10-Q 1 form10q-124276_necb.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended June 30, 2012

 

OR

 

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

 

For the transition period from ______________ to _____________

Commission file number: 0-51852

Northeast Community Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

United States of America   06-1786701
(State or other jurisdiction of incorporation or   (I.R.S. Employer Identification No.)
organization)    
     
325 Hamilton Avenue, White Plains, New York   10601
(Address of principal executive offices)   (Zip Code)

 

                                   (914) 684-2500                                   

(Registrant’s telephone number, including area code)

 

                                                                           N/A                                                                           

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

 

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

 

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

 

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

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

 

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

As of August 10, 2012, there were 12,644,752 shares of the registrant’s common stock outstanding.

 

 
 

NORTHEAST COMMUNITY BANCORP, INC.

Table of Contents

 

        Page
No.
Part I—Financial Information
         
Item 1.   Financial Statements (Unaudited)   1
         
    Consolidated Statements of Financial Condition at June 30, 2012 and December 31, 2011   1
         
    Consolidated Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011   2
         
    Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011   3
         
    Consolidated Statements of  Stockholders’ Equity for the Six Months Ended June 30, 2012 and 2011   4
         
    Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011..   5
         
    Notes to Consolidated Financial Statements   6
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   24
         
Item 3.   Quantitative and Qualitative Disclosures about Market Risk   36
         
Item 4.   Controls and Procedures   37
         
Part II—Other Information
         
Item 1.   Legal Proceedings   38
         
Item 1A.   Risk Factors   38
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   38
         
Item 3.   Defaults Upon Senior Securities   38
         
Item 4.   Mine Safety Disclosures   38
         
Item 5.   Other Information   38
         
Item 6.   Exhibits   38
         
    Signatures   39
 
 
PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

   June 30,
2012
   December 31,
2011
 
   (In thousands,
except share and per share data)
 
ASSETS
Cash and amounts due from depository institutions  $2,708   $2,517 
Interest-bearing deposits   49,615    80,066 
Cash and cash equivalents   52,323    82,583 
           
Certificates of deposit   1,395    2,640 
Securities available-for-sale   137    149 
Securities held-to-maturity (fair value of $14,562 and $16,662, respectively)   14,017    16,099 
Loans receivable, net of allowance for loan losses of $3,867 and $7,397, respectively   348,686    350,894 
Premises and equipment, net   10,028    8,907 
Federal Home Loan Bank of New York stock, at cost   1,355    1,633 
Bank owned life insurance   17,021    16,736 
Accrued interest receivable   944    1,499 
Goodwill   1,310    1,310 
Intangible assets   436    466 
Real estate owned       620 
Other assets   5,795    5,753 
Total assets  $453,447   $489,289 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities          
Deposits:          
Non-interest bearing  $18,870   $15,046 
Interest bearing   305,125    338,590 
Total deposits   323,995    353,636 
           
Advance payments by borrowers for taxes and insurance   2,929    3,353 
Federal Home Loan Bank advances   15,000    20,000 
Accounts payable and accrued expenses   4,446    5,235 
Total liabilities   346,370    382,224 
Stockholders’ equity:          
          
Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued        
Common stock, $0.01 par value; 19,000,000 shares authorized; 13,225,000
         shares issued; 12,644,752 shares outstanding
   132    132 
Additional paid-in capital   57,239    57,292 
Unearned Employee Stock Ownership Plan (“ESOP”) shares   (3,499)   (3,629)
Retained earnings   57,074    57,076 
Treasury stock – at cost, 580,248 shares   (3,712)   (3,712)
Accumulated comprehensive loss   (157)   (94)
Total stockholders’ equity   107,077    107,065 
Total liabilities and stockholders’ equity  $453,447   $489,289 

 

See Notes to Consolidated Financial Statements

 

1

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2012   2011   2012   2011 
   (In thousands, except per share data) 
                 
INTEREST INCOME:                    
       Loans  $4,969   $5,338   $9,861   $10,936 
       Interest-earning deposits   9    12    21    19 
       Securities – taxable   126    178    264    363 
                     
Total Interest Income   5,104    5,528    10,146    11,318 
                     
INTEREST EXPENSE:                    
       Deposits   785    1,116    1,817    2,301 
       Borrowings   137    147    280    321 
                     
            Total Interest Expense   922    1,263    2,097    2,622 
                     
              Net Interest Income   4,182    4,265    8,049    8,696 
                     
PROVISION FOR LOAN LOSSES   117    393    117    720 
                     
            Net Interest Income after Provision for Loan Losses   4,065    3,872    7,932    7,976 
                     
NON-INTEREST INCOME:                    
       Other loan fees and service charges   233    87    423    149 
       Gain (loss) on disposition of equipment   3    (5)   (9)   (6)
       Earnings on bank owned life insurance   143    147    286    293 
       Investment advisory fees   233    201    439    411 
       Other   4    4    6    7 
                     
            Total Non-Interest Income   616    434    1,145    854 
                     
NON-INTEREST EXPENSES:                    
       Salaries and employee benefits   2,224    1,630    4,375    3,320 
       Occupancy expense   312    300    601    577 
       Equipment   212    150    358    285 
       Outside data processing   281    200    515    408 
       Advertising   55    42    113    63 
      FDIC insurance premiums   98    97    191    229 
       Other   1,167    801    2,274    1,519 
                     
            Total Non-Interest Expenses   4,349    3,220    8,427    6,401 
                     
            Income before Provision for Income Taxes   332    1,086    650    2,429 
                     
PROVISION FOR INCOME TAXES   67    362    133    870 
                     
            Net Income  $265   $724   $517   $1,559 
            Net Income per Common Share – Basic  $0.02   $0.06   $0.04   $0.12 
            Weighted Average Number of Common Shares Outstanding – Basic   12,292    12,562    12,288    12,641 
            Dividends Declared per Common Share  $0.03   $0.03   $0.06   $0.06 

 

See Notes to Consolidated Financial Statements

2

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

  

Three Months

Ended June 30,

   Six Months Ended
June 30,
 
   (In thousands) 
   2012   2011   2012   2011 
Net income  $265   $724   $517   $1,559 
Other comprehensive income (loss):                    
Pension liability – DRP, net of taxes
   of $16, $7, $33 and $14, respectively
   (25)   10    (63)   57 
Unrealized loss on securities available
   for sale, net of taxes of $0 and $0,
   respectively
       (1)       (1)
Total comprehensive income  $240   $733   $454   $1,615 

 

 

See Notes to Consolidated Financial Statements

3

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

Six Months Ended June 30, 2012 and 2011 (in thousands)

 

   Common
Stock
   Additional
Paid- in
Capital
   Unearned
ESOP
Shares
   Retained
Earnings
   Treasury
Stock
   Accumulated
Other
Comprehensive
Loss
   Total Equity 
Balance at December 31, 2010  $132   $57,391   $(3,888)  $55,335   $(664)  $(167)  $108,139 
Net income               1,559            1,559 
Other comprehensive income                       56    56 
Purchase of 317,363 shares of treasury stock                   (2,019)       (2,019)
Cash dividend declared ($.06 per share)               (316)           (316)
ESOP shares earned       (49)   129                80 
Balance – June 30, 2011  $132   $57,342   $(3,759)  $56,578   $(2,683)  $(111)  $107,499 
 
Balance at December 31, 2011
  $132   $57,292   $(3,629)  $57,076   $(3,712)  $(94)  $107,065 
Net income               517            517 
Other comprehensive loss                       (63)   (63)
Cash dividend declared ($.06 per share)               (519)           (519)
ESOP shares earned       (53)   130                77 
Balance – June 30, 2012  $132   $57,239   $(3,499)  $57,074   $(3,712)  $(157)  $107,077 

 

 

 

 

