash and cash equivalents increased by $6.1 million, or 19.4%, to $37.6 million at June 30, 2014 from $31.5 million at December 31, 2013 due primarily to increases in deposits. Bank owned life insurance increased by $309,000, or 1.5%, to $20.8 million at June 30, 2014 from $20.5 million at December 31, 2013 due to accrued earnings during 2014. Accrued interest receivable increased by $189,000, or 14.9%, to $1.5 million at June 30, 2014 from $1.3 million at December 31, 2013 due primarily to an increase in the mortgage loan portfolio.

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Other assets decreased by $2.4 million, or 32.2%, to $5.1 million at June 30, 2014 from $7.5 million at December 31, 2013 due to a $1.9 million income tax refund from the Internal Revenue Service that reduced current tax assets. Securities held-to-maturity decreased by $938,000, or 11.1%, to $7.5 million at June 30, 2014 from $8.4 million at December 31, 2013 due primarily to repayments of $956,000. Premises and equipment decreased by $303,000, or 2.5%, to $11.9 million at June 30, 2014 from $12.2 million at December 31, 2013 due primarily to depreciation.

 

Deposits increased by $18.4 million, or 5.6%, to $343.6 million at June 30, 2014 from $325.2 million at December 31, 2013. The increase in deposits was primarily attributable to increases of $17.8 million in certificates of deposit and $733,000 in regular savings accounts, partially offset by decreases of $99,000 in NOW and money market accounts and $32,000 in non-interest bearing accounts. The increase in certificates of deposit was due to non-broker certificates of deposit gathered through a nationwide certificate of deposit listing service from banks and credit unions in amounts greater than $75,000 and less than $250,000. In this regard, we obtained $17.1 million in non-broker certificates of deposit since December 31, 2013. The increase in deposits was primarily attributable to efforts by the Company to increase liquidity, fund loan originations, and increase reliance on long term certificates of deposit.

 

Advance payments by borrowers for taxes and insurance decreased by $786,000, or 19.7%, to $3.2 million at June 30, 2014 from $4.0 million at December 31, 2013 due primarily to remittances of taxes for our borrowers. Accounts payable and accrued expenses increased by $570,000, or 14.8%, to $4.4 million at June 30, 2014 from $3.9 million at December 31, 2013 due primarily to preparation of remittances of taxes for our borrowers through the accounts payable process.

 

Stockholders’ equity decreased by $892,000, or 0.9%, to $103.3 million at June 30, 2014, from $104.2 million at December 31, 2013. This decrease was primarily the result of stock repurchases of $1.4 million, and cash dividends declared and paid of $289,000, partially offset by comprehensive income of $693,000 and the amortization of $94,000 for the ESOP for the period.

 

Comparison of Operating Results for the Three Months Ended June 30, 2014 and 2013

 

General. Net income increased by $75,000, or 19.7%, to $456,000 for the quarter ended June 30, 2014 from net income of $381,000 for the quarter ended June 30, 2013. The increase was primarily the result of an increase of $35,000 in net interest income, an increase of $21,000 in non-interest income, and a decrease of $296,000 in non-interest expenses, partially offset by a decrease of $206,000 in provision for loan losses and an increase of $71,000 in income taxes.

 

Net Interest Income. Net interest income increased by $35,000, or 0.9%, to $4.02 million for the three months ended June 30, 2014 from $3.99 million for the three months ended June 30, 2013. The increase in net interest income resulted primarily from an increase of $105,000 in interest income, partially offset by an increase of $70,000 in interest expense.

 

The net interest spread decreased by 37 basis points to 3.55% for the three months ended June 30, 2014 from 3.92% for the three months ended June 30, 2013. The net interest margin decreased by 39 basis points between these periods from 4.16% for the quarter ended June 30, 2013 to 3.77% for the quarter ended June 30, 2014. The decrease in the interest rate spread and the net interest margin in the second quarter of 2014 compared to the same period in 2013 was due to a decrease of 40 basis points in the yield on our interest-earning assets that exceeded a decrease of three basis points in the cost of our interest-bearing liabilities.

 

The average yield on our interest-earning assets decreased by 40 basis points to 4.57% for the three months ended June 30, 2014 from 4.97% for the three months ended June 30, 2013 and the cost of our interest-bearing liabilities decreased by three basis points to 1.02% for the three months ended June 30, 2014 from 1.05% for the three months ended June 30, 2013. The decrease in the yield on our interest-earning assets was due to a decrease in the yield on loans receivable, offset by increases in the yield on securities and other interest-earning assets. The decrease in the cost of our interest-bearing liabilities was due to a decrease in the cost of borrowed money, offset by an increase in the cost of interest-bearing deposits.

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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 June 30, 2014 and 2013.

 

   Three Months Ended June 30, 
   2014   2013 
       Interest           Interest     
   Average   and   Yield/   Average   and   Yield/ 
   Balance   Dividends   Cost   Balance   Dividends   Cost 
     
   (Dollars in thousands) 
Assets:                              
Interest-earning assets:                              
   Loans  $388,603   $4,789    4.93%  $343,487   $4,677    5.45%
   Securities (including FHLB stock)   9,383    74    3.15    11,720    84    2.87 
   Other interest-earning assets   28,351    5    0.07    28,476    2    0.03 
      Total interest-earning assets   426,337    4,868    4.57    383,683    4,763    4.97 
Allowance for loan losses   (4,200)             (4,683)          
Non-interest-earning assets   47,420              50,110           
      Total assets  $469,557             $429,110           
                               
Liabilities and equity:                              
Interest-bearing liabilities:                              
   Interest-bearing demand  $59,646   $54    0.36%  $61,107   $52    0.34%
   Savings and club accounts   86,310    118    0.55    82,049    110    0.54 
   Certificates of deposit   169,386    640    1.51    147,395    568    1.54 
      Total interest-bearing deposits   315,342    812    1.03    290,551    730    1.00 
                               
Borrowings   17,051    33    0.77    5,000    45    3.60 
      Total interest-bearing liabilities   332,393    845    1.02    295,551    775    1.05 
                               
Noninterest-bearing demand   24,638              20,567           
Other liabilities   9,144              8,572           
      Total liabilities   366,175              324,690           
                               
