[LOGO]
NOTICE OF 2009 ANNUAL MEETING,
PROXY STATEMENT AND
2008 ANNUAL REPORT
NORTHEAST COMMUNITY BANCORP, INC.
Corporate Profile
Northeast Community Bancorp, Inc., headquartered in White Plains, New York, is the holding company for
Northeast Community Bank. Established in 1934, Northeast Community Bank is a community-oriented
financial institution offering traditional financial services to consumers and businesses in the New York
metropolitan area. We conduct our lending activities throughout the Northeastern United States, including
New York, Massachusetts, New Jersey, Connecticut, Pennsylvania, New Hampshire and Rhode Island. We
attract deposits from the general public and use those funds to originate multi-family residential, mixed-use
and non-residential real estate and consumer loans, which we hold for investment.
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
800.368.5948
www.RTCO.com
Stock Listing
Northeast Community Bancorp, Inc.’s
common stock is quoted on the Nasdaq
Global Market under the symbol “NECB.”
Locations
Corporate Headquarters
325 Hamilton Avenue
White Plains, New York 10601
Bank Branches
325 Hamilton Avenue
White Plains, New York 10601
590 East 187th Street
Bronx, New York 10458
242 West 23rd Street
New York, New York 10011
Other Properties
300 Hamilton Avenue
White Plains, New York 10601
1353-55 First Avenue
New York, New York 10021
* Expected to be a full service branch office in April 2009.
1470 First Avenue
Ne
w York, New York 10021
2047 86
Brookly
th Street
n, New York 11214
1751 Second Avenue
Ne
w York, New York 10218
*87 Elm Street
Danvers,
Massachusetts 01923
830 Post Road East
Westport, Connecticut 06880
[Northeast Community Bancorp, Inc. Logo]
April 10, 2009
Dear Stockholder:
You are cordially invited to attend the annual meeting of stockholders of NorthEast Community
Bancorp, Inc. The meeting will be held at the Renaissance Westchester Hotel, 80 West Red Oak Lane,
White Plains, New York on Wednesday, May 20, 2009 at 1:00 p.m., local time.
The notice of annual meeting and proxy statement appearing on the following pages describe the
formal business to be transacted at the meeting. Officers and directors of the Company, as well as a
representative of Beard Miller Company LLP, the Company’s independent registered public accounting
firm, will be present to respond to appropriate questions of stockholders.
It is important that your shares are represented at this meeting, whether or not you attend the
meeting in person and regardless of the number of shares you own. To make sure your shares are
represented, we urge you to complete and mail the enclosed proxy card. If you attend the meeting, you
may vote in person even if you have previously mailed a proxy card.
We look forward to seeing you at the meeting.
Sincerely,
Kenneth A. Martinek
Chairman, President and
Chief Executive Officer
[Northeast Community Bancorp, Inc. Logo]
325 Hamilton Avenue
White Plains, New York 10601
(914) 684-2500
____________________
NOTICE OF 2009 ANNUAL MEETING OF STOCKHOLDERS
____________________
TIME AND DATE . . . . . . . . . . . . . . . 1:00 p.m. on Wednesday May 20, 2009
PLACE . . . . . . . . . . . . . . . . . . . . . . . . Renaissance Westchester Hotel
80 West Red Oak Lane
White Plains, New York
ITEMS OF BUSINESS . . . . . . . . . . . (1)
The election of three directors to serve for a term of three
years;
(2)
(3)
The ratification of the appointment of Beard Miller
Company LLP as our independent registered public
accounting firm for fiscal year 2009; and
Such other business as may properly come before the
meeting and any adjournment or postponement thereof.
RECORD DATE . . . . . . . . . . . . . . . .
In order to vote, you must have been a stockholder at the close of
business on March 31, 2009.
PROXY VOTING . . . . . . . . . . . . . . . It is important that your shares be represented and voted at the
meeting. You can vote your shares by completing and returning
the proxy card or voting instruction card sent to you. Voting
instructions are printed on your proxy card or voting instruction
card. You can revoke a proxy at any time prior to its exercise at
the meeting by following the instructions in the proxy statement.
Anne Stevenson-DeBlasi
Corporate Secretary
April 10, 2009
IMPORTANT: Whether or not you plan to attend the annual meeting, please vote by marking,
signing, dating and promptly returning the enclosed proxy card in the enclosed envelope.
NORTHEAST COMMUNITY BANCORP, INC.
PROXY STATEMENT
GENERAL INFORMATION
We are providing this proxy statement to you in connection with the solicitation of proxies by the
Board of Directors of Northeast Community Bancorp, Inc. for the 2009 annual meeting of stockholders
and for any adjournment or postponement of the meeting. Northeast Community Bancorp is the holding
company for Northeast Community Bank.