See Notes to Consolidated Financial Statements

4

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

   Six Months Ended 
   June 30, 
   2012   2011 
   (In thousands) 
Cash Flows from Operating Activities:          
Net income  $517   $1,559 
Adjustments to reconcile net income to net cash provided by operating activities:          
Net amortization of securities premiums and discounts, net   27    35 
Provision for loan losses   117    720 
Depreciation   320    356 
Net amortization of deferred loan fees and costs   98    72 
Amortization of intangible assets   30    30 
Deferred income tax expense (benefit)   124    (167)
Accretion of discount on note payable       3 
Retirement plan expense   135    337 
Loss on disposal of equipment   9    6 
Earnings on bank owned life insurance   (285)   (293)
ESOP compensation expense   77    80 
Decrease in accrued interest receivable   555    88 
Decrease (increase) in other assets   (143)   661 
(Decrease) increase in accounts payable and accrued expenses   (1,010)   101 
Net Cash Provided by Operating Activities   571    3,588 
Cash Flows from Investing Activities:          
Net (increase) decrease  in loans   1,993    (3,856)
Purchase of securities held-to-maturity       (986)
Principal repayments on securities available-for-sale   12    6 
Principal repayments on securities held-to-maturity   2,055    1,702 
Proceeds from maturities of certificates of deposit   1,245     
Redemption of Federal Home Loan Bank of New York stock   278    26 
Purchases of premises and equipment   (830)   (503)
Net Cash Provided by (Used in) Investing Activities   4,753    (3,611)
Cash Flows from Financing Activities:          
           
Net decrease in deposits   (29,641)   (20,735)
Proceeds from FHLB of NY advances       10,000 
Repayment of FHLB of NY advances   (5,000)   (10,000)
Purchase of treasury stock       (2,019)
Decrease in advance payments by borrowers for taxes and insurance   (424)   (776)
Cash dividends paid to minority shareholders   (519)   (316)
           
Net Cash Used in Financing Activities   (35,584)   (23,846)
           
Net Decrease in Cash and Cash Equivalents   (30,260)   (23,869)
           
Cash and Cash Equivalents - Beginning   82,583    44,453 
           
Cash and Cash Equivalents - Ending  $52,323   $20,584 
           
SUPPLEMENTARY CASH FLOWS INFORMATION          
           
Income taxes paid  $2,375   $705 
Interest paid  $2,097   $2,622 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES          
Real estate owned transferred to premises and equipment  $620   $ 

 

See Notes to Consolidated Financial Statements

5

NORTHEAST COMMUNITY BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – BASIS OF PRESENTATION

 

Northeast Community Bancorp, Inc. (the “Company”) is a federally-chartered corporation organized as a mid-tier holding company for Northeast Community Bank (the “Bank”), in conjunction with the Bank’s reorganization from a mutual savings bank to the mutual holding company structure on July 5, 2006. The Bank is a New York State-chartered savings bank and completed its conversion from a federally-chartered savings bank effective as of the close of business on June 29, 2012. The accompanying unaudited consolidated financial statements include the accounts of the Company, the Bank and the Bank’s wholly owned subsidiary, New England Commercial Properties, LLC (“NECP”). All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The accompanying unaudited consolidated financial statements were prepared in accordance with generally accepted accounting principles for interim financial information as well as instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information or footnotes necessary for the presentation of financial position, results of operations, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2012 are not necessarily indicative of the results that may be expected for the full year or any other interim period. The December 31, 2011 consolidated statement of financial condition data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles. That data, along with the interim financial information presented in the consolidated statements of financial condition, comprehensive income, stockholders’ equity, and cash flows should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s annual report on Form 10-K for the year ended December 31, 2011.

 

The preparation of consolidated 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. In preparing these consolidated financial statements, the Company evaluated the events that occurred after June 30, 2012 and through the date these consolidated financial statements were issued.

 

Loans

Loans are stated at unpaid principal balances plus net deferred loan origination fees and costs less an allowance for loan losses. Interest on loans receivable is recorded on the accrual basis. An allowance for uncollected interest is established on loans where management has determined that the borrowers may be unable to meet contractual principal and/or interest obligations or where interest or principal is 90 days or more past due, unless the loans are well secured and in the process of collection. When a loan is placed on nonaccrual, an allowance for uncollected interest is established and charged against current income. Thereafter, interest income is not recognized unless the financial condition and payment record of the borrower warrant the recognition of interest income. Interest on loans that have been restructured is accrued according to the renegotiated terms, unless on non-accrual. Net loan origination fees and costs are deferred and amortized into income over the contractual lives of the related loans by use of the level yield method. Past due status of loans is based upon the contractual due date.

Allowance for Loan Losses

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

 

6

NOTE 1 – BASIS OF PRESENTATION (Continued)

 

Allowance for Loan Losses (Continued)

 

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

 

This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available

 

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

 

The Bank does not evaluate consumer or residential one- to four-family loans for impairment, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring.

 

Loans whose terms are modified are classified as troubled debt restructurings if the Bank grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate, a below market rate, or an extension of a loan’s stated maturity date. Adversely classified, non-accrual troubled debt restructurings may be reclassified as accruing loans if principal and interest payments, under the modified terms, are current for six consecutive months after modification.

 

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

 

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

 

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

 

The general component covers pools of loans by loan class including loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate and consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates and expected loss given default derived from the Bank’s internal risk rating process for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include:

 

1.Changes in policies and procedures in underwriting standards and collections.
2.Changes in economic conditions.
3.Changes in nature and volume of lending.
7

NOTE 1 – BASIS OF PRESENTATION (Continued)

 

Allowance for Loan Losses (Continued)

 

4.Experience of origination team.
5.Changes in past due loan volume and severity of classified assets.
6.Quality of loan review system.
7.Collateral values in general throughout lending territory.
8.Concentrations of credit.
9.Competition, legal and regulatory issues.

 

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

 

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process which allows for a periodic review of its loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type of collateral and financial condition of the borrowers. The Company’s President is ultimately responsible for the timely and accurate risk rating of the loan portfolio.

 

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial, residential and consumer loans. Credit quality risk ratings include classifications of pass, special mention, substandard, doubtful and loss. Loans criticized as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

 

In addition, banking regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the allowance for loan losses is adequate as of June 30, 2012.

 

NOTE 2 – EARNINGS PER SHARE

 

Basic earnings per common share is calculated by dividing the net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is computed in a manner similar to basic earnings per common share except that the weighted average number of common shares outstanding is increased to include the incremental common shares (as computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. Common stock equivalents may include restricted stock awards and stock options. Anti-dilutive shares are common stock equivalents with weighted-average exercise prices in excess of the weighted-average market value for the periods presented. The Company has not granted any restricted stock awards or stock options and, during the six-month periods ended June 30, 2012 and 2011, 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 earnings per common share until they are committed to be released.

 

8

NOTE 3 – EMPLOYEE STOCK OWNERSHIP PLAN

 

 

 

As of December 31, 2011 and June 30, 2012, the ESOP trust held 518,420 shares of the Company’s common stock, which represents all allocated and unallocated shares held by the plan. As of December 31, 2011, the Company had allocated 129,605 shares to participants, and an additional 25,921 shares had been committed to be released. As of June 30, 2012, the Company had allocated 155,526 shares to participants, and an additional 12,960 shares had been committed to be released.

 

The Company recognized compensation expense of $37,000 and $41,000 during the three-month periods ended June 30, 2012 and 2011, respectively, and $77,000 and $80,000 during the six-month periods ended June 30, 2012 and 2011, respectively, which equals the fair value of the ESOP shares when they became committed to be released.

