UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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ý
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT
OF
1934
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For
the fiscal year ended December 31, 2006
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period from _______________ to
_______________
Commission
File Number: 0-51852
NORTHEAST
COMMUNITY BANCORP, INC.
(Exact
name of registrant as specified in its charter)
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UNITED
STATES
(State
or other jurisdiction of
incorporation
or organization)
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06-1786701
(I.R.S.
Employer Identification No.)
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325
Hamilton Avenue, White Plains, New York
(Address
of principal executive offices)
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10601
(Zip
Code)
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Registrant’s
telephone number, including area code: (914) 684-2500
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, par value $0.01 per share
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The
Nasdaq Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes ¨ No ý
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No ý
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 ý No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. ý
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“large accelerated filer and accelerated filer” in Rule 12b-2 of the Exchange
Act.
(Check
one): Large
Accelerated Filer ¨ Accelerated
Filer ¨ Non-accelerated
Filer ý
Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Act). Yes ¨ No ý
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates as of June 30, 2006 was $0.00
The
number of shares outstanding of the registrant’s common stock as of March 15,
2007 was 13,225,000
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the 2007 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form
10-K.
INDEX
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Page
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Business
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1
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||
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Risk
Factors
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15
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||
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Unresolved
Staff Comments
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19
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||
|
Properties
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19
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||
|
Legal
Proceedings
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20
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||
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Submission
of Matters to a Vote of Security Holders
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20
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||
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Market
for Registrant’s Common Equity, Related Stockholder Matters and
Issuer
|
|||
|
Purchases
of Equity Securities
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20
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||
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Selected
Financial Data
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22
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||
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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24
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||
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Quantitative
and Qualitative Disclosures About Market Risk
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45
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||
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Financial
Statements and Supplementary Data
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45
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||
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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77
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Controls
and Procedures
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77
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Other
Information
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77
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Directors,
Executive Officers of the Registrant, and Corporate
Governance
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77
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||
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Executive
Compensation
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78
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Security
Ownership of Certain Beneficial Owners and Management and
Related
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|||
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Stockholder
Matters
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78
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||
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Certain
Relationships and Related Transactions and Director
Independence
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78
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||
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Principal
Accountant Fees and Services
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78
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||
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Exhibits
and Financial Statement Schedules
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79
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||
This
report contains certain
“forward-looking statements” within the meaning of the federal securities
laws. These statements are not historical facts; rather, they are
statements based on Northeast Community Bancorp, Inc.’s current expectations
regarding its business strategies, intended results and future
performance. Forward-looking statements are preceded by terms such as
“expects,” “believes,” “anticipates,” “intends” and similar
expressions.
Management’s
ability to predict
results or the effect of future plans or strategies is inherently
uncertain. Factors which could affect actual results include interest
rate trends, the general economic climate in the market area in which Northeast
Community Bancorp, Inc. operates, as well as nationwide, Northeast Community
Bancorp, Inc.’s ability to control costs and expenses, competitive products and
pricing, loan delinquency rates and changes in federal and state legislation
and
regulation. For further discussion of factors that may affect our results,
see
“Item 1A. Risk Factors” in this Annual Report on Form 10-K (“Form
10-K”). These factors should be considered in evaluating the
forward-looking statements and undue reliance should not be placed on such
statements. Northeast Community Bancorp, Inc. assumes no obligation
to update any forward-looking statements.
PART
I
Item
1. BUSINESS
General
Northeast
Community Bancorp, Inc.
(“Northeast Community Bancorp” or the “Company”) is a federally chartered stock
holding company established on July 5, 2006 to be the holding company for
Northeast Community Bank (the “Bank”). Northeast Community Bancorp’s
business activity is the ownership of the outstanding capital stock of the
Bank. Northeast Community Bancorp does not own or lease any property
but instead uses the premises, equipment and other property of the Bank with
the
payment of appropriate rental fees, as required by applicable law and
regulations, under the terms of an expense allocation agreement.
Northeast
Community Bancorp, MHC (the
“MHC”) is the Company’s federally chartered mutual holding company
parent. As a mutual holding company, the MHC is a non-stock company
that has as its members the depositors of Northeast Community
Bank. The MHC does not engage in any business activity other than
owning a majority of the common stock of Northeast Community
Bancorp. So long as we remain in the mutual holding company form of
organization, the MHC will own a majority of the outstanding shares of Northeast
Community Bancorp.
Northeast
Community Bank has been
conducting business throughout the New York metropolitan area for more than
70
years. Northeast Community Bank was originally chartered in
1934. In 2006, Northeast Community Bank changed its name from “Fourth
Federal Savings Bank” to “Northeast Community Bank.”
We
operate as a community-oriented
financial institution offering traditional financial services to consumers
and
businesses in our market area and our lending territory. We attract
deposits from the general public and use those funds to originate multi-family
residential, mixed-use and non-residential real estate and consumer loans,
which
we hold for investment. We have been originating multi-family and
mixed-use real estate loans in the New York metropolitan area for more than
50
years and recently expanded our lending territory to include all of New York,
New Jersey, Connecticut, Massachusetts, Rhode Island, southern New Hampshire,
southern Maine and Pennsylvania. We generally do not offer one- to
four-family residential loans.
In
February 2007, we hired an
additional lending officer with significant multi-family, mixed-use and
non-residential lending experience and hired a treasurer with accounting and
public company reporting experience. In March 2007, we hired a senior
lending officer with significant commercial bank lending
experience. We are in the process of developing new commercial credit
policies and intend to begin originating commercial loans to individuals and
businesses located in our primary market areas.
Our
website address is
www.necommunitybank.com. Information on our website should not
be considered a part of this Form 10-K.
Market
Area
We
are headquartered in White Plains,
New York, which is located in Westchester County and we operate five
full-service branch offices in the New York City boroughs of Manhattan (New
York
County), Brooklyn (Kings County) and the Bronx (Bronx County), which we consider
our primary market area. On March 15, 2007 we notified the Office of
Thrift Supervision of our intent to open a branch office at 325 Hamilton
Avenue, White Plains, NY, our corporate headquarters location, which we expect
will open in the second quarter of 2007. We also operate a loan
production office in Wellesley, Massachusetts. We generate deposits
through our five current branch offices and when opened, through our branch
office at our corporate headquarters, which we are opening in conjunction with
the commencement of our commercial business lending operations. We
conduct lending activities throughout the New York metropolitan area as well
as
in the Northeast and Midatlantic regions of the United States. In
addition to New York and Massachusetts, our lending territory includes New
Jersey, Connecticut, southern New Hampshire, Rhode Island, southern Maine and
Pennsylvania.
Our
primary market area includes a
population base with a broad cross section of wealth, employment and
ethnicity. We operate in markets that generally have experienced
relatively slow demographic growth, a characteristic typical of mature urban
markets located throughout the Northeast region. Population and
household growth rates for all four of the primary market area counties have
been and are projected to remain below the comparable U.S.
measures. With the exception of Kings County, the counties within our
primary market area matched or exceeded the comparable historical and projected
growth rates for the state of New York.
New
York County is a relatively
affluent market, reflecting the influence of Wall Street along with the presence
of a broad spectrum of Fortune 500 companies. Comparatively, Kings
County and Bronx County are home to a broad socioeconomic spectrum, with a
significant portion of the respective populations employed in relatively low
wage blue collar jobs. Westchester County is also an affluent market,
serving as a desired suburban location for commuting into New York City as
well
as reflecting growth of higher paying jobs in the county, particularly in White
Plains. Over the next five years, New York County and Westchester
County are projected to sustain growth in household income that exceeds
comparable New York and U.S. growth rates. The more affluent nature
of New York County and Westchester County is further implied by household income
distribution measures, which show that, in comparison to Bronx County and Kings
County, New York and Westchester Counties maintain a lower percentage of
households with incomes of less than $25,000 and a much higher percentage of
households with incomes in the upper income brackets.
Our
lending territory also includes
Massachusetts, New Jersey, Connecticut, Pennsylvania, southern New Hampshire,
southern Maine and Rhode Island. While each of these states has
different economic characteristics, our customer base in these states tends
to
be similar to our customer base in New York and is comprised mostly of owners
of
low to moderate income apartment buildings or non-residential real estate in
low
to moderate income areas. Outside the State of New York, our largest
concentration of real estate loans is in Massachusetts, primarily in the suburbs
of Boston, inside the I-495 loop. This area is characterized by a
large number of apartment buildings, condominiums and office
buildings. The greater Boston metropolitan area benefits from the
presence of numerous institutions of higher learning, medical care and research
centers and the corporate headquarters of several significant mutual fund
investment companies. Eastern Massachusetts also has many high
technology companies employing personnel with specialized skills. It
should be noted, however, that Massachusetts has lost population two years
in a
row. These factors affect the demand for residential homes,
multi-family apartments, office buildings, shopping centers, industrial
warehouses and other commercial properties.
Competition
We
face significant competition for the
attraction of deposits. The New York metropolitan area has a
significant concentration of financial institutions, including large money
center and regional banks, community banks and credit unions. Over
the past 10 years, consolidation of the banking industry in the New York
metropolitan area has continued, resulting in larger and increasingly efficient
competitors. We also face competition for investors’ funds from money
market funds, mutual funds and other corporate and government
securities. At June 30, 2006, which is the most recent date for which
data is available from the Federal Deposit Insurance Corporation, we held less
than 0.7% of the deposits in each of Westchester, Kings and New York counties,
New York, and approximately 0.7% of the deposits in Bronx County, New
York.
We
also face significant competition
for the origination of loans. Our competition for loans comes
primarily from financial institutions in our lending territory, and, to a lesser
extent, from other financial service providers such as insurance companies,
hedge funds and mortgage companies. As our lending territory is based
around densely populated areas surrounding urban centers, we face significant
competition from regional banks, savings banks and commercial banks in the
New
York metropolitan area as well as in the other seven states in which we
originate real estate loans. The competition for loans that we
encounter, as well as the types of institutions with which we compete, varies
from time to time depending upon certain factors, including the general
availability of lendable funds and credit, general and local economic
conditions, current interest rate levels, volatility in the mortgage markets
and
other factors which are not readily predictable.
We
expect competition to increase in
the future as a result of legislative, regulatory and technological changes
and
the continuing trend of consolidation in the financial services
industry. Technological advances, for example, have lowered the
barriers to market entry, allowed banks and other lenders to expand their
geographic reach by providing services over the Internet and made it possible
for non-depository institutions to offer products and services that
traditionally have been provided by banks. Changes in federal law
permit affiliation among banks, securities firms and insurance companies, which
promotes a competitive environment in the financial services
industry. Competition for deposits and the origination of loans could
limit our future growth.
Lending
Activities
General. We
originate loans primarily for investment purposes. The largest
segment of our loan portfolio is multi-family residential real estate
loans. We also originate mixed-use real estate loans and
non-residential real estate loans. To a limited degree, we make
consumer loans. We intend to offer commercial loans. We
currently do not originate one- to four-family residential loans and have no
present intention to do so in the future. We consider our lending
territory to include New York, New Jersey, Massachusetts, Connecticut, Rhode
Island, southern New Hampshire, Pennsylvania and southern Maine.
Multi-family
and Mixed-use
Real Estate Loans. We offer adjustable
rate mortgage loans secured by multi-family and mixed-use real
estate. These loans are comprised primarily of loans on low to
moderate income apartment buildings located in our lending territory and
include, to a limited degree, loans on cooperative apartment buildings (in
the
New York area), loans for Section 8 multi-family housing and loans for single
room occupancy (“SRO”) multi-family housing properties. In New York,
most of the apartment buildings that we lend on are
rent-stabilized. Mixed-use real estate loans are secured by
properties that are intended for both residential and business
use. Until 2004, our policy had been to originate multi-family and
mixed-use real estate loans primarily in the New York metropolitan
area. In January 2004, we opened a loan production office in
Wellesley, Massachusetts and currently originate multi-family and mixed-use
real
estate loans in New York, Massachusetts, Connecticut, New Jersey, Pennsylvania,
Rhode Island, southern New Hampshire and southern Maine. For the year
ended December 31, 2006, originations of multi-family real estate loans in
states other than New York represented 55.7% of our total multi-family mortgage
loan originations and originations of mixed-use real estate loans in states
other than New York represented 39.3% of our total mixed-use mortgage loan
originations. For the year ended December 31, 2005, originations of
multi-family real estate loans in states other than New York
represented 67.8% of our total multi-family mortgage loan originations and
originations of mixed-use real estate loans in states other than New York
represented 54.3% of our total mixed-use mortgage loan
originations. Of originations in states other than New York for 2006,
13.8% of our total originations of multi-family loans and 33.5% of our mixed-use
real estate loans were made in Massachusetts. Of originations in
states other than New York for 2005, 41.2% of our total originations of
multi-family loans and 32.0% of our mixed-use real estate loans were made in
Massachusetts. We intend to continue to increase our originations of
multi-family and mixed-use real estate loans in the eight states in which we
are
currently lending.
We
originate a variety of
adjustable-rate and balloon multi-family and mixed-use real estate
loans. The adjustable-rate loans have fixed rates for a period of up
to five years and then adjust every three to five years thereafter, based on
the
terms of the loan. Maturities on these loans can be up to 15 years,
and typically they amortize over a 25 year period. Interest rates on
our adjustable-rate loans are adjusted to a rate that equals the applicable
three-year or five-year constant maturity treasury index plus a
margin. The balloon loans have a maximum maturity of five
years. The lifetime interest rate cap is five percentage points over
the initial interest rate
of
the
loan (four percentage points for loans with three-year terms). For a
mixed-use property with commercial space accounting for over 30% of the gross
operating income of the building, competition permitting, the rate offered
is
generally based on the rate we offer for non-residential real estate
loans. Due to the nature of our borrowers and our lending niche, the
typical multi-family or mixed-use real estate loan refinances within the first
five-year period and, in doing so, generates prepayment penalties ranging from
five points to one point of the initial loan balance. Under our
loan-refinancing program, borrowers who are current under the terms and
conditions of their contractual obligations can apply to refinance their
existing loans to the rates and terms then offered on new loans after the
payment of their contractual prepayment penalties.
In
making multi-family and mixed-use
real estate loans, we primarily consider the net operating income generated
by
the real estate to support the debt service, the financial resources, income
level and managerial expertise of the borrower, the marketability of the
property and our lending experience with the borrower. We do not
typically require a personal guarantee of the borrower, but may do so depending
on the location, building condition or credit profile. We rate the
property underlying the loan either Class A, B or C. Our current
policy is to require a minimum debt service coverage ratio (the ratio of
earnings after subtracting all operating expenses to debt service payments) of
1.25% or 1.35% depending on the rating of the underlying property. On
multi-family and mixed-use real estate loans, our current policy is to finance
up to 75% of the lesser of appraised value or purchase price of the property
securing the loan on purchases and refinances of Class A and B properties and
up
to 65% of the lesser of appraised value or purchase price for properties that
are rated Class C. In some markets within our lending territory, we
will finance up to 80% of the lesser of appraised value or the purchase
price. Properties securing multi-family and mixed-use real estate
loans are appraised by independent appraisers, inspected by us and generally
require Phase 1 environmental surveys. We have not had a loss on a
multi-family or mixed-use real estate loan during the past five
years.
While
we have only recently expanded
our lending territory beyond the New York metropolitan area, we have been
originating multi-family and mixed-use real estate loans in the New York market
area for more than 50 years. In the New York market area, our ability
to continue to grow our portfolio is dependent on the continuation of our
relationships with mortgage brokers, as the multi-family and mixed-use real
estate loan market is primarily broker driven. We have longstanding
relationships with mortgage brokers in the New York market area, who are
familiar with our lending practices and our underwriting
standards. We have developed similar relationships with mortgage
brokers in the other states within our lending territory and will continue
to do
so in order to grow our loan portfolio.
The
majority of the multi-family real
estate loans in our portfolio are secured by ten unit to one hundred unit
apartment buildings. At December 31, 2006, the majority of our
mixed-use real estate loans are secured by properties that are at least 75%
apartment buildings, but contain some commercial or office space.
On
December 31, 2006, the largest
outstanding multi-family real estate loan had a balance of $3.8
million. This loan was performing according to its terms at December
31, 2006. Subsequent to December 31, 2006 this loan was
satisfied. Currently, the largest outstanding multi-family loan is
$2.3 million and it is current. This loan is secured by two rental
apartment buildings containing 16 two bedroom apartments and one commercial
space in the Beacon Hill neighborhood of Boston, Massachusetts. As of
December 31, 2006, the average loan balance in our multi-family and
mixed-use portfolio was approximately $533,000.
Non-residential
Real Estate
Loans. We offer adjustable-rate mortgage loans secured
by non-residential real estate in the same lending territory that we offer
multi-family and mixed-use real estate loans. Our non-residential
real estate loans are generally secured by office buildings and retail shopping
centers that are primarily located in low to moderate income areas within our
lending territory. We intend to continue to grow this segment of our
loan portfolio.
Our
non-residential real estate loans
are structured in a manner similar to our multi-family and mixed-use real estate
loans, typically at a fixed rate of interest for three to five years and then
a
rate that adjusts every three to five years over the term of the loan, which
is
typically 15 years. Interest rates and payments on these loans
generally are based on the three-year or five-year constant maturity treasury
index plus a margin. The lifetime interest rate cap is five
percentage points over the initial interest rate of the loan (four percentage
points for loans with three-year
terms). Loans
are secured by first mortgages that generally do not exceed 75% of the
property’s appraised value. Properties securing non-residential real
estate loans are appraised by independent appraisers and inspected by
us.
We
also charge prepayment penalties,
with five points of the initial loan balance generally being charged on loans
that refinance in the first year of the mortgage, scaling down to one point
on
loans that refinance in year five. These loans are typically repaid
or the term extended before maturity, in which case a new rate is negotiated
to
meet market conditions and an extension of the loan is executed for a new term
with a new amortization schedule. Our non-residential real estate
loans tend to refinance within the first five-year period.
Our
assessment of credit risk and our
underwriting standards and procedures for non-residential real estate loans
are
similar to those applicable to our multi-family and mixed-use real estate
loans. In reaching a decision on whether to make a non-residential
real estate loan, we consider the net operating income of the property, the
borrower’s expertise, credit history and profitability and the value of the
underlying property. In addition, with respect to rental properties,
we will also consider the term of the lease and the credit quality of the
tenants. We have generally required that the properties securing
non-residential real estate loans have debt service coverage ratios (the ratio
of earnings after subtracting all operating expenses to debt service payments)
of at least 1.30%. Phase 1 environmental surveys and property
inspections are required for all loans.
At
December 31, 2006, we had $47.8
million in non-residential real estate loans outstanding, or 23.7% of total
loans. Originations in states other than New York represented 28.3%
of our total originations of non-residential real estate loans for the year
ended December 31, 2006 and 26.1% for the year ended December 31,
2005. At December 31, 2006, the largest outstanding non-residential
real estate loan had an outstanding balance of $3.6 million. This
loan is secured by a multi-tenant building located in Bronx, New York, and
was
performing according to its terms at December 31, 2006. As of
December 31, 2006, the average balance of loans in our non-residential loan
portfolio was $822,000.
Equity
Lines of Credit on
Real Estate Loans. Northeast Community Bank offers
equity lines of credit on multi-family, mixed-use and non-residential real
estate properties on which it holds the first mortgage.
For
existing borrowers only, we offer
an equity line of credit program secured by a second mortgage on the borrower’s
multi-family, mixed-use or non-residential property. All lines of
credit are underwritten separately from the first mortgage and support debt
service ratios and loan-to-value ratios that when combined with the first
mortgage meet or exceed our current underwriting standards for multi-family,
mixed-use and non-residential real estate loans. Borrowers typically
hold these lines in reserve and use them for ongoing property improvements
or to
purchase additional properties when the opportunity arises.
Our
equity lines of credit are interest
only for the first five years and then the remaining term of the line of credit
is tied to the remaining term on the first mortgage on the multi-family,
mixed-use or non-residential property. After the first five years, a
payment of both principal and interest is required. Interest rates
and payments on our equity lines of credit are indexed to the prime rate as
published in The Wall Street Journal and adjusted as the prime rate
changes. Interest rate adjustments on equity lines of credit are
limited to a specified maximum percentage over the initial interest
rate.
Commercial
Loans. Continuing our plan to
diversify our portfolio, both geographically and by product type, we plan to
begin offering commercial loans during the second quarter of 2007. To
this end, we have hired a senior commercial banking and lending officer from
a
regional commercial bank to head this department.
Interest
rates and payments on our
commercial loans will typically be indexed to the prime rate as published in
the
Wall Street Journal and adjusted as the prime rate changes.
Consumer
Loans. We offer loans secured by
savings accounts or certificates of deposit (share loans) and overdraft
protection for checking accounts which is linked to statement savings accounts
and has the ability to transfer funds from the statement savings account to
the
checking account when needed to cover overdrafts. At December 31,
2006, our portfolio of consumer loans was $419,000, or 0.2% of total
loans.
Loan
Underwriting Risks
Adjustable-Rate
Loans. While we anticipate that
adjustable-rate loans will better offset the adverse effects of an increase
in
interest rates as compared to fixed-rate loans, the increased payments required
of adjustable-rate loan borrowers in a rising interest rate environment could
cause an increase in delinquencies and defaults. The marketability of
the underlying property also may be adversely affected in a high interest rate
environment. In addition, although adjustable-rate loans help make
our loan portfolio more responsive to changes in interest rates, the extent
of
this interest sensitivity is limited by the annual and lifetime interest rate
adjustment limits.
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
borrower’s creditworthiness and the feasibility and cash flow potential of the
project. 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. To monitor cash flows on income producing properties, we
require borrowers to provide annual financial statements for all multi-family,
mixed-use and non-residential real estate loans. In reaching a
decision on whether to make a multi-family, mixed-use or non-residential real
estate loan, we consider the net operating income of the property, the
borrower’s expertise, credit history and profitability and the value of the
underlying property. In addition, with respect to non-residential
real estate properties, we also consider the term of the lease and the quality
of the tenants. An appraisal of the real estate used as collateral
for the real estate loan is also obtained as part of the underwriting
process. We have generally required that the properties securing
these real estate loans have debt service coverage ratios (the ratio of earnings
after subtracting all operating expenses to debt service payments) of at least
1.25%. In underwriting these loans, we take into account projected
increases in interest rates in determining whether a loan meets our debt service
coverage ratios at the higher interest rate under the adjustable rate
mortgage. Environmental surveys and property inspections are utilized
for all loans.
Commercial
Loans. Unlike residential mortgage loans, which
are generally made on the basis of a borrower’s ability to make repayment from
his or her employment or other income and are secured by real property whose
value tends to be more ascertainable, commercial 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 loans may depend substantially on
the
suceess of the business itself. Further, any collateral securing such
loans may depreciate over time, may be diffult to appriase and may flucture
in
value.
Consumer
Loans. Because the only consumer loans
we offer are secured by passbook savings accounts, certificates of
deposit accounts or statement savings accounts, we do not believe these loans
represent a risk of loss to the Bank.
Loan
Originations and
Participations. Our loan originations
come from a number of sources. The primary source of loan
originations are referrals from brokers, existing customers, advertising and
personal contacts by our loan officers. Over the years, we have
developed working relationships with many mortgage brokers in our lending
territory. Under the terms of the agreements with such brokers, the
brokers refer potential loans to us. The loans are underwritten and
approved by us utilizing our underwriting policies and standards. The
mortgage brokers typically receive a fee from the borrower upon the funding
of
the loans by us. In some instances, we will originate a real estate
loan based on premium pricing. Historically, mortgage brokers have
been the source of the majority of the multi-family, mixed-use and
non-residential real estate loans originated by us. We generally
retain for our portfolio all of the loans that we originate.
In
2006, we purchased a participation
interest in a non-residential loan on a multi-tenant office building in
Manhattan from another financial institution. The outstanding
balance of the participation interest purchased totaled $2.5 million at December
31, 2006. We perform our own underwriting analysis on each of our
participation interests before purchasing such loans and therefore believe
there
is no greater risk of default on these obligations. However, in a
purchased participation loan, we do not service the loan and thus are subject
to
the policies and practices of the lead lender with regard to monitoring
delinquencies, pursuing collections and instituting foreclosure proceedings,
all
of which are reviewed and approved in advance of any participation
transaction. We review all of
the
documentation relating to any loan in which we participate, including annual
financial statements provided by a borrower. Additionally, we receive
monthly statements on the loan from the lead lender.
We
intend to continue to consider, on a
case-by-case basis, additional participation purchases that conform to our
underwriting standards.
We
have
not historically purchased any whole loans. However, we would
entertain doing so if a loan was presented to us that met our underwriting
criteria and fit within our interest rate strategy.
Loan
Approval Procedures
and Authority. Our lending activities
follow written, non-discriminatory, underwriting standards and loan origination
procedures established by our board of directors and management. The
board has granted the Loan Origination Group (which is comprised of all our
loan
officers and our staff attorney) with loan approval authority for mortgage
loans
on income producing property in amounts of up to $1.0 million.
Loans
in amounts between $1.0 million
and $2.0 million, in addition to being approved by the Loan Origination Group,
must be approved by the president, the chief financial officer and at least
one
non-employee director.
Loans
in amounts greater than $2.0
million, in addition to being approved by the Loan Origination Group, must
be
approved by the president, the chief financial officer and a majority of the
non-employee directors. At each monthly meeting of the board of
directors, the board ratifies all commitments issued, regardless of
size.
Loans
to One
Borrower. The maximum amount that we
may lend to one borrower and the borrower’s related entities generally is
limited, by regulation, to 15% of our stated capital and reserves. At
December 31, 2006, our general regulatory limit on loans to one borrower was
approximately $10.3 million. On December 31, 2006, our largest
lending relationship was a $3.8 million multi-tenant building located in Bronx,
New York , which was comprised of one loan that was performing according to
its
terms at December 31, 2006.
Loan
Commitments. We issue commitments for
adjustable-rate loans conditioned upon the occurrence of certain
events. Commitments to originate adjustable-rate loans are legally
binding agreements to lend to our customers. Generally, our
adjustable-rate loan commitments expire after 60 days.
Investment
Activities
We
have legal authority to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies and municipal governments, deposits at the Federal
Home Loan Bank of New York and certificates of deposit of federally insured
institutions. Within certain regulatory limits, we also may invest a
portion of our assets in mutual funds. While we have the authority
under applicable law to invest in derivative securities, we had no investments
in derivative securities at December 31, 2006.
At
December 31, 2006, our securities
and short-term investments totaled $62.3 million and consisted primarily of
$33.8 million in interest-earning deposits with the Federal Home Loan Bank
of
New York, $19.9 million in U.S. Treasury securities, $4.8 million in
mortgage-backed securities issued primarily by Fannie Mae, Freddie Mac and
Ginnie Mae, $3.0 million in Government sponsored and agency securities, and
$399,000 in Federal Home Loan Bank of New York stock. At December 31,
2006, we had no investments in callable securities.
Our
securities and short-term
investments are primarily viewed as a source of liquidity. Our
investment management policy is designed to provide adequate liquidity to meet
any reasonable decline in deposits and any anticipated increase in the loan
portfolio through conversion of secondary reserves to cash and to provide safety
of principal and interest through investment in securities under limitations
and
restrictions prescribed in banking regulations. Consistent with
liquidity and safety requirements, our policy is designed to generate a
significant amount of stable income and to provide collateral for advances
and
repurchase agreements. The policy is also designed to serve as a
counter-cyclical balance to earnings in that the investment portfolio will
absorb funds when loan demand is low and will infuse funds when loan demand
is
high.