We are holding the 2009 annual meeting at the Renaissance Westchester Hotel, 80 West Red Oak
Lane, White Plains, New York on Wednesday, May 20, 2009 at 1:00 p.m., local time.
We intend to mail this proxy statement and the enclosed proxy card to stockholders of record
beginning on or about April 10, 2009.
INFORMATION ABOUT VOTING
Who Can Vote at the Meeting
You are entitled to vote the shares of Northeast Community Bancorp common stock that you
owned as of the close of business on March 31, 2009. As of the close of business on March 31, 2009, a
total of 13,225,000 shares of Northeast Community Bancorp common stock were outstanding, including
7,273,750 shares of common stock held by Northeast Community Bancorp, MHC. Each share of
common stock has one vote.
The Company’s Charter provides that, until July 5, 2011, record holders of the Company’s
common stock, other than Northeast Community Bancorp, MHC, who beneficially own, either directly or
indirectly, in excess of 10% of the Company’s outstanding shares are not entitled to any vote in respect of
the shares held in excess of the 10% limit.
Ownership of Shares; Attending the Meeting
You may own shares of Northeast Community Bancorp in one or more of the following ways:
•
•
Directly in your name as the stockholder of record; or
Indirectly through a broker, bank or other holder of record in “street name.”
If your shares are registered directly in your name at our transfer agent, Registrar and Transfer
Company, you are the holder of record of these shares and we are sending these proxy materials directly
to you. As the holder of record, you have the right to give your proxy directly to us or to vote in person at
the annual meeting.
2
If you hold your shares in street name, your broker, bank or other holder of record is sending
these proxy materials to you. As the beneficial owner, you have the right to direct your broker, bank or
other holder of record how to vote by filling out a voting instruction form that accompanies your proxy
materials. Your broker, bank or other holder of record may allow you to provide voting instructions by
telephone or by the Internet. Please see the voting instruction form provided by your broker, bank or
other holder of record that accompanies this proxy statement. If you hold your shares in street name, you
will need proof of ownership to be admitted to the meeting. A recent brokerage statement or letter from a
bank or broker are examples of proof of ownership. If you want to vote your shares of Northeast
Community Bancorp common stock held in street name in person at the annual meeting, you must obtain
a written proxy in your name from the broker, bank or other holder of record of your shares.
Quorum and Vote Required
Quorum. We will have a quorum and will be able to conduct the business of the annual meeting
if the holders of a majority of the outstanding shares of common stock entitled to vote are present at the
meeting, either in person or by proxy.
Votes Required for Proposals. At this year’s annual meeting, stockholders will elect three
directors to each serve a term of three years. In voting on the election of directors, you may vote in favor
of all the nominees for director, withhold votes as to all nominees, or withhold votes as to specific
nominees. There is no cumulative voting for the election of directors. Directors must be elected by a
plurality of the votes cast at the annual meeting. This means that the nominees receiving the greatest
number of votes will be elected.
In voting on the ratification of the appointment of Beard Miller Company LLP as the Company’s
independent registered public accounting firm, you may vote in favor of the proposal, vote against the
proposal or abstain from voting. To ratify the appointment of Beard Miller Company LLP as our
independent registered public accounting firm for 2009, the affirmative vote of a majority of the shares
represented at the annual meeting and entitled to vote is required.
Routine and Non-Routine Proposals. The rules of the New York Stock Exchange determine
whether proposals presented at stockholder meetings are routine or non-routine. If a proposal is routine, a
broker, bank or other entity holding shares for an owner in street name may vote on the proposal without
receiving voting instructions from the owner. If a proposal is non-routine, the broker, bank or other entity
may vote on the proposal only if the owner has provided voting instructions. A broker non-vote occurs
when a broker, bank or other entity holding shares for an owner in street name is unable to vote on a
particular proposal and has not received voting instructions from the owner. The election of directors and
the ratification of Beard Miller Company LLP as our independent accounting firm for 2009 are currently
considered routine matters.
How We Count Votes. If you return valid proxy instructions or attend the meeting in person, we
will count your shares for purposes of determining whether there is a quorum, even if you abstain from
voting. Broker non-votes, if any, also will be counted for purposes of determining the existence of a
quorum.
In the election of directors, votes that are withheld will have no effect on the outcome of the
election. In counting votes on the proposal to ratify the selection of the independent registered public
accounting firm, abstentions will have the same effect as a vote against the proposal.
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Because Northeast Community Bancorp, MHC owns in excess of 50% of the outstanding shares
of Northeast Community Bancorp, Inc. common stock, the votes it casts will ensure the presence of a
quorum and control the outcome of the vote on both proposals.