Stockholders’ equity   103,382              104,420           
      Total liabilities and                              
          Stockholders’ equity  $469,557             $429,110           
Net interest income       $4,023             $3,988      
Interest rate spread             3.55%             3.92%
Net interest margin             3.77%             4.16%
Net interest-earning assets  $93,944             $88,132           
Interest-earning assets to interest-bearing liabilities   128.26%             129.82%          

 

Total interest income increased by $105,000, or 2.2%, to $4.9 million for the three months ended June 30, 2014 from $4.8 million for the three months ended June 30, 2013. Interest income on loans increased by $112,000, or 2.4%, to $4.8 million for the three months ended June 30, 2014 from $4.7 million for the three months ended June 30, 2013. The increase was primarily the result of an increase of $45.1 million, or 13.1%, in the average balance of the loan portfolio to $388.6 million for the three months ended June 30, 2014 from $343.5 million for the three months ended June 30, 2013 as originations outpaced repayments and charge-offs, net of recoveries. The increase in the average balance of the loan portfolio was offset by a decrease of 52 basis points in the average yield on loans to 4.93% for the three months ended June 30, 2014 from 5.45% for the three months ended June 30, 2013. The decrease in 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.

 

Interest income on securities decreased by $10,000, or 11.9%, to $74,000 for the three months ended June 30, 2014 from $84,000 for the three months ended June 30, 2013. The decrease was primarily due to a decrease of $2.3 million, or 19.9%, in the average balance of securities to $9.4 million for the three months ended June 30, 2014 from $11.7 million for the three months ended June 30, 2013, offset by an increase of 28 basis points in the average yield on securities to 3.15% for the three months ended June 30, 2014 from 2.87% for the three months ended June 30, 2013. The decrease in the average balance was due to the principal repayments on investment securities, offset by an increase in FHLB New York stock. The increase in the yield was due to dividends from FHLB New York stock that yielded approximately 4.0% and an increase in FHLB New York stock as a percentage of total investment securities.

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Interest income on other interest-earning assets (consisting solely of interest-earning deposits) increased by $3,000, or 150.0% to $5,000 for the three months ended June 30, 2014 from $2,000 for the three months ended June 30, 2013. The increase was primarily due to an increase of four basis points in the average yield on other interest-earning assets to 0.07% for the three months ended June 30, 2014 from 0.03% for the three months ended June 30, 2013, offset by a decrease of $125,000, or 0.4%, in the average balance of interest-earning assets to $28.4 million for the three months ended June 30, 2014 from $28.5 million for the three months ended June 30, 2013. The increase in interest income on interest-earnings deposits was due to an increase in the average balance of higher yielding certificates of deposit at other financial institutions, offset by a decrease in the average balance of interest-earning deposits maintained at the FHLB and Federal Reserve Bank of New York.

 

Total interest expense increased by $70,000, or 9.0%, to $845,000 for the three months ended June 30, 2014 from $775,000 for the three months ended June 30, 2013. Interest expense on deposits increased by $82,000, or 11.2%, to $812,000 for the three months ended June 30, 2014 from $730,000 for the three months ended June 30, 2013. The increase in the interest expense on deposits was a result of an increase of $24.8 million, or 8.5%, in the average balance of interest bearing deposits to $315.3 million for the three months ended June 30, 2014 from $290.6 million for the three months ended June 30, 2013. The increase in the interest expense on deposits was also a result of an increase of three basis points in the average cost of interest-bearing deposits to 1.03% for the three months ended June 30, 2014 from 1.00% for the three months ended June 30, 2013.

 

The interest expense of our interest-bearing demand deposits increased by $2,000, or 3.8%, to $54,000 for the three months ended June 30, 2014 from $52,000 for the three months ended June 30, 2013. The increase in interest expense in our interest-bearing demand deposits was due to an increase of two basis points in the average interest cost to 0.36% for the three months ended June 30, 2014 from 0.34% for the three months ended June 30, 2013 as we offered competitive interest rates to generate deposits, offset by a decrease of $1.5 million, or 2.4%, in the average balance of our interest-bearing demand deposits to $59.6 million for the three months ended June 30, 2014 from $61.1 million for the three months ended June 30, 2013.

 

The interest expense of our interest-bearing savings and club deposits increased by $8,000, or 7.2%, to $118,000 for the three months ended June 30, 2014 from $110,000 for the three months ended June 30, 2013. The increase in interest expense in our interest-bearing savings and club deposits was due to an increase of $4.3 million, or 5.2%, in the average balance of our interest-bearing savings and club deposits to $86.3 million for the three months ended June 30, 2014 from $82.0 million for the three months ended June 30, 2013. The increase in interest expense in our interest-bearing savings and club deposits was also due to a one basis point increase in the average interest cost to 0.55% for the three months ended June 30, 2014 from 0.54% for the three months ended June 30, 2013 as we continued to offer competitive interest rates to generate deposits.

 

The interest expense of our interest-bearing certificates of deposit increased by $72,000, or 12.7%, to $640,000 for the three months ended June 30, 2014 from $568,000 for the three months ended June 30, 2013. The increase in interest expense in our interest-bearing certificates of deposit was due to an increase of $22.0 million, or 14.9%, in the average balance of our interest-bearing certificates of deposit to $169.4 million for the three months ended June 30, 2014 from $147.4 million for the three months ended June 30, 2013. The increase in our interest-bearing certificates was due to management’s decision to continue offering competitive interest rates to generate deposits through a nationwide certificate of deposit listing service. The increase in interest expense of our interest-bearing certificates of deposit was offset by a three basis point decrease in the average interest cost on such certificates to 1.51% for the three months ended June 30, 2014 from 1.54% for the three months ended June 30, 2013. The decrease in the average interest cost of our interest-bearing certificates of deposit was due to the re-pricing of maturing certificates of deposit and the acquisition of competitively priced interest-bearing certificates of deposit through a non-broker nationwide certificate of deposit listing service.

 

Interest expense on borrowings decreased by $12,000, or 26.7%, to $33,000 for the three months ended June 30, 2014 from $45,000 for the three months ended June 30, 2013. The decrease in interest expense on borrowings was due to a decrease of 283 basis points in the cost of borrowed money to 0.77% for the three months ended June 30, 2014 from 3.60% for the three months ended June 30, 2013 due primarily to the maturity and repayment of higher costing FHLB advances during the quarter ended June 30, 2014 and new lower cost FHLB advances obtained during the first six months of 2014. The decrease in interest expense on borrowings was partially offset by an increase of $12.1 million, or 241.0%, in the average balance of borrowed money to $17.1 million for the three months ended June 30, 2014 from $5.0 million for the three months ended June 30, 2013.