Deposit
Activities and Other Sources of Funds
General. Deposits,
borrowings and loan repayments are the major sources of our funds for lending
and other investment purposes. Loan repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are significantly influenced by general interest rates and money market
conditions.
Deposit
Accounts. Substantially all of our
depositors are residents of the State of New York. We offer a variety
of deposit accounts with a range of interest rates and terms. Our
deposits principally consist of interest-bearing demand accounts
(such as NOW and money market accounts), regular savings accounts,
noninterest-bearing demand accounts (such as checking accounts) and certificates
of deposit. At December 31, 2006, we did not utilize brokered
deposits. Deposit account terms vary according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. In determining the terms of our deposit
accounts, we consider the rates offered by our competition, our liquidity needs,
profitability to us, matching deposit and loan products and customer preferences
and concerns. We generally review our deposit mix and pricing
weekly. Our current strategy is to offer competitive rates and to be
in the middle of the market for rates on all types of deposit
products.
Our
deposits are typically obtained
from customers residing in or working in the communities in which our branch
offices are located, and we rely on our long-standing relationships with our
customers to retain these deposits. We use traditional means of
advertising our deposit products, and we do not generally solicit deposits
from
outside the New York metropolitan area. In the future, as we open new
branches in other states we expect our deposits will also be obtained from
those
states. We may also, in the future, utilize our website to attract
deposits. While we will accept certificates of deposit in excess of
$100,000, we do not actively solicit such accounts nor do we offer special
rates
on jumbo certificates of deposit.
Borrowings. We
may utilize advances from the Federal Home Loan Bank of New York to supplement
our supply of investable funds. The Federal Home Loan Bank functions
as a central reserve bank providing credit for its member financial
institutions. As a member, we are required to own capital stock in
the Federal Home Loan Bank and are authorized to apply for advances on the
security of such stock and certain of our whole first mortgage loans and other
assets (principally securities which are obligations of, or guaranteed by,
the
United States), provided certain standards related to creditworthiness have
been
met. Advances are made under several different programs, each having
its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either on a fixed
percentage of an institution’s net worth or on the Federal Home Loan Bank’s
assessment of the institution’s creditworthiness.
Personnel
As
of December 31, 2006, we had 71
full-time employees and two part-time employees, none of whom is represented
by
a collective bargaining unit. We believe our relationship with our
employees is good.
Legal
Proceedings
From
time to time, we may be party to
various legal proceedings incident to our business. At December 31,
2006, we were not a party to any pending legal proceedings that we believe
would
have a material adverse effect on our financial condition, results of operations
or cash flows.
Subsidiaries
Northeast
Community Bancorp’s only
subsidiary is Northeast Community Bank.
REGULATION
AND SUPERVISION
General
Northeast
Community Bank is subject to
extensive regulation, examination and supervision by the Office of Thrift
Supervision, as its primary federal regulator, and the Federal Deposit Insurance
Corporation, as its deposits insurer. Northeast Community Bank is a
member of the Federal Home Loan Bank System and its deposit accounts are insured
up to applicable limits by the Deposit Insurance Fund managed by the Federal
Deposit Insurance Corporation. Northeast Community Bank must file
reports with the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation concerning its activities and financial condition in addition to
obtaining regulatory approvals prior to entering into certain transactions
such
as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the Office of Thrift
Supervision and, under certain circumstances, the Federal Deposit Insurance
Corporation to evaluate Northeast Community Bank’s safety and soundness and
compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives
the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment
of
adequate loan loss reserves for regulatory purposes. Any change in
such policies, whether by the Office of Thrift Supervision, the Federal Deposit
Insurance Corporation or Congress, could have a material adverse impact on
Northeast Community Bancorp, Northeast Community Bancorp, MHC and Northeast
Community Bank and their operations. Northeast Community Bancorp and
Northeast Community Bancorp, MHC, as savings and loan holding companies, are
required to file certain reports with, are subject to examination by, and
otherwise must comply with the rules and regulations of the Office of Thrift
Supervision. Northeast Community Bancorp also is subject to the rules
and regulations of the Securities and Exchange Commission under the federal
securities laws.
Certain
of the regulatory requirements
that are applicable to Northeast Community Bank, Northeast Community Bancorp
and
Northeast Community Bancorp, MHC are described below. This
description of statutes and regulations is not intended to be a complete
explanation of such statutes and regulations and their effects on Northeast
Community Bank, Northeast Community Bancorp and Northeast Community Bancorp,
MHC
and is qualified in its entirety by reference to the actual statutes and
regulations.
Regulation
of Federal Savings Institutions
Business
Activities. Federal law and regulations govern the
activities of federal savings banks, such as Northeast Community
Bank. These laws and regulations delineate the nature and extent of
the activities in which federal savings banks may engage. In
particular, certain lending authority for federal savings banks, e.g.,
commercial, non-residential real property loans and consumer loans, is limited
to a specified percentage of the institution’s capital or assets.
Capital
Requirements. The Office of Thrift Supervision’s
capital regulations require federal savings institutions to meet three minimum
capital standards: a 1.5% tangible capital to total assets ratio, a
4% leverage ratio (3% for institutions receiving the highest rating on the
CAMELS examination rating system) and an 8% risk-based capital
ratio. In addition, the prompt corrective action standards discussed
below also establish, in effect, a minimum 2% tangible capital standard, a
4%
leverage ratio (3% for institutions receiving the highest rating on the CAMELS
system) and, together with the risk-based capital standard itself, a 4% Tier
1
risk-based capital standard. The Office of Thrift Supervision
regulations also require that, in meeting the tangible, leverage and risk-based
capital standards, institutions must generally deduct investments in and loans
to subsidiaries engaged in activities as principal that are not permissible
for
a national bank.
The
risk-based capital standard
requires federal savings institutions to maintain Tier 1 (core) and total
capital (which is defined as core capital and supplementary capital) to
risk-weighted assets of at least 4% and 8%, respectively. In
determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, recourse obligations, residual interests and direct
credit substitutes, are multiplied by a risk-weight factor of 0% to 100%,
assigned by the Office of Thrift Supervision capital regulation based on the
risks believed inherent in the type of asset. Core (Tier 1) capital
is generally defined as common stockholders’ equity (including
retained
earnings),
certain noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card
relationships. The components of supplementary (Tier 2) capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock, the allowance for loan and lease losses limited to a maximum
of
1.25% of risk-weighted assets and up to 45% of unrealized gains on
available-for-sale equity securities with readily determinable fair market
values. Overall, the amount of supplementary capital included as part
of total capital cannot exceed 100% of core capital.
The
Office of Thrift Supervision also
has authority to establish individual minimum capital requirements in
appropriate cases upon a determination that an institution’s capital level is or
may become inadequate in light of the particular circumstances. At
December 31, 2006, Northeast Community Bank met each of these capital
requirements.
Prompt
Corrective
Regulatory Action. The Office of Thrift Supervision is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution’s degree of
undercapitalization. Generally, a savings institution that has a
ratio of total capital to risk weighted assets of less than 8%, a ratio of
Tier
1 (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be “undercapitalized.” A
savings institution that has a total risk-based capital ratio less than 6%,
a
Tier 1 capital ratio of less than 3% or a leverage ratio that is less than
3% is
considered to be “significantly undercapitalized” and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to
be
“critically undercapitalized.” Subject to a narrow exception, the
Office of Thrift Supervision is required to appoint a receiver or conservator
within specified time frames for an institution that is “critically
undercapitalized.” An institution must file a capital restoration
plan with the Office of Thrift Supervision within 45 days of the date it
receives notice that it is “undercapitalized,” “significantly undercapitalized”
or “critically undercapitalized.” Compliance with the plan must be
guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions
and
expansion. “Significantly undercapitalized” and “critically
undercapitalized” institutions are subject to more extensive mandatory
regulatory actions. The Office of Thrift Supervision could also take
any one of a number of discretionary supervisory actions, including the issuance
of a capital directive and the replacement of senior executive officers and
directors.
Loans
to One
Borrower. Federal law provides that savings
institutions are generally subject to the limits on loans to one borrower
applicable to national banks. Subject to certain exceptions, savings
institution may not make a loan or extend credit to a single or related group
of
borrowers in excess of 15% of its unimpaired capital and surplus. An
additional amount may be lent, equal to 10% of unimpaired capital and surplus,
if secured by specified readily-marketable collateral.
Standards
for Safety and
Soundness. The federal banking agencies have adopted
Interagency Guidelines prescribing Standards for Safety and
Soundness. The guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes
impaired. If the Office of Thrift Supervision determines that a
savings institution fails to meet any standard prescribed by the guidelines,
the
Office of Thrift Supervision may require the institution to submit an acceptable
plan to achieve compliance with the standard.
Limitation
on Capital
Distributions. Office of Thrift Supervision regulations
impose limitations upon all capital distributions by a savings institution,
including cash dividends, payments to repurchase its shares and payments to
stockholders of another institution in a cash-out merger. Under the
regulations, an application to and the prior approval of the Office of Thrift
Supervision is required before any capital distribution if the institution
does
not meet the criteria for “expedited treatment” of applications under Office of
Thrift Supervision regulations (i.e., generally, examination and Community
Reinvestment Act ratings in the two top categories), the total capital
distributions for the calendar year exceed net income for that year plus the
amount of retained net income for the preceding two years, the institution
would
be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with the Office
of
Thrift Supervision. If an application is not required, the
institution must still provide prior notice to the Office of Thrift Supervision
of the capital distribution if, like Northeast Community Bank, it is a
subsidiary of a holding company. If Northeast
Community
Bank’s
capital were ever to fall below its regulatory requirements or the Office of
Thrift Supervision notified it that it was in need of increased supervision,
its
ability to make capital distributions could be restricted. In
addition, the Office of Thrift Supervision could prohibit a proposed capital
distribution that would otherwise be permitted by the regulation, if the agency
determines that such distribution would constitute an unsafe or unsound
practice.
Qualified
Thrift Lender
Test. Federal law requires savings institutions to meet a
qualified thrift lender test. Under the test, a savings association
is required to either qualify as a “domestic building and loan association”
under the Internal Revenue Code or maintain at least 65% of its “portfolio
assets” (total assets less: (i) specified liquid assets up to 20% of total
assets; (ii) intangibles, including goodwill; and (iii) the value of property
used to conduct business) in certain “qualified thrift investments” (primarily
residential mortgages and related investments, including certain mortgage-backed
securities) in at least 9 months out of each 12-month
period. Legislation has
expanded
the extent to which education loans, credit card loans and small business loans
may be considered “qualified thrift investments.”
A
savings institution that fails the
qualified thrift lender test is subject to certain operating restrictions and
may be required to convert to a bank charter. As of December 31,
2006, Northeast Community Bank maintained 75.9% of its portfolio assets in
qualified thrift investments and, therefore, met the qualified thrift lender
test.
Transactions
with Related
Parties. Federal law permits Northeast
Community Bank to lend to, and engage in certain other transactions with
(collectively, “covered transactions”), “affiliates” (i.e., generally, any
company that controls or is under common control with an institution), including
Northeast Community Bancorp and Northeast Community Bancorp, MHC and their
non-savings institution subsidiaries. The aggregate amount of covered
transactions with any individual affiliate is limited to 10% of the capital
and
surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution’s
capital and surplus. Loans and other specified transactions with
affiliates are required to be secured by collateral in an amount and of a type
described in federal law. The purchase of low quality assets from
affiliates is generally prohibited. Transactions with affiliates must
be on terms and under circumstances that are at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are
prohibited from lending to any affiliate that is engaged in activities that
are
not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The
Sarbanes-Oxley Act generally
prohibits loans by Northeast Community Bancorp to its executive officers and
directors. However, the Sarbanes-Oxley Act contains a specific
exemption from such prohibition for loans by Northeast Community Bank to its
executive officers and directors in compliance with federal banking
regulations. Federal regulations require that all loans or extensions
of credit to executive officers and directors of insured institutions must
be
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other persons
and must not involve more than the normal risk of repayment or present other
unfavorable features. Northeast Community Bank is therefore
prohibited from making any new loans or extensions of credit to executive
officers and directors at different rates or terms than those offered to the
general public. Notwithstanding this rule, federal regulations permit
Northeast Community Bank to make loans to executive officers and directors
at
reduced interest rates if the loan is made under a benefit program generally
available to all other employees and does not give preference to any executive
officer or director over any other employee.
In
addition, loans made to a director
or executive officer in an amount that, when aggregated with the amount of
all
other loans to the person and his or her related interests, are in excess of
the
greater of $25,000 or 5% of Northeast Community Bank’s capital and surplus, up
to a maximum of $500,000, must be approved in advance by a majority of the
disinterested members of the board of directors.
Enforcement.
The Office of Thrift Supervision has primary enforcement
responsibility over federal savings institutions and has the authority to bring
actions against the institution and all institution-affiliated parties,
including stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution. Formal enforcement action may range
from the issuance of a capital directive or cease and desist order to removal
of
officers and/or directors to institution of receivership, conservatorship or
termination of deposit insurance. Civil penalties cover a wide range
of violations and can amount to $25,000 per day, or even $1 million per day
in
especially egregious cases. The Federal Deposit
Insurance
Corporation has authority to recommend to the Director of the Office of Thrift
Supervision that enforcement action be taken with respect to a particular
savings institution. If action is not taken by the Director, the
Federal Deposit Insurance Corporation has authority to take such action under
certain circumstances. Federal law also establishes criminal
penalties for certain violations.
Assessments. Federal
savings banks are required to pay assessments to the Office of Thrift
Supervision to fund its operations. The general assessments, paid on
a semi-annual basis, are based upon the savings institution’s total assets,
including consolidated subsidiaries, financial condition and complexity of
its
portfolio. The Office of Thrift Supervision assessments paid by
Northeast Community Bank for the year ended December 31, 2006 totaled
$97,000.
Insurance
of Deposit
Accounts. Deposits of Northeast Community Bank are
insured by the Deposit Insurance Fund of the Federal Deposit Insurance
Corporation. The FDIC determines insurance premiums based on a number
of factors, primarily the risk of loss that insured institutions pose to the
Deposit Insurance Fund. Recent legislation eliminated the minimum
1.25% reserve ratio for the insurance funds, the mandatory assessments when
the
ratio fall below 1.25% and the prohibition on assessing the highest quality
banks when the ratio is above 1.25%. The FDIC has the ability to
adjust the new insurance fund’s reserve ratio between 1.15% and 1.5%, depending
on projected losses, economic changes and assessment rates at the end of a
calendar year. The FDIC has adopted regulations that set assessment
rates that took effect at the beginning of 2007. The new assessment
rates for most banks vary between five cents and seven cents for every $100
of
deposits. A change in insurance premiums could have an adverse effect
on the operating expenses and results of operations of Northeast Community
Bank. We cannot predict what insurance assessment rates will be in
the future. Assessment credits have been provided to institutions
that were paying insurance premiums prior to December 31, 1996. The
assessment credit provided to Northeast Community Bank amounts to
$307,703. As a result, Northeast Community Bank will have credits
that offset all of its premiums in 2007, 90% of the insurance premium for 2008,
90% in 2009, 90% in 2010 and 100% in 2011 and beyond until the $307,703
assessment credit is offset.
Insurance
of deposits may be terminated
by the FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by
the
FDIC or the Office of Thrift Supervision. We do not know of any
practice, condition or violation that might lead to termination of deposit
insurance.
In
addition to the assessment for
deposit insurance, institutions are required to make payments on bonds issued
in
the late 1980s by the Financing Corporation to recapitalize a predecessor
deposit insurance fund.
Federal
Home Loan Bank
System. Northeast Community Bank is a member of the Federal Home
Loan Bank System, which consists of 12 regional Federal Home Loan
Banks. The Federal Home Loan Bank provides a central credit facility
primarily for member institutions. Northeast Community Bank, as a
member of the Federal Home Loan Bank of New York, is required to acquire and
hold shares of capital stock in that Federal Home Loan
Bank. Northeast Community Bank was in compliance with this
requirement with an investment in Federal Home Loan Bank stock at December
31,
2006 of $399,000. Federal Home Loan Bank advances must be secured by
specified types of collateral.
The
Federal Home Loan Banks are
required to provide funds for the resolution of insolvent thrifts in the late
1980s and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the Federal Home Loan
Banks pay to their members and could also result in the Federal Home Loan Banks
imposing a higher rate of interest on advances to their members. If
dividends were reduced, or interest on future Federal Home Loan Bank advances
increased, our net interest income would likely also be reduced.
Federal
Reserve System.
The Federal Reserve Board regulations require savings institutions
to maintain non-interest earning reserves against their transaction accounts
(primarily Negotiable Order of Withdrawal (NOW) and regular checking
accounts). The regulations generally provide that reserves be
maintained against aggregate transaction accounts as follows: a 3%
reserve ratio is assessed on net transaction accounts up to and including $45.8
million; a 10% reserve ratio is applied above $45.8 million. The
first $8.5 million of otherwise reservable balances are exempted from the
reserve requirements. The amounts are adjusted
annually. Northeast Community Bank complies with the foregoing
requirements.
Holding
Company Regulation
General. Northeast
Community Bancorp and Northeast Community Bancorp, MHC are savings and loan
holding companies within the meaning of federal law. As such, they
are registered with the Office of Thrift Supervision and are subject to Office
of Thrift Supervision regulations, examinations, supervision, reporting
requirements and regulations concerning corporate governance and
activities. In addition, the Office of Thrift Supervision has
enforcement authority over Northeast Community Bancorp and Northeast Community
Bancorp, MHC and their non-savings institution subsidiaries. Among
other things, this authority permits the Office of Thrift Supervision to
restrict or prohibit activities that are determined to be a serious risk to
Northeast Community Bank.
Restrictions
Applicable to
Mutual Holding Companies. According to federal law and Office of
Thrift Supervision regulations, a mutual holding company, such as Northeast
Community Bancorp, MHC, may generally engage in the following
activities: (1) investing in the stock of a bank; (2) acquiring a
mutual association through the merger of such association into a bank subsidiary
of such holding company or an interim bank subsidiary of such holding company;
(3) merging with or acquiring another holding company, one of whose subsidiaries
is a bank; and (4) any activity approved by the Federal Reserve Board for a
bank
holding company or financial holding company or previously approved by Office
of
Thrift Supervision for multiple savings and loan holding
companies. In addition, mutual holding companies may engage in
activities permitted for financial holding companies. Financial
holding companies may engage in a broad array of financial service activities
including insurance and securities.
Federal
law prohibits a savings and
loan holding company, including a federal mutual holding company, from directly
or indirectly, or through one or more subsidiaries, acquiring more than 5%
of
the voting stock of another savings association, or its holding company, without
prior written approval of the Office of Thrift Supervision. Federal
law also prohibits a savings and loan holding company from acquiring more than
5% of a company engaged in activities other than those authorized for savings
and loan holding companies by federal law, or acquiring or retaining control
of
a depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating applications by holding companies to
acquire savings associations, the Office of Thrift Supervision must consider
the
financial and managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
funds, the convenience and needs of the community and competitive
factors.
The
Office of Thrift Supervision is
prohibited from approving any acquisition that would result in a multiple
savings and loan holding company controlling savings associations in more than
one state, except: (1) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (2) the acquisition
of a
savings association in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states
vary in the extent to which they permit interstate savings and loan holding
company acquisitions.
If
the savings association subsidiary
of a savings and loan holding company fails to meet the qualified thrift lender
test, the holding company must register with the Federal Reserve Board as a
bank
holding company within one year of the savings association’s failure to so
qualify.
Stock
Holding Company
Subsidiary Regulation. The Office of Thrift Supervision has
adopted regulations governing the two-tier mutual holding company form of
organization and subsidiary stock holding companies that are controlled by
mutual holding companies. Northeast Community Bancorp is the stock
holding company subsidiary of Northeast Community Bancorp,
MHC. Northeast Community Bancorp is permitted to engage in activities
that are permitted for Northeast Community Bancorp, MHC subject to the same
restrictions and conditions.
Waivers
of Dividends by
Northeast Community Bancorp, MHC. Office of Thrift
Supervision regulations require Northeast Community Bancorp, MHC to notify
the
Office of Thrift Supervision if it proposes to waive receipt of dividends from
Northeast Community Bancorp. The Office of Thrift Supervision reviews
dividend waiver notices on a case-by-case basis, and, in general, does not
object to any such waiver if: (i) the waiver would not be detrimental
to the safe and sound operation of the savings association; and (ii) the mutual
holding company’s
board
of
directors determines that such waiver is consistent with such directors’
fiduciary duties to the mutual holding company’s members.
Conversion
of Northeast
Community Bancorp, MHC to Stock Form. Office of Thrift
Supervision regulations permit Northeast Community Bancorp, MHC to convert
from
the mutual form of organization to the capital stock form of organization.
There
can be no assurance when, if ever, a conversion transaction will occur, and
the
board of directors has no current intention or plan to undertake a conversion
transaction. In a conversion transaction, a new holding company would be formed
as the successor to Northeast Community Bancorp, Northeast Community Bancorp,
MHC’s corporate existence would end, and certain depositors of Northeast
Community Bank would receive the right to subscribe for additional shares of
the
new holding company. In a conversion transaction, each share of common stock
held by stockholders other than Northeast Community Bancorp, MHC would be
automatically converted into a number of shares of common stock of the new
holding company based on an exchange ratio determined at the time of conversion
that ensures that stockholders other than Northeast Community Bancorp, MHC
own
the same percentage of common stock in the new holding company as they owned
in
Northeast Community Bancorp immediately before conversion. The total
number of shares held by stockholders other than Northeast Community Bancorp,
MHC after a conversion transaction would be increased by any purchases by such
stockholders in the stock offering conducted as part of the conversion
transaction.
Acquisition
of Control.
Under the federal Change in Bank Control Act, a notice must be
submitted to the Office of Thrift Supervision if any person (including a
company), or group acting in concert, seeks to acquire “control” of a savings
and loan holding company or savings association. An acquisition of
“control” can occur upon the acquisition of 10% or more of the voting stock of a
savings and loan holding company or savings institution or as otherwise defined
by the Office of Thrift Supervision. Under the Change in Bank Control
Act, the Office of Thrift Supervision has 60 days from the filing of a complete
notice to act, taking into consideration certain factors, including the
financial and managerial resources of the acquirer and the anti-trust effects
of
the acquisition. Any company that so acquires control would then be
subject to regulation as a savings and loan holding company.
Federal
Securities Laws
Northeast
Community Bancorp’s common
stock is registered with the Securities and Exchange Commission under the
Securities Exchange Act of 1934. Northeast Community Bancorp is
subject to the information, proxy solicitation, insider trading restrictions
and
other requirements under the Securities Exchange Act of 1934.
EXECUTIVE
OFFICERS OF THE REGISTRANT
The
Board of Directors annually elects
the executive officers of Northeast Community Bancorp, MHC, Northeast Community
Bancorp and Northeast Community Bank, who serve at the Board’s
discretion. Our executive officers are:
|
Name
|
Position
|
|||
|
Kenneth
A. Martinek
|
President
and Chief Executive Officer of the MHC, the Company and the
Bank
|
|||
|
Salvatore
Randazzo
|
Executive
Vice President and Chief Financial Officer of the MHC, the Company
and the
Bank
|
|||
|
Susan
Barile
|
Senior
Vice President and Chief Mortgage Officer of the Bank
|
|||
|
Michael
N. Gallina
|
Senior
Vice President and Chief Commerical Banking Officer of the
Bank
|
|||
Below
is
information regarding our executive officers who are not also
directors. Ages presented are as of December 31,
2006.
Susan
Barile has served as Senior Vice President and Chief Mortgage Officer of
the Bank since October 2006. Prior to serving in this position, Ms.
Barile spent 11 years as a multi-family, mixed-use and non-residential loan
officer at the Bank. Age 41.
Michael
N. Gallina was appointed Senior Vice President and Chief Commercial Banking
Officer of the Bank in March 2007. Most recently, Mr. Gallina served
as Senior Vice President, Relationship Manager at North Fork Bank since
2001. Prior to serving with North Fork Bank, Mr. Gallina was Senior
Vice President at Sterling National Bank. Mr. Gallina has over 16
years of experience as a banker. Age 38.
ITEM
1A. RISK
FACTORS
Rising
interest rates may hurt our earnings and asset value.
Our
primary source of income is net
interest income, which is the difference between the interest income generated
by our interest-earning assets (consisting primarily of loans and, to a lesser
extent, securities) and the interest expense generated by our interest-bearing
liabilities (consisting primarily of deposits).
Since
June 30, 2004, the U.S.
Federal Reserve has increased its target for the federal funds rate 17 times,
from 1.0% to 5.25%. While these short-term market interest rates
(which we use as a guide to price our deposits) have increased,
intermediate-term market interest rates (i.e., five-year) (which we use as
a
guide to price our loans) have not increased in a corresponding
manner. This “flattening” of the market yield curve (meaning that the
levels of short-term interest rates and intermediate-term interest rates
approximate each other) has had a negative impact on our interest rate spread
and net interest margin. For the year ended December 31, 2006, our
net interest margin decreased by 31 basis points to 4.24% from 4.55% at December
31, 2005.
By
the
end of 2005, the yield curve had inverted, meaning that the level of short-term
interest rates exceeded the level of intermediate-term interest
rates. Should the inverted yield curve continue or become more
pronounced, our net interest income could experience further contraction, which
could have a material adverse effect on our net income and cash flows and the
value of our assets.
Changes
in interest rates also affect the value of our interest-earning
assets. Generally, the value of fixed-rate assets fluctuates
inversely with changes in interest rates. Unrealized gains and losses
on securities available for sale are reported as a separate component of equity,
net of tax. Decreases in the fair value of securities available for
sale resulting from increases in interest rates could have an adverse effect
on
stockholders’ equity. For further discussion of how changes in
interest rates could impact us, see “Management’s Discussion and Analysis of
Results of Operations and Financial Condition—Risk Management—Interest Rate Risk
Management.”
Our
emphasis on multi-family residential, mixed-use and non-residential real estate
lending and our plans to expand into commercial lending could expose us to
increased lending risks.
Our
primary business strategy centers on continuing our emphasis on multi-family,
mixed-use and non-residential real estate loans. We have grown our
loan portfolio in recent years with respect to these types of loans and intend
to continue to emphasize these types of lending. At December 31,
2006, $200.8 million,
or 99.6%, of our loan portfolio consisted of
multi-family residential, mixed-use and non-residential real estate
loans. As a result, our credit risk profile will be higher than
traditional thrift institutions that have higher concentrations of one- to
four-family residential loans.
Loans
secured by multi-family,
mixed-use and non-residential real estate generally expose a lender to greater
risk of non-payment and loss than one- to four-family residential mortgage
loans
because repayment of the loans often depends on the successful operation of
the
property and the income stream of the underlying property. Such loans
typically involve larger loan balances to single borrowers or groups of related
borrowers compared to one- to four-family residential mortgage
loans. Accordingly, an adverse development with respect to one loan
or one credit relationship can expose us to greater risk of loss compared to
an
adverse development with respect to a
one-
to
four-family residential mortgage loan. We seek to minimize these
risks through our underwriting policies, which require such loans to be
qualified on the basis of the property’s net income and debt service ratio;
however, there is no assurance that our underwriting policies will protect
us
from credit-related losses.