Voting by Proxy
The Company’s Board of Directors is sending you this proxy statement to request that you allow
your shares of Company common stock to be represented at the annual meeting by the persons named on
the enclosed proxy card. All shares of Company common stock represented at the meeting by properly
executed and dated proxy cards will be voted according to the instructions indicated on the proxy card. If
you sign, date and return a proxy card without giving voting instructions, your shares will be voted as
recommended by the Company’s Board of Directors. The Board of Directors recommends that you
vote “FOR” each of the nominees for director and “FOR” ratification of the appointment of Beard
Miller Company LLP as the Company’s independent registered public accounting firm.
If any matters not described in this proxy statement are properly presented at the annual meeting,
the persons named in the proxy card will use their judgment to determine how to vote your shares. This
includes a motion to adjourn or postpone the annual meeting in order to solicit additional proxies. If the
annual meeting is postponed or adjourned, your Company common stock may be voted by the persons
named in the proxy card on the new annual meeting date, provided you have not revoked your proxy. We
do not know of any other matters to be presented at the annual meeting.
You may revoke your proxy at any time before the vote is taken at the meeting. To revoke your
proxy, you must either advise the Corporate Secretary of the Company in writing before your common
stock has been voted at the annual meeting, deliver a later dated proxy or attend the meeting and vote
your shares in person. Attendance at the annual meeting will not itself constitute revocation of your
proxy.
Participants in the Bank’s ESOP or 401(k) Plan
If you participate in the Northeast Community Bank Employee Stock Ownership Plan (the
“ESOP”) or if you hold Company common stock through the Northeast Community Bank 401(k) Plan
(the “401(k) Plan”), you will receive a voting instruction form for each plan in which you participate that
reflects all shares that you may direct the trustee to vote on your behalf under such plan. Under the terms
of the ESOP, the ESOP trustee votes all shares held by the ESOP, but each ESOP participant may direct
the trustee how to vote the shares of common stock allocated to his or her account. The ESOP trustee,
subject to the exercise of its fiduciary duties, will vote all unallocated shares of Company common stock
held by the ESOP and all allocated shares for which no voting instructions are received in the same
proportion as shares for which the trustee has received timely voting instructions. Under the terms of the
401(k) Plan, a participant is entitled to direct the trustee how to vote the shares in the Northeast
Community Bancorp, Inc. Stock Fund credited to his or her account. The trustee, subject to its fiduciary
duties, will vote all shares for which no instructions are given or for which instructions were not timely
received in the same proportion as shares for which the trustee received voting instructions. The
deadline for returning your voting instructions to each plan’s trustee is May 13, 2009.
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CORPORATE GOVERNANCE AND BOARD MATTERS
Director Independence
The Company’s Board of Directors currently consists of nine members, all of whom are
independent under the listing requirements of The NASDAQ Stock Market, except for Kenneth A.
Martinek, President and Chief Executive Officer of the Company and the Bank, Salvatore Randazzo,
Executive Vice President and Chief Financial Officer of the Company and the Bank and Charles A.
Martinek, Vice President and Internal Loan Review Officer of the Bank and brother of Kenneth A.
Martinek. In determining the independence of its directors, the Board considered transactions,
relationships and arrangements between the Company and its directors that are not required to be
disclosed in this proxy statement under the heading “Transactions with Related Persons,” including: (i)
consultant services provided to the Bank by director Kenneth H. Thomas; and (ii) legal services provided
to the Bank by a law firm in which director Diane B. Cavanaugh’s husband is a partner.
Committees of the Board of Directors
The following table identifies the members of our Audit, Compensation, and
Nominating/Corporate Governance Committees as of December 31, 2008. All members of each
committee are independent in accordance with the listing requirements of The NASDAQ Stock Market.
Each of the committees operates under a written charter that is approved by the Board of Directors. Each
committee reviews and reassesses the adequacy of its charter at least annually. The charters of all three
committees are available in the Investor Relations section of the Company’s website,
www.necommunitybank.com.
Director
Diane B. Cavanaugh ........................
Arthur M. Levine .............................
John F. McKenzie ............................
Harry (Jeff) A.S. Read .....................
Linda M. Swan.................................
Kenneth H. Thomas .........................
Number of Meetings in 2008 ...........
* Denotes Chairperson
Audit
Committee
X*
X
X
4
Audit Committee
Nominating/
Corporate
Governance
Committee
X
Compensation
Committee
X*
X
X
1
X*
X
2
The Audit Committee assists the Board of Directors in its oversight of the Company’s accounting
and reporting practices, the quality and integrity of the Company’s financial reports and the Company’s
compliance with applicable laws and regulations. The Audit Committee is also responsible for engaging
the Company’s independent registered public accounting firm and monitoring its conduct and
independence. The Board of Directors has determined that Arthur M. Levine is an audit committee
financial expert under the rules of the Securities and Exchange Commission. The report of the Audit
Committee required by the rules of the Securities and Exchange Commission is included in this proxy
statement. See “Report of the Audit Committee.”