 

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 June 30, 2014 and 2013.

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   Three Months 
   Ended June 30, 
   2014   2013 
         
   (Dollars in thousands) 
Allowance at beginning of period  $4,205   $4,706 
Provision (credit) for loan losses   (217)   (423)
Charge-offs   (398)   (105)
Recoveries   340    27 
Net charge-offs   (58)   (78)
Allowance at end of period  $3,930   $4,205 
           
End of period - Allowance to non-performing loans   36.93%   195.40%
End of period - Allowance to total loans outstanding   1.02%   1.25%
Net charge-offs to average loans outstanding during the period   0.01%   0.02%

 

The allowance to non-performing loans ratio decreased to 36.93% at June 30, 2014 from 195.40% at June 30, 2013 due primarily to an increase in non-performing loans to $10.6 million at June 30, 2014 from $2.2 million at June 30, 2013 and a decrease in the allowance for loan losses. The increase in non-performing loans was due to the addition of seven mortgage loans totaling $7.6 million and four commercial and industrial loans totaling $2.5 million, partially offset by the conversion from non-performing to performing status of three mortgage loans totaling $1.0 million and the satisfaction of one mortgage loan totaling $727,000.

 

The allowance for loan losses was $3.93 million at June 30, 2014, $4.02 million at December 31, 2013, and $4.21 million at June 30, 2013. We recorded a credit provision for loan losses of ($217,000) for the three months ended June 30, 2014 compared to a credit provision for loan losses of ($423,000) for the three month period ended June 30, 2013. The reduction in the allowance for loan losses was due to the Company’s assessment that there are no losses anticipated in connection with the increase in non-performing loans beyond the amounts already charged-off, that there has been an improvement in the Company’s historical charge-offs, and that the level of allowance for loan losses was adequate due to improvements in the economy and the multi-family, mixed-use and non-residential real estate market.

 

We had charge-offs of $398,000 during the three months ended June 30, 2014 compared to charge-offs of $105,000 during the three months ended June 30, 2013. We recorded recoveries of $340,000 during the three months ended June 30, 2014 compared to recoveries of $27,000 during the three months ended June 30, 2013.

 

Non-interest Income. Non-interest income increased by $21,000, or 4.5%, to $487,000 for the three months ended June 30, 2014 from $466,000 for the three months ended June 30, 2013. The increase was primarily due to increases of $20,000 in advisory fee income generated by our wealth management division, and $8,000 in other loan fees and service charges, offset by a decrease of $7,000 in earnings on bank owned life insurance. The increase in advisory fee income from our wealth management division was due to an increase in assets under management. The increase in other loan fees and service charges was due to an increase in loan fees as our loan portfolio increased. The decrease in earnings on bank owned life insurance was due to a decrease in the effective yield of the underlying investments.

 

Non-interest Expense. Non-interest expense decreased by $296,000, or 6.8%, to $4.1 million for the three months ended June 30, 2014 from $4.4 million for the three months ended June 30, 2013. The decrease resulted primarily from decreases of $334,000 in impairment loss on goodwill, $136,000 in real estate owned expenses, $14,000 in equipment expense, and $10,000 in advertising expense, partially offset by increases of $105,000 in salaries and employee benefits, $38,000 in FDIC insurance expense, $37,000 in other non-interest expense, $10,000 in occupancy expense, and $8,000 in outside data processing expense.

 

The Company did not have any impairment loss on goodwill in the quarter ended June 30, 2014 compared to a $334,000 impairment loss on goodwill recognized in the quarter ended June 30, 2013. The impairment loss on goodwill during the second quarter of 2013 was due to the Company’s determination that an adjustment to the goodwill impairment of $227,000 previously recorded in 2012 was necessary. The goodwill was recorded in connection with the Hayden Financial Group acquisition in 2007. The impairment was caused primarily by the expected decrease in other revenue from this division resulting from a reduction in personnel.

 

Real estate owned expense decreased by $136,000, or 78.6%, to $37,000 in 2014 from $173,000 in 2013 due to operating expenses related to one foreclosed property during the quarter ended June 30, 2014 compared to two foreclosed properties during the quarter ended June 30, 2013 and a loss of $51,000 on the sale of a real estate owned during the quarter ended June 30, 2013.

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Equipment expense decreased by $14,000, or 9.3%, to $136,000 in 2014 from $150,000 in 2013 due to decreases in the purchases of additional equipment and continued efforts to contain expenses. Advertising expense decreased by $10,000, or 50.0%, to $10,000 in 2014 from $20,000 in 2013 due to continued efforts to contain expenses.

 

Salaries and employee benefits, which represented 51.6% of the Company’s non-interest expense during the quarter ended June 30, 2014, increased by $105,000, or 5.3%, to $2.1 million in 2014 from $2.0 million in 2013 due to the staffing of the Rockland County, New York loan production office, offset by a reduction in the number of full time equivalent employees to 99 at June 30, 2014 from 104 at June 30, 2013. The reduction in staff occurred in the wealth management department and branch operations.

 

FDIC insurance expense increased by $38,000, or 45.8%, to $121,000 in 2014 from $83,000 in 2013 due to increases in the Company’s assessment base and quarterly assessment multiplier from 2013 to 2014.

 

Other non-interest expense increased by $37,000, or 3.8%, to $1.02 million in 2014 from $978,000 in 2013 due mainly to increases of $85,000 in miscellaneous other non-interest expenses, $54,000 in audit and accounting fees, $29,000 in service contracts, $10,000 in directors, officers and employee expenses, and $9,000 in telephone expenses, offset by decreases of $113,000 in legal fees, $23,000 in directors compensation, and $14,000 in office supplies and stationery. The decrease in legal fees from the quarter ended June 30, 2013 compared to the quarter ended June 30, 2014 was due primarily to the Company’s decision to capitalize certain legal fees.

 

Occupancy expense increased by $10,000, or 2.9%, to $356,000 in 2014 from $346,000 in 2013 and outside data processing expense increased by $8,000, or 2.8%, to $291,000 in 2014 from $283,000 in 2013 due to the addition of the Rockland County, New York loan production office in January 2014.