 

NOTE 4 – Outside Director Retirement Plan (“DRP”)

 

Periodic expenses for the Company’s DRP were as follows:

 

  

Three Months

Ended June 30,

  

Six Months Ended

June 30,

 
   (In thousands) 
                 
   2012   2011   2012   2011 
Service cost  $11   $14   $21   $28 
Interest cost   15    10    30    20 
Amortization of prior service cost   5    5    10    11 
Amortization of actuarial loss       1        2 
Total  $31   $30   $61   $61 

 

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

 

NOTE 5 – INVESTMENTS

 

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

  

                 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
June 30, 2012                     
Securities available for sale:                    
  Mortgage-backed securities – residential:                    
    Federal Home Loan Mortgage Corporation  $83   $2   $   $85 
    Federal National Mortgage Association   50    2        52 
       Total  $133   $4   $   $137 
                     
Securities held to maturity:                    
  Mortgage-backed securities – residential:                    
      Government National Mortgage Association  $10,483   $416   $   $10,899 
      Federal Home Loan Mortgage Corporation   284    7        291 
      Federal National Mortgage Association   245    9        254 
      Collateralized mortgage obligations-GSE   3,004    113        3,117 
      Other   1            1 
        Total  $14,017   $545   $   $14,562 

 

9

NOTE 5 – INVESTMENTS (Continued)

 

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
December 31, 2011                    
Securities available for sale:                    
  Mortgage-backed securities – residential:                    
    Federal Home Loan Mortgage Corporation  $93   $2   $   $95 
    Federal National Mortgage Association   52    2        54 
       Total  $145   $4   $   $149 
                     
Securities held to maturity:                    
  Mortgage-backed securities – residential:                    
      Government National Mortgage Association  $11,884   $414   $   $12,298 
      Federal Home Loan Mortgage Corporation   299    8        307 
      Federal National Mortgage Association   275    7        282 
      Collateralized mortgage obligations-GSE   3,640    134        3,774 
      Other   1            1 
   Total  $16,099   $563   $   $16,662 

 

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

   June 30, 2012 
   Amortized Cost   Fair Value 
   (In Thousands) 
Due after ten years  $133   $137 
           
   $133   $137 

 

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

 

   June 30, 2012 
   Amortized Cost   Fair Value 
   (In Thousands) 
Due after one but within five years  $22   $22 
Due after five but within ten years   195    202 
Due after ten years   13,800    14,338 
           
   $14,017   $14,562 

 

 

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

 

 

NOTE 6 – FAIR VALUE DISCLOSURES

 

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

10

NOTE 6 – FAIR VALUE DISCLOSURES (Continued)

 

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

 

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

For financial assets measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used are as follows:

 

Description  Total   (Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets
   (Level 2)
Significant
Other
Observable
Inputs
   (Level 3)
Significant
Unobservable Inputs
 
June 30, 2012:   (In thousands) 
Recurring:                    
Mortgage-backed securities - residential:                    
    Federal Home Loan Mortgage Corporation  $85   $   $85   $ 
    Federal National Mortgage Association   52        52     
Nonrecurring:                    
    Impaired loans   13,614            13,614 
                     
December 31, 2011:                    
Recurring:                    
Mortgage-backed securities - residential:                    
    Federal Home Loan Mortgage Corporation  $95   $   $95   $ 
    Federal National Mortgage Association   54        54     
Nonrecurring:                    
    Impaired loans   9,163            9,163 

 

11

NOTE 6 – FAIR VALUE DISCLOSURES (Continued)

 

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

 

    Quantitative Information about Level 3 Fair Value Measurements
        Unobservable
(unaudited, in thousands)   Fair Value
Estimate
  Valuation
Techniques
  Input   Range
June 30, 2012:                
Impaired loans   $     13,614   Appraisal of collateral (1)  

Appraisal adjustments (2)

Liquidation expenses (2)  

 

0% to 63.0%

2% to 8.0%  

 

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

 

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

 

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at June 30, 2012 and December 31, 2011:

 

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

 

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

 

Securities

 

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

 

Loans

 

Fair values are estimated for portfolios of loans with similar financial characteristics. The total loan portfolio is first divided into performing and non-performing categories. Performing loans are then segregated into adjustable and fixed rate interest terms. Fixed rate loans are segmented by type, such as construction 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 current market rate. The discounted value of the cash flows is reduced by a credit risk adjustment based on internal loan classifications.

12

NOTE 6 – Fair Value DISCLOSURES (Continued)

 

For non-performing 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 a market rate.

For impaired loans which the Company has measured and recorded impairment generally based on the fair value of the loan’s collateral, fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are typically included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

 

FHLB of New York Stock

 

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

 

Deposit Liabilities

 

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

 

FHLB of New York Advances

 

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

 

Off-Balance- Sheet Financial Instruments

 

The fair value of commitments to extend credit is estimated based on an analysis of the interest rates and fees currently charged to enter into similar transactions, considering the remaining terms of the commitments and the credit-worthiness of the potential borrowers. At June 30, 2012 and December 31, 2011, the estimated fair values of these off-balance-sheet financial instruments were immaterial.

 

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

 

           Fair Value at
June 30, 2012
 
           Quoted
Prices in
Active
Markets for
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
(unaudited, in thousands)  Carrying
Amount
   Fair Value
Estimate
   (Level 1)   (Level 2)   (Level 3) 
Financial Assets                         
       Cash and cash equivalents  $52,323   $52,323   $52,323   $   $ 
       Certificates of deposit   1,395    1,395    1,395         
       Securities available for sale   137    137        137     
       Securities held to maturity   14,017    14,562        14,562     
       Loans receivable   348,646    365,056            365,056 
       FHLB stock   1,355    1,355    1,355         
       Accrued interest receivable   944    944    944         
 
Financial Liabilities
                         
       Deposits, including accrued interest   323,995    325,316    191,707    133,609     
      FHLB advances   15,000    15,466        15,466     

 

13

NOTE 6 – Fair Value DISCLOSURES (Continued)

 

   December 31, 2011 
(unaudited, in thousands)  Carrying
Amount
   Fair Value
Estimate
 
Financial assets:          
       Cash and cash equivalents  $82,583   $82,583 
       Certificates of deposit   2,640    2,640 
       Securities available for sale   149    149 
       Securities held to maturity   16,099    16,662 
       Loans receivable   350,894    361,974 
       FHLB stock   1,633    1,633 
       Accrued interest receivable   1,499    1,499 
 
Financial liabilities:
          
       Deposits, including accrued interest   353,636    356,950 
       FHLB advances   20,000    20,686 

 

NOTE 7 – LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES

 

   June 30,
2012
   December 31,
2011
 
   (In Thousands) 
Residential real estate:          
       One-to-four family  $5,395   $627 
       Multi-family   186,575    189,253 
       Mixed use   49,082    51,229 
           
    241,052    241,109 
Non-residential real estate   86,586    83,602 
Construction   208    9,065 
Commercial and Industrial   23,979    23,725 
Consumer   80    68 
           
Total Loans   351,905    357,569 
           
Allowance for loan losses   (3,867)   (7,397)
Deferred loan fees and costs   648    722 
           
Net Loans  $348,686   $350,894 

 

14

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

 

The following is an analysis of the allowance for loan losses:

 

At and for the Six Months Ended June 30, 2012 (in thousands)

   Residential
Real Estate
   Non-
residential
Real
Estate
   Construction   Commercial
and
Industrial
   Consumer   Total 
Allowance for loan losses:                              
Beginning balance  $3,781   $1,596   $1,724   $296   $   $7,397 
       Charge-offs   (1,173)   (764)   (1,715)           (3,652)
       Recoveries   5                    5 
       Provision   68    65    (9)   (7)       117 
Ending balance  $2,681   $897   $   $289   $   $3,867 
Ending balance:  individually evaluated for impairment  $   $   $   $   $   $ 
                               
Ending balance:  collectively evaluated for impairment  $2,681   $897   $   $289   $   $3,867 
                               
Loans receivable:                              
Ending balance  $241,052   $86,586   $208   $23,979   $80   $351,905 
                               
Ending balance: individually evaluated for impairment  $10,262   $15,206   $   $1,750   $   $27,218 
                               
Ending balance:  collectively evaluated for impairment  $230,789   $71,381   $208   $22,229   $80   $324,687 

 

 

At and for the Three Months Ended June 30, 2012 (in thousands)

 

   Residential
Real Estate
   Non-
residential
Real
Estate
   Construction   Commercial   Consumer   Total 
Allowance for loan losses:                              
Beginning balance  $3,280   $1,855   $1,660   $291   $   $7,086 
       Charge-offs   (868)   (764)   (1,704)           (3,336)
       Recoveries                        
       Provision   269    (194)   44    (2)       117 
Ending balance  $2,681   $897   $   $289   $   $3,867 
Ending balance:  individually evaluated for impairment  $   $   $   $   $   $ 
                               
Ending balance:  collectively evaluated for impairment  $2,681   $897   $   $289   $   $3,867 
                               