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Compensation Committee
The Compensation Committee approves the compensation objectives for the Company and the
Bank and establishes the compensation for the Chief Executive Officer and other executives. Our Chief
Executive Officer makes recommendations to the Compensation Committee from time to time regarding
the appropriate mix and level of compensation for other executives. Those recommendations consider the
objectives of our compensation philosophy and the range of compensation programs authorized by the
Compensation Committee. The Compensation Committee reviews all compensation components for the
Company’s Chief Executive Officer and other highly compensated executive officers’ compensation
including base salary, annual incentive, long-term incentives and other perquisites. In addition to
reviewing competitive market values, the Compensation Committee also examines the total compensation
mix, pay-for-performance relationship, and how all elements, in the aggregate, comprise the executive’s
total compensation package. Decisions by the Compensation Committee with respect to the
compensation of executive officers are approved by the full Board of Directors. The Compensation
Committee also assists the Board of Directors in evaluating potential candidates for executive positions.
Nominating/Corporate Governance Committee
The Company’s Nominating/Corporate Governance Committee assists the Board of Directors in
identifying qualified individuals to serve as Board members, in determining the composition of the Board
of Directors and its committees, in monitoring a process to assess Board effectiveness and in developing
and implementing the Company’s corporate governance guidelines. The Nominating/Corporate
Governance Committee also considers and recommends the nominees for director to stand for election at
the Company’s annual meeting of stockholders. The procedures of the Nominating/Corporate
Governance Committee required to be disclosed by the rules of the Securities and Exchange Commission
are set forth below.
Minimum Qualifications. The Nominating/Corporate Governance Committee has adopted a set
of criteria that it considers when it selects individuals to be nominated for election to the Board of
Directors. A candidate must meet the eligibility requirements set forth in the Company’s bylaws, which
include a requirement that the candidate not have been subject to certain criminal or regulatory actions. A
candidate also must meet any qualification requirements set forth in any Board or committee governing
documents.
Candidates deemed eligible for election to the Board of Directors are evaluated by the
Nominating/Corporate Governance Committee using the following criteria for selecting nominees:
•
•
•
•
•
financial, regulatory and business experience;
familiarity with and participation in the local community;
integrity, honesty and reputation in connection with upholding a position of trust with
respect to customers;
dedication to the Company and its stockholders; and
independence.
The Nominating/Corporate Governance Committee will also consider any other factors the
Committee deems relevant, including age, diversity, size of the Board of Directors and regulatory
disclosure obligations.
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5
With respect to nominating an existing director for re-election to the Board of Directors, the
Nominating/Corporate Governance Committee will consider and review an existing director’s Board and
committee attendance and performance; length of Board service; experience, skills and contributions that
the existing director brings to the Board; and the director’s independence.
Director Nomination Process. The process that the Nominating/Corporate Governance
Committee follows to identify and evaluate individuals to be nominated for election to the Board of
Directors is as follows:
Identification. For purposes of identifying nominees for the Board of Directors, the
Nominating/Corporate Governance Committee relies on personal contacts of the committee members and
other members of the Board of Directors, as well as its knowledge of members of the communities served
by the Bank. The Nominating/Corporate Governance Committee will also consider director candidates
recommended by stockholders in accordance with the policy and procedures set forth below. The
Nominating/Corporate Governance Committee has not previously used an independent search firm to
identify nominees.
Evaluation. In evaluating potential nominees, the Nominating/Corporate Governance Committee
determines whether the candidate is eligible and qualified for service on the Board of Directors by
evaluating the candidate under the selection criteria described above. If such individual fulfills these
criteria, the Nominating/Corporate Governance Committee will conduct a check of the individual’s
background and interview the candidate to further assess the qualities of the prospective nominee and the
contributions he or she would make to the Board.
Consideration of Recommendations by Stockholders. It is the policy of the
Nominating/Corporate Governance Committee of the Board of Directors of the Company to consider
director candidates recommended by stockholders who appear to be qualified to serve on the Company’s
Board of Directors. The Nominating/Corporate Governance Committee may choose not to consider an
unsolicited recommendation if no vacancy exists on the Board of Directors and the Nominating/Corporate
Governance Committee does not perceive a need to increase the size of the Board of Directors. To avoid
the unnecessary use of the Nominating/Corporate Governance Committee’s resources, the
Nominating/Corporate Governance Committee will consider only those director candidates recommended
in accordance with the procedures set forth below.