 

Income Taxes. Income tax expense increased by $71,000, or 51.1%, to $210,000 for the three months ended June 30, 2014 from $139,000 for the three months ended June 30, 2013. The increase resulted primarily from a $146,000 increase in pre-tax income in 2014 compared to 2013. The effective tax rate was 31.5% for the three months ended June 30, 2014 and 26.7% for the three months ended June 30, 2013. The increase in the effective tax rate between periods was due to a higher percentage of our pre-tax income being tax-exempt, specifically the earnings on bank-owned life insurance, in 2013 compared to 2014.

 

Comparison of Operating Results For The Six Months Ended June 30, 2014 and 2013

 

General. Net income increased by $83,000, or 14.1%, to $671,000 for the six months ended June 30, 2014 from $588,000 for the six months ended June 30, 2013. The increase was primarily the result of an increase of $64,000 in net interest income and a decrease of $343,000 in non-interest expenses, offset by a decrease of $146,000 in credit to the provision for loan losses, a decrease of $69,000 in non-interest income, and an increase of $109,000 in the provision for income taxes.

 

Net Interest Income. Net interest income increased by $64,000, or 0.8%, to $7.97 million for the six months ended June 30, 2014 from $7.91 million for the six months ended June 30, 2013. The increase in net interest income resulted primarily from an increase of $124,000 in interest income that exceeded an increase of $60,000 in interest expense.

 

The net interest spread decreased by 25 basis points to 3.57% for the six months ended June 30, 2014 from 3.82% for the six months ended June 30, 2013. The net interest margin decreased by 27 basis points between these periods from 4.06% for the six months ended June 30, 2013 to 3.79% for the six months ended June 30, 2014. The decrease in the interest rate spread and the net interest margin in 2014 compared to the same period in 2013 was due to a decrease of 31 basis points in the yield on our interest-earning assets that exceeded a decrease of six basis points in the cost of our interest-bearing liabilities.

 

The average yield on our interest-earning assets decreased by 31 basis points to 4.58% for the six months ended June 30, 2014 from 4.89% for the six months ended June 30, 2013 and the cost of our interest-bearing liabilities decreased by six basis points to 1.01% for the six months ended June 30, 2014 from 1.07% for the six months ended June 30, 2013. The decrease in the yield on our interest-earning assets was due to a decrease in the yield on loans receivable, offset by increases in the yield on securities and other interest-earning assets. The decrease in the cost of our interest-bearing liabilities was due to a decrease in the cost of borrowed money, offset by an increase in the cost of interest-bearing deposits.

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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 six months ended June 30, 2014 and 2013.

 

   Six Months Ended June 30, 
   2014   2013 
       Interest           Interest     
   Average   and   Yield/   Average   and   Yield/ 
   Balance   Dividends   Cost   Balance   Dividends   Cost 
                         
   (Dollars in thousands) 
Assets:                              
Interest-earning assets:                              
   Loans  $383,111   $9,480    4.95%  $344,039   $9,323    5.42%
   Securities   9,684    147    3.04    12,353    183    2.96 
   Other interest-earning assets   27,556    9    0.07    32,960    6    0.04 
     Total interest-earning assets   420,351    9,636    4.58    389,352    9,512    4.89 
Allowance for loan losses   (4,165)             (4,504)          
Non-interest-earning assets   48,386              50,017           
      Total assets  $464,572             $434,865           
                               
Liabilities and equity:                              
Interest-bearing liabilities:                              
   Interest-bearing demand  $61,418   $109    0.35%  $61,480   $102    0.33%
   Savings and club accounts   85,849    233    0.54    82,642    219    0.53 
   Certificates of deposit   162,238    1,224    1.51    147,701    1,137    1.54 
      Total interest-bearing deposits   309,505    1,566    1.01    291,823    1,458    1.00 
                               
   Borrowings   19,015    98    1.03    8,122    146    3.60 
      Total interest-bearing liabilities   328,520    1,664    1.01    299,945    1,604    1.07 
                               
   Noninterest-bearing demand   23,954              22,108           
   Other liabilities   8,446              7,856           
      Total liabilities   360,920              329,909           
                               
Stockholders’ equity   103,652              104,956           
      Total liabilities and                              
          Stockholders’ equity  $464,572             $434,865           
Net interest income       $7,972             $7,908      
Interest rate spread             3.57%             3.82%
Net interest margin             3.79%             4.06%
Net interest-earning assets  $91,831             $89,407           
Average interest-earning assets to                              
   average interest-bearing liabilities   127.95%             129.81%          

 

Total interest income increased by $124,000, or 1.3%, to $9.6 million for the six months ended June 30, 2014, from $9.5 million for the six months ended June 30, 2013. Interest income on loans increased by $157,000, or 1.7%, to $9.5 million for the six months ended June 30, 2014 from $9.3 million for the six months ended June 30, 2013 as a result of an increase of $39.1 million, or 11.4%, in the average balance of the loan portfolio to $383.1 million for the six months ended June 30, 2014 from $344.0 million for the six months ended June 30, 2013 as originations outpaced repayments. The increase in the average balance of the loan portfolio was offset by a decrease of 47 basis points in the average yield on loans to 4.95% for the six months ended June 30, 2014 from 5.42% for the six months ended June 30, 2013. The decrease in the average yield on loans was due to the pay-off of higher yielding mortgage loans and the refinancing and/or re-pricing to lower interest rates of mortgage loans in our loan portfolio.

 

Interest income on securities decreased by $36,000, or 19.7%, to $147,000 for the six months ended June 30, 2014 from $183,000 for the six months ended June 30, 2013. The decrease was primarily due to a decrease of $2.7 million, or 21.6%, in the average balance of securities to $9.7 million for the six months ended June 30, 2014 from $12.4 million for the six months ended June 30, 2013, offset by an increase of eight basis points in the average yield on securities to 3.04% for the six months ended June 30, 2014 from 2.96% for the six months ended June 30, 2013. The decrease in the average balance was due to the principal repayments on investment securities, offset by an increase in FHLB New York stock. The increase in the yield was due to dividends from FHLB New York stock that yielded approximately 4.0% and an increase in FHLB New York stock as a percentage of total investment securities.

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Interest income on other interest-earning assets (consisting solely of interest-earning deposits) increased by $3,000, or 50.0%, to $9,000 for the six months ended June 30, 2014 from $6,000 for the six months ended June 30, 2013. The increase was primarily due to an increase of three basis points in the average yield on other interest-earning assets to 0.07% for the six months ended June 30, 2014 from 0.04% for the six months ended June 30, 2013, offset by a decrease of $5.4 million or 16.4%, in the average balance of interest-earning assets to $27.6 million for the six months ended June 30, 2014 from $33.0 million for the six months ended June 30, 2013. The increase in interest income on interest-earnings deposits was due to an increase in the average balance of higher yielding certificates of deposit at other financial institutions, offset by a decrease in the average balance of interest-earning deposits maintained at the FHLB and Federal Reserve Bank of New York.