As
with
loans secured by multi-family, mixed-use and non-residential real estate,
commercial loans tend to be of higher risk than one- to-four family residential
mortgage loans. We will seek to minimize the risks involved in
commercial lending by underwriting such loans on the basis of the cash flows
produced by the business; by requiring that such loans be collateralized by
various business assets, including inventory, equipment, and accounts
receivable, among others; and by requiring personal guarantees, whenever
possible. However, the capacity of a borrower to repay a commercial
loan is substantially dependent on the degree to which his or her business
is
successful. In addition, the collateral underlying such loans may
depreciate over time, may not be conducive to appraisal, or may fluctuate in
value, based upon the business’ results.
Our
recent expansion of our lending territory could expose us to increased lending
risks.
We
recently expanded our lending
territory beyond the New York metropolitan area to include all of New York,
Massachusetts, Connecticut, Rhode Island, southern Maine, Pennsylvania, New
Jersey and southern New Hampshire. In January 2004, we opened a loan
production office in Wellesley, Massachusetts. In 2006, approximately
44.0% of our total loan originations were outside the state of New York, with
approximately 12.4% of our 2006 originations made in
Massachusetts. In 2005, approximately 48.8% of our total loan
originations were outside the state of New York, with approximately 26.2% of
our
total originations in Massachusetts. While we have over fifty years
of experience in multi-family and mixed-use real estate lending in the New
York
metropolitan area and have significant expertise in non-residential real estate
lending, our experience in our expanded lending territory is more
limited. We have experienced loan officers throughout our lending
area and we apply the same underwriting standards to all of our loans,
regardless of their location. As a result, we have had no losses on
our multi-family, mixed-use and non-residential loans over the past five
years. However, there is no assurance that our loss experience
in the New York metropolitan area will be the same in our expanded lending
territory. Because we only recently increased the number of
out-of-state real estate loans in our portfolio, the lack of delinquencies
and
defaults in our loan portfolio over the past five years might not be
representative of the level of delinquencies and defaults that could occur
as we
continue to expand our real estate loan originations outside of the New York
metropolitan area.
We
may not be able to successfully implement our plans for
growth.
We
currently operate out of five full-service branch offices in the New York
metropolitan area. Recently, our management began to implement a
growth strategy that expands our presence in other select markets in the
Northeast and Midatlantic regions. In January 2004, we opened a loan
production office in Wellesley, Massachusetts and we are exploring the
possibility of opening a retail branch office in that market area. We
also intend to open two additional retail branch offices, one in Pennsylvania,
and one in a location yet to be determined. At this time, we are not
able to estimate the costs associated with or the timing of the opening of
new
branch offices. We are in the process of determining locations for
the possible branches and anticipate that we will incur approximately $50,000
in
expenses relating to our search for possible locations. In addition,
we intend to open two additional loan production offices in the next two years,
one in Pennsylvania and one in a location yet to be determined. We
anticipate that the estimated setup and operating expenses of the loan
production office in Pennsylvania will be approximately $265,000 in the first
twelve months of operations. The estimate includes the expense of
office space, equipment, communications, marketing and personnel for the loan
production office. We intend to continue to pursue opportunities to
expand our branch network and our lending operations. In connection
with the expansion of our branch network and lending operations, we would need
to hire new lending, real estate investment and other employees to support
our
expanded infrastructure. There is no assurance that we will be
successful in implementing our expansion plans or that we will be able to hire
the employees necessary to implement our plans.
If
we do not achieve profitability on new branches and loan production offices,
the
new branches and loan production offices may hurt our
earnings.
As
we expand our branch and lending
network, there is no assurance that our expansion strategy will be accretive
to
our earnings. Numerous factors will affect our expansion strategy,
such as our ability to select suitable locations for branches and loan
production offices, real estate acquisition costs, competition, interest rates,
managerial resources, our ability to hire and retain qualified personnel, the
effectiveness of our marketing strategy and our ability to attract
deposits. We can provide no assurance that we will be successful in
increasing the volume of our loans and deposits by expanding our branch and
lending network. Building and staffing new branch offices and loan
production offices will increase our operating expenses. We can
provide no assurance that we will be able to manage the costs and implementation
risks associated with this strategy so that expansion of our branch and lending
network will be profitable.
We
are expanding our branch and lending network into geographic markets in which
we
have limited experience.
Prior
to January 2004, our business was
primarily focused in the New York metropolitan area. A key component
of our strategy to grow and enhance profitability is to expand into additional
markets in Northeast and Midatlantic regions that are also in densely populated
areas surrounding urban centers. As a result, in January 2004 we
opened a loan production office in Wellesley, Massachusetts. We
intend to pursue further expansion in this market, as well as in Pennsylvania
and other market areas in future years. In Massachusetts, we have
hired employees with significant lending experience in the local
market. Our ability to operate successfully in new markets will be
dependent, in part, on our ability to identify and retain personnel familiar
with the new markets. We can provide no assurance that we will be
successful in attracting deposits or originating loans in these new geographic
markets.
Strong
competition within our primary market area and our lending territory could
hurt
our profits and slow growth.
We
face intense competition both in
making loans in our lending territory and attracting deposits in our primary
market area. This competition has made it more difficult for us to
make new loans and at times has forced us to offer higher deposit
rates. Price competition for loans and deposits might result in us
earning less on our loans and paying more on our deposits, which would reduce
net interest income. Competition also makes it more difficult to grow
loans and deposits. As of June 30, 2006, the most recent date for
which information is available from the Federal Deposit Insurance Corporation,
we held less than 0.7% of the deposits in each of Westchester, Kings and New
York counties, New York, and approximately 0.7% of the deposits in Bronx County,
New York. Competition also makes it more difficult to hire and retain
experienced employees. Some of the institutions with which we compete
have substantially greater resources and lending limits than we have and may
offer services that we do not provide. We expect competition to
increase in the future as a result of legislative, regulatory and technological
changes and the continuing trend of consolidation in the financial services
industry. Our profitability depends upon our continued ability to
compete successfully in our primary market area and our lending
territory.
Changes
in economic conditions could cause an increase in delinquencies and
non-performing assets, including loan charge-offs, which could hurt our income
and growth.
Our
loan portfolio includes primarily
real estate secured loans, demand for which may decrease during economic
downturns as a result of, among other things, an increase in unemployment,
a
decrease in real estate values or increases in interest rates. These
factors could depress our earnings and consequently our financial condition
because customers may not want or need our products and services; borrowers
may
not be able to repay their loans; the value of the collateral
securing our loans to borrowers may decline; and the quality of our loan
portfolio may decline.
Any
of the latter three scenarios could
cause an increase in delinquencies and non-performing assets or require us
to
“charge-off” a percentage of our loans and/or increase our provisions for loan
losses, which would reduce our earnings.
The
loss of our President and Chief Executive Officer could hurt our
operations.
We
rely heavily on our President and
Chief Executive Officer, Kenneth A. Martinek. The loss of Mr.
Martinek could have an adverse effect on us because, as a small community bank,
Mr. Martinek has more responsibility than would be typical at a larger financial
institution with more employees. In addition, as a small community
bank, we have fewer management-level personnel who are in position to succeed
and assume the responsibilities of Mr. Martinek.
We
operate in a highly regulated environment and we may be adversely affected
by
changes in laws and regulations.
We
are subject to extensive regulation,
supervision and examination by the Office of Thrift Supervision, our primary
federal regulator, and by the Federal Deposit Insurance Corporation, as insurer
of our deposits. Northeast Community Bancorp, MHC, Northeast
Community Bancorp and Northeast Community Bank are all subject to regulation
and
supervision by the Office of Thrift Supervision. Such regulation and
supervision governs the activities in which an institution and its holding
company may engage, and are intended primarily for the protection of the
insurance fund and the depositors and borrowers of Northeast Community Bank
rather than for holders of Northeast Community Bancorp common
stock. Regulatory authorities have extensive discretion in their
supervisory and enforcement activities, including the imposition of restrictions
on our operations, the classification of our assets and determination of the
level of our allowance for loan losses. Any change in such regulation
and oversight, whether in the form of regulatory policy, regulations,
legislation or supervisory action, may have a material impact on our
operations.
Northeast
Community Bancorp, MHC’s majority control of our common stock will enable it to
exercise voting control over most matters put to a vote of stockholders and
will
prevent stockholders from forcing a sale or a second-step conversion transaction
you may like.
Northeast
Community Bancorp, MHC, owns
a majority of Northeast Community Bancorp’s common stock and, through its board
of directors, will be able to exercise voting control over most matters put
to a
vote of stockholders. The same directors and officers who manage
Northeast Community Bancorp and Northeast Community Bank also manage Northeast
Community Bancorp, MHC. As a federally chartered mutual holding
company, the board of directors of Northeast Community Bancorp, MHC must ensure
that the interests of depositors of Northeast Community Bank are represented
and
considered in matters put to a vote of stockholders of Northeast Community
Bancorp. Therefore, the votes cast by Northeast Community Bancorp,
MHC may not be in your personal best interests as a stockholder. For
example, Northeast Community Bancorp, MHC may exercise its voting control to
defeat a stockholder nominee for election to the board of directors of Northeast
Community Bancorp. In addition, stockholders will not be able to
force a merger or second-step conversion transaction without the consent of
Northeast Community Bancorp, MHC. Some stockholders may desire a sale
or merger transaction, since stockholders typically receive a premium for their
shares, or a second-step conversion transaction, since fully converted
institutions tend to trade at higher multiples than mutual holding
companies.
The
Office of Thrift Supervision policy on remutualization transactions could
prohibit acquisition of Northeast Community Bancorp, which may adversely affect
our stock price.
Current
Office of Thrift Supervision
regulations permit a mutual holding company to be acquired by a mutual
institution in a remutualization transaction. However, the Office of
Thrift Supervision has issued a policy statement indicating that it views
remutualization transactions as raising significant issues concerning disparate
treatment of minority stockholders and mutual members of the target entity
and
raising issues concerning the effect on the mutual members of the acquiring
entity. Under certain circumstances, the Office of Thrift Supervision
intends to give these issues special scrutiny and reject applications providing
for the remutualization of a mutual holding company unless the applicant can
clearly demonstrate that the Office of Thrift Supervision’s concerns are not
warranted in the particular case. Should the Office of Thrift
Supervision prohibit or otherwise restrict these transactions in the future,
our
per share stock price may be adversely affected. In addition, Office
of Thrift Supervision regulations prohibit, for three years following completion
of our initial public offering in July 2006, the acquisition of more than 10%
of
any class of equity security issued by us without the prior approval of the
Office of Thrift Supervision.
ITEM
1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM
2. PROPERTIES
We
conduct our business through our
main office and branch offices. The following table sets forth
certain information relating to these facilities as of December 31,
2006.
|
Location
|
Year
Opened
|
Square
Footage
|
Date
of Lease
Expiration
|
Owned/
Leased
|
Net
Book Value
|
|||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Corporate
Headquarters:
|
||||||||||||
|
325
Hamilton Avenue
White
Plains, New York 10601
|
1994
|
N/A
|
Owned
|
$
|
1,142
|
|||||||
|
Branch
Offices:
|
||||||||||||
|
1470
First Avenue
New
York, NY 10021(1)
|
2006
|
04/30/2011
|
Leased
|
273
|
||||||||
|
1355
First Avenue
New
York, NY 10021(2)
|
1946
|
N/A
|
Owned
|
6,182
|
||||||||
|
590
East 187th Street
Bronx,
New York 10458
|
1972
|
N/A
|
Owned
|
570
|
||||||||
|
2047
86th Street
Brooklyn,
New York 11214
|
1988
|
N/A
|
Owned
|
998
|
||||||||
|
242
West 23rd Street
New
York, NY 10011
|
1996
|
N/A
|
Owned/Leased(3)
|
1,067
|
||||||||
|
1751
Second Avenue
New
York, NY 10128
|
1978
|
09/30/2015
|
Leased
|
40
|
||||||||
|
Other
Properties:
|
||||||||||||
|
300
Hamilton Avenue
White
Plains, New York 10601
|
2000
|
05/31/2010
|
Leased
|
68
|
||||||||
|
40
Grove Street
Wellesley,
Massachusetts 02482
|
2004
|
02/28/2009
|
Leased
|
2
|
||||||||
_______________________________
|
(1)
|
The
Bank has temporarily relocated its branch office at 1355 First Avenue
to
this property in anticipation of the sale and renovation of the building
located at 1355 First Avenue. See footnote 2
below.
|
|
(2)
|
The
Bank has entered into an agreement for the sale of this building
and has
closed the branch at this location and temporarily relocated it to
1470
First Avenue, New York, New York. Under the terms of the
agreement, the Bank will enter into a 99 year lease for office space
on
the first floor of the building so that the Bank may continue to
operate a
branch office at this location after the building has been sold and
renovated. The due diligence period for the sale of the
building expired on March 30, 2007, and the Bank expects that the
sale of the building at 1355 First Avenue will be completed in the
second
quarter of 2007.
|
|
(3)
|
This
property is owned by us, but is subject to a 99 year ground lease,
the
term of which expires in 2084.
|
ITEM
3. LEGAL
PROCEEDINGS
Legal
Proceedings
From
time to time, we may be party to
various legal proceedings incident to our business. At December 31,
2006, we were not a party to any pending legal proceedings that we believe
would
have a material adverse effect on our financial condition, results of operations
or cash flows.
ITEM
4.
SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
None.
PART
II
|
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
The
Company’s common stock is listed on
the Nasdaq Stock Market LLC (“NASDAQ”) under the trading symbol
“NECB.” The Company completed its initial public offering on July 5,
2006 and commenced trading on July 6, 2006. The following table sets
forth the high and low sales prices of the common stock for the year ended
December 31, 2006, as reported by NASDAQ. The Company has not paid
any dividends to its shareholders to date. See Item 1,
“Business—Regulation and Supervision—Regulation of Federal Savings
Institutions—Limitation on Capital Distributions” and Note 2 in the Notes
to the Consolidated Financial Statements for more information relating to
restrictions on dividends.
|
Dividends
|
High
|
Low
|
|||||||
|
2006:
|
|||||||||
|
First
Quarter
|
N/A
|
N/A
|
N/A
|
||||||
|
Second
Quarter
|
N/A
|
N/A
|
N/A
|
||||||
|
Third
Quarter
|
N/A
|
$ |
11.45
|
$ |
10.75
|
||||
|
Fourth
Quarter
|
N/A
|
12.35
|
11.25
|
||||||
As
of March 12, 2007, there were
approximately 427 holders of record of the Company’s common stock.
The
Company did not repurchase any of
its common stock during the fourth quarter of 2006 and at December 31, 2006,
we
had no publicly announced repurchase plans or programs.
Stock
Performance Graph
The
following graph compares the
cumulative total stockholder return on the Company’s common stock with the
cumulative total return on the Nasdaq Composite the SNL Thrift Index and the
SNL
MHCs Thrift Index. The graph assumes $100 was invested at the close of business
on July 6, 2006, the initial day of trading of the Company’s common
stock.
|
Period
Ending
|
||||||||||||||||||||||||
|
Index
|
7/6/06
|
8/31/06
|
9/30/06
|
10/31/06
|
11/30/06
|
12/31/06
|
||||||||||||||||||
|
Northeast
Community Bancorp, Inc.
|
100.00
|
102.55
|
103.18
|
103.18
|
102.27
|
111.73
|
||||||||||||||||||
|
NASDAQ
Composite
|
100.00
|
101.54
|
104.97
|
109.89
|
113.18
|
113.88
|
||||||||||||||||||
|
SNL
Thrift Index
|
100.00
|
98.49
|
101.07
|
102.95
|
105.51
|
107.94
|
||||||||||||||||||
|
SNL
MHCs Thrift Index
|
100.00
|
105.31
|
110.15
|
114.75
|
120.58
|
121.76
|
||||||||||||||||||
ITEM
6. SELECTED
FINANCIAL DATA
|
At
or For the Years Ended December 31,
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||||||
|
(Dollars
in thousands, except per share data)
|
||||||||||||||||||||
|
Financial
Condition Data:
|
||||||||||||||||||||
|
Total
assets
|
$ |
288,417
|
$ |
238,821
|
$ |
237,300
|
$ |
231,788
|
$ |
234,331
|
||||||||||
|
Cash
and cash equilavents
|
36,749
|
27,389
|
48,555
|
57,824
|
46,017
|
|||||||||||||||
|
Securities
held to maturity
|
27,455
|
12,228
|
11,395
|
9,452
|
8,555
|
|||||||||||||||
|
Securities
available for sale
|
355
|
362
|
473
|
649
|
975
|
|||||||||||||||
|
Loans
receivable, net
|
201,306
|
190,896
|
167,690
|
154,546
|
168,069
|
|||||||||||||||
|
Bank
owned life insurance
|
8,154
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Deposits
|
188,592
|
193,314
|
193,617
|
190,037
|
193,401
|
|||||||||||||||
|
Advances
from Federal Home Loan Bank
|
–
|
–
|
–
|
–
|
900
|
|||||||||||||||
|
Total
stockholders’ equity
|
96,751
|
43,120
|
41,146
|
39,589
|
37,192
|
|||||||||||||||
|
Operating
Data:
|
||||||||||||||||||||
|
Interest
income
|
$ |
15,348
|
$ |
13,652
|
$ |
12,885
|
$ |
14,513
|
$ |
16,540
|
||||||||||
|
Interest
expense
|
4,493
|
3,110
|
2,494
|
2,620
|
4,236
|
|||||||||||||||
|
Net
interest
income
|
10,855
|
10,542
|
10,391
|
11,893
|
12,304
|
|||||||||||||||
|
Provision
for loan
losses
|
–
|
–
|
–
|
–
|
294
|
|||||||||||||||
|
Net
interest income after provision for loan
losses
|
10,855
|
10,542
|
10,391
|
11,893
|
12,010
|
|||||||||||||||
|
Other
income
|
619
|
534
|
423
|
491
|
1,463
|
|||||||||||||||
|
Other
expenses
|
8,870
|
7,515
|
8,078
|
7,400
|
7,449
|
|||||||||||||||
|
Income
before income
taxes
|
2,604
|
3,561
|
2,736
|
4,984
|
6,024
|
|||||||||||||||
|
Provision
for income
taxes
|
1,046
|
1,571
|
1,173
|
2,592
|
2,723
|
|||||||||||||||
|
Net
income
|
$ |
1,558
|
$ |
1,990
|
$ |
1,563
|
$ |
2,392
|
$ |
3,301
|
||||||||||
|
Net
income per share – basic and diluted (1)
|
$ |
0.06
|
N/A
|
N/A
|
N/A
|
N/A
|
||||||||||||||
_______________________________________
(1) The
Company completed its initial public stock offering on July 5,
2006.
|
At
or For the Years Ended December 31,
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||||||
|
Performance
Ratios:
|
||||||||||||||||||||
|
Return
on average assets
|
0.57 | % | 0.83 | % | 0.66 | % | 1.02 | % | 1.32 | % | ||||||||||
|
Return
on average equity
|
2.24
|
4.69
|
3.80
|
6.13
|
9.18
|
|||||||||||||||
|
Interest
rate spread (1)
|
3.65
|
4.27
|
4.36
|
5.07
|
4.81
|
|||||||||||||||
|
Net
interest margin (2)
|
4.24
|
4.55
|
4.58
|
5.30
|
5.10
|
|||||||||||||||
|
Noninterest
expense to average assets
|
3.26
|
3.13
|
3.42
|
3.16
|
2.97
|
|||||||||||||||
|
Efficiency
ratio (3)
|
77.31
|
67.85
|
74.70
|
59.75
|
54.11
|
|||||||||||||||
|
Average
interest-earning assets to average
interest-bearing liabilities
|
133.99
|
120.33
|
119.73
|
118.82
|
116.66
|
|||||||||||||||
|
Average
equity to average assets
|
25.57
|
17.65
|
17.45
|
16.66
|
14.35
|
|||||||||||||||
|
Capital
Ratios - Bank:
|
||||||||||||||||||||
|
Tangible
capital
|
25.46
|
17.92
|
17.05
|
16.92
|
15.72
|
|||||||||||||||
|
Core
capital
|
25.46
|
17.92
|
17.05
|
16.92
|
15.72
|
|||||||||||||||
|
Total
risk-based capital
|
44.58
|
33.08
|
35.71
|
36.33
|
33.60
|
|||||||||||||||
|
Asset
Quality Ratios:
|
||||||||||||||||||||
|
Allowance
for loan losses as a percent of
total
loans
|
0.60
|
0.63
|
0.71
|
0.77
|
0.72
|
|||||||||||||||
|
Allowance
for loan losses as a percent of nonperforming
loans
|
N/M
|
N/M
|
N/M
|
N/M
|
4,353.57
|
|||||||||||||||
|
Net
charge-offs (recoveries) to average outstanding
loans during the period
|
0.00
|
0.00
|
0.00
|
0.01
|
0.00
|
|||||||||||||||
|
Non-performing
loans as a percent of
total loans
|
0.00
|
0.00
|
0.00
|
0.00
|
0.02
|
|||||||||||||||
|
Other
Data:
|
||||||||||||||||||||
|
Number
of:
|
||||||||||||||||||||
|
Real
estate loans outstanding
|
400
|
399
|
364
|
381
|
444
|
|||||||||||||||
|
Deposit
accounts
|
15,898
|
17,243
|
18,251
|
19,528
|
20,755
|
|||||||||||||||
|
Offices
(4)
|
8
|
8
|
7
|
7
|
6
|
|||||||||||||||
____________________________________
|
(1)
|
Represents
the difference between the weighted average yield on average
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
|
|
(2)
|
Represents
net interest income as a percent of average interest-earning
assets.
|
|
(3)
|
Represents
noninterest expense divided by the sum of net interest income and
noninterest income.
|
|
(4)
|
Includes
our corporate headquarters, five full service branches, one loan
production office and an office that houses our processing
center.
|
N/M
–
not
meaningful as non-performing loans as of these dates.
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
Income.
Our primary source of pre-tax income is net interest income. Net
interest income is the difference between interest income, which is the income
that we earn on our loans and investments, and interest expense, which is the
interest that we pay on our deposits and borrowings. Other
significant sources of pre-tax income are prepayment penalties on multi-family,
mixed-use and non-residential real estate loans and service charges – mostly
from service charges on deposit accounts – and fees for various
services.
Allowance
for Loan
Losses. The allowance for loan losses is a
valuation allowance for losses inherent in the loan portfolio. We
evaluate the need to establish allowances against losses on loans on a quarterly
basis. When additional allowances are necessary, a provision for loan
losses is charged to earnings.
Expenses. The
noninterest expenses we incur in operating our business consist of salary and
employee benefits expenses, occupancy and equipment expenses, advertising
expenses, federal insurance premiums and other miscellaneous
expenses.
Salary
and employee benefits consist
primarily of the salaries and wages paid to our employees, payroll taxes and
expenses for health insurance, retirement plans and other employee
benefits.
Occupancy
and equipment expenses, which
are the fixed and variable costs of buildings and equipment, consist primarily
of depreciation charges, ATM and data processing expenses, furniture and
equipment expenses, maintenance, real estate taxes and costs of
utilities. Depreciation of premises and equipment is computed using
the straight-line method based on the useful lives of the related assets, which
range from three to 40 years. Leasehold improvements are amortized
over the shorter of the useful life of the asset or term of the
lease.
Advertising
expenses include expenses
for print, promotions, third-party marketing services and premium
items.
Federal
insurance premiums are payments
we make to the Federal Deposit Insurance Corporation for insurance of our
deposit accounts.
Other
expenses include expenses for
professional services, office supplies, postage, telephone, insurance,
charitable contributions, regulatory assessments and other miscellaneous
operating expenses.
Critical
Accounting Policies
We
consider accounting policies
involving significant judgments and assumptions by management that have, or
could have, a material impact on the carrying value of certain assets or on
income to be critical accounting policies. We consider the following
to be our critical accounting policies: allowance for loan losses and
deferred income taxes.
Allowance
for Loan
Losses. The allowance for loan losses is
the amount estimated by management as necessary to cover probable credit losses
in the loan portfolio at the statement of financial condition
date. The allowance is established through the provision for loan
losses, which is charged to income. Determining the amount of the
allowance for loan losses necessarily involves a high degree of
judgment. Among the material estimates required to establish the
allowance are: loss exposure at default; the amount and timing of
future cash flows on impacted loans; value of collateral; and determination
of
loss factors to be applied to the various elements of the
portfolio. All of these estimates are susceptible to significant
change. Management reviews the level of the allowance on a quarterly
basis and establishes the provision for loan losses based upon an evaluation
of
the portfolio, past loss experience, current economic conditions and other
factors related to the collectibility of the loan portfolio. Although
we believe that we use the best information available to establish the allowance
for loan losses, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making
the
evaluation. In addition, the Office of Thrift Supervision, as an
integral part of its
examination
process, periodically reviews our allowance for loan losses. The
Office of Thrift Supervision could require us to recognize adjustments to the
allowance based on its judgments about information available to it at the time
of its examination. A large loss could deplete the allowance and
require increased provisions to replenish the allowance, which would negatively
affect earnings. For additional discussion, see note 1 of the notes
to the consolidated financial statements included elsewhere in this
filing.
Deferred
Income
Taxes. We use the asset and liability method of accounting
for income taxes as prescribed in Statement of Financial Accounting Standards
No. 109, “Accounting for Income Taxes.” Under this method, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. If
current available information raises doubt as to the realization of the deferred
tax assets, a valuation allowance is established. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. We exercise significant judgment in
evaluating the amount and timing of recognition of the resulting tax liabilities
and assets. These judgments require us to make projections of future
taxable income. The judgments and estimates we make in determining
our deferred tax assets, which are inherently subjective, are reviewed on a
continual basis as regulatory and business factors change. Any
reduction in estimated future taxable income may require us to record a
valuation allowance against our deferred tax assets. A valuation
allowance would result in additional income tax expense in the period, which
would negatively affect earnings.
Expected
Sale of Our New York City Branch Office
On
December 13, 2006, the Bank entered
into an agreement to sell the Bank’s branch office building located at 1353-1355
First Avenue, New York, New York. The purchase price for the building
is $28 million. Under the terms of the agreement, the Bank will
receive $10 million in cash at closing and the remaining $18 million will be
paid in two equal installments of $9 million on each of the first and second
anniversary of the date of the closing pursuant to a promissory note secured
by
a purchase money real estate mortgage, assignment and security
agreement. The agreement to sell the building is subject to numerous
customary undertakings, covenants, obligations and
conditions. Concurrently with the execution of the agreement, the
purchaser deposited $200,000 with an escrow agent. On March 30, 2007,
the purchaser’s due diligence period expired, at which time the purchaser
delivered an additional $800,000 with the escrow agent. The sale of
the building is expected to be completed in the second quarter of
2007.
In
connection with the sale of the
branch office building, the Bank will enter into a 99 year lease to enable
the
Bank to retain a branch office at 1355 First Avenue. In anticipation
of the sale, and the renovation of the building by its new owner, the Bank
has
closed its branch office at this location and temporarily relocated its branch
office to 1470 First Avenue, New York, New York.
Balance
Sheet Analysis
Loans. Our
primary lending activity is the origination of loans secured by real
estate. We originate real estate loans secured by multi-family
residential real estate, mixed-use real estate and non-residential real
estate. To a much lesser extent, we originate consumer loans.
At December 31, 2006 real estate loans totaled $201.2
million, or 99.8% of total loans, compared to $191.1 million, or 99.8% of total
loans, at December 31, 2005. The increase in outstanding real
estate loan balances of $10.1 million was due primarily to lower prepayments
in
2006 versus 2005 and new loan originations.