Procedures to be Followed by Stockholders. To submit a recommendation of a director
candidate to the Nominating/Corporate Governance Committee, a stockholder should submit the
following information in writing, addressed to the Chairman of the Nominating/Corporate Governance
Committee, care of the Corporate Secretary, at the main office of the Company:
1.
2.
3.
4.
The name of the person recommended as a director candidate;
All information relating to such person that is required to be disclosed in solicitations of
proxies for election of directors pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended;
The written consent of the person being recommended as a director candidate to being
named in the proxy statement as a nominee and to serving as a director if elected;
As to the stockholder making the recommendation, the name and address of such
stockholder as they appear on the Company’s books; provided, however, that if the
stockholder is not a registered holder of the Company’s common stock, the stockholder
should submit his or her name and address along with a current written statement from
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the record holder of the shares that reflects ownership of the Company’s common stock;
and
5.
A statement disclosing whether such stockholder is acting with or on behalf of any other
person and, if applicable, the identity of such person.
In order for a director candidate to be considered for nomination at the Company’s annual
meeting of stockholders, the recommendation must be received by the Nominating/Corporate Governance
Committee at least 120 calendar days before the date the Company’s proxy statement was released to
stockholders in connection with the previous year’s annual meeting, advanced by one year.
Director Compensation
The following table provides the compensation received by individuals, other than our named
executive officers listed in the “Summary Compensation Table,” who served as directors of the Company
during the 2008 fiscal year.
Name
Fees Earned
or Paid
in Cash(1)
All Other
Compensation
Total
Diane B. Cavanaugh ..........................
$29,750
$ –
$29,750
Arthur M. Levine ...............................
30,750
Charles A. Martinek...........................
John F. McKenzie ..............................
Linda M. Swan...................................
Harry (Jeff) A.S. Read .......................
–
30,750
29,750
30,750
–
–
–
–
–
30,750
– (2)
30,750
29,750
30,750
Kenneth H. Thomas ...........................
(1)
(2) As an employee of the Bank, Mr. Charles Martinek did not receive any fees for his service as a
Includes fees earned for service with the Company and the Bank.
109,750
29,750
80,000(3)
director of the Company or the Bank. Mr. Martinek is not a named executive officer listed in the
Summary Compensation Table.
(3) Amount listed represents payment for work performed as a consultant to the Bank. Dr. Thomas
has been a consultant to the Bank since 1978.
Cash Retainer and Meeting Fees for Non-Employee Directors. Each non-employee director of
the Bank receives a $3,000 quarterly retainer plus $1,000 per meeting attended. Non-employee directors
also receive a $750 quarterly retainer plus $750 per meeting attended for their service on the Board of
Directors of the Company, $500 per meeting attended for service on the Audit, Compensation, and
Nominating/Corporate Governance Committees of the Board of the Company, and $1,000 per meeting
attended for service on the Strategic Planning Committee. Directors do not receive any fees for their
service on the Board of Directors of Northeast Community Bancorp, MHC. Directors who are also
employees received the same fees as non-employee directors until such compensation was discontinued
for employee directors beginning in July, 2007.
Directors’ Deferred Compensation Plan. The Bank maintains the Northeast Community Bank
Directors’ Deferred Compensation plan to provide director participants with a vehicle to defer fees until
termination of service or a change in control. Director participants may elect on or before December 31st
of each year to defer all or part of their fees earned during the following year. All deferrals are credited
with interest on an annual basis at the prevailing rate payable by the Bank on its 60-month certificate of
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deposit. Directors are fully vested at all times in their deferrals. Directors must determine when their
deferrals will be distributed at the time a deferral election is made. Deferrals are also payable upon
disability, termination of service, death, following a change in control or upon the occurrence of an
unforeseeable emergency. All distributions will be made in cash.
Outside Director Retirement Plan. The Bank maintains the Northeast Community Bank Outside
Director Retirement Plan to provide non-employee directors with long standing service with a
supplemental retirement benefit. All current non-employee directors are participants in the plan.
Participating directors are entitled to receive a retirement benefit calculated based on years of service and
director fees paid during the 12 completed calendar months preceding a director’s termination of service
multiplied by a vesting percentage. Participating directors with less than 10 years of service will receive
no benefit under the plan. Participating directors with 10 years but less than 15 years of service will
receive a benefit based on 50% of the total directors fees paid during the 12 completed calendar months
preceding the director’s termination. Participating directors with 15 years but less than 20 years will
receive 75% of the total directors fees paid during the 12 completed calendar months preceding the
director’s termination. Participating directors with 20 or more years of service will receive a benefit
calculated using 100% of the director fees paid during the 12 months preceding the directors termination.