 

Total interest expense increased by $60,000, or 3.7%, to $1.66 million for the six months ended June 30, 2014 from $1.60 million for the six months ended June 30, 2013. Interest expense on deposits increased by $108,000, or 7.4%, to $1.6 million for the six months ended June 30, 2014 from $1.5 million for the six months ended June 30, 2013. The increase in the interest expense on deposits was a result of an increase of $17.7 million, or 6.1%, in the average balance of interest bearing deposits to $309.5 million for the six months ended June 30, 2014 from $291.8 million for the six months ended June 30, 2013. The increase in the interest expense on deposits was also a result of an increase of one basis point in the average cost of interest-bearing deposits to 1.01% for the six months ended June 30, 2014 from 1.00% for the six months ended June 30, 2013.

 

The interest expense of our interest-bearing demand deposits increased by $7,000, or 6.9%, to $109,000 for the six months ended June 30, 2014 from $102,000 for the six months ended June 30, 2013. The increase in interest expense in our interest-bearing demand deposits was due to an increase of two basis points in the average interest cost to 0.35% for the six months ended June 30, 2014 from 0.33% for the six months ended June 30, 2013 as we continued to offer competitive interest rates to generate deposits, offset by a decrease of $62,000, or 0.1%, in the average balance of our interest-bearing demand deposits to $61.42 million for the six months ended June 30, 2014 from $61.48 million for the six months ended June 30, 2013.

 

The interest expense of our interest-bearing savings and club deposits increased by $14,000, or 6.4%, to $233,000 for the six months ended June 30, 2014 from $219,000 for the six months ended June 30, 2013. The increase in interest expense in our interest-bearing savings and club deposits was due to an increase of $3.2 million, or 3.9%, in the average balance of our interest-bearing savings and club deposits to $85.8 million for the six months ended June 30, 2014 from $82.6 million for the six months ended June 30, 2013. The increase in interest expense in our interest-bearing savings and club deposits was also due to a 1 basis point increase in the average interest cost to 0.54% for the six months ended June 30, 2014 from 0.53% for the six months ended June 30, 2013 as we offered competitive interest rates to generate deposits.

 

The interest expense of our interest-bearing certificates of deposit increased by $87,000, or 7.7%, to $1.2 million for the six months ended June 30, 2014 from $1.1 million for the six months ended June 30, 2013. The increase in interest expense in our interest-bearing certificates of deposit was due to an increase of $14.5 million, or 9.8%, in the average balance of our interest-bearing certificates of deposit to $162.2 million for the six months ended June 30, 2014 from $147.7 million for the six months ended June 30, 2013. The increase in our interest-bearing certificates was due to management’s decision to continue offering competitive interest rates to generate deposits through a nationwide certificate of deposit listing service. The increase in interest expense of our interest-bearing certificates of deposit was offset by a 3 basis point decrease in the average interest cost on such certificates to 1.51% for the six months ended June 30, 2014 from 1.54% for the six months ended June 30, 2014. The decrease in the average interest cost of our interest-bearing certificates of deposit was due to the re-pricing of maturing certificates of deposit and the acquisition of competitively priced interest-bearing certificates of deposit through a non-broker nationwide certificate of deposit listing service.

 

Interest expense on borrowings decreased by $48,000, or 32.9%, to $98,000 for the six months ended June 30, 2014 from $146,000 for the six months ended June 30, 2013. The decrease in interest expense on borrowings was due to a decrease of 257 basis points in the cost of borrowed money to 1.03% for the six months ended June 30, 2014 from 3.60% for the six months ended June 30, 2013 due primarily to the maturity and repayment of higher costing FHLB advances in June 2014 and new lower costing FHLB advances obtained in December 2013 and the first six months of 2014. The decrease in interest expense on borrowings was partially offset by an increase of $10.9 million, or 134.1%, in the average balance of borrowed money to $19.0 million for the six months ended June 30, 2014 from $8.1 million for the six months ended June 30, 2013.

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Allowance for Loan Losses. The following table summarizes the activity in the allowance for loan losses for the six months ended June 30, 2014 and 2013.

 

   Six Months 
   Ended June 30, 
   2014   2013 
   (Dollars in thousands) 
Allowance at beginning of period  $4,015   $4,646 
Provision (credit) for loan losses   (217)   (363)
Charge-offs   (433)   (105)
Recoveries   565    27 
Net recovery (charge-offs)   132    (78)
Allowance at end of period  $3,930   $4,205 

 

We recorded provisions (credit) for loan losses of ($217,000) and ($363,000) for the six-month periods ended June 30, 2014 and 2013, respectively. We charged-off $433,000 against two non-performing multi-family mortgage loans, one mixed-use mortgage loan, and one non-residential mortgage loan during the six months ended June 30, 2014 compared to charge-offs of $105,000 against two non-performing non-residential mortgage loans during the six months ended June 30, 2013. We recorded recoveries of $565,000 during the six months ended June 30, 2014 compared to recoveries of $27,000 during the six months ended June 30, 2013.

 

Non-interest Income. Non-interest income decreased by $69,000, or 6.7%, to $954,000 for the six months ended June 30, 2014 from $1.0 million for the six months ended June 30, 2013. The decrease was primarily due to decreases of $104,000 in other loan fees and service charges and $11,000 in earnings on bank owned life insurance, partially offset by increases of $45,000 in advisory fee income generated by our wealth management division and $1,000 in other non-interest income. The decrease in other loan fees and service charges was due to decreases of $66,000 in mortgage broker fee income and $40,000 in loan fee income. The increase in advisory fee income from our wealth management division was due to an increase in assets under management.

 

Non-interest Expense. Non-interest expense decreased by $343,000, or 4.0%, to $8.2 million for the six months ended June 30, 2014 from $8.6 million for the six months ended June 30, 2013. The decrease resulted primarily from decreases of $334,000 in impairment loss on goodwill, $147,000 in real estate owned expenses, $35,000 in equipment expenses, $16,000 in outside data processing expenses, and $9,000 in advertising expense, offset by increases of $135,000 in FDIC insurance expense, $37,000 in occupancy expense, $18,000 in salaries and employee benefits, and $8,000 in other non-interest expense.