The
largest segment of our real estate
loans is multi-family residential loans. As of December 31, 2006 our
real estate loan portfolio consisted of $110.4 million, or 54.8%, in
multi-family residential real estate loans, $42.6 million, or 21.1%, in
mixed-use real estate loans, $47.8 million, or 23.7%, in non-residential real
estate loans and $405,000, or 0.2%, in one- to four-family residential real
estate loans. At December 31, 2005 our real estate loan portfolio
consisted of $100.4 million, or 52.4%, in multi-family real estate loans, $43.9
million, or 22.9%, in mixed-use real estate loans, $46.2 million , or 24.1%,
in
non-residential real estate loans and $587,000, or 0.3%, in one-to four-family
residential loans.
During
2006 the multi-family
residential portion of our portfolio increased by $10.0 million, the mixed-use
portion decreased by $1.3 million, the non-residential portion increased by
$1.6
million and the one-to-four family portion decreased by $182,000
We
also originate several types of
consumer loans secured by savings accounts or certificates of deposit (share
loans) and overdraft protection for checking accounts which is linked to
statement savings accounts and has the ability to transfer funds from the
statement savings account to the checking account when needed to cover
overdrafts. Consumer loans totaled $419,000 and represented
0.2% of total loans at December 31, 2006, compared to $351,000, or 0.2%, of
total loans at December 31, 2005.
The
following table sets forth the
composition of our loan portfolio at the dates indicated.
|
At
December 31,
|
||||||||||||||||||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||||||||||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Real
estate:
|
||||||||||||||||||||||||||||||||||||||||
|
One-
to four-family
|
$ |
405
|
0.20 | % | $ |
587
|
0.31 | % | $ |
837
|
0.49 | % | $ |
985
|
0.63 | % | $ |
1,569
|
0.93 | % | ||||||||||||||||||||
|
Multi-family
(1)
|
110,389
|
54.76
|
100,360
|
52.43
|
99,400
|
58.93
|
86,000
|
55.29
|
95,449
|
56.30
|
||||||||||||||||||||||||||||||
|
Mixed-use
(1)
|
42,576
|
21.12
|
43,919
|
22.94
|
38,287
|
22.70
|
40,457
|
26.01
|
50,814
|
29.98
|
||||||||||||||||||||||||||||||
|
Total
residential real estate
loans
|
153,370
|
76.08
|
144,866
|
75.68
|
138,524
|
82.12
|
127,442
|
81.93
|
147,832
|
87.21
|
||||||||||||||||||||||||||||||
|
Non-residential
real estate (1)
|
47,802
|
23.71
|
46,219
|
24.14
|
29,785
|
17.66
|
27,795
|
17.87
|
21,414
|
12.63
|
||||||||||||||||||||||||||||||
|
Total
real estate
|
201,172
|
99.79
|
191,085
|
99.82
|
168,309
|
99.78
|
155,237
|
99.80
|
169,246
|
99.84
|
||||||||||||||||||||||||||||||
|
Consumer:
|
||||||||||||||||||||||||||||||||||||||||
|
Overdraft
lines of credit
|
71
|
.04
|
83
|
0.04
|
96
|
0.06
|
113
|
0.07
|
142
|
0.08
|
||||||||||||||||||||||||||||||
|
Passbook
loans
|
348
|
.17
|
268
|
0.14
|
270
|
0.16
|
207
|
0.13
|
136
|
0.08
|
||||||||||||||||||||||||||||||
|
Total
consumer loans
|
419
|
.21
|
351
|
0.18
|
366
|
0.22
|
320
|
0.20
|
278
|
0.16
|
||||||||||||||||||||||||||||||
|
Total
loans
|
201,591
|
100.00 | % |
191,436
|
100.00 | % |
168,675
|
100.00 | % |
155,557
|
100.00 | % |
169,524
|
100.00 | % | |||||||||||||||||||||||||
|
Net
deferred loan costs (fees)
|
915
|
660
|
215
|
189
|
(236 | ) | ||||||||||||||||||||||||||||||||||
|
Allowance
for losses
|
(1,200 | ) | (1,200 | ) | (1,200 | ) | (1,200 | ) | (1,219 | ) | ||||||||||||||||||||||||||||||
|
Loans,
net
|
$ |
201,306
|
$ |
190,896
|
$ |
167,690
|
$ |
154,546
|
$ |
168,069
|
||||||||||||||||||||||||||||||
______________________________________
|
(1)
|
Includes
equity lines of credit that we originate on properties on which we
hold
the first mortgage.
|
The
following table sets forth certain information at December 31, 2006 regarding
the dollar amount of loan principal repayments coming due during the periods
indicated. The table does not include any estimate of prepayments,
which significantly shorten the average life of all loans and may cause our
actual repayment experience to differ from that shown below.
The
following table sets forth the dollar amount of all loans at December 31, 2006
that are due after December 31, 2007 and have either fixed or adjustable
interest rates.
|
Fixed
Rates
|
Adjustable
Rates
|
Total
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Residential
real estate:
|
||||||||||||
|
One-
to
four-family
|
$ |
73
|
$ |
327
|
$ |
400
|
||||||
|
Multi-family
|
-
|
106,343
|
106,343
|
|||||||||
|
Mixed-use
|
320
|
41,437
|
41,757
|
|||||||||
|
Non-residential
real
estate
|
450
|
46,608
|
47,058
|
|||||||||
|
Consumer
and other
loans
|
–
|
71
|
71
|
|||||||||
|
Total
|
$ |
843
|
$ |
194,786
|
$ |
195,629
|
||||||
The
following table shows loan
origination, purchase and sale activity during the periods
indicated.
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Total
loans at beginning of
period
|
$ |
191,436
|
$ |
168,675
|
$ |
155,557
|
$ |
169,524
|
$ |
181,967
|
||||||||||
|
Loans
originated:
|
||||||||||||||||||||
|
Residential
real estate:
|
||||||||||||||||||||
|
One-
to four-family
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Multi-family
|
19,409
|
24,551
|
34,939
|
23,114
|
21,828
|
|||||||||||||||
|
Mixed-use
|
7,304
|
9,794
|
11,801
|
5,945
|
8,679
|
|||||||||||||||
|
Non-residential
real estate
|
9,010
|
23,831
|
6,957
|
12,006
|
4,073
|
|||||||||||||||
|
Consumer
and other loans
|
80
|
–
|
63
|
71
|
–
|
|||||||||||||||
|
Total
loans originated
|
35,803
|
58,176
|
53,760
|
41,136
|
34,580
|
|||||||||||||||
|
Deduct:
|
||||||||||||||||||||
|
Loan
principal repayments
|
25,648
|
35,415
|
40,642
|
52,006
|
47,023
|
|||||||||||||||
|
Loan
sales
|
–
|
–
|
–
|
3,097
|
–
|
|||||||||||||||
|
Total
deductions
|
25,648
|
35,415
|
40,642
|
55,103
|
47,023
|
|||||||||||||||
|
Total
loans at end of period
|
$ |
201,591
|
$ |
191,436
|
$ |
168,675
|
$ |
155,557
|
$ |
169,524
|
||||||||||
Securities. Our
securities portfolio consists primarily of U.S. Treasury securities, U.S.
Government agency securities, and mortgage-backed
securities. Securities increased $15.2 million, or 124.5%, in the
year ended December 31, 2006 and $722,000, or 6.1%, in the year ended December
31, 2005 due to purchases of additional securities for the
portfolio.
The
following table sets forth the amortized cost and fair values of our securities
portfolio at the dates indicated.
|
At
December 31,
|
||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
||||||||||||||||||||||
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Securities
available for sale:
|
||||||||||||||||||||||||
|
Fannie
Mae common
stock
|
$ |
4
|
$ |
72
|
$ |
4
|
$ |
58
|
$ |
4
|
$ |
86
|
||||||||||||
|
Mortgage-backed
securities
|
281
|
283
|
302
|
304
|
381
|
387
|
||||||||||||||||||
|
Total
|
$ |
285
|
$ |
355
|
$ |
306
|
$ |
362
|
$ |
385
|
$ |
473
|
||||||||||||
|
Securities
held to maturity:
|
||||||||||||||||||||||||
|
U.S.
Government and agency securities
|
$ |
22,904
|
$ |
22,904
|
$ |
4,999
|
$ |
4,950
|
$ |
2,000
|
$ |
1,993
|
||||||||||||
|
Mortgage-backed
securities
|
4,551
|
4,564
|
7,229
|
7,232
|
9,395
|
9,463
|
||||||||||||||||||
|
Total
|
$ |
27,455
|
$ |
27,468
|
$ |
12,228
|
$ |
12,182
|
$ |
11,395
|
$ |
11,456
|
||||||||||||
At
December 31, 2006, we had no
investments in a single company or entity (other than the U.S. Government or
an
agency of the U.S. Government) that had an aggregate book value in excess of
10%
of our equity.
The
following table sets forth the stated maturities and weighted average yields
of
debt securities at December 31, 2006. Certain mortgage-backed
securities have adjustable interest rates and will reprice annually within
the
various maturity ranges. These repricing schedules are not reflected
in the table below. At December 31, 2006, mortgage-backed securities
with adjustable rates totaled $4.5 million. Weighted average yields
are on a tax-equivalent basis.
|
One
Year
or
Less
|
More
than
One
Year to
Five
Years
|
More
than
Five
Years to
Ten
Years
|
More
than
Ten
Years
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
|||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Securities
available for sale:
|
||||||||||||||||||||||||||||||||||||||||
|
Fannie
Mae common stock
|
$ |
72
|
0.00 | % | $ |
–
|
-
|
$ |
–
|
-
|
$ |
-
|
-
|
$ |
72
|
-
|
||||||||||||||||||||||||
|
Mortgage-backed
securities
|
–
|
-
|
4
|
6.50 | % |
–
|
-
|
279
|
5.59 | % |
283
|
5.61 | % | |||||||||||||||||||||||||||
|
Total
securities available for sale
|
$ |
72
|
0.00
|
$ |
4
|
6.50 | % |
–
|
-
|
$ |
279
|
5.59 | % | $ |
355
|
4.47 | % | |||||||||||||||||||||||
|
Securities
held to maturity:
|
||||||||||||||||||||||||||||||||||||||||
|
U.S.
Government and agency
securities
|
$ |
21,904
|
4.92 | % | $ |
1,000
|
4.00 | % | $ |
–
|
$ |
-
|
-
|
$ |
22,904
|
4.88 | % | |||||||||||||||||||||||
|
Mortgage-backed
securities
|
–
|
-
|
258
|
6.53 | % |
95
|
6.51 | % |
4,198
|
5.33 | % |
4,551
|
5.43 | % | ||||||||||||||||||||||||||
|
Total
securities held to maturity
|
$ |
21,904
|
4.92 | % | $ |
1,258
|
4.52 | % | $ |
95
|
6.51 | % | $ |
4,198
|
5.33 | % | $ |
27,455
|
4.97 | % | ||||||||||||||||||||
Deposits. Our
primary source of funds is retail deposit accounts which are comprised of
savings accounts, demand deposits and certificates of deposit held primarily
by
individuals and businesses within our primary market area.
Deposits decreased
$4.7
million, or 2.4%, in the year ended December 31, 2006. The decrease
in deposits is primarily attributable to withdrawals made by depositors for
the
purchase of stock during the initial public offering and to a lesser degree,
due
to the continuing intense rate competition in all markets in which we operate
and our strategy of offering rates on our deposit accounts that are in the
middle of the market.
The
following table sets forth the
balances of our deposit products at the dates indicated.
|
At
December 31,
|
||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
||||||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
Now
and money market deposit accounts
|
$ |
21,137
|
11.2 | % | $ |
22,731
|
11.8 | % | $ |
24,099
|
12.4 | % | ||||||||||||
|
Savings
accounts
|
60,755
|
32.2
|
73,133
|
37.8
|
77,466
|
40.0
|
||||||||||||||||||
|
Noninterest
bearing demand deposits
|
1,439
|
0.8
|
1,499
|
0.8
|
2,055
|
1.1
|
||||||||||||||||||
|
Certificates
of
deposit
|
105,261
|
55.8
|
95,951
|
49.6
|
89,997
|
46.5
|
||||||||||||||||||
|
Total
|
$ |
188,592
|
100.0 | % | $ |
193,314
|
100.0 | % | $ |
193,617
|
100.0 | % | ||||||||||||
The
following table indicates the amount of certificates of deposit with balances
of
$100,000 or greater by time remaining until maturity as of December 31,
2006. We do not solicit jumbo certificates of deposit nor do we offer
special rates for jumbo certificates. The minimum deposit to open a
certificate of deposit ranges from $500 to $2,500.
|
Maturity
Period
|
Certificates
of
Deposit
|
|||
|
(In
thousands)
|
||||
|
Three
months or less
|
$ |
3,945
|
||
|
Over
three through six months
|
6,153
|
|||
|
Over
six through twelve months
|
6,217
|
|||
|
Over
twelve months
|
9,453
|
|||
|
Total
|
$ |
25,768
|
||
The
following table sets forth time deposits classified by rates at the dates
indicated.
|
At
December 31,
|
||||||||||||||
|
2006
|
2005
|
2004
|
||||||||||||
|
(In
thousands)
|
||||||||||||||
| 0.00-1.00% | $ |
32
|
$ |
567
|
$ |
4,233
|
||||||||
| 1.01-2.00% |
329
|
10,350
|
38,457
|
|||||||||||
| 2.01-3.00% |
9,407
|
33,683
|
18,637
|
|||||||||||
| 3.01-4.00% |
26,025
|
28,680
|
13,739
|
|||||||||||
| 4.01-5.00% |
47,212
|
22,284
|
11,654
|
|||||||||||
| 5.01-6.00% |
22,249
|
338
|
2,083
|
|||||||||||
|
Over
6.00%
|
7
|
49
|
1,194
|
|||||||||||
|
Total
|
$ |
105,261
|
$ |
95,951
|
$ |
89,997
|
||||||||
The
following table sets forth the amount and maturities of time deposits at
December 31, 2006.
|
Amount
Due
|
||||||||||||||||||||||||||||||
|
Less
Than
One
Year
|
More
Than
One
Year to
Two
Years
|
More
Than
Two
Years to
Three
Years
|
More
Than
Three
Years
to
Four Years
|
More
Than
Four
Years
to
Five
Years
|
Total
|
Percent
of
Total
Certificate
Accounts
|
||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||
| 0.00–1.00% | $ |
32
|
$ |
-
|
$ |
-
|
$ |
-
|
$ |
–
|
$ |
32
|
0.03 | % | ||||||||||||||||
| 1.01–2.00% |
329
|
–
|
–
|
-
|
–
|
329
|
0.31
|
|||||||||||||||||||||||
| 2.01–3.00% |
8,242
|
1,117
|
48
|
-
|
–
|
9,407
|
8.94
|
|||||||||||||||||||||||
| 3.01–4.00% |
15,800
|
7,183
|
3,008
|
34
|
–
|
26,025
|
24.72
|
|||||||||||||||||||||||
| 4.01–5.00% |
28,480
|
1,667
|
6,574
|
9,191
|
1,300
|
47,212
|
44.85
|
|||||||||||||||||||||||
| 5.01–6.00% |
15,143
|
3,570
|
–
|
114
|
3,422
|
22,249
|
21.14
|
|||||||||||||||||||||||
|
Over
6.00%
|
7
|
–
|
–
|
–
|
–
|
7
|
0.01
|
|||||||||||||||||||||||
|
Total
|
$ |
68,033
|
$ |
13,537
|
$ |
9,630
|
$ |
9,339
|
$ |
4,722
|
$ |
105,261
|
100.0 | % | ||||||||||||||||
Borrowings. We
may utilize borrowings from a variety of sources to supplement our supply of
funds for loans and investments and to meet deposit withdrawal
requirements. However, we had no borrowings as of or during the years
ended December 31, 2006, 2005 and 2004.
Results
of Operations for the Years Ended December 31, 2006, 2005 and
2004
Overview.
|
2006
|
2005
|
2004
|
%
Change
2006/2005
|
%
Change
2005/2004
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Net
income
|
$ |
1,558
|
$ |
1,990
|
$ |
1,563
|
(21.7 | )% | 27.3 | % | ||||||||||
|
Return
on average assets
|
0.57 | % | 0.83 | % | 0.66 | % | (31.3 | ) |
25.8
|
|||||||||||
|
Return
on average equity
|
2.24
|
4.69
|
3.80
|
(52.2 | ) |
23.4
|
||||||||||||||
|
Average
equity to average assets
|
25.57
|
17.65
|
17.45
|
44.9
|
1.1
|
|||||||||||||||
2006
vs.
2005. Net income decreased by $432,000 or 21.7% for the
year ended December 31, 2006 as compared to the year ended December 31,
2005. Net interest income increased by $313,000, or 3.0%, for 2006 as
increases in interest income on loans, securities and interest earning deposits
were sufficient to offset increases in interest expense on
deposits. Noninterest income increased by $85,000, or 15.9%, due to
an increase of $147,000 in other non-interest income partially offset by a
$76,000 decrease in service charges. Included in other non-interest
income was $154,000 in income on the bank-owned life insurance that we purchased
in 2006. Noninterest expense increased by $1.4 million, or 18.0%, due
to expenses associated with the Company’s name change prior to the initial
public offering, expenses related to the relocation and pending sale of our
1355
First Avenue office, the implementation of the Company’s ESOP and
other retirement plans, and the additional expenses of being a public
company.
2005
vs.
2004. Net income increased $427,000, or 27.3%, for the
year ended December 31, 2005 as compared to the year ended December 31,
2004. Net interest income increased $151,000, or 1.5%, for 2005 as
interest income on loans increased due to increased loan originations partly
offset by a decreased yield resulting from refinancing activity that resulted
in
the origination of lower yielding real estate loans. Noninterest
income increased $111,000, or 26.2%, due primarily to a decrease in net loss
from dispositions of premises and equipment. Noninterest expense
decreased by $563,000, or 7.0%, due to ongoing cost containment
efforts.
Net
Interest Income.
2006
vs.
2005. Net interest income increased by $313,000, or
3.0%, to 10.9 million for 2006 due to a $784,000 increase in interest earned
on
the loan portfolio, an increase of $568,000 in interest earned on securities,
and an increase of $344,000 in interest earned on other interest-earning
assets. These increases offset an increase of $1.4 million in
interest paid on deposits.
Total
interest income increased by $1.7
million, or 12.4%, to $15.3 million for 2006. Interest income on
loans increased by $784,000, or 6.5%, as the average balance of the loan
portfolio grew by $21.6 million, or 12.0%, while the average yield on
the loan portfolio decreased by 33 basis points to 6.36%. The decline
in the average yield was the result of the prevailing low interest rate
environment for loans in 2006. This has resulted in the origination
of loans at lower rates and the refinancing of higher rate loans to lower
interest rates.
Interest
income on securities increased by $568,000, or 114.5%, as the average balance
of
the securities portfolio grew by $9.1 million, or 66.5 %, to $22.9 million
and
the average yield increased by 104 basis points to 4.64% as a result of the
deployment of the stock conversion proceeds to higher interest yielding
securities. Interest income on other interest-earning assets
increased by $344,000, or 29.4%, as the average yield increased by 165 basis
points to 4.67% due to higher interest rates on overnight deposits at the
Federal Home Loan Bank. The increase in yield offset a decline of
$6.3 million, or 16.3%, in the average balance of other interest-earning
assets.
Total
interest expense increased by $1.4 million, or 44.5%, to $4.5 million for 2006
due to an increase in the average deposit cost, despite a $1.4 million, or
0.7%
decrease in the average balance of interest-bearing
deposits. The average interest rate paid on deposits increased
by 73 basis points to 2.35% as a result of the rising interest rate environment
for deposits. The increase in the average deposit cost was also
due to an increase of $8.7 million, or 9.3%, to $101.7 million in the average
balance of certificates of deposit, our highest cost product, and an increase
of
97 basis points to 3.85% in the average interest cost of certificates of
deposit. As a result of these two factors, the interest cost of
certificates of deposit increased by $1.2 million, or 46.3%, to $3.9
million. The increase in certificate balances represents a shift from
other deposit balances. In the aggregate, interest expense on our
other deposit products increased $145,000, or 33.3%, as an increase in average
cost of 21 basis points to 0.65% more than offset a $10.1 million, or 10.2%,
decrease in average balance to $89.3 million.
2005
vs.
2004. Net interest income increased
$151,000, or 1.5%, to $10.5 million for 2005 primarily due to increases in
interest income of $102,000 on the loan portfolio, $124,000 on securities,
and
$541,000 on other interest-earning assets, all of which more than offset an
increase of $616,000 in interest paid on deposits.
Total
interest income increased
$767,000, or 6.0%, to $13.7 million for 2005. Interest income on
loans increased $102,000, or 0.9%, for 2005 as the average balance of the loan
portfolio grew $17.2 million, or 10.6%, while the average yield on the loan
portfolio declined 65 basis points to 6.69%. The decrease in the
average yield was the result of the prevailing low interest rate environment
in
2005. New loans were originated at lower rates and many higher rate
loans refinanced at lower rates.
Interest
income on securities increased
$124,000, or 33.3%, in 2005 as the average balance of the
securities portfolio grew $1.7 million, or 13.8%, in 2005, and the
average yield increased 53 basis points to 3.60% as a result of higher interest
rates. Interest income on other interest-earning assets increased
$541,000, or 86.1%. The average balance of other interest earning
assets decreased by $14.0 million, or 26.5%, in 2005, but this was more than
offset by an increase in the average yield of 183 basis points to 3.02% as
a
result of higher interest rates on overnight deposits at the Federal Home Loan
Bank.
Total
interest expense increased
$616,000, or 24.7%, to $3.1 million for 2005 due to a 30 basis point increase
in
average deposit costs to 1.62%. The average balance of
interest-bearing deposits increased $3.1 million, or 1.7%, in
2005. The average interest rate paid on deposits increased as a
result of the rising interest rate environment and the growth in certificates
of
deposit. Additionally, deposits shifted from lower cost savings
deposits to higher cost certificates of deposits.
Average
Balances and
Yields. The following table presents
information regarding average balances of assets and liabilities, the total
dollar amounts of interest income and dividends from average interest-earning
assets, the total dollar amounts of interest expense on average interest-bearing
liabilities, and the resulting annualized average yields and
costs. The yields and costs for the periods indicated are derived by
dividing income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. For purposes of this table,
average balances have been calculated using average daily
balances. Loan fees are included in interest income on
loans. Interest income on loans and investment securities has not
been calculated on a tax equivalent basis because the impact would be
insignificant.
|
Average
Balance
|
Interest
and
Dividends
|
Yield/
Cost
|
Average
Balance
|
Interest
and
Dividends
|
Yield/
Cost
|
Average
Balance
|
Interest
and
Dividends
|
Yield/
Cost
|
||||||||||||||||||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||||||||||||||
|
Interest-earning
assets:
|
||||||||||||||||||||||||||||||||||||
|
Loans
|
$ |
200,683
|
$ |
12,771
|
6.36 | % | $ |
179,129
|
$ |
11,987
|
6.69 | % | $ |
161,908
|
$ |
11,885
|
7.34 | % | ||||||||||||||||||
|
Securities
|
22,913
|
1,064
|
4.64
|
13,764
|
496
|
3.60
|
12,100
|
372
|
3.07
|
|||||||||||||||||||||||||||
|
Other
interest-earning assets
|
32,390
|
1,513
|
4.67
|
38,707
|
1,169
|
3.02
|
52,689
|
628
|
1.19
|
|||||||||||||||||||||||||||
|
Total
interest-earning assets
|
255,986
|
15,348
|
6.00
|
231,600
|
13,652
|
5.89
|
226,697
|
12,885
|
5.68
|
|||||||||||||||||||||||||||
|
Allowance
for loan losses
|
(1,200 | ) | (1,200 | ) | (1,200 | ) | ||||||||||||||||||||||||||||||
|
Noninterest-earning
assets
|
17,145
|
9,879
|
10,450
|
|||||||||||||||||||||||||||||||||
|
Total
assets
|
$ |
271,931
|
$ |
240,279
|
$ |
235,947
|
||||||||||||||||||||||||||||||
|
Liabilities
and equity:
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing
demand
|
$ |
22,363
|
$ |
111
|
0.50 | % | $ |
22,825
|
62
|
0.27
|
$ |
23,769
|
61
|
0.26
|
||||||||||||||||||||||
|
Savings
and club accounts
|
66,951
|
469
|
0.70
|
76,607
|
373
|
0.49
|
81,032
|
393
|
0.48
|
|||||||||||||||||||||||||||
|
Certificates
of deposit
|
101,732
|
3,913
|
3.85
|
93,039
|
2,675
|
2.88
|
84,541
|
2,040
|
2.41
|
|||||||||||||||||||||||||||
|
Total
interest-bearing deposits
|
191,046
|
4,493
|
2.35
|
192,471
|
3,110
|
1.62
|
189,342
|
2,494
|
1.32
|
|||||||||||||||||||||||||||
|
Borrowings
|
-
|
-
|
0.00
|
-
|
-
|
0.00
|
-
|
-
|
0.00
|
|||||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
191,046
|
4,493
|
2.35
|
192,471
|
3,110
|
1.62
|
189,342
|
2,494
|
1.32
|
|||||||||||||||||||||||||||
|
Noninterest-bearing
demand
|
7,806
|
1,663
|
2,008
|
|||||||||||||||||||||||||||||||||
|
Other
liabilities
|
3,559
|
3,735
|
3,421
|
|||||||||||||||||||||||||||||||||
|
Total
liabilities
|
202,411
|
197,869
|
194,771
|
|||||||||||||||||||||||||||||||||
|
Stockholders’
equity
|
69,520
|
42,410
|
41,176
|
|||||||||||||||||||||||||||||||||
|
Total
liabilities and
Stockholders’
equity
|
$ |
271,931
|
$ |
240,279
|
$ |
235,947
|
||||||||||||||||||||||||||||||
|
Net
interest income
|
$ |
10,855
|
$ |
10,542
|
$ |
10,391
|
||||||||||||||||||||||||||||||
|
Interest
rate spread
|
3.65
|
4.27
|
4.36
|
|||||||||||||||||||||||||||||||||
|
Net
interest margin
|
4.24
|
4.55
|
4.58
|
|||||||||||||||||||||||||||||||||
|
Net
interest-earning assets
|
$ |
64,940
|
$ |
39,129
|
$ |
37,355
|
||||||||||||||||||||||||||||||
|
Interest-earning
assets to interest-
bearing
liabilities
|
133.99 | % | 120.33 | % | 119.73 | % | ||||||||||||||||||||||||||||||
Rate/Volume
Analysis. The following table sets
forth the effects of changing rates and volumes on our net interest
income. The rate column shows the effects attributable to changes in
rate (changes in rate multiplied by prior volume). The volume column
shows the effects attributable to changes in volume (changes in volume
multiplied by prior rate). The net column represents the sum of the
prior columns. For purposes of this table, changes attributable to
changes in both rate and volume that cannot be segregated have been allocated
proportionately based on the changes due to rate and the changes due to
volume.
|
2006
Compared to 2005
|
2005
Compared to 2004
|
|||||||||||||||||||||||
|
Increase
(Decrease)
Due
to
|
Increase
(Decrease)
Due
to
|
|||||||||||||||||||||||
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Interest
and dividend income:
|
||||||||||||||||||||||||
|
Loans
receivable
|
$ |
1,392
|
$ | (608 | ) | $ |
784
|
$ |
1,203
|
$ | (1,101 | ) | $ |
102
|
||||||||||
|
Investment
securities
|
396
|
172
|
568
|
55
|
69
|
124
|
||||||||||||||||||
|
Other
interest-earning
assets
|
(215 | ) |
559
|
344
|
(204 | ) |
745
|
541
|
||||||||||||||||
|
Total
interest-earning
assets
|
1,573
|
123
|
1,696
|
1,054
|
(287 | ) |
767
|
|||||||||||||||||
|
Interest
expense:
|
||||||||||||||||||||||||
|
Interest-bearing
demand deposits
|
(1 | ) |
50
|
49
|
(2 | ) |
3
|
1
|
||||||||||||||||
|
Savings
accounts
|
(52 | ) |
148
|
96
|
(22 | ) |
2
|
(20 | ) | |||||||||||||||
|
Certificates
of
deposit
|
268
|
970
|
1,238
|
219
|
416
|
635
|
||||||||||||||||||
|
Borrowings
|
–
|
–
|
–
|
–
|
–
|
–
|
||||||||||||||||||
|
Total
interest-bearing liabilities
|
215
|
1,168
|
1,383
|
195
|
421
|
616
|
||||||||||||||||||
|
Net
change in interest
income
|
$ |
1,358
|
$ | (1,045 | ) | $ |
313
|
$ |
773
|
$ | (446 | ) | $ |
327
|
||||||||||
Provision
for Loan
Losses.