Loans receivable:                              
Ending balance  $241,052   $86,586   $208   $23,979   $80   $351,905 
                               
Ending balance: individually evaluated for impairment  $10,262   $15,206   $   $1,750   $   $27,218 
                               
Ending balance:  collectively evaluated for impairment  $230,790   $71,380   $208   $22,229   $80   $324,687 

 

15

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

 

At and for the Six Months Ended June 30, 2011 (in thousands)

 

   Residential
Real
Estate
   Non-
residential
Real
Estate
   Construction   Commercial   Consumer   Total 
Allowance for credit losses:                              
Beginning balance  $3,924   $1,560   $2,083   $80   $   $7,647 
       Charge-offs   (767)                   (767)
       Recoveries                        
       Provision   736    (251)   237    (2)       720 
Ending balance  $3,893   $1,309   $2,320   $78   $   $7,600 

 

At and for the Three Months Ended June 30, 2011 (in thousands)

 

   Residential
Real
Estate
   Non-
residential
Real
Estate
   Construction   Commercial   Consumer   Total 
Allowance for credit losses:                              
Beginning balance  $4,305   $1,421   $2,132   $50   $   $7,908 
       Charge-offs   (701)                   (701)
       Recoveries                        
       Provision   289    (112)   188    28        393 
Ending balance  $3,893   $1,309   $2,320   $78   $   $7,600 

 

At and for the Year Ended December 31, 2011 (in thousands)

 

   Residential
Real
Estate
   Non-
residential
Real
Estate
   Construction   Commercial
and
Industrial
   Consumer   Total 
Allowance for loan losses:                              
Beginning balance  $3,924   $1,560   $2,083   $80   $   $7,647 
       Charge-offs   (1,358)   (17)               (1,375)
       Recoveries   12                    12 
       Provision   1,203    53    (359)   216        1,113 
Ending balance  $3,781   $1,596   $1,724   $296   $   $7,397 
                               
Ending balance: individually evaluated for impairment  $456   $333   $1,661   $   $   $2,450 
                               
Ending balance:  collectively evaluated for impairment  $3,325   $1,263   $63   $296   $   $4,947 
                               
Loans receivable:                              
Ending balance  $241,109   $83,602   $9,065   $23,725   $68   $357,569 
Ending balance: individually evaluated for impairment  $12,871   $9,764   $7,660   $   $   $30,295 
                               
Ending balance:  collectively evaluated for impairment  $228,238   $73,838   $1,405   $23,725   $68   $327,274 

 

16

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

 

The following is an analysis of the Company’s impaired loans.

 

Impaired Loans as of or for the three months ended June 30, 2012 (in thousands)

2012  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no related allowance recorded:                         
  Residential real estate-Multi-family  $10,262   $10,262   $   $10,245   $74 
  Non-residential real estate   15,206    15,206        16,112    1,595 
  Commercial and Industrial   1,750    1,750        1,750    26 
       Subtotal   27,218    27,218        28,107    1,695 
 
With an allowance recorded:
                         
  Residential real estate-Multi-family                    
  Non-residential real estate                    
  Commercial and Industrial                    
       Subtotal                    
 
Total:
                         
  Residential real estate-Multi-family  $10,262   $10,262   $   $10,245   $74 
  Non-residential real estate   15,206    15,206        16,112    1,595 
  Commercial and Industrial   1,750    1,750        1,750    26 
       Total   27,218    27,218        28,107    1,695 

 

Impaired Loans as of or for the six months ended June 30, 2012 (in thousands)

 

2012  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no related allowance recorded:                         
  Residential real estate-Multi-family  $10,262   $10,262   $   $10,216   $148 
  Non-residential real estate   15,206    15,206        16,113    1,636 
  Commercial and Industrial   1,750    1,750        1,713    52 
       Subtotal   27,218    27,218        28,042    1,836 
 
With an allowance recorded:
                         
  Residential real estate-Multi-family                    
  Non-residential real estate                    
  Commercial and Industrial                    
       Subtotal                    
 
Total:
                         
  Residential real estate-Multi-family  $10,262   $10,262   $   $10,216   $148 
  Non-residential real estate   15,206    15,206        16,113    1,636 
  Commercial and Industrial   1,750    1,750        1,713    52 
       Total   27,218    27,218        28,042    1,836 

 

17

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

 

Impaired Loans as of or for the three months ended June 30, 2011 (in thousands)

2011  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no related allowance recorded:                         
  Residential real estate-Multi-family  $7,442   $7,442   $   $7,441   $46 
  Non-residential real estate   8,512    8,512        8,522    29 
  Construction                    
       Subtotal   15,954    15,954        15,963    75 
 
With an allowance recorded:
                         
  Residential real estate-Multi-family   1,347    1,347    306    1,331     
  Non-residential real estate                    
  Construction   7,593    7,593    2,179    7,532     
       Subtotal   8,940    8,940    2,485    8,863     
 
Total:
                         
  Residential real estate-Multi-family   8,789    8,789    306    8,772    46 
  Non-residential real estate   8,512    8,512        8,522    29 
  Construction   7,593    7,593    2,179    7,532     
       Total  $24,894   $24,894   $2,485   $24,826   $75 

 

Impaired Loans as of or for the six months ended June 30, 2011 (in thousands)

  

2011  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no related allowance recorded:                         
  Residential real estate-Multi-family  $7,442   $7,442   $   $7,406   $115 
  Non-residential real estate   8,512    8,512        8,515    58 
  Construction                    
       Subtotal   15,954    15,954        15,921    173 
 
With an allowance recorded:
                         
  Residential real estate-Multi-family   1,347    1,347    306    1,328     
  Non-residential real estate                    
  Construction   7,593    7,593    2,179    7,532    4 
       Subtotal   8,940    8,940    2,485    8,860    4 
 
Total:
                         
  Residential real estate-Multi-family   8,789    8,789    306    8,734    115 
  Non-residential real estate   8,512    8,512        8,515    58 
  Construction   7,593    7,593    2,179    7,532    4 
       Total  $24,894   $24,894   $2,485   $24,781   $177 

 

18

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

  

Impaired Loans as of and for the Year Ended December 31, 2011 (in thousands)

 

2011  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no related allowance recorded:                         
  Residential real estate-Multi-family  $10,081   $10,081   $   $10,245   $422 
  Non-residential real estate   8,601    8,601        8,560    108 
  Construction                    
       Subtotal   18,682    18,682        18,805    530 
 
With an allowance recorded:
                         
  Residential real estate-Multi-family   2,790    2,790    456    2,717    7 
  Non-residential real estate   1,163    1,163    333    1,154    28 
  Construction   7,660    7,660    1,661    7,566    10 
       Subtotal   11,613    11,613    2,450    11,437    45 
 
Total:
                         
  Residential real estate-Multi-family   12,871    12,871    456    12,962    429 
  Non-residential real estate   9,764    9,764    333    9,714    136 
  Construction   7,660    7,660    1,661    7,566    10 
       Total  $30,295   $30,295   $2,450   $30,242   $575 

 

 

19

 

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

 

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

 

Age Analysis of Past Due Loans as of June 30, 2012 (in Thousands)

 

   30-59 Days
Past Due
   60 – 89
Days Past
Due
   Greater
Than 90
Days
   Total Past
Due
   Current   Total
Loans
Receivable
   Recorded
Investment
> 90 Days
and
Accruing
 
                             
Residential real estate:                                   
             One- to four-family  $   $   $   $   $5,395   $5,395   $ 
             Multi-family   1,905    385    4,606    6,896    179,679    186,575     
             Mixed-use           733    733    48,349    49,082     
Non-residential real estate           447    447    86,139    86,586     
Construction loans                   208    208     
Commercial and industrial loans                   23,979    23,979     
Consumer.                   80    80     
             Total loans  $1,905   $385   $5,786   $8,076   $343,829   $351,905   $ 

 

Age Analysis of Past Due Loans as of December 31, 2011 (in Thousands)

 

   30-59 Days
Past Due
   60 – 89
Days Past
Due
   Greater
Than 90
Days
   Total Past
Due
   Current   Total
Loans
Receivable
   Recorded
Investment
> 90 Days
and
Accruing
 