 

The Company did not have any impairment loss on goodwill for the six months ended June 30, 2014. 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, an additional impairment charge of $334,000 was recognized for the six months ended June 30, 2013. The goodwill was recorded in connection with the Hayden Financial Group acquisition in 2007. The impairment was caused primarily by the expected decrease in other revenue from this division resulting from a reduction in personnel.

 

Real estate owned expense decreased by $147,000, or 56.8%, to $112,000 in 2014 from $259,000 in 2013 due to operating expenses related to one foreclosed property during the six months ended June 30, 2014 compared to two foreclosed properties during the six months ended June 30, 2013 and a loss of $51,000 on the sale of a real estate owned during the six months ended June 30, 2013. Equipment expense decreased by $35,000, or 10.6%, to $296,000 in 2014 from $331,000 in 2013 due to decreases in the purchases of additional equipment and continued efforts to contain expenses. Outside data processing expense decreased by $16,000, or 2.9%, to $544,000 in 2014 from $560,000 in 2013 and advertising expense decreased by $9,000, or 30.0%, to $21,000 in 2014 from $30,000 in 2013 due to continued efforts to contain expenses.

 

FDIC insurance expense increased by $135,000, or 119.5%, to $248,000 in 2014 from $113,000 in 2013 due to increases in the Company’s assessment base and quarterly assessment multiplier from 2013 to 2014. Occupancy expense increased by $37,000, or 5.0%, to $777,000 in 2014 from $740,000 in 2013 due to the addition of the Rockland County, New York loan production office in January 2014.

 

Salaries and employee benefits, which represented 53.1% of the Company’s non-interest expense during the six months ended June 30, 2014, increased by $18,000, or 0.4%, to $4.35 million in 2014 from $4.33 million in 2013 due to the staffing of the Rockland County, New York loan production office, offset by a reduction in the number of full time equivalent employees to 99 at June 30, 2014 from 104 at June 30, 2013. The reduction in staff occurred in the wealth management department and branch operations.

 

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Other non-interest expense increased by $8,000, or 0.4%, to $1.85 million in 2014 from $1.85 million in 2013 due mainly to increases of $96,000 in miscellaneous other non-interest expenses, $91,000 in audit and accounting fees, $48,000 in service contracts, $45,000 in telephone expenses, $6,000 in insurance expenses, and $4,000 in directors, officers and employee expenses, offset by decreases of $230,000 in legal fees, $37,000 in directors compensation, and $15,000 in office supplies and stationery. The increase in miscellaneous other non-interest expenses was due primarily to an increase of $117,000 in personnel finder’s fees, offset by a decrease of $17,000 in consulting expenses. The increase in audit and accounting fees was due to an increase in services provided by our independent and contract internal auditors. The decrease in legal fees was due primarily to the Company’s decision to capitalize certain legal fees.

 

Income Taxes. Income tax expense increased by $109,000, or 69.0%, to $267,000 for the six months ended June 30, 2014 from $158,000 for the six months ended June 30, 2013. The increase resulted primarily from a $192,000 increase in pre-tax income in 2014 compared to 2013. The effective tax rate was 28.5% for the six months ended June 30, 2014 compared to 21.2% for the six months ended June 30, 2013. The increase in the effective tax rate was primarily due to the decreased portion of pre-tax income during 2014 attributed to tax-exempt earnings on bank-owned life insurance.

 

NON PERFORMING ASSETS

 

The following table provides information with respect to our non-performing assets at the dates indicated.

 

   At   At 
   June 30, 2014   December 31, 2013 
   (Dollars in thousands) 
         
Non-accrual loans  $10,643   $4,666 
Loans past due 90 days or more and accruing        
         Total non-performing loans   10,643    4,666 
Real estate owned   4,014    3,985 
         Total non-performing assets   14,657    8,651 
           
Accruing troubled debt restructurings   12,201    15,535 
Nonaccrual troubled debt restructurings   4,693    1,269 
Total troubled debt restructurings   16,894    16,804 
Less nonaccrual troubled debt restructurings in total nonaccrual loans   4,693    1,269 
           
Total troubled debt restructurings and non-performing assets  $26,858   $24,186 
Total non-performing loans to total loans   2.76%    1.26% 
Total non-performing assets to total assets   3.08%    1.89% 
Total non-performing assets and troubled          
   debt restructurings to total assets   5.65%    5.28% 

 

The non-accrual loans at June 30, 2014 consisted of 12 loans in the aggregate, comprised of three multi-family mortgage loans, one mixed-use mortgage loan, four non-residential mortgage loans, and four commercial and industrial loans.

 

Non-performing loans increased by $6.0 million, or 128.1%, to $10.6 million at June 30, 2014 from $4.7 million at December 31, 2013. The increase in non-performing loans was due to the addition of five mortgage loans totaling $5.3 million and two commercial and industrial loans totaling $2.5 million, offset by the satisfaction of one mortgage loan totaling $789,000, the conversion from non-performing to performing status of one mortgage loan totaling $824,000, and the charge-off of one mortgage loan of $325,000.

 

The three non-accrual multi-family mortgage loans totaled $3.1 million at June 30, 2014 and consisted primarily of the following mortgage loans:

 

(1)An outstanding balance of $2.2 million secured by a 50 unit apartment building. We classified this loan as substandard. The Company acquired the property at a sheriff sale on July 8, 2014 and has retained a property management company to renovate and operate the property. Upon renovation and full lease-up of the property, the Company will evaluate its options. We do not anticipate any loss due to the projected positive cash flow from the property.

 

(2)An outstanding balance of $695,000 secured by a 23 unit apartment building. We classified this loan as substandard. The Company has commenced a foreclosure action. We are evaluating the options currently available to us.

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(3)An outstanding balance of $200,000 secured by a six unit apartment building. We classified this loan as substandard. The Company has commenced a foreclosure action. We are evaluating the options currently available to us.

 

The one non-accrual mixed-use mortgage loan totaled $1.9 million, net of charge-off of $325,000, at June 30, 2014, and was secured by three separate buildings with 25 apartment units and office spaces. We classified this loan as substandard. The Court has appointed a receiver who is currently managing the property and a forensic accountant who is reviewing the books and records of the borrowing entity and managing partner. Upon the hiring of the forensic accountant, the borrower filed a chapter 7 bankruptcy petition. The receiver is currently marketing the property for sale.