2006
vs.
2005. The allowance for loan losses was $1.2 million at
December 31, 2006 and 2005. There were no provisions for loan losses
added and there were no charge-offs or recoveries during 2006 or
2005.
2005
vs.
2004. The allowance for loan
losses was $1.2 million at December 31, 2005 and 2004. There were no
provisions for loan losses added and there were no charge-offs or recoveries
during 2005 or 2004.
Noninterest
Income. The following table shows the components of
noninterest income for the years ended December 31, 2006, 2005 and
2004.
|
2006
|
2005
|
2004
|
%
Change
2006/2005
|
%
Change
2005/2004
|
||||||||||||||||
|
Service
charges
|
$ |
443
|
$ |
519
|
$ |
526
|
(14.6 | %) | (1.3 | %) | ||||||||||
|
Net
loss from fixed assets
|
(5 | ) | (19 | ) | (136 | ) |
73.7
|
86.0
|
||||||||||||
|
Other
|
181
|
34
|
33
|
432.4
|
3.0
|
|||||||||||||||
|
Total
|
$ |
619
|
$ |
534
|
$ |
423
|
15.9 | % | 26.2 | % | ||||||||||
2006
vs.
2005. For the year ended December 31, 2006, noninterest
income increased by $85,000, or 15.9%, due to an increase of $147,000, or
432.4%, in other noninterest income that offset a decrease of $76,000, or 14.6%,
in service charges. The increase in non-interest income was primarily
due to income of $154,000 earned on bank-owned life insurance that we purchased
in 2006.
2005
vs. 2004. During the year ended December 31, 2005,
noninterest income increased by $111,000, or 26.2%, due primarily to a decrease
of $117,000, or 86.0%, in net loss from dispositions of premises and
equipment.
Noninterest
Expense.
The following table shows the components of noninterest expense
and the percentage changes for the years ended December 31, 2006, 2005 and
2004.
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
%
Change
2006/2005
|
%
Change
2005/2004
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Salaries
and employee benefits
|
$ |
4,604
|
$ |
4,136
|
$ |
4,201
|
11.3 | % | (1.5 | )% | ||||||||||
|
Net
occupancy expense of premises
|
1,072
|
817
|
917
|
31.2
|
(10.9 | ) | ||||||||||||||
|
Equipment
|
480
|
390
|
525
|
23.1
|
(25.7 | ) | ||||||||||||||
|
Outside
data
processing
|
608
|
556
|
523
|
9.4
|
6.3
|
|||||||||||||||
|
Advertising
|
135
|
82
|
85
|
64.6
|
(3.5 | ) | ||||||||||||||
|
Service
contracts
|
191
|
171
|
215
|
11.7
|
(20.5 | ) | ||||||||||||||
|
Insurance
|
162
|
166
|
186
|
(2.4 | ) | (10.8 | ) | |||||||||||||
|
Audit
and
accounting
|
208
|
153
|
188
|
35.9
|
(18.6 | ) | ||||||||||||||
|
Directors
compensation
|
214
|
66
|
46
|
224.2
|
43.5
|
|||||||||||||||
|
Telephone
|
161
|
145
|
154
|
11.0
|
(5.8 | ) | ||||||||||||||
|
Office
supplies and stationary
|
252
|
145
|
156
|
73.8
|
(7.1 | ) | ||||||||||||||
|
Director,
officer and employee expenses
|
158
|
155
|
182
|
1.9
|
(14.8 | ) | ||||||||||||||
|
Legal
fees
|
185
|
48
|
174
|
285.4
|
(72.4 | ) | ||||||||||||||
|
Other
|
440
|
485
|
526
|
(9.3 | ) | (7.8 | ) | |||||||||||||
|
Total
noninterest
expenses
|
$ |
8,870
|
$ |
7,515
|
$ |
8,078
|
18.0 | % | (7.0 | )% | ||||||||||
_________________________
N/M Not
meaningful.
2006 vs.
2005. Noninterest expenses increased by $1.4 million,
or 18.0%, due to expenses associated with the Company’s name change prior to the
initial public offering, expenses related to the relocation and pending sale
of
our 1355 First Avenue office, including legal expenses, $461,000 in expenses
related to the Company’s ESOP and other retirement plans, which were implemented
in 2006, and the additional expenses of being a public company. The
increase in director’s compensation for 2006 is due to an increase in directors
fees in 2006 and the expenses associated with our outside directors retirement
plan, which was implemented in 2006.
2005
vs.
2004. In
2005, noninterest expenses decreased by $563,000, or 7.0%, due primarily to
on-going cost containment efforts to improve our efficiency ratio, the absence
of various non-recurring charges from 2004 and the absence of loan production
office setup costs and sign-on bonuses for additional loan
officers. Material decreases in expenses in 2005 included legal
expenses, equipment and service contracts.
Income
Taxes.
2006
vs.
2005. Income tax expense for 2006 was $1.0
million compared to $1.6 million for 2005. Income taxes decreased due
to a decrease in pre-tax net income in 2006 as compared to 2005 as well as
the
addition in 2006 of tax-exempt income from bank-owned life
insurance.
2005
vs. 2004. Income tax expense for the year ended December 31, 2005
was $1.6 million compared to $1.2 million for the year ended December
31, 2004. Income taxes increased due to an increase in pre-tax income
in 2005 as compared to 2004.
Risk
Management
Overview. Managing
risk is an essential part of successfully managing a financial
institution. Our most prominent risk exposures are credit risk,
interest rate risk and operational risk. Credit risk is the risk of
not collecting the interest and/or the principal balance of a loan or investment
when it is due. Interest rate risk is the potential reduction of net
interest income as a result of changes in interest rates. Operational
risks include risks related to fraud, regulatory compliance, processing errors,
technology and disaster recovery. Other risks that we face are market
risk, liquidity risk and reputation risk. Market risk arises from
fluctuations in interest rates that may
result
in
changes in the values of financial instruments, such as available-for-sale
securities, that are accounted for on a mark-to-market
basis. Liquidity risk is the possible inability to fund obligations
to depositors, lenders or borrowers. Reputation risk is the risk that
negative publicity or press, whether true or not, could cause a decline in
our
customer base or revenue.
Credit
Risk
Management. Our strategy for credit risk management
focuses on having well-defined credit policies and uniform underwriting criteria
and providing prompt attention to potential problem loans. We
underwrite each mortgage loan application on its merits, applying risk factors
to insure that each transaction is considered on an equitable
basis.
When
a borrower fails to make a
required loan payment, we take a number of steps to attempt to have the borrower
cure the delinquency and restore the loan to current status. When the
ten day grace period expires and the payment has not been received, a late
payment notice is mailed and telephone contact is
initiated. Throughout the rest of the month that payment is due, the
borrower is called several times. If the payment has not been
received by the end of the month, the borrower is informed that the loan will
be
placed in foreclosure within two weeks. On the 45th day after
payment
is due, the loan is forwarded to the problem loan officer who will
review the file and authorize an acceleration letter. Once a
foreclosure action has been instituted, a written agreement between the Bank
and
the debtor will be required to discontinue the foreclosure action. We
may consider loan workout arrangements with certain borrowers under certain
circumstances. If no satisfactory resolution to the delinquency is
forthcoming, the note and mortgage may be sold prior to a foreclosure sale
or the real property securing the loan would be sold at
foreclosure.
Management
reports to the board of
directors monthly regarding the amount of loans delinquent more than 30
days.
Analysis
of Nonperforming
and Classified Assets. We generally consider
repossessed assets and loans that are 90 days or more past due to be
nonperforming assets. It is generally our policy to discontinue
accruing interest on all loans that are contractually 90 days or more past
due
and when, in the opinion of management, the collectibility of the loan is
doubtful. When a loan is placed on nonaccrual status, the accrual of
interest ceases and the allowance for any uncollectible accrued interest is
established and charged against operations. Typically, payments
received on a nonaccrual loan are applied in the following order to late
charges, interest, escrow and outstanding principal.
Real
estate that we acquire as a result
of foreclosure action or by deed-in-lieu of foreclosure is classified as
foreclosed real estate until it is sold. When property is acquired,
it is initially recorded at fair market value at the date of
foreclosure. Holding costs and declines in fair value after
acquisition of the property result in charges against income.
The
following table provides
information with respect to our nonperforming assets at the dates
indicated. We did not have any troubled debt restructurings at the
dates presented.
|
At
December 31,
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Nonaccrual
loans:
|
||||||||||||||||||||
|
Residential
real
estate:
|
||||||||||||||||||||
|
One-
to
four-family
|
$ |
–
|
$ |
–
|
$ |
–
|
$ |
–
|
$ |
–
|
||||||||||
|
Multi-family
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Mixed-use
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Non-residential
real
estate
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Consumer
and other
loans
|
-
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Total
|
$ |
–
|
$ |
–
|
$ |
–
|
$ |
–
|
$ |
–
|
||||||||||
|
Accruing
loans past due 90 days or more:
|
||||||||||||||||||||
|
Residential
real estate:
|
||||||||||||||||||||
|
One-
to
four-family
|
–
|
–
|
–
|
–
|
28
|
|||||||||||||||
|
Multi-family
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Mixed-use
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Non-residential
real
estate
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Consumer
and other
loans
|
2
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Total
|
2
|
–
|
–
|
–
|
28
|
|||||||||||||||
|
Total
of nonaccrual and 90 days or more
past due
loans
|
2
|
–
|
–
|
–
|
28
|
|||||||||||||||
|
Foreclosed
real
estate
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Other
nonperforming
assets
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Total
nonperforming assets
|
2
|
–
|
–
|
–
|
28
|
|||||||||||||||
|
Troubled
debt
restructurings
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Troubled
debt restructurings and total
nonperforming asset
|
$ |
2
|
$ |
–
|
$ |
–
|
$ |
–
|
$ |
28
|
||||||||||
|
Total
nonperforming loans to total loans
|
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.02 | % | ||||||||||
|
Total
nonperforming loans to total assets
|
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.01 | % | ||||||||||
|
Total
nonperforming assets and troubled debt
restructurings to total assets
|
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.01 | % | ||||||||||
Federal
regulations require us to
review and classify our assets on a regular basis. In addition, the
Office of Thrift Supervision has the authority to identify problem assets and,
if appropriate, require them to be classified. There are three
classifications for problem assets: substandard, doubtful and
loss. “Substandard assets” must have one or more defined weaknesses
and are characterized by the distinct possibility that we will sustain some
loss
if the deficiencies are not corrected. “Doubtful assets” have the
weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified “loss” is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. The regulations also provide for a
“special mention” category, described as assets which do not currently expose us
to a sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving our close
attention. We recognize a loss as soon as a reasonable determination
of that loss can be made. We directly charge, against earnings, that
portion of the asset that is determined to be uncollectible. If an
accurate determination of the loss is impossible, for any reason, we will
establish an allowance in an amount sufficient to absorb the most probable
loss
expected. In cases where a reasonable determination of a loss cannot
be made, we will adjust our allowance to reflect a potential loss until a more
accurate determination can be made.
We
had no classified assets at December
31, 2006 or December 31, 2005 and there are no loans at December 31, 2006 that
management has serious doubts about the ability of the borrowers to comply
with
the present loan repayment terms.
Delinquencies. The
following table provides information about delinquencies in our loan portfolio
at the dates indicated.
|
At
December 31,
|
||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
||||||||||||||||||||||
|
30-59
Days
Past
Due
|
60-89
Days
Past
Due
|
30-59
Days
Past
Due
|
60-89
Days
Past
Due
|
30-59
Days
Past
Due
|
60-89
Days
Past
Due
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Residential
real estate:
|
$ |
–
|
$ |
–
|
$ |
–
|
$ |
–
|
$ |
–
|
$ |
–
|
||||||||||||
|
One-
to
four-family
|
–
|
–
|
–
|
–
|
–
|
–
|
||||||||||||||||||
|
Multi-family
|
–
|
–
|
–
|
–
|
–
|
–
|
||||||||||||||||||
|
Mixed-use
|
–
|
–
|
–
|
–
|
–
|
–
|
||||||||||||||||||
|
Non-residential
real estate
|
–
|
–
|
–
|
–
|
–
|
–
|
||||||||||||||||||
|
Consumer
and other loans
|
–
|
2
|
1
|
–
|
–
|
–
|
||||||||||||||||||
|
Total
|
$ |
–
|
$ |
2
|
$ |
1
|
$ |
–
|
$ |
–
|
$ |
–
|
||||||||||||
Analysis
and Determination
of the Allowance for Loan Losses. The
allowance for loan losses is a valuation allowance for probable credit losses
in
the loan portfolio. We evaluate the need to establish allowances
against losses on loans on a quarterly basis. When additional
allowances are necessary, a provision for loan losses is charged to
earnings. The recommendations for increases or decreases to the
allowance are presented by management to the board of directors.
Our
methodology for assessing the
appropriateness of the allowance for loan losses consists of: (1) a
specific allowance on identified problem loans; and (2) a general valuation
allowance on the remainder of the loan portfolio. Although we
determine the amount of each element of the allowance separately, the entire
allowance for loan losses is available for the entire portfolio.
Specific
Allowance Required
for Identified Problem Loans. We establish an allowance
on certain identified problem loans when the loan balance exceeds the fair
market value, when collection of the full amount outstanding becomes improbable
and when an accurate estimate of the loss can be documented.
General
Valuation Allowance
on the Remainder of the Loan
Portfolio. We establish a general
allowance for loans that are not delinquent to recognize the inherent losses
associated with lending activities. This general valuation allowance
is determined by segregating the loans by loan category and assigning
percentages to each category. The percentages are adjusted for
significant factors that, in management’s judgment, affect the collectibility of
the portfolio as of the evaluation date. These significant factors
may include changes in existing general economic and business conditions
affecting our primary lending areas and the national economy, staff lending
experience, recent loss experience in particular segments of the portfolio,
collateral value, loan volumes and concentration, specific reserve and
classified asset trends, delinquency trends and risk rating
trends. These loss factors are subject to ongoing evaluation to
ensure their relevance in the current economic environment.
We
also establish a general allowance
for loans identified by the internal loan review process and loans not
performing according to contractual terms. These loans typically do
not pose significant risk of loss, but do demonstrate a higher level of risk
than the average loan in our portfolio. These could include loans 30
days or more past due, properties with vacant apartments or commercial spaces
temporarily vacant due to tenant turnover or renovation, or the death of the
obligator causing delinquency until a court appointed executor takes control
of
the property. We separate these loans by property type and assign a
risk factor to each category based on its risk
potential
as compared to the other categories and the portfolio as a
whole. Loans classified special mention or substandard would
typically be candidates for treatment under this category.
We
also identify loans that may need to
be charged off as a loss by reviewing all delinquent loans, classified loans
and
other loans that management may have concerns about
collectibility. For individually reviewed loans, the borrower’s
inability to make payments under the terms of the loan or a shortfall in
collateral value would result in our allocating a portion of the allowance
to
the loan that was impaired or to an addition to the general valuation allowance
to reflect the higher risk associated with the identified loan.
At
December 31, 2006, our allowance for
loan losses was $1.2 million and represented 0.60% of total gross
loans.
At
December 31, 2005, our allowance for
loan losses was $1.2 million and represented 0.63% of total gross
loans. The allowance for loan losses did not change from
2004.
The
following table sets forth the
breakdown of the allowance for loan losses by loan category at the dates
indicated.
|
At
December 31,
|
||||||||||||||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||||||||||
|
Amount
|
%
of
Allowance
to
Total
Allowance
|
%
of
Loans
in
Category
to
Total
Loans
|
Amount
|
%
of
Allowance
to
Total
Allowance
|
%
of
Loans
in
Category
to
Total
Loans
|
Amount
|
%
of
Allowance
to
Total
Allowance
|
%
of
Loans
in
Category
to
Total
Loans
|
||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
|
Residential
real estate:
|
||||||||||||||||||||||||||||||||||||
|
One-
to four-family
|
$ |
-
|
0.0 | % | 0.2 | % | $ |
–
|
0.0 | % | 0.3 | % | $ |
2
|
0.2 | % | 0.5 | % | ||||||||||||||||||
|
Multi-family
|
395
|
32.9
|
54.8
|
443
|
36.9
|
52.4
|
520
|
43.3
|
58.9
|
|||||||||||||||||||||||||||
|
Mixed-use
|
251
|
20.9
|
21.1
|
277
|
23.1
|
22.9
|
290
|
24.2
|
22.7
|
|||||||||||||||||||||||||||
|
Non-residential
real estate
|
554
|
46.2
|
23.7
|
480
|
40.0
|
24.2
|
388
|
32.3
|
17.7
|
|||||||||||||||||||||||||||
|
Consumer
and other loans
|
-
|
0.0
|
0.2
|
–
|
0.0
|
0.2
|
–
|
0.0
|
0.2
|
|||||||||||||||||||||||||||
|
Total
allowance for loan losses
|
$ |
1,200
|
100.0 | % | 100.0 | % | $ |
1,200
|
100.0 | % | 100.0 | % | $ |
1,200
|
100.0 | % | 100.0 | % | ||||||||||||||||||
|
At
December 31,
|
||||||||||||||||||||||||
|
2003
|
2002
|
|||||||||||||||||||||||
|
Amount
|
%
of
Allowance
to
Total
Allowance
|
%
of
Loans
in
Category
to
Total
Loans
|
Amount
|
%
of
Allowance
to
Total
Allowance
|
%
of
Loans
in
Category
to
Total
Loans
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
Residential
real estate:
|
||||||||||||||||||||||||
|
One-
to
four-family
|
$ |
3
|
0.3 | % | 0.6 | % | $ |
24
|
2.0 | % | 0.9 | % | ||||||||||||
|
Multi-family
|
497
|
41.4
|
55.3
|
522
|
42.8
|
56.3
|
||||||||||||||||||
|
Mixed-use
|
329
|
27.4
|
26.0
|
388
|
31.8
|
30.0
|
||||||||||||||||||
|
Non-residential
real estate
|
371
|
30.9
|
17.9
|
285
|
23.4
|
12.6
|
||||||||||||||||||
|
Consumer
and other loans
|
–
|
0.0
|
0.2
|
–
|
0.0
|
0.2
|
||||||||||||||||||
|
Total
allowance for loan losses
|
$ |
1,200
|
100.0 | % | 100.0 | % | $ |
1,219
|
100.0 | % | 100.0 | % | ||||||||||||
Although
we believe that we use the
best information available to establish the allowance for loan losses, future
adjustments to the allowance for loan losses may be necessary and our results
of
operations could be adversely affected if circumstances differ substantially
from the assumptions used in making the determinations. Furthermore,
while we believe we have established our allowance for loan losses in conformity
with U.S. generally accepted accounting principles, there can be no assurance
that the Office of Thrift Supervision, in reviewing our loan portfolio, will
not
request us to increase our allowance for loan losses. The Office of
Thrift Supervision may require us to increase our allowance for loan losses
based on judgments different from ours. In addition, because future
events affecting borrowers and collateral cannot be predicted with certainty,
there can be no assurance that increases will not be necessary should the
quality of any loans deteriorate as a result of the factors discussed
above. Any material increase in the allowance for loan losses may
adversely affect our financial condition and results of
operations.
Analysis
of Loan Loss Experience. The following table sets forth
an analysis of the allowance for loan losses for the periods
indicated.
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Allowance
at beginning of period
|
$ |
1,200
|
$ |
1,200
|
$ |
1,200
|
$ |
1,219
|
$ |
919
|
||||||||||
|
Provision
for loan losses
|
–
|
–
|
–
|
–
|
294
|
|||||||||||||||
|
Charge
offs:
|
||||||||||||||||||||
|
Residential
real estate:
|
||||||||||||||||||||
|
One-
to four-family
|
–
|
–
|
–
|
(19 | ) |
–
|
||||||||||||||
|
Multi-family
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Mixed-use
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Non-residential
real estate
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Consumer
and other loans
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Total
charge-offs
|
–
|
–
|
–
|
(19 | ) |
–
|
||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Residential
real estate:
|
||||||||||||||||||||
|
One-
to four-family
|
–
|
–
|
–
|
–
|
6
|
|||||||||||||||
|
Multi-family
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Mixed-use
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Non-residential
real estate
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Consumer
and other loans
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Total
recoveries
|
–
|
–
|
–
|
–
|
6
|
|||||||||||||||
|
Net
charge-offs
|
–
|
–
|
–
|
(19 | ) |
6
|
||||||||||||||
|
Allowance
at end of period
|
$ |
1,200
|
$ |
1,200
|
$ |
1,200
|
$ |
1,200
|
$ |
1,219
|
||||||||||
|
Allowance
to nonperforming loans
|
N/M
|
N/M
|
N/M
|
N/M
|
4,353.57
|
|||||||||||||||
|
Allowance
to total loans outstanding at
the end of the period
|
0.60 | % | 0.63 | % | 0.71 | % | 0.77 | % | 0.72 | % | ||||||||||
|
Net
charge-offs (recoveries) to average loans
outstanding during the period
|
0.00 | % | 0.00 | % | 0.00 | % | 0.01 | % | 0.00 | % | ||||||||||
In
the past five years, we have had no
real estate loan charge-offs, other than one charge-off for a one- to
four-family residential loan.
Interest
Rate Risk
Management. We manage the interest rate sensitivity of
our interest-bearing liabilities and interest-earning assets in an effort to
minimize the adverse effects of changes in the interest rate
environment. Deposit accounts typically react more quickly to changes
in market interest rates than mortgage loans because of the shorter maturities
of deposits. As a result, sharp increases in interest rates may
adversely affect our earnings while decreases in interest rates may beneficially
affect our earnings. To reduce the potential volatility of our
earnings, we have sought to improve the match between asset and liability
maturities and rates, while maintaining an acceptable interest rate
spread. Our strategy for managing interest rate risk
emphasizes: originating mortgage real estate loans that reprice to
market interest rates in three to five years; purchasing securities that
typically reprice within a three year time frame to limit exposure to market
fluctuations; and, where appropriate, offering higher rates on long term
certificates of deposit to lengthen the repricing time frame of our
liabilities. We currently do not participate in hedging programs,
interest rate swaps or other activities involving the use of derivative
financial instruments.
We
have an Asset/Liability Committee,
comprised of our chief executive officer, chief financial officer, chief
mortgage officer, and treasurer, whose function is to communicate, coordinate
and control all aspects involving asset/liability management. The
committee establishes and monitors the volume, maturities, pricing and mix
of
assets and funding sources with the objective of managing assets and funding
sources to provide results that are consistent with liquidity, growth, risk
limits and profitability goals.
Our
goal is to manage asset and
liability positions to moderate the effects of interest rate fluctuations on
net
interest income and net income.
Net
Portfolio Value
Analysis. We use a net portfolio value
analysis prepared by the Office of Thrift Supervision to review our level of
interest rate risk. This analysis measures interest rate risk by
computing changes in net portfolio value of our cash flows from assets,
liabilities and off-balance sheet items in the event of a range of assumed
changes in market interest rates. Net portfolio value represents the
market value of portfolio equity and is equal to the market value of assets
minus the market value of liabilities, with adjustments made for off-balance
sheet items. These analyses assess the risk of loss in market
risk-sensitive instruments in the event of a sudden and sustained 100 to 300
basis point increase or 100 and 200 basis point decrease in market interest
rates with no effect given to any steps that we might take to counter the effect
of that interest rate movement.
The
following table presents the change
in our net portfolio value at December 31, 2006 that would occur in the event
of
an immediate change in interest rates based on the Office of Thrift Supervision
assumptions, with no effect given to any steps that we might take to counteract
that change.
|
Net
Portfolio Value
(Dollars
in thousands)
|
Net
Portfolio Value
as
% of
Portfolio
Value of Assets
|
|||||||||||||||||
|
Basis
Point (“bp”)
Change
in Rates
|
$
Amount
|
$
Change
|
%
Change
|
NPV
Ratio
|
Change
|
|||||||||||||
|
300
|
$ |
69,424
|
$ | (5,122 | ) | (7 | )% | 26.62 | % |
(105)
bp
|
||||||||
|
200
|
71,083
|
(3,463 | ) | (5 | )% | 26.97 | % |
(70)
bp
|
||||||||||
|
100
|
72,789
|
(1,757 | ) | (2 | )% | 27.32 | % |
(35)
bp
|
||||||||||
|
0
|
74,546
|
-
|
-
|
27.67 | % | |||||||||||||
|
(100)
|
76,135
|
1,589
|
2 | % | 27.96 | % |
29
bp
|
|||||||||||
|
(200)
|
77,541
|
2,996
|
4 | % | 28.20 | % |
53
bp
|
|||||||||||
We
and the Office of Thrift Supervision
use various assumptions in assessing interest rate risk. These
assumptions relate to interest rates, loan prepayment rates, deposit decay
rates
and the market values of certain assets under differing interest rate scenarios,
among others. As with any method of measuring interest rate risk,
certain shortcomings are inherent in the methods of analyses presented in the
foregoing tables. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other
types
may lag behind changes in market rates. Additionally, certain assets,
such as adjustable-rate mortgage loans, have features that restrict changes
in
interest rates on a short-term basis and over the life of the
asset. Further, in the event of a change in interest rates, expected
rates of prepayments on loans and early withdrawals from certificates could
deviate significantly from those assumed in calculating the
table. Prepayment rates can have a significant impact on interest
income. Because of the large percentage of loans we hold, rising or
falling interest rates have a significant impact on the prepayment speeds of
our
earning assets that in turn affect the rate sensitivity
position. When interest rates rise, prepayments tend to
slow. When interest rates fall, prepayments tend to
rise. Our asset sensitivity would be reduced if prepayments slow and
vice versa. While we believe these assumptions to be reasonable,
there can be no assurance that assumed prepayment rates will approximate actual
future loan repayment activity.
Liquidity
Management. Liquidity is the ability
to meet current and future financial obligations of a short-term
nature. Our primary sources of funds consist of deposit inflows, loan
repayments, maturities and sales of securities and borrowings from the Federal
Home Loan Bank of New York. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition.
We
regularly adjust our investments in
liquid assets based upon our assessment of: (1) expected loan demand;
(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 $36.7 million at December
31, 2006 and consist primarily of deposits at other
financial institutions and miscellaneous cash
items. Securities classified as available-for-sale and whose market
value exceeds our cost provide an additional source of
liquidity. Total securities classified as available-for-sale were
$355,000 at December 31, 2006 and $362,000 at December 31, 2005.