                             
Residential real estate:                                   
             One- to four-family  $   $   $   $   $627   $627   $ 
             Multi-family           5,422    5,422    183,831    189,253    1,192 
             Mixed-use           722    722    50,507    51,229     
Non-residential real estate       545    6,634    7,179    76,423    83,602     
Construction loans           7,660    7,660    1,405    9,065     
Commercial and industrial loans                   23,725    23,725     
Consumer                   68    68     
             Total loans  $   $545   $20,438   $20,983   $336,586   $357,569   $1,192 

 

 

20

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

 

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

Credit Quality Indicators as of June 30, 2012 (in thousands)

 

Credit Risk Profile by Internally Assigned Grade

 

   Residential
Real Estate
   Non-
residential
Real Estate
   Construction   Commercial
and
Industrial
   Consumer   Total 
Grade:                              
  Pass  $230,002   $77,336   $208   $22,229   $80   $329,855 
  Special Mention   3,421    8,803        1,750        13,974 
  Substandard   7,629    447                8,076 
Total  $241,052   $86,586   $208   $23,979   $80   $351,905 

 

Credit Quality Indicators as of December 31, 2011 (in thousands)

 

Credit Risk Profile by Internally Assigned Grade

 

   Residential
Real Estate
   Non-
residential
Real Estate
   Construction   Commercial
and
Industrial
   Consumer   Total 
Grade:                              
  Pass  $230,128   $73,838   $1,405   $23,725   $68   $329,164 
  Special Mention   4,259                    4,259 
  Substandard   6,722    9,764    7,660            24,146 
Total  $241,109   $83,602   $9,065   $23,725   $68   $357,569 

 

21

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

 

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

 

Loans Receivable on Nonaccrual Status as of June 30, 2012 and December 31, 2011 (in thousands)

 

   2012   2011 
         
   Residential real estate-Multi-family  $7,629   $4,951 
   Non-residential real estate   447    6,634 
Construction loans       7,661 
Total  $8,076   $19,246 

 

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

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2012   2012 
       Recorded   Recorded       Recorded   Recorded 
       Investment   Investment       Investment   Investment 
   Number of   Prior to   After   Number of   Prior to   After 
(dollars in thousands)  Modifications   Modification   Modification   Modifications   Modification   Modification 
Real estate:                        
          Multi-family      $   $    2   $1,900   $1,900 
          Non-residential   4    10,500    10,500    4    10,500    10,500 
                 Total   4   $10,500   $10,500    6   $12,400   $12,400 
                               

 

   Twelve Months Ended December 31, 
   2011 
       Recorded   Recorded 
       Investment   Investment 
   Number of   Prior to   After 
(dollars in thousands)  Modifications   Modification   Modification 
Residential real estate:            
          Multi-family  2   $2,279   $1,935 
                

 

The two multi-family mortgage loans had an interest rate of 5% with an amortization of 30 years that was modified to an interest only rate of 2.5% for the first six months of 2012. One of the non-residential loans had an interest rate of 7% that was modified to 2%, plus monthly modified net income of the property. The other three non-residential loans had an interest rate of 6.125% that was modified to 5%, with interest paid in advance for two years from the date of modification.

 

In the six month ended June 30, 2012, the two multi-family mortgage loans that were modified had defaulted and are classified as non-accrual and substandard. There were no defaults in the six month period ended June 30, 2011.

 

NOTE 8 – EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

 

ASU 2011-04: This ASU amends FASB ASC Topic 820, Fair Value Measurements, to bring U.S. GAAP for fair value measurements in line with International Accounting Standards. The ASU clarifies existing guidance for items such as: the application of the highest and best use concept to non-financial assets and liabilities; the application of fair value measurement to financial instruments classified in a reporting entity’s stockholder’s equity; and disclosure requirements regarding quantitative information about unobservable inputs used in the fair value measurements of level 3 assets. The ASU also creates an exception to Topic 820 for entities which carry financial instruments within a portfolio or group, under which the entity is now permitted to base the price used for fair valuation upon a price that would be received to sell the net asset position or transfer a net liability position in an orderly transaction. The ASU also allows for the application of premiums and discounts in a fair value measurement if the financial instrument is categorized in level 2 or 3 of the fair value hierarchy. Lastly, the ASU contains new disclosure requirements regarding fair value amounts categorized as level 3 in the fair value hierarchy such as: disclosure of the valuation process used; effects of and relationships between unobservable inputs; usage of nonfinancial assets for purposes other than their highest and best use when that is the basis of the disclosed fair value; and categorization by level of items disclosed at fair value, but not measured at fair value for financial statement purposes. For public entities, this ASU is effective for interim and annual periods beginning after December 15, 2011. The adoption of this ASU did not have a significant impact on the Company’s consolidated financial statements.

 

22

NOTE 8 – EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

 

ASU 2011-05: The provisions of this ASU amend FASB ASC Topic 220, Comprehensive Income, to facilitate the continued alignment of U.S. GAAP with International Accounting Standards. The ASU prohibits the presentation of the components of comprehensive income in the statement of stockholder’s equity. Reporting entities are allowed to present either: a statement of comprehensive income, which reports both net income and other comprehensive income; or separate, but consecutive, statements of net income and other comprehensive income. Under previous GAAP, all 3 presentations were acceptable. Regardless of the presentation selected, the Reporting Entity is required to present all reclassifications between other comprehensive and net income on the face of the new statement or statements. The provisions of this ASU are effective for fiscal years and interim periods beginning after December 31, 2011 for public entities. As the two remaining options for presentation existed prior to the issuance of this ASU, early adoption is permitted. The adoption of this ASU resulted in the addition of a separate consolidated statement of comprehensive income in the Company’s consolidated financial statements.

 

ASU 2011-12: Deferral of the Effective Date to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update 2011-05. In response to stakeholder concerns regarding the operational ramifications of the presentation of these reclassifications for current and previous years, the FASB has deferred the implementation date of this provision to allow time for further consideration. The requirement in ASU 2011-05, Presentation of Comprehensive Income, for the presentation of a combined statement of comprehensive income or separate, but consecutive, statements of net income and other comprehensive income is still effective for fiscal years and interim periods beginning after December 15, 2011 for public companies, and fiscal years ending after December 15, 2011 for nonpublic companies. The adoption of this ASU did not have a significant impact on the Company’s consolidated financial statements.

 

ASU 2011-08: Testing Goodwill for Impairment. The purpose of this ASU is to simplify how entities test goodwill for impairment by adding a new first step to the preexisting goodwill impairment test under ASC Topic 350, Intangibles – Goodwill and other. This amendment gives the entity the option to first assess a variety of qualitative factors such as economic conditions, cash flows, and competition to determine whether it was more likely than not that the fair value of goodwill has fallen below its carrying value. If the entity determines that it is not likely that the fair value has fallen below its carrying value, then the entity will not have to complete the original two-step test under Topic 350. The amendments in this ASU are effective for impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this ASU did not have a significant impact on the Company’s consolidated financial statements.

 

NOTE 9 – DIVIDEND RESTRICTION

 

NorthEast Community Bancorp MHC (the “MHC”) held 7,273,750 shares, or 57.5%, of the Company’s issued and outstanding common stock, and the minority public shareholders held 42.5% of outstanding stock, at June 30, 2012. The MHC filed notice with, and received approval from, the Federal Reserve Bank of Philadelphia to waive its right to receive cash dividends through March 31, 2012. The MHC has waived receipt of all past dividends paid by the Company through March 31, 2012. The dividends waived are considered as a restriction on the retained earnings of the Company. As of June 30, 2012 and December 31, 2011, the aggregate retained earnings restricted for cash dividends waived were $4,146,000 and $ 3,928,000, respectively.

 

The MHC has determined not to waive receipt of the dividend for the quarter ended June 30, 2012 as it has done in all prior periods.