 

The four non-accrual non-residential mortgage loans totaled $3.0 million at June 30, 2014 and consisted primarily of the following mortgage loans:

 

(1)An outstanding balance of $2.1 million secured by an office building. We classified this loan as substandard. The borrowers have agreed to provide a deed-in-lieu of foreclosure. The Company has retained a property management company to operate the property and has exercised the right to collect rents from the tenants. Upon minor renovation and lease-up of the property, the Company will market the property for sale. We do not anticipate any loss due to the projected positive cash flow from the property.

 

(2)An outstanding balance of $448,000, net of charge-off of $400,000, secured by a strip shopping center and warehouse. We classified this loan as substandard. The property was severely damaged by fire and the Company and borrower are currently suing the insurance company and the borrower’s insurance agent as part of the Company’s collection efforts. The borrower is marketing the property for sale.

 

(3)An outstanding balance of $336,000, secured by a building housing auto repair and auto rental facilities. We classified this loan as substandard. The Company has commenced a foreclosure action, but the borrower filed for bankruptcy protection on March 18, 2014. The Chapter 11 bankruptcy was dismissed and the foreclosure action is continuing. We are evaluating the options available and anticipate scheduling a foreclosure sale during the third quarter of 2014.

 

(4)An outstanding balance of $197,000, secured by a restaurant and seafood market. We classified this loan as substandard. The Company has commenced a foreclosure action. We are evaluating the options currently available to us.

 

The four non-accrual commercial and industrial loans totaled $2.6 million at June 30, 2014 and consisted primarily of the following loans:

 

(1)Two loans with an aggregate balance of $2.5 million, consisting of a line of credit with an outstanding balance of $1.4 million and remaining available line of credit of $76,000 and a term loan with an outstanding balance of $1.1 million. The loans are secured by the assets of a construction company. The Company is working with the borrower and the borrower’s surety bonding company to cure the delinquencies and/or satisfy the loans.

 

(2)Two loans with an aggregate balance of $79,000, consisting of a line of credit with an outstanding balance of $48,000 and a remaining available line of credit of $2,000 and a term loan with an outstanding balance of $31,000. The loans are secured by the assets of the business and a real estate property. We are evaluating the options currently available to us.

 

Based on current appraisals and/or fair value analyses of these properties, the Company does not anticipate any losses beyond the amounts already charged off.

 

At June 30, 2014, we owned one foreclosed property with a net balance of $4.0 million consisting of an office building located in New Jersey. The property was most recently appraised in November 2013 for $4.25 million. The Company plans to renovate the property shortly to attract more tenants. Upon completion of the renovation, the Company will order an updated appraisal. The Company’s managing agent is operating and marketing the building for additional tenants and sale. The Company won a $1.7 million judgment in July 2014 against the former borrower whereby the judgment protects the Company in the event of a loss on the sale of the property.

 

TROUBLED DEBT RESTRUCTURED LOANS

 

There were no loans modified that were deemed to be TDRs during the three and six months ended June 30, 2014. As of June 30, 2014, none of the loans that were modified during the previous twelve months had defaulted in the three and six month period ended June 30, 2014.

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The following tables show the activity in TDR loans for the period indicated:

 

               Commercial         
   Residential   Nonresidential       and         
   Real Estate   Real Estate   Construction   Industrial   Consumer   Total 
   (in thousands) 
                         
Balance at December 31, 2013  $6,419   $10,385   $   $   $   $16,804 
   Additions   34    62                96 
   Repayments   (31)   (35)               (66)
   Amortization of TDR reserves   11    49                60 
   Balance - June 30, 2014  $6,433   $10,461   $   $   $   $16,894 
   Related allowance  $   $   $   $   $   $ 

 

There were no charge-offs of loans classified as TDRs in the three and six months ended June 30, 2014. Additions for the period consist of real estate taxes and similar items paid to protect the collateral position of the Company.

 

There were four loans modified during the three and six months ended June 30, 2013.

 

One multi-family mortgage loan had an original interest rate of 6.75% with an amortization of 25 years. We reduced the interest rate and converted the monthly payments to interest only for twenty months and then amortizing for 30 years, with a balloon payment after approximately five and one-half years from the modification date.

 

Two non-residential mortgage loans had an original interest rate of 6.75% with an amortization of 25 years. We reduced the interest rate and converted the monthly payments to interest only for twenty months and then amortizing for 30 years, with a balloon payment after approximately five and one-half years from the modification date.

 

One non-residential mortgage loan had an original interest rate of 6.75% with an amortization of 30 years. We reduced the interest rate and converted the monthly payments to interest only for nineteen months and then amortizing for 30 years, with a balloon payment after two years from the modification date.

 

As of June 30, 2013, none of the loans that were modified during the previous twelve months had defaulted in the three and six month periods ended June 30, 2013.

 

The following tables show the activity in TDR loans for the period indicated:

 

               Commercial         
   Residential   Nonresidential       and         
   Real Estate   Real Estate   Construction   Industrial   Consumer   Total 
   (in thousands) 
                         
Balance at December 31, 2012  $6,444   $6,989   $   $   $   $13,433 
   Additions   282    3,287                3,569 
   Repayments   (19)   (27)               (46)
   Amortization of TDR reserves   27    73                100 
   Balance - June 30, 2013  $6,734   $10,322   $   $   $   $17,056 
   Related allowance  $   $   $   $   $   $ 

 

There were no charge offs against loans classified as TDRs in the three and six months ended June 30, 2013. Additions for the period consist of four non-residential mortgage loans and one residential mortgage loans that were modified and real estate taxes and similar items paid to protect the collateral position of the Company.

 

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.

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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 $37.6 million at June 30, 2014 and consisted primarily of interest-bearing deposits at other financial institutions and miscellaneous cash items. The Company can also borrow an additional $80.8 million from the FHLB of New York to provide additional liquidity.

 

At June 30, 2014, we had $97.3 million in loan commitments outstanding, consisting of $38.6 million of real estate loan commitments, $26.9 million in unused commercial and industrial loan lines of credit, $25.2 million in unused loans in process, $3.8 million in unused real estate equity lines of credit, $2.7 million in commercial and industrial loan commitments, and $158,000 in consumer lines of credit. Certificates of deposit due within one year of June 30, 2014 totaled $62.2 million. This represented 36.8% of certificates of deposit at June 30, 2014. We believe a 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 paid on the certificates of deposit due on or before June 30, 2014. 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 deposit accounts and FHLB advances. At June 30, 2014, we had the ability to borrow $80.8 million, net of $20.9 million in outstanding advances, from the FHLB of New York. At June 30, 2014, we had no overnight advances outstanding. Deposit flows are affected by the overall level of interest rates, 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.