At
December 31, 2006, we had $7.8
million in loan commitments outstanding. At December 31, 2006, this
consisted of $3.9 million of real estate loan origination commitments, $3.7
million in unused real estate equity lines of credit and $210,000 in unused
consumer lines of credit. Certificates of deposit due within one year
of December 31, 2006 totaled $68.0 million. This represented 64.6% of
certificates of deposit at December 31, 2006. We believe the large
percentage of certificates of deposit that mature within one year reflects
customers’ hesitancy to invest their funds for long periods in the current low
interest rate environment. If these maturing deposits do not remain
with us, we will be required to seek other sources of funds, including other
certificates of deposit and borrowings. Depending on market
conditions, we may be required to pay higher rates on such deposits or other
borrowings than we currently pay on the certificates of deposit due on or before
December 31, 2007. We believe, however, based on past experience,
that 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.
The
following table presents certain of
our contractual obligations as of December 31, 2006.
|
Payments
due by period
|
||||||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
than
One
Year
|
One
to
Three
Years
|
Three
to
Five
Years
|
More
Than
5
Years
|
|||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Operating
lease
obligations
|
$ |
2,432
|
$ |
277
|
$ |
568
|
$ |
409
|
$ |
1,178
|
||||||||||
|
Certificates
of
deposit
|
105,261
|
68,033
|
23,167
|
14,061
|
–
|
|||||||||||||||
|
Total
|
$ |
107,693
|
$ |
68,310
|
$ |
23,735
|
$ |
14,470
|
$ |
1,178
|
||||||||||
__________________________
Our
primary investing activities are
the origination of loans and the purchase of securities. Our primary
financing activities consist of activity in deposit accounts. At
December 31, 2006, we had the ability to borrow $12.0 million from the Federal
Home Loan Bank of New York, which included two available overnight lines of
credit of $6.0 million each. At December 31, 2006, 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
following table presents our
primary investing and financing activities during the periods
indicated.
|
Year
Ended December 31,
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Investing
activities:
|
||||||||||||
|
Loans
disbursed or
closed
|
$ | (35,803 | ) | $ | (58,176 | ) | $ | (53,760 | ) | |||
|
Loan
principal
repayments
|
25,648
|
35,415
|
40,642
|
|||||||||
|
Proceeds
from maturities and principal repayments
of
securities
|
35,682
|
3,107
|
3,025
|
|||||||||
|
Purchases
of
securities
|
(50,335 | ) | (3,874 | ) | (4,807 | ) | ||||||
|
Purchase
of bank owned life insurance
|
(8,000 | ) |
–
|
–
|
||||||||
|
Purchases
of premises and equipment (1)
|
(6,726 | ) | (156 | ) | (314 | ) | ||||||
|
Financing
activities:
|
||||||||||||
|
Increase
(decrease) in deposits
|
(4,727 | ) | (302 | ) |
3,584
|
|||||||
|
Initial
stock offering, net of ESOP shares
|
52,444
|
–
|
–
|
|||||||||
______________________________
|
(1)
|
Includes
the purchase of approximately 29,152 square feet of excess air rights
from
the abuting under-improved property adjacent to our 1355 First Avenue
property. See “Expected Sale of Our New York City Branch
Office” earlier in this Item 7.
|
Capital
Management. We are subject to various regulatory
capital requirements administered by the Office
of
Thrift Supervision, including a risk-based capital measure. The
risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning balance sheet assets
and off-balance sheet items to broad risk categories. At December 31,
2006, we exceeded all of our regulatory capital requirements. We are
considered “well capitalized” under regulatory guidelines.
The
capital from our initial public
offering increased our liquidity and capital resources. In addition,
the expected sale of our First Avenue branch office building in the second
quarter of 2007, pursuant to an agreement of sale we entered into on December
13, 2006, would further increase our capital. Over time, the initial
level of liquidity will be reduced as net proceeds from the stock offering
and
the expected sale of the branch office building are used for general corporate
purposes, including the funding of lending activities. Our financial
condition has been enhanced by the capital from the offering, resulting in
increased net interest-earning assets. However, the large increase in
equity resulting from the capital raised in the offering and the expected branch
office building sale will, initially, have an adverse impact on our return
on
equity. We may consider capital management tools such as cash
dividends and common stock repurchases. However, under Office of
Thrift Supervision regulations, we are not allowed to repurchase any shares
during the first year following our initial public offering, unless
extraordinary circumstances exist and we receive regulatory
approval.
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 and lines of credit. For information about our loan
commitments and unused lines of credit, see Note 3 of the Notes to the
Consolidated Financial Statements. We currently have no plans to
engage in hedging activities in the future.
For
the years ended December 31, 2006
and December 31, 2005, 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.
Effect
of Inflation and Changing Prices
The
financial statements and related
financial data presented in this Form 10-K have been prepared in accordance
with
U.S. generally accepted accounting principles, which require the measurement
of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time
due
to inflation. The primary impact of inflation on our operations is
reflected in increased operating costs. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution’s performance than do general
levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and
services.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
information required by this item
is incorporated herein by reference to Part II, Item
7, “Management’s Discussion and Analysis of Financial Condition
and Results of Operation.”
ITEM
8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
46
|
|
Consolidated
Statements of Financial Condition as of December 31, 2006 and
2005
|
47
|
|
Consolidated
Statements of Income for the Years Ended December 31, 2006, 2005
and
2004
|
48
|
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended December 31, 2006,
2005 and 2004
|
49
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2006, 2005
and
2004
|
50
|
|
Notes
to Consolidated Financial Statements
|
51
|
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders
Northeast
Community Bancorp, Inc. and Subsidiary
White
Plains, New York
We
have
audited the accompanying consolidated statements of financial condition of
Northeast Community Bancorp, Inc. and Subsidiary (the “Company”) as of
December 31, 2006 and 2005, and the related consolidated statements of
income, stockholders’ equity, and cash flows for each of the years in the
three-year period ended December 31, 2006. These consolidated
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made
by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Northeast
Community Bancorp, Inc. and Subsidiary as of December 31, 2006 and 2005,
and the consolidated results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2006, in
conformity with accounting principles generally accepted in the United States
of
America.
Beard
Miller Company LLP
Pine
Brook, New Jersey
March
15,
2007
Northeast
Community Bancorp, Inc.
Notes
to
Consolidated Financial Statements
Consolidated
Statements of Financial Condition
|
December
31,
|
|||
|
2006
|
2005
|
||
|
(In
thousands,
except
share and per share
data)
|
|||
Assets
|
Cash
and amounts due from depository institutions
|
$ |
2,650
|
$ |
2,929
|
||||
|
Interest-bearing
deposits
|
34,099
|
24,460
|
||||||
|
Cash
and cash equivalents
|
36,749
|
27,389
|
||||||
|
Securities
available for sale
|
355
|
362
|
||||||
|
Securities
held to maturity
|
27,455
|
12,228
|
||||||
|
Loans
receivable, net of allowance for loan losses $1,200 and
$1,200
|
201,306
|
190,896
|
||||||
|
Bank
owned life insurance
|
8,154
|
-
|
||||||
|
Premises
and equipment, net
|
11,117
|
5,002
|
||||||
|
Federal
Home Loan Bank of New York stock, at cost
|
399
|
357
|
||||||
|
Accrued
interest receivable
|
1,101
|
1,003
|
||||||
|
Other
assets
|
1,781
|
1,584
|
||||||
|
Total
Assets
|
$ |
288,417
|
$ |
238,821
|
||||
Liabilities
and Stockholders’ Equity
|
Liabilities
|
|
Deposits:
|
||||||||
|
Non-interest
bearing
|
$ |
1,439
|
$ |
1,499
|
||||
|
Interest
bearing
|
187,153
|
191,815
|
||||||
|
Total
deposits
|
188,592
|
193,314
|
||||||
|
Advance
payments by borrowers for taxes and insurance
|
1,929
|
1,703
|
||||||
|
Accounts
payable and accrued expenses
|
1,145
|
684
|
||||||
|
Total
Liabilities
|
191,666
|
195,701
|
||||||
|
Commitments
and Contingencies
|
-
|
-
|
||||||
|
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; issued
and
outstanding: 13,225,000 (2006) and none (2005)
|
132
|
-
|
||||||
|
Additional
paid-in capital
|
57,513
|
-
|
||||||
|
Unearned
Employee Stock Ownership Plan (“ESOP”) shares
|
(4,925 | ) |
-
|
|||||
|
Retained
earnings
|
44,147
|
43,089
|
||||||
|
Accumulated
comprehensive income (loss)
|
(116 | ) |
31
|
|||||
|
Total
Stockholders’ Equity
|
96,751
|
43,120
|
||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ |
288,417
|
$ |
238,821
|
See
notes to consolidated financial statements.
Northeast
Community Bancorp, Inc.
Notes
to
Consolidated Financial
Statements
Consolidated
Statements of Income
|
Years
Ended December 31,
|
||||||
|
2006
|
2005
|
2004
|
||||
|
(In
thousands, except share and per share data)
|
||||||
|
Interest
Income
|
|
Loans
|
$ |
12,771
|
$ |
11,987
|
$ |
11,885
|
||||||
|
Interest-earning
deposits
|
1,513
|
1,169
|
628
|
|||||||||
|
Securities
- taxable
|
1,064
|
496
|
372
|
|||||||||
|
Total
Interest Income
|
15,348
|
13,652
|
12,885
|
|
|
Interest
Expense
|
|
Deposits
|
4,493
|
3,110
|
2,494
|
|||||||||
|
Total
Interest Expense
|
4,493
|
3,110
|
2,494
|
|||||||||
|
Net
Interest Income
|
10,855
|
10,542
|
10,391
|
|||||||||
|
Provision
for Loan Losses
|
-
|
-
|
-
|
|||||||||
|
Net
Interest Income after Provision for Loan Losses
|
10,855
|
10,542
|
10,391
|
|||||||||
|
Non-Interest
Income
|
||||||||||||
|
Other
loan fees and service charges
|
443
|
519
|
526
|
|||||||||
|
Net
loss from dispositions of premises and equipment
|
(5 | ) | (19 | ) | (136 | ) | ||||||
|
Earnings
on bank owned life insurance
|
154
|
-
|
-
|
|||||||||
|
Other
|
27
|
34
|
33
|
|||||||||
|
Total
Non-Interest Income
|
619
|
534
|
423
|
|
|
Non-Interest
Expenses
|
|
Salaries
and employee benefits
|
4,604
|
4,136
|
4,201
|
|||||||||
|
Net
occupancy expense
|
1,072
|
817
|
917
|
|||||||||
|
Equipment
|
480
|
390
|
525
|
|||||||||
|
Outside
data processing
|
608
|
556
|
523
|
|||||||||
|
Advertising
|
135
|
82
|
85
|
|||||||||
|
Other
|
1,971
|
1,534
|
1,827
|
|||||||||
|
Total
Non-Interest Expenses
|
8,870
|
7,515
|
8,078
|
|||||||||
|
Income
before Income Taxes
|
2,604
|
3,561
|
2,736
|
|||||||||
|
Income
Taxes
|
1,046
|
1,571
|
1,173
|
|||||||||
|
Net
Income
|
$ |
1,558
|
$ |
1,990
|
$ |
1,563
|
||||||
|
Net
Income per Common Share – Basic and Diluted
|
$
|
0.06
(A)
|
N/A
|
N/A
|
||||||||
|
Weighted
Average Number of Common Shares Outstanding – Basic and
Diluted
|
12,726
(A)
|
N/A
|
N/A
|
|||||||||
|
(A)The
Company completed its initial public stock offering
on
July 5, 2006.
|
||||||||||||
See
notes to consolidated financial statements.
Northeast
Community Bancorp, Inc.
Notes
to
Consolidated Financial
Statements
Consolidated
Statements of Stockholders’ Equity
Years
Ended December 31, 2006, 2005 and 2004
|
Common
Stock
|
Additional
Paid-
in
Capital
|
Unearned
ESOP
Shares
|
Retained
Earnings
|
Accumu-
lated
Other
Compre-
hensive
Income
(Loss)
|
Total
|
|||||||
|
(In
thousands)
|
||||||||||||
|
Balance
- December 31, 2003
|
$ |
-
|
$ |
-
|
$ |
-
|
$ |
39,536
|
$ |
53
|
$ |
39,589
|
||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
1,563
|
-
|
1,563
|
||||||||||||||||||
|
Unrealized
loss on securities
available
for sale, net of deferred
income
taxes of $2
|
-
|
-
|
-
|
-
|
(6 | ) | (6 | ) | ||||||||||||||||
|
Total
Comprehensive Income
|
1,557
|
|||||||||||||||||||||||
|
Balance
- December 31, 2004
|
-
|
-
|
-
|
41,099
|
47
|
41,146
|
||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
1,990
|
-
|
1,990
|
||||||||||||||||||
|
Unrealized
loss on securities
available
for sale, net of deferred
income
taxes of $14
|
-
|
-
|
-
|
-
|
(16 | ) | (16 | ) | ||||||||||||||||
|
Total
Comprehensive Income
|
1,974
|
|||||||||||||||||||||||
|
Balance
- December 31, 2005
|
-
|
-
|
-
|
43,089
|
31
|
43,120
|
||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
1,558
|
-
|
1,558
|
||||||||||||||||||
|
Unrealized
gain on securities
available
for sale, net of deferred
income
taxes of $(3)
|
-
|
-
|
-
|
-
|
11
|
11
|
||||||||||||||||||
|
Total
Comprehensive Income
|
1,569
|
|||||||||||||||||||||||
|
Adjustment
to initially apply SFAS
158,
net of deferred income taxes
of
$129
|
-
|
-
|
-
|
-
|
(158 | ) | (158 | ) | ||||||||||||||||
|
ESOP
shares earned
|
-
|
17
|
259
|
-
|
-
|
276
|
||||||||||||||||||
|
Capitalization
of Mutual Holding
Company
|
-
|
-
|
-
|
(500 | ) |
-
|
(500 | ) | ||||||||||||||||
|
Issuance
of common stock
|
132
|
57,496
|
-
|
-
|
-
|
57,628
|
||||||||||||||||||
|
Common
stock acquired by ESOP
|
-
|
-
|
(5,184 | ) |
-
|
-
|
(5,184 | ) | ||||||||||||||||
|
Balance
- December 31, 2006
|
$ |
132
|
$ |
57,513
|
$ | (4,925 | ) | $ |
44,147
|
$ | (116 | ) | $ |
96,751
|
See
notes to consolidated financial statements.
Northeast
Community Bancorp, Inc.
Notes
to
Consolidated Financial
Statements
Consolidated
Statements of Cash Flows
|
Years
Ended December 31,
|
||||||
|
2006
|
2005
|
2004
|
||||
|
(In
thousands)
|
||||||
|
|
Cash
Flows from Operating
Activities
|
|
Net
income
|
$ |
1,558
|
$ |
1,990
|
$ |
1,563
|
||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Amortization
of securities
premiums and (discounts), net
|
(553 | ) |
13
|
9
|
||||||||
|
Provision
for
depreciation
|
589
|
574
|
621
|
|||||||||
|
Amortization
of deferred loan
discounts, fees and costs, net
|
76
|
77
|
28
|
|||||||||
|
Deferred
income tax expense
(benefit)
|
(214 | ) | (37 | ) | (264 | ) | ||||||
|
Loss
from dispositions of
premises and equipment
|
5
|
19
|
136
|
|||||||||
|
Earrings
on bank owned life
insurance
|
(154 | ) |
-
|
-
|
||||||||
|
(Increase)
decrease in accrued
interest receivable
|
(98 | ) | (125 | ) |
2
|
|||||||
|
(Increase)
decrease in other
assets
|
143
|
(66 | ) | (240 | ) | |||||||
|
Increase
(decrease) in accrued
interest payable
|
5
|
(1 | ) | (4 | ) | |||||||
|
Increase
(decrease) in other
liabilities
|
174
|
(53 | ) | (138 | ) | |||||||
|
ESOP
shares
earned
|
276
|
-
|
-
|
|||||||||
|
Net
Cash Provided by Operating Activities
|
1,807
|
2,391
|
1,713
|
|
|
Cash
Flows from Investing
Activities
|
|
Net
(increase) decrease in loans
|
(10,486 | ) | (23,283 | ) | (13,172 | ) | ||||||
|
Purchase
of securities held to maturity
|
(50,335 | ) | (3,874 | ) | (4,807 | ) | ||||||
|
Principal
repayments on securities available for sale
|
21
|
79
|
170
|
|||||||||
|
Principal
repayments on securities held to maturity
|
35,661
|
3,028
|
2,855
|
|||||||||
|
Purchase
of Federal Home Loan of New York stock
|
(42 | ) | (123 | ) |
-
|
|||||||
|
Redemptions
of Federal Home Loan Bank of New York stock
|
-
|
1,122
|
182
|
|||||||||
|
Purchases
of premises and equipment
|
(6,726 | ) | (156 | ) | (314 | ) | ||||||
|
Proceeds
from sale of premises and equipment
|
17
|
49
|
7
|
|||||||||
|
Purchase
of bank owned life insurance
|
(8,000 | ) |
-
|
-
|
||||||||
|
Net
Cash Provided by (Used in) Investing Activities
|
(39,890 | ) | (23,158 | ) | (15,079 | ) |
|
|
Cash
Flows from Financing
Activities
|
|
Net
increase (decrease) in deposits
|
(4,727 | ) | (302 | ) |
3,584
|
|||||||
|
Increase
(decrease) in advance payments by borrowers for taxes and
insurance
|
226
|
(97 | ) |
513
|
||||||||
|
Net
proceeds of initial public stock offering
|
57,628
|
-
|
-
|
|||||||||
|
Common
stock acquired by the ESOP
|
(5,184 | ) |
-
|
-
|
||||||||
|
Initial
capitalization of mutual holding company
|
(500 | ) |
-
|
-
|
||||||||
|
Net
Cash Provided by (Used in) Financing Activities
|
47,443
|
(399 | ) |
4,097
|
||||||||
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
9,360
|
(21,166 | ) | (9,269 | ) | |||||||
|
Cash
and Cash Equivalents - Beginning
|
27,389
|
48,555
|
57,824
|
|||||||||
|
Cash
and Cash Equivalents - Ending
|
$ |
36,749
|
$ |
27,389
|
$ |
48,555
|
|
|
Supplementary
Cash Flows
Information
|
|
Income
taxes paid
|
$ |
1,093
|
$ |
1,436
|
$ |
1,657
|
||||||
|
Interest
paid
|
$ |
4,488
|
$ |
3,111
|
$ |
2,498
|
See
notes to consolidated financial statements.
Northeast
Community Bancorp, Inc.
Notes
to
Consolidated Financial Statements
Notes
to Consolidated Financial Statements
Note
1 - Summary of Significant Accounting Policies
The
following is a description of our business and significant accounting and
reporting policies:
Nature
of Business and Significant Estimates
Northeast
Community Bancorp, Inc. (the “Company”) is a Federally-chartered corporation
that was organized to be a mid-tier holding company for Northeast Community
Bank
(the “Bank”) in conjunction with the Bank’s reorganization from a mutual savings
bank to a mutual holding company structure on July 5, 2006. The Company’s
primary activity is the ownership and operation of the Bank.
The
Bank
is principally engaged in the business of attracting deposits and investing
those funds into mortgage loans. When demand for loans is low, the
Bank invests in debt securities. Currently, the Bank conducts banking
operations in the New York City area. The Bank also has a Loan
Production Office in the Boston, Massachusetts area. Prior to a name
change effective February 15, 2006, the Bank was known as Fourth Federal
Savings Bank. The change in name had no effect on the operations of
the Bank.
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, the Bank, and have been prepared in conformity with
accounting principles generally accepted in the United States of
America. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The
preparation of financial statements in conformity with generally accepted
accounting principles 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. The
borrowers ability to meet contractual obligations and collateral value are
the
most significant assumptions used to arrive at the estimate. The
risks associated with such estimates arise when unforeseen conditions affect
the
borrowers ability to meet the contractual obligations of the loan and result
in
a decline in the value of the supporting collateral. Such unforeseen
changes may have an adverse effect on the consolidated results of operations
and
financial position of the Company.
In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank’s allowance for loan
losses. Such agencies may require the Bank to recognize additions to
the allowance based on their judgments about information available to them
at
the time of their examination.
Additionally,
we are exposed to significant changes in market interest rates. Such
changes could have an adverse effect on our earning capacity and consolidated
financial position, particularly in those situations in which the maturities
or
repricing of assets are different than the maturities or repricing of the
supporting liabilities.
Cash
and Cash Equivalents
Cash
and
cash equivalents include cash and amounts due from depository institutions
and
interest-bearing deposits in other banks, all with original maturities of three
months or less.
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial
Statements
Note
1 - Summary of Significant Accounting Policies
(Continued)
Securities
Statement
of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain
Investments in Debt and Equity Securities” requires financial institutions to
classify their securities among three categories: held to maturity,
trading, and available for sale. Management determines the
appropriate classification at the time of purchase. Held to maturity
securities are those debt securities which management has the intent and the
Bank has the ability to hold to maturity and are reported at amortized cost
(unless value is permanently impaired). Trading securities are those
debt and equity securities which are bought and held principally for the purpose
of selling them in the near term and are reported at fair value, with unrealized
gains and losses included in earnings. Available for sale securities
are those debt and equity securities which are neither held to maturity
securities nor trading securities and are reported at fair value, with
unrealized gains and losses, net of the related income tax effect, excluded
from
earnings and reported in a separate component of stockholders’
equity. The Company does not have trading securities in its
portfolio.
Individual
securities are considered impaired when fair value is less than amortized
cost. Management evaluates on a monthly basis whether any securities
are other-than-temporarily impaired. In making this determination, we
consider the extent and duration of the impairment, the nature and financial
health of the issuer, other factors relevant to specific securities, and our
ability and intent to hold securities for a period of time sufficient to allow
for any anticipated recovery in market value. If a security is
determined to be other-than-temporarily impaired, an impairment loss is charged
to operations.
Premiums
and discounts on all securities are amortized/accreted to maturity by use of
the
level-yield method. Gain or loss on sales of securities is based on
the specific identification method.
Loans
and Allowance for Loan Losses
An
allowance for loan losses is maintained at a level that represents management’s
best estimate of losses known and inherent in the loan portfolio that are both
probable and reasonable to estimate. The allowance is decreased by
loan charge-offs, increased by subsequent recoveries of loans previously charged
off, and then adjusted, via either a charge or credit to operations, to an
amount determined by management to be necessary. Loans or portions
thereof, are charged off when, after collection efforts are exhausted, they
are
determined to be uncollectible. Management of the Bank, in
determining the allowance for loan losses, considers the losses inherent in
its
loan portfolio and changes in the nature and volume inherent in its loan
activities, along with the general economic and real estate market
conditions. The Bank utilizes a two tier approach: (1)
identification of impaired loans and establishment of specific loss allowances
on such loans; and (2) establishment of general valuation allowances on the
remainder of its loan portfolio. The Bank maintains a loan review
system, 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. Specific loan
loss allowances are established for identified loans based on a review of such
information and/or appraisals of the underlying collateral. General
loan losses are based upon a combination of factors including, but not limited
to, actual loan loss experience, composition of the loan portfolio, current
economic conditions and management’s judgment. Although management
believes that specific and general loan losses are established in accordance
with management’s best estimate, actual losses are dependent upon future events
and, as such, further additions to the level of loan loss allowances may be
necessary.
A
loan
evaluated for impairment is deemed to be impaired when, based on current
information and events, it is probable that the Bank will be unable to collect
all amounts due according to the contractual terms of the loan
agreement. All loans identified as impaired are evaluated
independently. The Bank does not aggregate such loans for evaluation
purposes. Payments received on impaired loans are applied first to
interest receivable and then to principal.
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial
Statements
Note
1 - Summary of Significant Accounting Policies (Continued)
Loan
Origination Fees and Costs
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.
Loan
Interest and the Allowance for Uncollected Interest
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. Interest on
loans that have been restructured is accrued according to the renegotiated
terms.
Concentration
of Risk
The
Bank’s lending activity is concentrated in loans secured by multi-family and
commercial real estate located primarily in the Northeast and Mid-Atlantic
regions of the United States. The Bank also had deposits in excess of
the FDIC insurance limit at other financial institutions. At
December 31, 2006, such deposits totaled $34.1 million, of which $33.8
million was held by the Federal Home Loan Bank of New
York. Generally, deposits in excess of $100,000 are not insured by
the FDIC.
Premises
and Equipment
Land
is
stated at cost. Buildings and improvements, leasehold improvements
and furnishings and equipment are stated at cost less accumulated depreciation
and amortization computed on the straight-line method over the following useful
lives:
|
Years
|
||
|
Buildings
|
30
- 50
|
|
|
Building
improvements
|
10
- 50
|
|
|
Leasehold
improvements
|
1
-
15
|
|
|
Furnishings
and equipment
|
3
-
50
|
Maintenance
and repairs are charged to operations in the years incurred.
Bank
Owned Life Insurance (“BOLI”)
During
2006, we purchased $8,000,000 in BOLI, which is recorded at its cash surrender
value. The change in cash surrender value is included in non-interest income
and
is exempt from federal, state and city income taxes. Our BOLI is invested in
a
General Account Portfolio and a Yield Portfolio account and is managed by an
independent investment firm.
Federal
Home Loan Bank of New York Stock
Federal
law requires a member institution of the Federal Home Loan Bank (“FHLB”) system
to hold stock of its district FHLB according to a predetermined formula. The
stock carried at cost.
Income
Taxes
The
Company and the Bank file a consolidated federal income tax
return. Income taxes are allocated to the Company and Bank based upon
their respective income or loss included in the consolidated income tax
return. The Company and the Bank file separate state and city income
tax returns.
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial
Statements
Note
1 - Summary of Significant Accounting Policies (Continued)
Income
Taxes (Continued)
Federal,
state and city income tax expense has been provided on the basis of reported
income. The amounts reflected on the tax returns differ from these
provisions due principally to temporary differences in the reporting of certain
items for financial reporting and income tax reporting purposes. The tax effect
of these temporary differences is accounted for as deferred taxes applicable
to
future periods. Deferred income tax expense or (benefit) is
determined by recognizing deferred tax assets and liabilities for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in earnings in the period that includes the enactment date.
The realization of deferred tax assets is assessed and a valuation allowance
provided, when necessary, for that portion of the asset, which is not more
likely than not to be realized.
Advertising
Costs
Advertising
costs are expensed as incurred. The direct response advertising
conducted by the Bank is immaterial and has not been
capitalized. Advertising costs are included in “non-interest
expenses” on the Statements of Income.
Other
Comprehensive Income
The
Company records in accumulated other comprehensive income, net of related
deferred income taxes, unrealized gains and losses on available for sale
securities and the prior service cost of the Outside Directors Retirement Plan
(“DRP”) that has not yet been recognized in expense. Realized gains
and losses, if any, are reclassified to non-interest income upon the sale of
the
related securities or upon the recognition of a security impairment
loss. A portion of the prior service cost of the DRP is recorded in
expense annually. At December 31, 2006, Accumulated Other Comprehensive Loss
totaled $(116,000) and included $70,000 of net gains on available for sale
securities less $(28,000) of related deferred income taxes and $(287,000) in
prior service cost of the DRP less $129,000 of related deferred income taxes.