Participating directors vest in their retirement benefit at a rate of 20% per year for years of service after
January 1, 2006. The annual director retirement benefit is generally paid monthly over a 120-month
period following the month in which a director terminates his service on the Board of Directors. In the
event a participating director dies while in pay status, the director’s beneficiary will receive his or her
remaining installments beginning in the month immediately following the director’s death. In the event a
participating director is terminated in connection with a change in control (as defined in the plan), the
director will receive a lump sum payment equal to the actuarial equivalent of the director’s monthly
benefit. In the event a participating director is removed from the Board of Directors for cause, the
director will forfeit all rights and benefits under the plan.
Board and Committee Meetings
During 2008, the Board of Directors held 13 meetings. Each of our current directors attended at
least 90% of the Board meetings and the committee meetings on which such director served during 2008.
Director Attendance at Annual Meeting of Stockholders
The Board of Directors encourages each director to attend annual meetings of stockholders. All
directors attended the 2008 Annual Meeting of Stockholders.
Code of Ethics and Business Conduct
The Company has adopted a Code of Ethics and Business Conduct that is designed to promote the
highest standards of ethical conduct by the Company’s directors, executive officers and employees. The
Code of Ethics and Business Conduct requires that the Company’s directors, executive officers and
employees avoid conflicts of interest, comply with all laws and other legal requirements, conduct business
in an honest and ethical manner and otherwise act with integrity and in the Company’s best interest.
Under the terms of the Code of Ethics and Business Conduct, directors, executive officers and employees
are required to report any conduct that they believe in good faith to be an actual or apparent violation of
the Code of Ethics and Business Conduct. A copy of the Code of Ethics and Business Conduct can be
found in the Investor Relations section of the Company’s website, www.necommunitybank.com.
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REPORT OF THE AUDIT COMMITTEE
The Company’s management is responsible for the Company’s internal controls and financial
reporting process. The independent registered public accounting firm (“independent accountants”) are
responsible for performing an independent audit of the Company’s consolidated financial statements and
issuing an opinion on the conformity of those financial statements with generally accepted accounting
principles. The Audit Committee oversees the Company’s internal controls and financial reporting
process on behalf of the Board of Directors.
In this context, the Audit Committee has met and held discussions with management and the
independent accountants. Management represented to the Audit Committee that the Company’s
consolidated financial statements were prepared in accordance with generally accepted accounting
principles, and the Audit Committee has reviewed and discussed the consolidated financial statements
with management and the independent accountants. The Audit Committee discussed with the
independent accountants matters required to be discussed by Statement on Auditing Standards No. 61, as
amended (AICPA, Professional Standards, Vol. 1 AV Section 380), as adopted by the Public Company
Accounting Oversight Board in Rule 3200T, including the quality, not just the acceptability, of the
accounting principles, the reasonableness of significant judgments, and the clarity of the disclosures in the
financial statements. In addition, the Audit Committee has received the written disclosures and the letter
from the independent accountants required by applicable requirements of the Public Company
Accounting Oversight Board regarding the independent accountant’s communications with the Audit
Committee concerning independence and has discussed with the independent accountants the independent
accountants’ independence. In concluding that the auditors are independent, the Audit Committee
considered, among other factors, whether the non-audit services provided by the auditors were compatible
with their independence.
The Audit Committee discussed with the Company’s independent accountants the overall scope
and plans for their audit. The Audit Committee meets with the independent accountants, with and
without management present, to discuss the results of their examination, their evaluation of the
Company’s internal controls, and the overall quality of the Company’s financial reporting.
In performing all of these functions, the Audit Committee acts only in an oversight capacity. In
its oversight role, the Audit Committee relies on the work and assurances of the Company’s management,
which has the primary responsibility for financial statements and reports, and of the independent
accountants who, in their report, express an opinion on the conformity of the Company’s financial
statements to generally accepted accounting principles. The Audit Committee’s oversight does not
provide it with an independent basis to determine that management has maintained appropriate
accounting and financial reporting principles or policies, or appropriate internal controls and procedures
designed to assure compliance with accounting standards and applicable laws and regulations.
Furthermore, the Audit Committee’s considerations and discussions with management and the
independent accountants do not assure that the Company’s financial statements are presented in
accordance with generally accepted accounting principles, that the audit of the Company’s consolidated
financial statements has been carried out in accordance with the standards of the Public Company
Accounting Oversight Board (United States) or that the Company’s independent accountants are in fact
“independent.”
In reliance on the reviews and discussions referred to above, the Audit Committee recommended
to the Board of Directors, and the Board has approved, that the audited consolidated financial statements
be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 for
filing with the Securities and Exchange Commission. The Audit Committee and the Board of Directors
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also have approved, subject to stockholder ratification, the selection of the Company’s independent
registered public accounting firm for the fiscal year ending December 31, 2009.
Audit Committee of the Board of Directors of
Northeast Community Bancorp, Inc.