 

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders and for the repurchase, if any, of its shares of common stock. At June 30, 2014, the Company had liquid assets of $11.7 million.

 

Capital Management. The Bank is subject to various regulatory capital requirements administered by the FDIC, 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, 2014, the Bank exceeded all 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 three and six months ended June 30, 2014 and the year ended December 31, 2013, 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 re-price to market interest rates in three to five years; purchasing securities that typically re-price 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 re-pricing 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.

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We have an Asset/Liability Committee, comprised of our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Retail Banking Officer, and three Chief Lending Officers, 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 an independent third party to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in the 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 400 basis point increase or 100 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 June 30, 2014 that would occur in the event of an immediate change in interest rates based on the independent third party assumptions, with no effect given to any steps that we might take to counteract that change.

 

      Net Portfolio Value
      as % of
   Net Portfolio Value  Portfolio Value of
   (Dollars in thousands)  Assets
Basis Point (“bp”)  $  $  %  NPV   
Change in Rates  Amount  Change  Change  Ratio  Change
400  $103,670   $(12,318)   (10.62)%   23.23%    (63) bp
300   106,392    (9,596)   (8.27)%   23.38%    (48) bp
200   110,725    (5,263)   (4.54)%   23.83%    (3) bp
100   114,423    (1,565)   (1.35)%   24.07%    21  bp
0   115,988              23.86%      
(100)   122,875    6,887    5.94%    24.64%    78  bp

 

We 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.

 

Item 4. Controls and Procedures

 

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.

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There were no changes in the Company’s internal control over financial reporting during the three months ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

On October 31, 2011, a complaint was filed by Stilwell Value Partners IV, L.P. in the Supreme Court of New York, New York County (the “Court”), against the MHC and each of the directors of the Company and the MHC as defendants, and against the Company as a nominal defendant. The complaint alleged that the directors had breached their fiduciary duties by not expanding the Company board to allow for disinterested consideration of a “second-step” conversion of the MHC. As relief, the complaint requested, among other things, that the Company’s board of directors be increased by at least three new members, that such new members be given sole responsibility to determine whether the Company should engage in a second-step conversion and that the Court order the Company to engage in a second-step conversion. A motion to dismiss the Complaint was filed on December 14, 2011. On September 27, 2012, the Court granted the Company’s motion to dismiss and dismissed the complaint granting Stilwell leave to file an amended complaint within 20 days. On December 14, 2012 Stilwell filed an amended complaint, alleging that the directors had breached their fiduciary duties by not voting to authorize a second step conversion or permitting disinterested consideration by new, independent board members of a second step conversion. Stilwell asserted claims against the MHC, as majority shareholder of the Company, for breach of fiduciary duty and for aiding and abetting the directors’ alleged breach of fiduciary duty.

 

The defendants and the Company filed a motion to dismiss on February 1, 2013. Stilwell filed his opposition on March 8, 2013, and the defendants and the Company filed their reply brief on March 29, 2013. The Court held a hearing on the motion on June 12, 2013. On October 23, 2013, the Court denied the motion to dismiss, holding the Court could not say that Stilwell had not alleged a viable claim, and thus the Court allowed the lawsuit against the Company’s directors and the MHC to proceed.  The defendants and the Company appealed that decision to the Supreme Court of the State of New York’s Appellate Division, First Department, (“Appellate Division”) on November 27, 2013.  The defendants and the Company filed their opening appeal brief on February 18, 2014.  Stilwell filed his response brief on March 26, 2014.  The defendants and the Company filed their reply brief on April 4, 2014.   The Appellate Division heard oral argument on May 22, 2014.  Additionally, on February 21, 2014, Stilwell moved to disqualify the Company’s counsel, which represents the Company, the individual directors, and MHC in this litigation.  Stilwell argued that he was suing the directors and MHC on behalf of the Company and thus that there was a conflict of interest among the defendants that required the Company to have separate counsel.  The defendants opposed the motion on March 7, 2014.  Stilwell filed a reply on March 13, 2014.  The Court held oral argument on April 9, 2014, and denied the disqualification motion. Plaintiff filed its opening brief on July 1, 2014. Defendant’s opposition was filed on August 6, 2014, and briefing of that appeal is on-going.

 

On July 3, 2014, Salvatore Randazzo, a former director of the MHC, the Company and the Bank, retained separate counsel to represent him in the litigation.

 

The parties are continuing to conduct discovery, including document production, depositions and third party discovery.

 

The Company and Bank are also subject to claims and litigation that arise primarily in the ordinary course of business. Based on information presently available and advice received from legal counsel representing the Company and Bank in connection with such claims and litigation, it is the opinion of management that the disposition or ultimate determination of such claims and litigation will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company.

 

Item 1A. Risk Factors

 

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, 2013, 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.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On November 26, 2013, the Company announced that its Board of Directors approved the repurchase for up to 268,550 shares of the Company’s outstanding common stock held by persons other than the MHC. The following table presents information regarding the Company’s stock repurchases during the three months ended June 30, 2014.

 

           Total Number of   Maximum Number 
   Total       Shares Purchased   of Shares that May 
   Number of   Average   as Part of Publicly   Yet Be Purchased 
   Shares   Price Paid   Announced Plans   Under the Plans or 
Period  Purchased   per Share   or Program   Programs 
                 
April 1 to                    
April 30.   47,900   $7.31    47,900    28,450 
                     
May 1 to                    
May 31.   28,450    7.26    28,450     
                     
June 1 to                    
June 30.                
Total   76,350   $7.29    76,350     

 

Item 3. Defaults Upon Senior Securities

 

Not applicable

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

31.1CEO certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2CFO certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

 

32.1CEO and CFO certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.0The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.
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Signatures

 

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, 2014 By: /s/ Kenneth A. Martinek
    Kenneth A. Martinek
    Chief Executive Officer

 

 

 

Date:  August 14, 2014 By: /s/ Donald S. Hom
    Donald S. Hom
    Executive Vice President and Chief Financial Officer
     

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