 

 

23

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

 

This quarterly report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in real estate market values in the Company’s market area, and changes in relevant accounting principles and guidelines. Additional factors that may affect the Company’s results are discussed in the Company’s Annual Report on Form 10-K under “Item 1A. Risk Factors.” These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

 

CRITICAL ACCOUNTING POLICIES

 

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the 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 collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. As of July 21, 2011, the Office of the Comptroller of the Currency (“OCC”) assumed responsibility from the Office of Thrift Supervision for the ongoing examination, supervision, and regulation of federal savings associations and rulemaking for all savings associations, state and federal. In addition, the supervision of savings and loan holding companies (“SLHCs”), such as the Company, and their non-depository subsidiaries transferred to the Board of Governors of the Federal Reserve System (the “Board”) on July 21, 2011.

 

Due to the conversion of the Bank to a New York State-chartered savings bank on June 29, 2012, the Federal Deposit Insurance Corporation (“FDIC”) and the New York State Department of Financial Services (“NYS”) are now the Bank’s primary regulators. As such, the FDIC and NYS, as an integral part of their examination process, periodically review our allowance for loan losses. The FDIC, NYS, and or the Board could require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examinations. A large loss or a series of losses could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings. For additional discussion, see note 1 of the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

Deferred Income Taxes. We use the asset and liability method of 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.

24

 

Second Quarter Performance Highlights

 

The Company’s earnings for the quarter ended June 30, 2012 decreased by $459,000 compared to the same period in 2011 primarily due to a decrease in net interest income and an increase in non-interest expenses, partially offset by a decrease in provision for loan losses, an increase in non-interest income and a decrease in the provision for income taxes. The increase in non-interest expense was due to the expansion of our Headquarters and Massachusetts lending and branch operations. In connection with the expansion, the Company hired additional employees to support the lending and branch expansion, acquired additional Headquarters facilities to house the additional employees, purchased additional equipment to support the expansion, and incurred additional expenses related to the support and supervision of the expansion.

 

Due to the Company’s aggressive pursuit of expansion opportunities in Massachusetts, particularly in and around the I-495 corridor, we continue to look for other branch sites within our Massachusetts market area. In addition, the Company is also focusing on opportunities to increase its commercial real estate lending and commercial and industrial lending in Massachusetts in a manner consistent with our conservative underwriting standards.

 

Non-performing loans decreased by $12.3 million, or 60.5%, to $8.1 million as of June 30, 2012 from $20.4 million as of December 31, 2011. The decrease in non-performing loans is primarily attributable to the satisfaction of six non-performing multi-family and one non-residential mortgage loans and the upgrade of two non-residential and four construction mortgage loans to current status, partially offset by the addition of five non-performing multi-family mortgage loans.

 

We continue to monitor our loan portfolio closely and adjust the level of allowance for loan losses appropriately as updated information becomes available. In this regard, the Company’s Special Assets Group reviews all non-performing loans, potential non-performing loans, and restructured loans each month. The monitoring of these loans by the Special Assets Group allows the Company to quickly respond to even modest changes in the loan portfolio’s performance.

 

Comparison of Financial Condition at June 30, 2012 and December 31, 2011

 

Total assets decreased by $35.8 million, or 7.3%, to $453.4 million at June 30, 2012 from $489.3 million at December 31, 2011. The decrease in total assets was due to decreases of $30.3 million in cash and cash equivalents, $2.2 million in loans receivable, net, $2.1 million in securities held-to-maturity, $1.2 million in certificates of deposits at other financial institutions, $620,000 in real estate owned, $555,000 in accrued interest receivable, and $278,000 in Federal Home Loan Bank of New York (“FHLB”) stock, partially offset by increases of $1.1 million in premises and equipment and $285,000 in bank owned life insurance. The decrease in total assets primarily resulted from decreases of $29.6 million in deposits, $789,000 in accounts payable and accrued expenses, $424,000 in advance payments by borrowers for taxes and insurance, and repayment of $5.0 million in FHLB advances.

 

Cash and cash equivalents decreased by $30.3 million, or 36.6%, to $52.3 million at June 30, 2012 from $82.6 million at December 31, 2011 due primarily to the above mentioned decreases in deposits, accounts payable and accrued expenses, advance payments by borrowers for taxes and insurance, and repayment of FHLB advances.

 

Securities held-to-maturity decreased by $2.1 million, or 12.9%, to $14.0 million at June 30, 2012 from $16.1 million at December 31, 2011 due primarily to repayments of $2.1 million. Certificates of deposits at other financial institutions decreased by $1.2 million, or 47.2%, to $1.4 million at June 30, 2012 from $2.6 million at December 31, 2011 due to the maturity and redemption of various certificates of deposits.

 

Loans receivable, net, decreased by $2.2 million, or 0.6%, to $348.7 million at June 30, 2012 from $350.9 million at December 31, 2011 due primarily to loan repayments and charge-offs totaling $31.8 million that exceeded loan originations totaling $29.6 million.

 

FHLB stock decreased by $278,000, or 17.0%, to $1.4 million at June 30, 2012 from $1.6 million at December 31, 2011 due primarily to a decrease in the amount of FHLB stock that we are required to hold as a result of decreases in FHLB advances and the mortgage loan portfolio.

25

 

Accrued interest receivable decreased by $555,000, or 37.0%, to $944,000 at June 30, 2012 from $1.5 million at December 31, 2011 due to a decrease in the yield and balance of the mortgage loan portfolio. Bank owned life insurance increased by $285,000, or 1.7%, to $17.0 million at June 30, 2012 from $16.7 million at December 31, 2011 due to accrued earnings during 2012.

 

Real estate owned decreased by $620,000 due to a reclassification of a foreclosed property from real estate owned to premises and equipment. Concurrently, premises and equipment increased by $1.1 million, or 12.6%, to $10.0 million at June 30, 2012 from $8.9 million at December 31, 2011 due to the acquisition of a branch site in Massachusetts, the addition of a Headquarters annex, and the reclassification of a foreclosed property.

 

Deposits decreased by $29.6 million, or 8.4%, to $324.0 million at June 30, 2012 from $353.6 million at December 31, 2011. The decrease in deposits was primarily attributable to decreases of $34.4 million in our NOW and money market accounts and $10.3 million in certificates of deposits, offset by increases of $11.3 million in our regular savings accounts and $3.8 million in non-interest bearing accounts.

 

Advance payments by borrowers for taxes and insurance decreased by $424,000, or 12.6%, to $2.9 million at June 30, 2012 from $3.4 million at December 31, 2011 due primarily to remittances of taxes for our borrowers.

 

FHLB advances decreased by $5.0 million, or 25.0%, to $15.0 million at June 30, 2012 from $20.0 million at December 31, 2011 due primarily to the maturity and repayment of certain FHLB advances.

 

Accounts payable and accrued expenses decreased by $789,000, or 15.1%, to $4.4 million at June 30, 2012 from $5.2 million at December 31, 2011 due to the payment of the Company’s 2011 income taxes and the pay-off during the March 31, 2012 quarter of a note payable that was reclassified as accounts payable of $175,000 at December 31, 2011.

 

Stockholders’ equity increased by $12,000 to $107.1 million at June 30, 2012, from $107.1 million at December 31, 2011. This increase was primarily the result of comprehensive income of $454,000 and the amortization of $77,000 for the ESOP for the period, partially offset by cash dividends declared of $519,000.

 

Comparison of Operating Results for the Three Months Ended June 30, 2012 and 2011

 

General. Net income decreased by $459,000, or 63.4%, to $265,000 for the quarter ended June 30, 2012, from $724,000 for the quarter ended June 30, 2011. The decrease was primarily the result of an increase of $1.1 million in non-interest expenses and a decrease of $83,000 in net interest income, offset by an increase of $182,000 in non-interest income and decreases of $276,000 in provision for loan losses and $295,000 in income taxes.

 

Net Interest Income. Net interest income decreased by $83,000, or 1.9%, to $4.2 million for the three months ended June 30, 2012 from $4.3 million for the three months ended June 30, 2011. The decrease in net interest income resulted primarily from a decrease of $424,000 in interest income that exceeded a decrease of $341,000 in interest expense and decreases in the net interest spread and the net interest margin.