Arthur M. Levine (Chairperson)
John F. McKenzie
Harry (Jeff) A.S. Read
STOCK OWNERSHIP
The following table provides information as of March 31, 2009, with respect to persons known by
the Company to be the beneficial owners of more than 5% of the Company’s outstanding common stock.
A person may be considered to own any shares of common stock over which he or she has, directly or
indirectly, sole or shared voting or investing power.
Name and Address
Northeast Community Bancorp, MHC(2) ................................
325 Hamilton Avenue
White Plains, New York 10601
Stilwell Value Partners IV, L.P., Stilwell Associates, L.P.,
Stilwell Value LLC, and Joseph Stilwell..................................
26 Broadway, 23rd Floor
New York, New York 10004
Number of Shares
Owned
Percent of Common
Stock Outstanding (1)
7,273,750
55.0%
1,110,900(3)
8.4
Manulife Financial Corporation ...............................................
MFC Global Investment Management (U.S.), LLC
200 Bloor Street East
Toronto, Ontario, Canada M4W 1E5
(1) Based on 13,225,000 shares of the Company’s common stock outstanding and entitled to vote as of March
5.1
677,462(4)
(2)
31, 2009.
The members of the Board of Directors of Northeast Community Bancorp and Northeast Community Bank
also constitute the Board of Directors of Northeast Community Bancorp, MHC.
(3) Based on information contained in a Schedule 13D filed with the Securities and Exchange Commission on
November 5, 2007.
(4) Based on information contained in a Schedule 13G filed with the Securities and Exchange Commission on
February 11, 2009.
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The following table provides information as of March 31, 2009 about the shares of Company
common stock that may be considered to be beneficially owned by each director, nominee for director,
executive officers named in the Summary Compensation Table and by all directors, nominees for director
and executive officers of the Company as a group. A person may be considered to beneficially own any
shares of common stock over which he or she has, directly or indirectly, sole or shared voting or
investment power. Unless otherwise indicated, none of the shares listed are pledged as security, and each
of the named individuals has sole voting power and sole investment power with respect to the shares
shown. All directors and executive officers as a group do not own over 1% of the Company’s outstanding
shares based on 13,225,000 shares of the Company’s common stock outstanding and entitled to vote as of
March 31, 2009.
Name
Number of Shares
Owned (1)(2)
Susan Barile...............................................................................................
Diane B. Cavanaugh..................................................................................
Arthur M. Levine.......................................................................................
Charles A. Martinek ..................................................................................
Kenneth A. Martinek.................................................................................
John F. McKenzie......................................................................................
Salvatore Randazzo ...................................................................................
Harry (Jeff) A.S. Read...............................................................................
Linda M. Swan ..........................................................................................
Kenneth H. Thomas...................................................................................
All Executive Officers, Directors and
Director Nominees, as a Group (10 persons) .........................................
(1) Includes shares allocated to the account of individuals under the Bank’s ESOP with respect to which
4,139
500
2,076(3)
4,383
34,789
1,500
3,696
5,031
690
5,000(4)
61,804
individuals have voting but not investment power as follows: Susan Barile – 2,889 shares, Charles Martinek
– 1,898 shares, Kenneth Martinek – 5,483 shares, and Salvatore Randazzo – 3,696 shares.
(2) Includes shares held in trust in the 401(k) Plan as to which each individual has investment and voting power
as follows: Ms. Barile – 1,250 shares, Mr. Charles Martinek – 995 shares, and Mr. Kenneth Martinek –
29,306 shares. These amounts reflect ownership units in the employer stock fund of the 401(k) Plan, which
consists of both issuer stock and a reserve of cash. The actual number of shares held by the individual may
vary when such units are actually converted into shares upon distribution of the units to the individual.
(3) Includes 1,000 shares held by Mr. Levine’s spouse as trustee.
(4) Includes 370 shares held by Mr. Thomas’ spouse’s IRA.
ITEMS TO BE VOTED ON BY STOCKHOLDERS
Item 1 — Election of Directors
The Board of Directors of Northeast Community Bancorp is presently composed of nine
members. The Board is divided into three classes, each with three-year staggered terms, with one-third of
the directors elected each year. The nominees for election this year are Diane B. Cavanaugh, Charles A.
Martinek and Kenneth H. Thomas, all of whom are current directors of the Company and the Bank.
Unless you indicate on your proxy card that your shares should not be voted for certain directors,
the Board of Directors intends that the proxies solicited by it will be voted for the election of all of the
Board’s nominees. If any nominee is unable to serve, the persons named in the proxy card will vote your
shares to approve the election of any substitute proposed by the Board of Directors. Alternatively, the
Board of Directors may adopt a resolution to reduce the size of the Board. At this time, the Board of
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Directors knows of no reason why any nominee might be unable to serve. The Board of Directors
recommends a vote “FOR” the election of all nominees.