At
December 31, 2005, Accumulated Other Comprehensive Income totaled $31,000 and
included solely net gains of $56,000 on available for sale securities net of
$(25,000) of related deferred income taxes. The Company has elected to report
the effects of other comprehensive income in the consolidated statements of
stockholders’ equity.
Net
Income Per Common Share
Basic
net
income 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. Basic net income per common share data for the
year ended December 31, 2006, are calculated by utilizing net income for the
period July 5, 2006, the date the Company completed its initial public stock
offering, through December 31, 2006 ($749,000), and the weighted-average common
shares outstanding during that same period. Diluted net income per common share
is computed in a manner similar to basic net income 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. The Company has not
granted any restricted stock awards or stock options and, during the year ended
December 31, 2006, had no potentially dilutive common stock
equivalents. 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
net
income per common share until they are committed to be released. Net income
per
common share data is not presented for the years ended December 31, 2005 and
2004, as the Company had no publicly held shares outstanding prior to the
Company's initial public offering on July 5, 2006.
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial
Statements
Note
1 - Summary of Significant Accounting Policies (Continued)
Interest
Rate Risk
The
Bank
is principally engaged in the business of attracting deposits from the general
public and using these deposits, together with other funds, to purchase
securities and to make loans secured by real estate. The potential for
interest-rate risk exists as a result of the generally shorter duration of
interest-sensitive liabilities compared to the generally longer duration of
interest-sensitive assets. In a rising rate environment, liabilities
will reprice faster than assets, thereby reducing net interest
income. For this reason, management regularly monitors the maturity
structure of the Bank’s assets and liabilities in order to measure its level of
interest-rate risk and to plan for future volatility.
Off-Balance-Sheet
Financial Instruments
In
the
ordinary course of business, we enter into off-balance-sheet financial
instruments consisting of commitments to extend credit. Such financial
instruments are recorded in the consolidated statement of financial condition
when funded.
Reclassification
Certain
amounts for prior periods have been reclassified to conform to the current
year’s presentation. Such reclassifications had no effect on net
income.
Note
2 – Mutual Holding Company Reorganization and Regulatory
Matters
On
July
5, 2006, the Company reorganized from a mutual savings bank to a mutual holding
company structure. In the reorganization, the Company sold 5,951,250 shares
of
its common stock to the public and issued 7,273,750 shares of its common stock
to Northeast Community Bancorp, MHC (“MHC”). The net proceeds received from the
common stock offering were $57.6 million. Costs incurred in connection with
the
common stock offering were recorded as a reduction of gross proceeds from the
offering and totaled approximately $1.9 million. The Company also provided
a
term loan to the Bank’s Employee Stock Ownership Plan to enable it to purchase
518,420 shares of Company common stock at $10.00 per share as part of the
reorganization.
The
MHC,
which owned 55.0% of the Company’s common stock as of December 31, 2006, must
hold at least 50.1% of the Company’s stock so long as the MHC exists. In
addition to owning shares of the Company’s common stock, the MHC was capitalized
with $500,000 in cash from the Bank.
All
depositors who had membership or liquidation rights with respect to the Bank
as
of the effective date of the reorganization will continue to have such rights
solely with respect to the MHC as long as they continue to hold deposit accounts
with the Bank. In addition, all persons who become depositors of the Bank
subsequent to the date of the transaction will have such membership and
liquidation rights with respect to the MHC. Borrowers of the Bank as
of the date of the transaction will have the same membership rights in the
MHC
that they had in the Bank immediately prior to the date of the transaction
as
long as their existing borrowings remain outstanding.
Office
of
Thrift Supervision (“OTS”) regulations impose limitations upon all capital
distributions, including cash dividends, by savings institutions such as the
Bank. Under these regulations, an application to and a prior approval of the
OTS
are required before any capital distribution if (1) the institution does not
meet the criteria for “expedited treatment” of applications under OTS
regulations; (2) total capital distributions for the calendar year exceed net
income for that year plus the amount of retained net income for the preceding
two years; (3) the institution would be undercapitalized following the
distribution; or (4) the distribution would otherwise be contrary to statute,
regulation or agreement with the OTS. If an application is not required, the
Bank would still be required to provide the OTS with prior notification. The
Company’s ability to pay dividends, should any be declared, may depend on the
ability of the Bank to pay dividends to the Company.
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial Statements
Note
2 – Mutual Holding Company Reorganization and Regulatory Matters
(continued)
OTS
regulations require the MHC to notify the OTS if it proposes to waive the
receipt of dividends declared by the Company. The OTS reviews dividend waiver
requests on a case-by-case basis and, generally, has not objected to such
waivers if (1) the waiver would not be detrimental to the safe and sound
operation of the institution; (2) the MHC’s board of directors has determined
that such waiver is consistent with such directors’ fiduciary duties to MHC’s
members; and (3) the MHC certifies that the dividends declared (distributed
and
waived) for the current year plus prior two calendar quarters does not exceed
cumulative net income during that period. We anticipate that the MHC will waive
dividends, if any, that the Company may declare.
The
Bank
is required to maintain certain levels of capital in accordance with the
Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and OTS
regulations. Under these capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank’s assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank’s capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk-weightings and other factors.
Under
the
OTS regulations, the Bank must have: (1) tangible capital equal to
1.5% of tangible assets, (2) core capital equal to 3% of tangible assets, and
(3) total (risk-based) capital equal to 8% of risk-weighted
assets. Tangible capital consists generally of stockholders’ equity
less most intangible assets. Core capital consists of tangible
capital plus certain intangible assets such as qualifying purchased mortgage
servicing rights. Risk-based capital consists of core capital plus
the general allowance for loan losses.
Under
the
prompt corrective action rule issued by the federal banking authorities, an
institution must have a leverage ratio of 4% or greater, a tier 1 capital ratio
of 4% or greater and a total risk-based capital ratio of 8% or greater in order
to be considered adequately capitalized. The Bank is in compliance
with these requirements at December 31, 2006.
The
following tables present a reconciliation of capital per generally accepted
accounting principles (“GAAP”) and regulatory capital and information about the
Bank’s capital levels at the dates presented:
|
December
31,
|
||||
|
2006
|
2005
|
|||
|
(In
Thousands)
|
||||
|
GAAP
capital
|
$ |
67,662
|
$ |
43,120
|
||||
|
Less: Unrealized
gain on securities available for sale
|
(42 | ) | (31 | ) | ||||
|
Disallowed
deferred tax assets
|
(667 | ) | (467 | ) | ||||
|
Core
and Tangible Capital
|
66,953
|
42,622
|
||||||
|
Add: General
valuation allowances
|
1,200
|
1,200
|
||||||
|
Total
Capital
|
$ |
68,153
|
$ |
43,822
|
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial Statements
Note
2 - Mutual Holding Company Reorganization and Regulatory Matters
(Continued)
|
Actual
|
For
Capital Adequacy
Purposes
|
To
be Well Capitalized
under
Prompt
Corrective
Action
Provisions
|
||||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||||||||||
|
As
of December 31, 2006:
|
||||||||||||||||||||||||
|
Total
capital (to risk-weighted
assets)
|
$ |
68,153
|
44.58 | % | $ |
³12,229
|
³8.00 | % | $ |
³15,286
|
³10.00 | % | ||||||||||||
|
Tier
1 capital (to risk-weighted
assets)
|
66,953
|
43.80
|
³ -
|
³ -
|
³9,172
|
³ 6.00
|
||||||||||||||||||
|
Core
(Tier 1) capital (to
adjusted total assets
|
66,953
|
25.46
|
³10,520
|
³4.00
|
³13,150
|
³ 5.00
|
||||||||||||||||||
|
Tangible
capital (to adjusted
total assets)
|
66,953
|
25.46
|
³3,945
|
³1.50
|
³ -
|
³ -
|
||||||||||||||||||
|
As
of December 31, 2005:
|
||||||||||||||||||||||||
|
Total
capital (to risk-weighted
assets)
|
$ |
43,822
|
33.08 | % | $ |
³10,597
|
³8.00 | % | $ |
³13,247
|
³10.00 | % | ||||||||||||
|
Tier
1 capital (to risk-weighted
assets)
|
42,622
|
32.18
|
³ -
|
³ -
|
³ 7,948
|
³ 6.00
|
||||||||||||||||||
|
Core
(Tier 1) capital (to
adjusted total assets
|
42,622
|
17.92
|
³ 9,512
|
³4.00
|
³11,890
|
³ 5.00
|
||||||||||||||||||
|
Tangible
capital (to adjusted
total assets)
|
42,622
|
17.92
|
³ 3,567
|
³1.50
|
³ -
|
³ -
|
||||||||||||||||||
Based
on
the most recent notification by the OTS, the Bank was categorized as well
capitalized under the regulatory framework for prompt corrective
action. There have been no conditions or events that have occurred
since notification that management believes have changed the Bank’s
category.
The
Bank’s management believes that, with respect to regulations under FIRREA, the
Bank will continue to meet its minimum capital requirements in the foreseeable
future. However, events beyond the control of the Bank, such as
increased interest rates or a downturn in the economy in areas where the Bank
has most of its loans, could adversely affect future earnings and, consequently,
the ability of the Bank to meet its future minimum capital
requirements.
Note
3 - Financial Instruments with Off-Balance Sheet
Risk
The
Bank
is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its
customers. These financial instruments are commitments to extend
credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
statements of financial condition.
The
Bank’s exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit is represented
by
the contractual notional amount of those instruments. The Bank uses
the same credit policies in making commitments and conditional obligations
as it
does for on-balance-sheet instruments.
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial Statements
Note
3 - Financial Instruments with Off-Balance Sheet Risk
(Continued)
|
December
31,
|
||||||||
|
2006
|
2005
|
|||||||
|
(In
Thousands)
|
||||||||
|
Financial
instruments whose contract amounts represent credit risk:
|
||||||||
|
Commitments
to extend
credit
|
$ |
3,933
|
$ |
13,221
|
||||
|
Commitments
to fund unused lines
of credit:
|
||||||||
|
Commercial
lines
|
|
3,651
|
3,537
|
|||||
|
Consumer
lines
|
210
|
246
|
||||||
| $ |
7,794
|
$ |
17,004
|
|||||
At
December 31, 2006, all of the financial instruments noted above carry
adjustable or floating interest rates. Commitments to extend credit
are legally binding agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The amount of collateral obtained, if
deemed necessary by the Bank, is based on management’s credit evaluation of the
borrower.
Note
4 - Securities Available for Sale
|
December
31, 2006
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
|
(In
Thousands)
|
||||||||||||||||
|
Federal
National Mortgage Association common stock
|
$ |
4
|
$ |
68
|
$ |
-
|
$ |
72
|
||||||||
|
Mortgage-backed
securities:
|
||||||||||||||||
|
Federal
Home Loan Mortgage Corporation
|
193
|
2
|
-
|
195
|
||||||||||||
|
Federal
National Mortgage Association
|
84
|
-
|
-
|
84
|
||||||||||||
|
Collateralized
Mortgage Obligations
|
4
|
-
|
-
|
4
|
||||||||||||
|
281
|
2
|
-
|
283
|
|||||||||||||
| $ |
285
|
$ |
70
|
$ |
-
|
$ |
355
|
|||||||||
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial Statements
Note
4 - Securities Available for Sale (Continued)
|
December
31, 2005
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
|
(In
Thousands)
|
||||||||||||||||
|
Federal
National Mortgage Association common stock
|
$ |
4
|
$ |
54
|
$ |
-
|
$ |
58
|
||||||||
|
Mortgage-backed
securities:
|
||||||||||||||||
|
Federal
Home Loan Mortgage Corporation
|
208
|
2
|
-
|
210
|
||||||||||||
|
Federal
National Mortgage Association
|
88
|
-
|
-
|
88
|
||||||||||||
|
Collateralized
Mortgage Obligations
|
6
|
-
|
-
|
6
|
||||||||||||
|
302
|
2
|
-
|
304
|
|||||||||||||
| $ |
306
|
$ |
56
|
$ |
-
|
$ |
362
|
|||||||||
There
were no sales of securities available for sale during the years ended
December 31, 2006, 2005 and 2004.
Contractual
maturities of mortgage-backed securities were as follows:
|
December
31,
|
||||||||||||||||
|
2006
|
2005
|
|||||||||||||||
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||||||
|
(In
Thousands)
|
||||||||||||||||
|
Due
after one but within five years
|
$ |
4
|
$ |
4
|
$ |
6
|
$ |
6
|
||||||||
|
Due
after ten years
|
277
|
279
|
296
|
298
|
||||||||||||
| $ |
281
|
$ |
283
|
$ |
302
|
$ |
304
|
|||||||||
The
maturities shown above are based upon contractual 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.
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial Statements
Note
5 - Securities Held to Maturity
|
December
31, 2006
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
|
(In
Thousands)
|
||||||||||||||||
|
U.S.
Government (including Agencies) maturing:
|
||||||||||||||||
|
Within
one year
|
$ |
21,904
|
$ |
11
|
$ |
2
|
$ |
21,913
|
||||||||
|
After
one but within five
years
|
1,000
|
-
|
9
|
991
|
||||||||||||
|
22,904
|
11
|
11
|
22,904
|
|||||||||||||
|
Mortgage-backed
securities:
|
||||||||||||||||
|
Government
National Mortgage
Association
|
2,190
|
6
|
13
|
2,183
|
||||||||||||
|
Federal
Home Loan Mortgage
Corporation
|
1,135
|
12
|
3
|
1,144
|
||||||||||||
|
Federal
National Mortgage
Association
|
995
|
12
|
2
|
1,005
|
||||||||||||
|
Collateralized
Mortgage
Obligations
|
222
|
1
|
-
|
223
|
||||||||||||
|
Private
Pass-through
Securities
|
9
|
-
|
-
|
9
|
||||||||||||
|
4,551
|
31
|
18
|
4,564
|
|||||||||||||
| $ |
27,455
|
$ |
42
|
$ |
29
|
$ |
27,468
|
|||||||||
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial Statements
Note
5 - Securities Held to Maturity (Continued)
|
December
31, 2005
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
|
(In
Thousands)
|
||||||||||||||||
|
U.S.
Government (including Agencies) maturing:
|
||||||||||||||||
|
Within
one year
|
$ |
3,000
|
$ |
-
|
$ |
23
|
$ |
2,977
|
||||||||
|
After
one but within five
years
|
1,999
|
-
|
26
|
1,973
|
||||||||||||
|
4,999
|
-
|
49
|
4,950
|
|||||||||||||
|
Mortgage-backed
securities:
|
||||||||||||||||
|
Government
National Mortgage Association
|
3,389
|
7
|
35
|
3,361
|
||||||||||||
|
Federal
Home Loan Mortgage Corporation
|
1,928
|
20
|
2
|
1,946
|
||||||||||||
|
Federal
National Mortgage Association
|
1,522
|
17
|
5
|
1,534
|
||||||||||||
|
Collateralized
Mortgage Obligations
|
373
|
3
|
2
|
374
|
||||||||||||
|
Private
Pass-through Securities
|
17
|
-
|
-
|
17
|
||||||||||||
|
7,229
|
47
|
44
|
7,232
|
|||||||||||||
| $ |
12,228
|
$ |
47
|
$ |
93
|
$ |
12,182
|
|||||||||
There
were no sales of securities held to maturity during the years ended
December 31, 2006, 2005 and 2004.
Contractual
maturities of mortgage-backed securities were as follows:
|
December
31,
|
||||||||||||||||
|
2006
|
2005
|
|||||||||||||||
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||||||
|
(In
Thousands)
|
||||||||||||||||
|
Due
within one year
|
$ |
-
|
$ |
-
|
$ |
5
|
$ |
5
|
||||||||
|
Due
after one but within five years
|
258
|
260
|
478
|
484
|
||||||||||||
|
Due
after five but within ten years
|
95
|
95
|
59
|
60
|
||||||||||||
|
Due
after ten years
|
4,198
|
4,209
|
6,687
|
6,683
|
||||||||||||
| $ |
4,551
|
$ |
4,564
|
$ |
7,229
|
$ |
7,232
|
|||||||||
The
maturities shown above are based upon contractual 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.
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial Statements
Note
5 - Securities Held to Maturity (Continued)
The age of unrealized losses and the fair value of related securities held to maturity were as follows:
|
Less
than 12 Months
|
12
Months or More
|
Total
|
||||||||||||||||||||||
|
Fair
Value
|
Gross
Unrealized
Losses
|
Fair
Value
|
Gross
Unrealized
Losses
|
Fair
Value
|
Gross
Unrealized
Losses
|
|||||||||||||||||||
|
(In
Thousands)
|
||||||||||||||||||||||||
|
December
31, 2006:
|
||||||||||||||||||||||||
|
U.
S. Government
(including
agencies)
|
$ |
997
|
$ |
2
|
$ |
991
|
$ |
9
|
$ |
1,988
|
$ |
11
|
||||||||||||
|
Mortgage-backed
securities
|
-
|
-
|
2,372
|
18
|
2,372
|
18
|
||||||||||||||||||
| $ |
997
|
$ |
2
|
$ |
3,363
|
$ |
27
|
$ |
4,360
|
$ |
29
|
|||||||||||||
|
December
31, 2005:
|
||||||||||||||||||||||||
|
U.
S. Government
(including
agencies)
|
$ |
2,980
|
$ |
19
|
$ |
1,970
|
$ |
30
|
$ |
4,950
|
$ |
49
|
||||||||||||
|
Mortgage-backed
securities
|
1,993
|
17
|
1,708
|
27
|
3,701
|
44
|
||||||||||||||||||
| $ |
4,973
|
$ |
36
|
$ |
3,678
|
$ |
57
|
$ |
8,651
|
$ |
93
|
|||||||||||||
At
December 31, 2006, two U. S. Government Agency Securities and 32
mortgage-backed securities had unrealized losses. As of
December 31, 2006 and 2005, management concluded that the unrealized losses
reflected above were temporary in nature since they were primarily related
to
market interest rates and not related to the underlying credit quality of the
issuers of the securities. Additionally, the Bank has the ability and
intent to hold these securities for the time necessary to recover the amortized
cost.
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial
Statements
Note
6 - Loans Receivable, Net
|
December
31,
|
||||||||
|
2006
|
2005
|
|||||||
|
(In
Thousands)
|
||||||||
|
Real
estate mortgage:
|
||||||||
|
One-to-four
family
|
$ |
405
|
$ |
587
|
||||
|
Multi-family
|
110,389
|
100,360
|
||||||
|
Mixed
use
|
42,576
|
43,919
|
||||||
|
Commercial
|
47,802
|
46,219
|
||||||
|
201,172
|
191,085
|
|||||||
|
Consumer:
|
||||||||
|
Line
of credit
|
71
|
83
|
||||||
|
Passbook
or
certificate
|
348
|
268
|
||||||
|
419
|
351
|
|||||||
|
Total
Loans
|
201,591
|
191,436
|
||||||
|
Allowance
for loan losses
|
(1,200 | ) | (1,200 | ) | ||||
|
Deferred
loan fees and costs
|
915
|
660
|
||||||
| $ |
201,306
|
$ |
190,896
|
|||||
Loans
serviced for the benefit of others totaled approximately $3,012,000, $3,163,000,
and $3,708,000 at December 31, 2006, 2005 and 2004,
respectively.
At
December 31, 2006, 2005 and 2004, the Bank had no loans on nonaccrual
status or which were in the process of foreclosure. At
December 31, 2006, 2005 and 2004, and for the years then ended, the Bank
had no loans that were classified as impaired. At December 31, 2006,
the Bank had $2,000 in loans which were three or more months delinquent and
still accruing interest. There were no such loans at December 31,
2005 and 2004.
The
following is an analysis of the allowance for loan losses:
|
Years
Ended December 31,
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
(In
Thousands)
|
||||||||||||
|
Balance,
beginning
|
$ |
1,200
|
$ |
1,200
|
$ |
1,200
|
||||||
|
Provision
charged to
operations
|
-
|
-
|
-
|
|||||||||
|
Losses
charged to
allowance
|
-
|
-
|
-
|
|||||||||
|
Balance,
ending
|
$ |
1,200
|
$ |
1,200
|
$ |
1,200
|
||||||
Note
7 - Premises and Equipment, Net
|
December
31,
|
||||||||
|
2006
|
2005
|
|||||||
|
(In
Thousands)
|
||||||||
|
Land
|
$ |
587
|
$ |
587
|
||||
|
Air
rights acquired
|
6,088
|
-
|
||||||
|
Buildings
and improvements
|
7,592
|
7,592
|
||||||
|
Leasehold
improvements
|
725
|
419
|
||||||
|
Furnishings
and equipment
|
4,823
|
4,562
|
||||||
|
19,815
|
13,160
|
|||||||
|
Accumulated
depreciation and amortization
|
(8,698 | ) | (8,158 | ) | ||||
| $ |
11,117
|
$ |
5,002
|
|||||
Included
in property and equipment at December 31, 2006, are $6,187,000 in assets which
are held for sale. These assets relate to a branch located in New
York City and consist of the following: land of $52,000, air rights of
$6,088,000, building of $5,000 and furnishings and equipment of
$42,000. The Bank entered into an agreement on December 14, 2006, to
sell these assets for an aggregate price of $28.0 million. This sale,
which is subject to significant conditions, is expected to close in the second
quarter of 2007.
Note
8 - Accrued Interest Receivable, Net
|
December
31,
|
||||||||
|
2006
|
2005
|
|||||||
|
(In
Thousands)
|
||||||||
|
Loans
|
$ |
1,041
|
$ |
925
|
||||
|
Securities
|
64
|
82
|
||||||
|
1,105
|
1,007
|
|||||||
|
Allowance
for uncollected interest
|
(4 | ) | (4 | ) | ||||
| $ |
1,101
|
$ |
1,003
|
|||||
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial
Statements
Note
9 - Deposits
|
December
31,
|
||||||||||||||||
|
2006
|
2005
|
|||||||||||||||
|
Amount
|
Weighted
Average
Interest
Rate
|
Amount
|
Weighted
Average
Interest
Rate
|
|||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||
|
Demand
deposits:
|
||||||||||||||||
|
Non-interest
bearing
|
$ |
1,439
|
0.00 | % | $ |
1,499
|
0.00 | % | ||||||||
|
NOW
and money
market
|
21,137
|
0.49 | % |
22,731
|
0.26 | % | ||||||||||
|
22,576
|
0.46 | % |
24,230
|
0.24 | % | |||||||||||
|
Savings
accounts
|
60,755
|
0.70 | % |
73,133
|
0.58 | % | ||||||||||
|
Certificates
of deposit maturing in:
|
||||||||||||||||
|
One
year or less
|
68,033
|
4.40 | % |
59,301
|
2.71 | % | ||||||||||
|
After
one to two
years
|
13,537
|
4.17 | % |
8,769
|
3.52 | % | ||||||||||
|
After
two to three
years
|
9,630
|
4.28 | % |
7,845
|
3.64 | % | ||||||||||
|
After
three to four
years
|
9,339
|
4.57 | % |
10,275
|
4.30 | % | ||||||||||
|
After
four to five
years
|
4,722
|
5.27 | % |
9,761
|
4.56 | % | ||||||||||
|
105,261
|
4.41 | % |
95,951
|
3.22 | % | |||||||||||
| $ |
188,592
|
2.74 | % | $ |
193,314
|
1.84 | % | |||||||||
As
of
December 31, 2006 and 2005, certificates of deposit over $100,000 totaled
$24,368,000 and $19,799,000, respectively. Generally, deposits in
excess of $100,000 are not insured by the FDIC.
Interest
expense on deposits consists of the following:
|
Years
Ended December 31,
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
(In
Thousands)
|
||||||||||||
|
Demand
deposits
|
$ |
111
|
$ |
62
|
$ |
61
|
||||||
|
Savings
accounts
|
469
|
373
|
393
|
|||||||||
|
Certificates
of deposit
|
3,913
|
2,675
|
2,040
|
|||||||||
| $ |
4,493
|
$ |
3,110
|
$ |
2,494
|
|||||||
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial
Statements
Note
10 - Income Taxes
The
Bank
qualifies as a savings institution under the provisions of the Internal Revenue
Code and was, therefore, prior to January 1, 1996, permitted to deduct from
taxable income an allowance for bad debts based upon eight percent of taxable
income before such deduction, less certain adjustments. Retained
earnings at December 31, 2006 and 2005, include approximately $4.1 million
of such bad debt deductions which, in accordance with SFAS No. 109,
“Accounting for Income Taxes,” is considered a permanent difference between the
book and income tax basis of loans receivable, and for which income taxes have
not been provided. If such amount is used for purposes other than for
bad debt losses, including distributions in liquidation, it will be subject
to
income tax at the then current rate.
The
components of income taxes are summarized as follows:
|
Years
Ended December 31,
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
(In
Thousands)
|
||||||||||||
|
Current
tax expense
|
$ |
1,260
|
$ |
1,608
|
$ |
1,437
|
||||||
|
Deferred
tax expense
|
(214 | ) | (37 | ) | (264 | ) | ||||||
|
Income
Tax Expense
|
$ |
1,046
|
$ |
1,571
|
$ |
1,173
|
||||||
The
following table presents a reconciliation between the reported income taxes
and
the income taxes, which would be computed by applying normal federal income
tax
rates to income before taxes:
|
Years
Ended December 31,
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
(In
Thousands)
|
||||||||||||
|
Federal
income tax at statutory rates
|
$ |
886
|
$ |
1,211
|
$ |
930
|
||||||
|
State
and City tax, net of federal income tax effect
|
202
|
333
|
209
|
|||||||||
|
Non-taxable
income on bank owned life insurance
|
(52 | ) |
-
|
-
|
||||||||
|
Other
|
10
|
27
|
34
|
|||||||||
|
Income
Tax Expense
|
$ |
1,046
|
$ |
1,571
|
$ |
1,173
|
||||||
|
Effective
Income Tax Rate
|
40.2 | % | 44.1 | % | 42.9 | % | ||||||
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial
Statements
Note
10 - Income Taxes (Continued)
The
tax
effects of significant items comprising the net deferred tax asset are as
follows:
|
December
31,
|
||||||||
|
2006
|
2005
|
|||||||
|
(In
Thousands)
|
||||||||
|
Deferred
tax assets:
|
||||||||
|
Allowance
for loan
losses
|
$ |
514
|
$ |
514
|
||||
|
Depreciation
|
264
|
88
|
||||||
|
Benefit
plans
|
63
|
-
|
||||||
|
Accumulated
other comprehensive
loss - DRP
|
114
|
-
|
||||||
|
Deferred
loan fees and
discounts
|
67
|
92
|
||||||
|
Total
Deferred Tax Assets
|
1,022
|
694
|
||||||
|
Deferred
tax liability, unrealized gain on securities available for
sale
|
28
|
25
|
||||||
|
Net
Deferred Tax Asset
|
$ |
994
|
$ |
669
|
||||
The
net
deferred tax asset is included in other assets in the consolidated statements
of
financial condition.