 

In this regard, the net interest spread decreased by 21 basis points to 3.41% for the three months ended June 30, 2012 from 3.62% for the three months ended June 30, 2011. The net interest margin decreased by 34 basis points between these periods from 3.99% for the quarter ended June 30, 2011 to 3.65% for the quarter ended June 30, 2012. The decrease in the interest rate spread and the net interest margin in the second quarter of 2012 compared to the same period in 2011 was due to a decrease in the yield on our interest-earning assets that exceeded a decrease in the cost of our interest-bearing liabilities.

 

The average yield on our interest-earning assets decreased by 72 basis points to 4.45% for the three months ended June 30, 2012 from 5.17% for the three months ended June 30, 2011 and the cost of our interest-bearing liabilities decreased by 51 basis points to 1.04% for the three months ended June 30, 2012 from 1.55% for the three months ended June 30, 2011. The decrease in the yield on our interest-earning assets and the cost of our interest-bearing liabilities was due to the low interest rate environment in 2011 which continued into the second quarter of 2012.

 

The following table summarizes average balances and average yields and costs of interest-earning assets and interest-bearing liabilities for the three months ended June 30, 2012 and 2011.

 

26

 

   Three Months Ended June 30, 
   2012   2011 
   Average
Balance
   Interest
and
Dividends
   Yield/
Cost
   Average
Balance
   Interest
and
Dividends
   Yield/
Cost
 
   (Dollars in thousands) 
Assets:                              
Interest-earning assets:                              
  Loans  $356,024   $4,969    5.58%  $372,537   $5,338    5.73%
  Securities (including FHLB stock)   16,187    126    3.11    21,554    178    3.30 
  Other interest-earning assets   86,665    9    0.04    33,567    12    0.14 
     Total interest-earning assets   458,876    5,104    4.45    427,658    5,528    5.17 
Allowance for loan losses   (6,667)             (7,832)          
Non-interest-earning assets   38,696              33,220           
     Total assets  $490,905             $453,046           
                               
Liabilities and equity:                              
Interest-bearing liabilities:                              
  Interest-bearing demand  $112,014   $127    0.45%  $74,778   $149    0.80%
  Savings and club accounts   91,808    131    0.57    58,042    87    0.60 
  Certificates of deposit   137,369    527    1.53    167,159    880    2.11 
     Total interest-bearing deposits   341,191    785    0.92    299,979    1,116    1.49 
                               
Borrowings   15,000    137    3.65    25,170    147    2.34 
     Total interest-bearing liabilities   356,191    922    1.04    325,149    1,263    1.55 
                               
Noninterest-bearing demand   18,030              10,986           
Other liabilities   8,988              8,164           
     Total liabilities   383,209              344,299           
                               
Stockholders’ equity   107,696              108,747           
     Total liabilities and Stockholders’ equity  $490,905             $453,046           
Net interest income       $4,182             $4,265      
Interest rate spread             3.41%             3.62%
Net interest margin             3.65%             3.99%
Net interest-earning assets  $102,685             $102,509           
Interest-earning assets to interest-bearing liabilities   128.83%             131.53%          

 

Total interest income decreased by $424,000, or 7.7%, to $5.1 million for the three months ended June 30, 2012, from $5.5 million for the three months ended June 30, 2011. Interest income on loans decreased by $369,000, or 6.9%, to $5.0 million for the three months ended June 30, 2012 from $5.3 million for the three months ended June 30, 2011 as a result of a decrease of 15 basis points in the average yield on loans to 5.58% for the three months ended June 30, 2012 from 5.73% for the three months ended June 30, 2011. The decrease in interest income and the average yield on loans was due to the pay-off of numerous higher yielding mortgage loans and the refinancing and/or re-pricing to lower interest rates of numerous mortgage loans in our loan portfolio. The decrease in interest income was also due to a decrease of $16.5 million, or 4.4%, in the average balance of the loan portfolio to $356.0 million for the three months ended June 30, 2012 from $372.5 million for the three months ended June 30, 2011 as repayments outpaced originations.

 

Interest income on securities decreased by $52,000, or 29.2%, to $126,000 for the three months ended June 30, 2012 from $178,000 for the three months ended June 30, 2011. The decrease was primarily due to a decrease of $5.4 million, or 24.9%, in the average balance of securities to $16.2 million for the three months ended June 30, 2012 from $21.6 million for the three months ended June 30, 2011. The decrease in the average balance was due to the principal repayments on investment securities and a decrease in FHLB New York stock. The decrease in interest income on securities was also due to the re-pricing of the yield of our adjustable rate investment securities and to the decline in interest rates from June 30, 2011 to June 30, 2012. As a result, the average yield on securities decreased by 19 basis points to 3.11% for the three months ended June 30, 2012 from 3.30% for the three months ended June 30, 2011.

 

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Interest income on other interest-earning assets (consisting solely of interest-earning deposits) decreased by $3,000, or 25.0% to $9,000 for the three months ended June 30, 2012 from $12,000 for the three months ended June 30, 2011. The decrease was primarily due to a decrease of 10 basis points in the average yield on other interest-earning assets to 0.04% for the three months ended June 30, 2012 from 0.14% for the three months ended June 30, 2011. The decrease in the average yield was offset by an increase of $53.1 million, or 158.2%, in the average balance of interest-earning assets to $86.7 million for the three months ended June 30, 2012 from $33.6 million for the three months ended June 30, 2011.

 

The decline in the yield was due to a decrease in the yield on our interest-earning deposits at the FHLB and the maturity of higher yielding certificates of deposits at other financial institutions. The increase in the average balance of other interest-earning assets was due to an increase in cash and cash equivalents, offset by a decrease in certificates of deposit at other financial institutions.

 

Total interest expense decreased by $341,000, or 27.0%, to $922,000 for the three months ended June 30, 2012 from $1.3 million for the three months ended June 30, 2011. Interest expense on deposits decreased by $331,000, or 29.7%, to $785,000 for the three months ended June 30, 2012 from $1.1 million for the three months ended June 30, 2011. During this same period, the average cost of deposits decreased by 57 basis points to 0.92% for the three months ended June 30, 2012 from 1.49% for the three months ended June 30, 2011.

 

Due to an effort by the Company to decrease reliance on high cost certificates of deposit by shifting deposits to lower cost interest-bearing demand deposits and savings and holiday club deposits, the average balance of certificates of deposit decreased by $29.8 million, or 17.8%, to $137.4 million for the three months ended June 30, 2012 from $167.2 million for the three months ended June 30, 2011. As a result of the decrease in the average balance of certificates of deposit, interest expense on our certificates of deposit decreased by $353,000, or 40.1%, to $527,000 for the three months ended June 30, 2012 from $880,000 for the three months ended June 30, 2011. The decrease in interest expense on our certificates of deposit was also due to a decrease of 58 basis points in the average cost of our certificates of deposit to 1.53% for the three months ended June 30, 2012 from 2.11% for the three months ended June 30, 2011.

 

The shift in deposits caused the interest expense on our other deposit products to increase by $22,000, or 9.3%, to $258,000 for the three months ended June 30, 2012 from $236,000 for the three months ended June 30, 2011. The increase was due to an increase of $37.2 million, or 49.8%, in the average balance of interest-bearing demand deposits to $112.0 million for the three months ended June 30, 2012 from $74.8 million for the three months ended June 30, 2011 and an increase of $33.8 million, or 58.2%, in the average balance of our savings and holiday club deposits to $91.8 million for the three months ended June 30, 2012 from $58.0 million for the three months ended June 30, 2011.

 

The increase in the interest expense on our other deposit products was offset by a decrease of 35 basis points in the cost of our interest-bearing demand deposits to 0.45% for the three months ended June 30, 2012 from 0.80% for the three months ended June 30, 2011 and a decrease of 3 basis points in the cost of our savings and holiday clubs to 0.57% for the three months ended June 30, 2012 from 0.60% for the three months ended June 30, 2012 from 0.60% for the three months ended June 30, 2011.

 

Interest expense on borrowings decreased by $10,000, or 6.8%, to $137,000 for the three months ended June 30, 2012 from $147,000 for the three months ended June 30, 2011. The decrease was primarily due to a decrease of $10.2 million, or 40.4%, in the average balance of borrowed money to $15.0 million for the three months ended June 30, 2012 from $25.2 million for the three months ended June 30, 2011. Offsetting the decrease in interest expense on borrowings was an increase of 131 basis points in the cost of borrowed money to 3.65% for the three months ended June 30, 2012 from 2.34% for the three months ended June 30, 2011 due primarily to the maturity and repayment of lower costing FHLB advances from 2011 to 2012.