Note
11 - Other Non-Interest Expenses
The
following is an analysis of other non-interest expenses:
|
Years
Ended December 31,
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
(In
Thousands)
|
||||||||||||
|
Service
contracts
|
$ |
191
|
$ |
171
|
$ |
215
|
||||||
|
Insurance
|
162
|
166
|
186
|
|||||||||
|
Audit
and accounting
|
208
|
153
|
188
|
|||||||||
|
Directors
compensation
|
214
|
66
|
46
|
|||||||||
|
Telephone
|
161
|
145
|
154
|
|||||||||
|
Office
supplies and stationary
|
252
|
145
|
156
|
|||||||||
|
Director,
officer, and employee expenses
|
158
|
155
|
182
|
|||||||||
|
Legal
fees
|
185
|
48
|
174
|
|||||||||
|
Other
|
440
|
485
|
526
|
|||||||||
| $ |
1,971
|
$ |
1,534
|
$ |
1,827
|
|||||||
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial Statements
Note
12 - Benefits Plans
Outside
Director Retirement Plan (“DRP”)
Effective
January 1, 2006, the Bank implemented the DRP. This plan is a non-contributory
defined benefit pension plan covering all non-employee directors meeting
eligibility requirements as specified in the plan document. The DRP is accounted
for under Statements of Financial Accounting Standards Nos. 132 and 158. The
following table sets forth the funded status of the DRP at December 31, 2006,
and components of net periodic expense for the year then ended (dollars in
thousands):
|
Benefit
Obligation – beginning
|
$ |
-
|
||
|
Service
cost
|
32
|
|||
|
Interest
cost
|
18
|
|||
|
Prior
service
cost
|
308
|
|||
|
Benefit
Obligation – ending
|
$ |
358
|
||
|
Funded
Status – Accrued liability included in Accounts Payable and
Accrued
Expenses
|
$ |
358
|
||
|
Discount
rate
|
6.00 | % | ||
|
Salary
increase rate
|
2.00 | % | ||
|
Net
pension expense:
|
||||
|
Service
cost
|
$ |
32
|
||
|
Interest
cost
|
18
|
|||
|
Amortization
of unrecognized
prior service liability
|
21
|
|||
|
Total
pension expense included in Other Non-Interest Expenses
|
$ |
71
|
||
|
Discount
rate
|
6.00 | % | ||
|
Salary
increase rate
|
2.00 | % | ||
At
December 31, 2006, $287,000 ($158,000 net of $129,000 of related deferred income
tax assets) in prior service cost reflected in the above table has been recorded
in Accumulated Other Comprehensive Loss. Approximately $21,000 of that amount
is
expected to be included in pension expense in 2007.
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial Statements
Note
12 - Benefits Plans (Continued)
Outside
Director Retirement Plan (“DRP”) (Continued)
Benefit
payments, which reflect expected future service as appropriate, are expected
to
be paid for the years ended December 31 as follows (in
thousands):
|
2007
|
$ |
-
|
||||
|
2008
|
-
|
|||||
|
2009
|
-
|
|||||
|
2010
|
-
|
|||||
|
2011
|
26
|
|||||
| 2012 – 2016 |
317
|
|||||
| $ |
343
|
|||||
Supplemental
Executive Retirement Plan (“SERP”)
Effective
January 1, 2006, the Bank implemented the SERP. This plan is a non-contributory
defined benefit plan accounted for under SFAS 106. The SERP covers both the
Bank’s Chief Executive Officer and Chief Financial Officer. Under the SERP, each
of these individuals will be entitled to receive, upon retirement at age 65,
an
annual benefit, paid in monthly installments, equal to 50% of his average base
salary in the three-year period preceding retirement. Each individual may also
retire early and receive a reduced benefit (0.25% reduction in benefit for
each
month by which retirement age is less than 65 years) upon the attainment of
both
age 60 and 20 years of service. Additional terms related to death while
employed, death after retirement, disability before retirement and termination
of employment are fully described within the plan document. The benefit payment
term is the greater of 15 years or the executives remaining life. No benefits
are expected to be paid during the next ten years. During the year ended
December 31, 2006, an expense of $114,000 was recorded for this plan and is
reflected in the Consolidated Statements of Income under Salaries and Employee
Benefits. At December 31, 2006, a liability for this plan of $114,000
is included in the Consolidated Statements of Financial Condition under Accounts
Payable and Accrued Expenses.
401(k)
Plan
The
Bank
maintains a 401(k) plan for all eligible employees. Participants are
permitted to contribute from 1% to 15% of their annual compensation up to the
maximum permitted under the Internal Revenue Code. The Bank through
August 2006, made matching contributions equal to 100% of the employees
contribution up to 5% of annual compensation. In September 2006, the
Bank ceased making matching contributions to the 401(k)
plan. Employer contributions fully vest after 6
years. Plan expenses for the years ended December 31, 2006, 2005
and 2004 were $90,000, $123,000, and $115,000, respectively.
Employee
Stock Ownership Plan (“ESOP”)
In
conjunction with the Company’s initial public stock offering, the Bank
established an ESOP for all eligible employees (substantially all full-time
employees). The ESOP borrowed $5,184,200 from the Company and used those funds
to acquire 518,420 shares of Company common stock at $10.00 per share. The
loan
from the Company carries an interest rate of 8.25% and is repayable in twenty
annual installments through 2025. Each year, the Bank intends to make
discretionary contributions to the ESOP equal to the principal and interest
payment required on the loan from the Company. The ESOP may further pay down
the
principal balance of the loan by using dividends paid, if any, on the shares
of
Company common stock it owns. The balance remaining on the ESOP loan was
$4,877,000 at December 31, 2006.
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial Statements
Note
12 - Benefits Plans (Continued)
Employee
Stock Ownership Plan (“ESOP”) (Continued)
Shares
purchased with the loan proceeds serve as collateral for the loan and are held
in a suspense account for future allocation among ESOP participants. As the
loan
principal is repaid, shares will be released from the suspense account and
become eligible for allocation. The allocation among plan participants will
be
as described in the ESOP governing document.
The
ESOP
is accounted for in accordance with Statement of Position 93-6, “Accounting for
Employee Stock Ownership Plans”, which was issued by the American Institute of
Certified Public Accountants. Accordingly, ESOP shares initially pledged as
collateral were recorded as unearned ESOP shares in the stockholders’ equity
section of the consolidated statement of financial condition. Thereafter, on
a
monthly basis over a 240 month period, approximately 2,160 shares are committed
to be released and compensation expense recorded equal to the shares committed
to be released multiplied by the average closing price of the Company’s stock
during that month. ESOP expense during the year ended December 31, 2006, totaled
approximately $276,000.
As
of
December 31, 2006, ESOP shares are summarized as follows:
|
Allocated
shares
|
-
|
|||
|
Shares
committed to be released
|
25,921
|
|||
|
Unearned
shares
|
492,499
|
|||
|
Total
ESOP Shares
|
518,420
|
|||
|
Fair
value of unearned shares
|
$ |
6,053,000
|
Note
13 - Commitments and Contingencies
Lease
Commitments
Rentals
under operating leases for certain branch offices amounted to $210,000, $88,000,
and $78,000 for the years ended December 31, 2006, 2005 and 2004,
respectively. At December 31, 2006, the minimum rental
commitments under all noncancellable leases with initial or remaining terms
of
more than one year are as follows (in thousands):
|
Year
ending December 31,
|
||||
|
2007
|
$ |
277
|
||
|
2008
|
294
|
|||
|
2009
|
274
|
|||
|
2010
|
248
|
|||
|
2011
|
161
|
|||
|
Thereafter
|
1,178
|
|||
| $ |
2,432
|
|||
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial Statements
Note
13 - Commitments and Contingencies (Continued)
Available
Credit Facilities
The
Bank
has the ability to borrow up to $12 million from the Federal Home Loan Bank
of
New York, consisting of a $6 million Overnight Line of Credit and a $6 million
Companion (DRA) Commitment, both of which expire on July 31,
2007. At December 31, 2006, no amounts were outstanding under
these credit facilities.
Other
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.
Note
14 - Disclosures About Fair Value of Financial Instruments
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate fair
value:
Cash
and Cash Equivalents and Accrued Interest Receivable
For
these
short-term instruments, the carrying amount is a reasonable estimate of fair
value.
Securities
For
both
available for sale and held to maturity securities, fair values are based on
quoted market prices.
Loans
Fair
values are estimated for portfolios of loans with similar financial
characteristics. The total loan portfolio is first divided into
performing and nonperforming categories. Performing loans are then
segregated into adjustable and fixed rate interest terms. Fixed rate
loans are segmented by type, such as construction and land development, other
loans secured by real estate, commercial and industrial loans, and loans to
individuals. Certain types, such as commercial loans and loans to
individuals, 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 discount rate equivalent to the rate
at
which the Bank would currently make loans which are similar with regard to
collateral, maturity, and the type of borrower. The discounted value
of the cash flows is reduced by a credit risk adjustment based on internal
loan
classifications.
For
nonperforming loans, fair value is calculated by first reducing the carrying
value by a credit risk adjustment based on internal loan classifications, and
then discounting the estimated future cash flows from the remaining carrying
value at the rate at which the Bank would currently make similar loans to
creditworthy borrowers.
Federal
Home Loan Bank of New York Stock
The
carrying amount of the Federal Home Loan Bank of New York stock is equal to
its
fair value.
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial Statements
Note
14 - Disclosures About Fair Value of Financial Instruments
(Continued)
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 equivalent to the rate currently by the
Bank for deposits of similar size, type and maturity. Accrued
interest payable is included in deposit liabilities.
Borrowed
Funds
The
fair
value of the Bank’s borrowed funds is estimated based on the discounted value of
future contractual payments. The discount rate is equivalent to the
estimated rate at which the Bank 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 December 31, 2006 and 2005, the
estimated fair values of these off-balance-sheet financial instruments were
immaterial.
The
carrying amounts and estimated fair value of our financial instruments are
as
follows:
|
December
31,
|
||||||||||||||||
|
2006
|
2005
|
|||||||||||||||
|
Carrying
Amount
|
Estimated
Fair
Value
|
Carrying
Amount
|
Estimated
Fair
Value
|
|||||||||||||
|
(In
Thousands)
|
||||||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash
and cash
equivalents
|
$ |
36,749
|
$ |
36,749
|
$ |
27,389
|
$ |
27,389
|
||||||||
|
Securities
available for
sale
|
355
|
355
|
362
|
362
|
||||||||||||
|
Securities
held to
maturity
|
27,455
|
27,468
|
12,228
|
12,182
|
||||||||||||
|
Loans
receivable
|
201,306
|
196,020
|
190,896
|
186,284
|
||||||||||||
|
FHLB
stock
|
399
|
399
|
357
|
357
|
||||||||||||
|
Accrued
interest
receivable
|
1,101
|
1,101
|
1,003
|
1,003
|
||||||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Deposits
|
188,592
|
187,919
|
193,314
|
192,880
|
||||||||||||
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial Statements
Note
15 – Parent Company Only Financial Information
|
STATEMENT
OF FINANCIAL CONDITION – DECEMBER 31, 2006 (In
Thousands)
|
||||
|
Assets
|
||||
|
Cash
and due from banks
|
$ |
9,533
|
||
|
Securities
held to maturity
|
14,916
|
|||
|
Investment
in subsidiary
|
67,662
|
|||
|
ESOP
loan receivable
|
4,877
|
|||
|
Other
assets
|
3
|
|||
|
Total
Assets
|
$ |
96,991
|
||
|
Liabilities
and Stockholders’ Equity
|
||||
|
Liabilities
|
||||
|
Other
liabilities
|
$ |
240
|
||
|
Total
Liabilities
|
240
|
|||
|
Total
Stockholders’ Equity
|
96,751
|
|||
|
Total
Liabilities and Stockholders’ Equity
|
$ |
96,991
|
||
|
STATEMENT
OF INCOME – July 5, 2006 (Inception) to December 31,
2006 (In
Thousands)
|
||||
|
Interest
income – securities
|
$ |
307
|
||
|
Interest
income – deposits
|
149
|
|||
|
Interest
Income – ESOP loan
|
210
|
|||
|
Operating
expenses
|
(90 | ) | ||
|
Income
before Income Tax Expense and Equity in Undistributed
Earnings of
Subsidiary
|
576
|
|||
|
Income
tax expense
|
226
|
|||
|
Income
before Equity in Undistributed Earnings
of Subsidiary
|
350
|
|||
|
Equity
in undistributed earnings of subsidiary
|
399
|
|||
|
Net
Income
|
$ |
749
|
||
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial Statements
Note
15 - Parent Only Financial Information (Continued)
|
STATEMENT
OF CASH FLOW - July 5, 2006 (Inception) to December 31, 2006
(In
Thousands)
|
||||
|
Cash
Flows from Operating Activities
|
||||
|
Net
income
|
$ |
749
|
||
|
Adjustments
to reconcile net
income to net cash provided by operating
activities:
|
||||
|
Equity
in undistributed earnings of subsidiary
|
(399 | ) | ||
|
Amortization
of securities discount
|
(307 | ) | ||
|
(Increase)
in other assets
|
(3 | ) | ||
|
Increase
in other liabilities
|
240
|
|||
|
Net
Cash Provided by Operating Activities
|
280
|
|||
|
Cash
Flows from Investing Activities
|
||||
|
Purchase
of securities held to
maturity
|
(29,609 | ) | ||
|
Maturities
of securities held to
maturity
|
15,000
|
|||
|
Loan
to ESOP
|
(5,184 | ) | ||
|
Repayment
of ESOP
loan
|
307
|
|||
|
Purchase
of Bank capital
stock
|
(28,889 | ) | ||
|
Net
Cash Used in Investing Activities
|
(48,375 | ) | ||
|
Cash
Flows from Financing Activities
|
||||
|
Proceeds
from issuance of common
stock
|
57,628
|
|||
|
Net
Cash Provided by Financing Activities
|
57,628
|
|||
|
Net
Increase in Cash and Cash Equivalents
|
9,533
|
|||
|
Cash
and Cash Equivalents - Beginning
|
-
|
|||
|
Cash
and Cash Equivalents - Ending
|
$ |
9,533
|
||
Note
16 - Recent Accounting Pronouncements
Fair
Value Measurement
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”,
which defines fair value, establishes a framework for measuring fair value
under
U.S. GAAP, and expands disclosures about fair value measurements. SFAS
No. 157 applies to other accounting pronouncements that require or permit
fair value measurements. The new guidance is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and for interim
periods within those fiscal years. We are currently evaluating the potential
impact, if any, of the adoption of SFAS No. 157 on our consolidated
financial position, results of operations and cash flows.
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial Statements
Note
16 - Recent Accounting
Pronouncements (Continued)
Defined
Benefit Pension and Other Postretirement Plans
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans”, which
amends SFAS Nos. 87 and 106 to require recognition of the over funded or
under
funded status of pension and other postretirement benefit plans on the balance
sheet. Under SFAS 158, gains and losses, prior service costs and credits,
and
any remaining transition amounts under SFAS Nos. 87 and 106 that have not
yet
been recognized through net periodic benefit cost will be recognized in
accumulated other comprehensive income, net of tax effects, until they are
amortized as a component of net periodic cost. The measurement date — the date
at which the benefit obligation and plan assets are measured — is required to be
the company’s fiscal year end. SFAS 158 is effective for publicly-held companies
for fiscal years ending after December 15, 2006, except for the measurement
date provisions, which are effective for fiscal years ending after
December 15, 2008. We have implemented SFAS 158 as of December 31,
2006. The effect of this implementation on our consolidated financial
statements is discussed in note 12.
Financial
Statement Misstatements
On
September 13, 2006, the Securities and Exchange Commission (“SEC”) issued
Staff Accounting Bulletin (“SAB”) No. 108. SAB No. 108 provides
interpretive guidance on how the effects of the carryover or reversal of
prior
year misstatements should be considered in quantifying a potential current
year
misstatement. Prior to SAB No. 108, companies might evaluate the materiality
of
financial-statement misstatements using either the income statement or balance
sheet approach, with the income statement approach focusing on new misstatements
added in the current year, and the balance sheet approach focusing on the
cumulative amount of misstatement present in a company’s balance sheet.
Misstatements that would be material under one approach could be viewed as
immaterial under another approach, and not be corrected. SAB No. 108 now
requires that companies view financial statement misstatements as material
if
they are material according to either the income statement or balance sheet
approach. The Company has analyzed SAB 108 and determined that it had no
impact
on the Company’s consolidated financial position or results of
operations.
Accounting
for Uncertainty in Income Taxes
In
July
2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in
Income Taxes." The interpretation clarifies the accounting for uncertainty
in
income taxes recognized in a company's financial statements in accordance
with
SFAS No. 109, "Accounting for Income Taxes." Specifically, the pronouncement
prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected
to be
taken in a tax return. The interpretation also provides guidance on the related
derecognition, classification, interest and penalties, accounting for interim
periods, disclosure and transition of uncertain tax positions. The
interpretation is effective for fiscal years beginning after December 15,
2006.
We are evaluating the impact of this new pronouncement on the Company’s
consolidated financial statements.
Northeast
Community Bancorp,
Inc.
Notes
to Consolidated Financial Statements
Note
17 - Quarterly Financial Data (Unaudited)
|
Quarter
Ended
|
||||||||||||||||
|
March
31,
2006
|
June
30,
2006
|
September
30,
2006
|
December
31,
2006
|
|||||||||||||
|
(In
thousands, except for per share data)
|
||||||||||||||||
|
Interest
Income
|
$ |
3,545
|
$ |
3,684
|
$ |
4,111
|
$ |
4,008
|
||||||||
|
Interest
Expense
|
903
|
1,072
|
1,225
|
1,293
|
||||||||||||
|
Net
Interest Income
|
2,642
|
2,612
|
2,886
|
2,715
|
||||||||||||
|
Provision
for Loan Losses
|
-
|
-
|
-
|
-
|
||||||||||||
|
Net
Interest Income after Provision for Loan Losses
|
2,642
|
2,612
|
2,886
|
2,715
|
||||||||||||
|
Non-Interest
Income
|
113
|
119
|
179
|
208
|
||||||||||||
|
Non-Interest
Expenses
|
2,035
|
2,110
|
2,354
|
2,371
|
||||||||||||
|
Income
before Income Taxes
|
720
|
621
|
711
|
552
|
||||||||||||
|
Income
Taxes
|
311
|
271
|
299
|
165
|
||||||||||||
|
Net
Income
|
$ |
409
|
$ |
350
|
$ |
412
|
$ |
387
|
||||||||
|
Net
Income per common share –
Basic and Diluted
|
N/A
|
N/A
|
$ |
0.03
|
$ |
0.03
|
||||||||||
|
Weighted
average numbers of common
shares outstanding – basic and diluted
|
N/A
|
N/A
|
12,723
|
12,729
|
||||||||||||
During
the fourth quarter of 2006, the Company recorded in non-interest expense
$185,000 for retirement plans that were implemented in 2006 as well as a related
income tax benefit of $83,000. These accrued expenses, as well as the
related income tax benefits, were inadvertently omitted from our previously
reported quarterly results for 2006. The quarterly data presented
above has been corrected to reflect an additional $46,000 in non-interest
expense and a $21,000 reduction in income taxes for each of the first three
quarters of 2006.
|
Quarter
Ended
|
||||||||||||||||
|
March
31,
2005
|
June
30,
2005
|
September
30,
2005
|
December
31,
2005
|
|||||||||||||
|
(In
Thousands)
|
||||||||||||||||
|
Interest
Income
|
$ |
3,297
|
$ |
3,399
|
$ |
3,590
|
$ |
3,366
|
||||||||
|
Interest
Expense
|
710
|
754
|
798
|
848
|
||||||||||||
|
Net
Interest Income
|
2,587
|
2,645
|
2,792
|
2,518
|
||||||||||||
|
Provision
for Loan Losses
|
-
|
-
|
-
|
-
|
||||||||||||
|
Net
Interest Income after Provision for Loan Losses
|
2,587
|
2,645
|
2,792
|
2,518
|
||||||||||||
|
Non-Interest
Income
|
126
|
130
|
121
|
157
|
||||||||||||
|
Non-Interest
Expenses
|
1,880
|
1,893
|
1,864
|
1,878
|
||||||||||||
|
Income
before Income Taxes
|
833
|
882
|
1,049
|
797
|
||||||||||||
|
Income
Taxes
|
368
|
389
|
462
|
352
|
||||||||||||
|
Net
Income
|
$ |
465
|
$ |
493
|
$ |
587
|
$ |
445
|
||||||||
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
|
ITEM
9A.
|
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, and based on the material
weakness in the Company’s internal control over financial reporting set forth
below, 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 not effective for the purposes 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.
During
the process of closing our books
for the year ended December 31, 2006, we became aware of certain internal
control deficiencies that we considered to be, in the aggregate, a material
weakness. A material weakness is a significant deficiency, or
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.
In
particular, the Company discovered
that it had not accrued for the expenses associated with our directors’
retirement plan and supplemental executive retirement plan, both of which were
established in 2006. These expenses, which amounted to approximately
$25,000 per quarter on a tax-effected basis, were inadvertently omitted from
our
previously reported quarterly results for 2006. The aggregate amount
of the accrued expenses, net of the related income tax benefits, was
approximately $102,000. The corrected quarterly data is reflected in
Note 17 to the Consolidated Financial Statements included under Item 8 of this
Form 10-K.
Upon
investigation, the Company
concluded that the failure to accrue for retirement plan expenses was caused
by
the lack of effective formalized procedures for ensuring that new types of
transactions entered into by the Company, and the related accounting
pronouncements related thereto, are appropriately identified and
addressed. In order to remediate the identified material weakness and
to improve the effectiveness of the Company’s disclosure controls, the Company
implemented new procedures designed to ensure that new types of transactions
entered into by the Company are appropriately identified in a timely manner
and
that the related accounting requirements are effectively analyzed and
implemented. Management will monitor, evaluate and test the operating
effectiveness of these controls on an ongoing basis.
ITEM
9B.
OTHER INFORMATION
None.
PART
III
|
ITEM
10.
|
DIRECTORS, EXECUTIVE
OFFICERS OF THE REGISTRANT AND CORPORATE
GOVERNANCE
|
The
information relating to the
directors and officers of Northeast Community Bancorp and information regarding
compliance with Section 16(a) of the Exchange Act is incorporated herein by
reference to Northeast Community Bancorp’s Proxy Statement for the 2007 Annual
Meeting of Stockholders (the “Proxy Statement”) and to Part I, Item 1,
“Business — Executive Officers of the Registrant” to this Annual Report
on Form 10-K.
Northeast
Community Bancorp has adopted
a Code of Ethics and Business Conduct, a copy of which can be found in the
investor relations section of the Company’s website at
www.necommunitybank.com.
ITEM
11. EXECUTIVE
COMPENSATION
The
information regarding executive
compensation is incorporated herein by reference to the Proxy
Statement.
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDERS MATTERS
|
|
|
(a)
|
Security
Ownership of Certain Beneficial
Owners
|
Information
required by this item is incorporated herein by reference to the section
captioned “Stock Ownership” in the Proxy Statement.
|
|
(b)
|
Security
Ownership of Management
|
Information
required by this item is incorporated herein by reference to the section
captioned “Stock Ownership” in the Proxy Statement.
|
|
(c)
|
Changes
in Control
|
Management
of Northeast Community Bancorp knows of no arrangements, including any pledge
by
any person or securities of Northeast Community Bancorp, the operation of which
may at a subsequent date result in a change in control of the
registrant.
|
|
(d)
|
Equity
Compensation Plan Information
|
None.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
The
information relating to certain
relationships and related transactions is incorporated herein by reference
to
the Proxy Statement.
|
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND
SERVICES
|
The
information relating to the
principal accountant fees and expenses is incorporated herein by reference
to
the Proxy Statement.
PART
IV
|
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT
SCHEDULES
|
|
|
(1)
|
The
financial statements required in response to this item are incorporated
by
reference from Item 8 of this
report.
|
|
|
(2)
|
All
financial statement schedules are omitted because they are not required
or
applicable, or the required information is shown in the consolidated
financial statements or the notes
thereto.
|
|
|
(3)
|
Exhibits
|
|
3.1
|
Amended
and Restated Charter of Northeast Community Bancorp,
Inc.
(1)
|
|
|
3.2
|
Amended
and Restated Bylaws of Northeast Community Bancorp,
Inc., as amended
(2)
|
|
|
4.1
|
Specimen
Stock Certificate of Northeast Community Bancorp, Inc.
(1)
|
|
|
4.2
|
No
long-term debt instrument issued by Northeast Community
Bancorp, Inc.
exceeds 10% of consolidated assets or is registered. In
accordance with paragraph 4(iii) of Item 601(b) of
Regulation S-K,
Northeast Community Bancorp, Inc. will furnish the
Securities and Exchange
Commission copies of long-term debt instruments and
related agreements
upon request.
|
|
|
10.1
|
Northeast
Community Bank Employee Severance Compensation Plan
(1)
|
|
|
10.2
|
Northeast
Community Bank Supplemental Executive Retirement Plan
and Participation
Agreements with Kenneth A. Martinek and Salvatore Randazzo
(1)*
|
|
|
10.3
|
Northeast
Community Bancorp, Inc. Employment Agreement for Kenneth
A. Martinek and
Salvatore Randazzo (1)*
|
|
|
10.4
|
Northeast
Community Bank Employment Agreement for Kenneth A.
Martinek and Salvatore
Randazzo (1)*
|
|
|
10.5
|
Employment
Agreement between Northeast Community Bancorp, Inc.,
Northeast Community
Bank and Susan Barile (2)*
|
|
|
10.6
|
Northeast
Community Bank Directors’ Retirement Plan (1)*
|
|
|
10.7
|
Northeast
Community Bank Directors’ Deferred Compensation Plan
(1)*
|
|
|
Employment
Agreement between Northeast Community Bancorp, Inc.,
Northeast Community
Bank and Michael N. Gallina*
|
||
|
List
of Subsidiaries
|
||
|
Consent
of Beard Miller Company LLP
|
||
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
||
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
||
|
Section
1350 Certification of Chief Executive Officer and Chief
Financial
Officer
|
______________________________
|
|
*
|
Management
contract or compensatory plan, contract or
arrangement.
|
|
|
(1)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-1, as
amended, initially filed on March 12,
2006.
|
|
|
(2)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-Q for the quarter
ended September 30, 2006.
|
SIGNATURES
Pursuant
to the requirements of Section
13 or 15(d) 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:
March 29, 2007
|
By:
|
/s/
Kenneth A. Martinek
|
|
Kenneth
A. Martinek
|
||
|
President
and Chief Executive
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Name
|
Title
|
Date
|
|
|
/s/
Kenneth A. Martinek
|
President,
Chief Executive Officer
|
||
|
Kenneth
A. Martinek
|
and
Director
|
March
29, 2007
|
|
|
(principal
executive officer)
|
|||
|
/s/
Salvatore Randazzo
|
Executive
Vice President, Chief
|
March
29, 2007
|
|
|
Salvatore
Randazzo
|
Financial
Officer and Director
|
||
|
(principal
accounting and
|
|||
|
financial
officer)
|
|||
|
/s/
Diane B. Cavanaugh
|
Director
|
March
29, 2007
|
|
|
Diane
B. Cavanaugh
|
|||
|
/s/
Arthur M. Levine
|
Director
|
March
29, 2007
|
|
|
Arthur
M. Levine
|
|||
|
/s/
Charles A. Martinek
|
Director
|
March
29, 2007
|
|
|
Charles
A. Martinek
|
|||
|
/s/John
F. McKenzie
|
Director
|
March
29, 2007
|
|
|
John
F. McKenzie
|
|||
|
/s/
Linda M. Swan
|
Director
|
March
29, 2007
|
|
|
Linda
M. Swan
|
|||
|
/s/
Harry (Jeff) A.S. Read
|
Director
|
March
29, 2007
|
|
|
Harry
(Jeff) A.S. Read
|
|||
|
/s/
Kenneth H. Thomas
|
Director
|
March
29, 2007
|
|
|
Kenneth
H. Thomas
|
|||
80