 

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Provision for Loan Losses. The following table summarizes the activity in the allowance for loan losses and provision for loan losses for the three months ended June 30, 2012 and 2011.

 

   Three Months
Ended June 30,
 
   2012   2011 
   (Dollars in thousands) 
Allowance at beginning of period  $7,086   $7,908 
Provision for loan losses   117    393 
Charge-offs   3,336    701 
Recoveries        
Net charge-offs   3,336    701 
Allowance at end of period  $3,867   $7,600 
           
Allowance to nonperforming loans   47.89%   40.15%
Allowance to total loans outstanding at the end of the period   1.10%   2.03%
Net charge-offs (recoveries) to average loans outstanding during the period   0.94%   0.75%

 

The allowance to non-performing loans ratio increased to 47.89% at June 30, 2012 from 40.15% at June 30, 2011 due primarily to the decrease in non-performing loans to $8.1 million at June 30, 2012 from $18.9 million at June 30, 2011, offset by a decrease in the allowance for loan losses. The decrease in non-performing loans was due to the identification, monitoring and resolution of several non-performing loans that eventually were paid-off or became performing as of June 30, 2012.

 

The decrease in the allowance for loan losses was due to charge-offs of $3.3 million against four non-performing multi-family mortgage loans, four non-performing non-residential mortgage loans, and one non-performing construction mortgage loan during the three months ended June 30, 2012. The charge-offs for 2012 increased by $2.6 million, or 375.9%, to $3.3 million compared to charge-offs of $701,000 against six non-performing multi-family mortgage loans during the three months ended June 30, 2011. We did not have any recoveries during the three months ended June 30, 2012 and June 30, 2011.

 

The allowance for loan losses was $3.87 million at June 30, 2012, $7.40 million at December 31, 2011, and $7.60 million at June 30, 2011. We recorded provision for loan losses of $117,000 for the three month period ended June 30, 2012 compared to provision for loan losses of $393,000 for the three month period ended June 30, 2011.

 

Non-interest Income. Non-interest income increased by $182,000, or 41.9%, to $616,000 for the three months ended June 30, 2012 from $434,000 for the three months ended June 30, 2011. The increase was primarily due to a $146,000 increase in other loan fees and service charges, primarily due to $137,000 in mortgage broker fee income, a $32,000 increase in fee income generated by Hayden Wealth Management Group, and a $3,000 net gain on the disposition of fixed assets, partially offset by a $4,000 decrease in earnings on bank owned life insurance.

 

Non-interest Expense. Non-interest expense increased by $1.1 million, or 35.1%, to $4.3 million for the three months ended June 30, 2012 from $3.2 million for the three months ended June 30, 2011. The increase resulted primarily from increases of $594,000 in salaries and employee benefits, $366,000 in other non-interest expense, $81,000 in outside data processing expense, $62,000 in equipment expense, $13,000 in advertising expense, and $12,000 in occupancy expense.

 

Salaries and employee benefits, which represented 51.1% of the Company’s non-interest expense during the quarter ended June 30, 2012, increased by $594,000, or 36.4%, to $2.2 million in 2012 from $1.6 million in 2011 due to an increase in the number of full time equivalent employees to 114 at June 30, 2012 from 87 at June 30, 2011. The increase in full time employees was due to the hiring of additional loan production and branch operations personnel in the Company’s Headquarters and Massachusetts locations to support new lending and branch operations activities and the Company’s new mortgage brokerage operations.

 

Other non-interest expense increased by $366,000, or 45.7%, to $1.2 million in 2012 from $801,000 in 2011 due mainly to increases of $120,000 in legal fees, $102,000 in recruitment expenses related to the hiring of additional loan production and branch operations personnel in the Company’s Headquarters and Massachusetts locations, $62,000 in directors, officers and employee expenses, $39,000 in telephone expenses, $32,000 in service contracts, $15,000 in directors compensation, $9,000 in office supplies and stationery, and $5,000 in insurance expenses. These increases were partially offset by decreases of $13,000 in consulting fees, $2,000 in audit and accounting fees, and $1,000 in real estate owned expenses.

 

29

Outside data processing expense increased by $81,000, or 40.5%, to $281,000 in 2012 from $200,000 in 2011 due to additional services provided in 2012 by the Company’s core data processing vendor. Equipment expense increased by $62,000, or 41.3%, to $212,000 in 2012 from $150,000 in 2011 due to purchases of additional equipment to support our Headquarters and Massachusetts expansion.

 

Advertising expense increased by $13,000, or 31.0%, to $55,000 in 2012 from $42,000 in 2011 due to an increase in marketing efforts to expand our Massachusetts operations. Occupancy expense increased by $12,000, or 4.0%, to $312,000 in 2012 from $300,000 in 2011 due to the Headquarters expansion, the addition of the Massachusetts loan operations facility, and the new Framingham, Massachusetts branch office. Real estate owned expense decreased by $4,000 due to the reclassification of real estate owned expenses to occupancy expense in 2012.

 

Income Taxes. Income taxes decreased by $295,000, or 81.5%, to $67,000 for the three months ended June 30, 2012 from $362,000 for the three months ended June 30, 2011. The decrease resulted primarily from a $754,000 decrease in pre-tax income in 2012 compared to 2011. The effective tax rate was 20.2% for the three months ended June 30, 2012 and 33.3% for the three months ended June 30, 2011. The decrease in the effective tax rate was primarily due to the increased portion of pre-tax income during 2012 from tax-exempt earnings on bank-owned life insurance.

 

Comparison of Operating Results For The Six Months Ended June 30, 2012 and 2011

 

General. Net income decreased by $1.0 million, or 66.8%, to $517,000 for the six months ended June 30, 2012 from $1.6 million for the six months ended June 30, 2011. The decrease was primarily the result of a decrease of $647,000 in net interest income and an increase of $2.0 million in non-interest expense, offset by a decrease of $603,000 in provision for loan losses, an increase of $291,000 in non-interest income, and a decrease of $737,000 in the provision for income taxes.

 

Net Interest Income. Net interest income decreased by $647,000, or 7.4%, to $8.0 million for the six months ended June 30, 2012 from $8.7 million for the six months ended June 30, 2011. The decrease in net interest income resulted primarily from a decrease of $1.2 million in interest income that exceeded a decrease of $525,000 in interest expense and decreases in the net interest spread and the net interest margin.

 

In this regard, the net interest spread decreased by 46 basis points to 3.22% for the six months ended June 30, 2012 from 3.68% for the six months ended June 30, 2011. The net interest margin decreased by 58 basis points between these periods from 4.05% for the six months ended June 30, 2011 to 3.47% for the six months ended June 30, 2012. The decrease in the interest rate spread and the net interest margin in the first half of 2012 compared to the same period in 2011 was due to a decrease in the yield on our interest-earning assets that exceeded a decrease in the cost of our interest-bearing liabilities.

 

The average yield on our interest-earning assets decreased by 89 basis points to 4.38% for the six months ended June 30, 2012 from 5.27% for the six months ended June 30, 2011 and the cost of our interest-bearing liabilities decreased by 43 basis points to 1.16% for the six months ended June 30, 2012 from 1.59% for the six months ended June 30, 2011. The decrease in the yield on our interest-earning assets and the cost of our interest-bearing liabilities was due to the low interest rate environment in 2011 which continued into the second quarter of 2012.

 

30

The following table summarizes average balances and average yields and costs of interest-earning assets and interest-bearing liabilities for the six months ended June 30, 2012 and 2011.

 

   Six Months Ended June 30, 
   2012   2011 
   Average
Balance
   Interest
and
Dividends
   Yield/
Cost
   Average
Balance
   Interest
and
Dividends
   Yield/
Cost
 
   (Dollars in thousands) 
Assets:                              
Interest-earning assets:                              
  Loans  $358,414   $9,861    5.50%  $371,732   $10,936