Information regarding the Board of Director’s nominees and the directors continuing in office is
provided below. Unless otherwise stated, each individual has held his or her current occupation for the
last five years. The age indicated for each individual is as of December 31, 2008. The indicated period of
service as a director includes service as a director of the Bank.
Board Nominees for Terms Ending in 2012
Diane B. Cavanaugh is an attorney. Age 52. Director since 1992.
Charles A. Martinek has served as Vice President and Internal Loan Review and Community
Reinvestment Officer of Northeast Community Bank since May, 2007. Prior to that time, Mr. Martinek
served as a commercial loan officer with the Bank since 2001, and as an assistant vice president since
2002. Before serving with the Bank, Mr. Martinek was a quality control analyst with C. Cowles & Co.
Mr. Martinek is also the owner of Martinek Investment Properties, LLC. Mr. Martinek’s brother,
Kenneth Martinek, also serves on the Board of Directors. Age 47. Director since 2002.
Kenneth H. Thomas has been an independent bank analyst and consultant since 1969 and has
been President of K.H. Thomas Associates, LLC since 1975. Mr. Thomas holds a Ph.D. in Finance from
the Wharton School and has written extensively on the Community Reinvestment Act of 1977. He has
been a consultant to the Bank since 1978. Age 61. Director since 2001.
Directors with Terms Ending in 2010
Kenneth A. Martinek has served as Chairman of the Board, President and Chief Executive
Officer of Northeast Community Bancorp since its formation in 2006. He has served with Northeast
Community Bank since 1976 and has been the President and Chief Executive Officer of the Bank since
1991. Mr. Martinek was first elected as a director of the Bank in 1983 and was appointed Chairman of
the Board in 2002. Mr. Martinek’s brother, Charles A. Martinek, also serves on the Board of Directors.
Age 56.
Arthur M. Levine is a certified public accountant and Member of the accounting firm A.L.
Wellen LLC. Age 74. Director since 1995.
John F. McKenzie is a retired insurance executive. Prior to his retirement in early 2008, Mr.
McKenzie was the owner of an insurance agency in Orange, Connecticut, providing multiline personal
and commercial insurance products. Age 65. Director since November 2006.
Directors with Terms Ending in 2011
Salvatore Randazzo has served as Executive Vice President and Chief Financial Officer of
Northeast Community Bancorp since its formation in 2006. He has served as Executive Vice President
and Chief Financial Officer of Northeast Community Bank since 2002. Mr. Randazzo joined the Bank as
senior accountant in 1997. Age 41. Director since 2003.
Harry (Jeff) A.S. Read has been a registered investment adviser with Geneos Wealth
Management, Inc. since January 2006. From January 2004 to December 2005, Mr. Read served as a
registered investment adviser with Financial Network Investment Corp., an ING company. Before
serving with Financial Network Investment Corp., Mr. Read worked as a registered investment adviser
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with Allmerica Financial of Worcester, MA, for over twenty years. Mr. Read has served several terms in
the Massachusetts House of Representatives. Age 72. Director since 2005.
Linda M. Swan is a retired Director of the Corporate Activities Division of the Office of Thrift
Supervision. Age 59. Director since 1991.
Item 2 — Ratification of the Independent Registered Public Accounting Firm
The Audit Committee of the Board of Directors has appointed Beard Miller Company LLP to be
the Company’s independent registered public accounting firm for the 2009 fiscal year, subject to
ratification by stockholders. A representative of Beard Miller Company LLP is expected to be present at
the annual meeting to respond to appropriate questions from stockholders and will have the opportunity to
make a statement should he or she desire to do so.
If the ratification of the appointment of Beard Miller Company LLP is not approved by the
stockholders at the annual meeting, the Audit Committee will consider other independent registered
public accounting firms.
Auditor Fees
The following table sets forth the fees billed to the Company for the fiscal years ending
December 31, 2008 and December 31, 2007 by Beard Miller Company LLP.
2008
2007
Audit Fees(1) ...................................................
Audit-Related Fees(2)......................................
Tax Fees(3) ......................................................
All other fees..................................................
(1) Includes professional services rendered for the audit of the Company’s annual financial statements and
$106,462
2,250
24,000
—
$135,095
—
24,000
—
review of financial statements included in Forms 10-Q, including out-of-pocket expenses.
(2) Consists of fees for accounting consultations in connection with acquisitions and asset sales.
(3) Tax fees include the following: preparation of federal, state and city tax returns.
Policy on Pre-Approval of Audit and Permissible Non-Audit Services
The Audit Committee is responsible for appointing and setting the compensation and overseeing
the work of the independent auditor. In accordance with its charter, the Audit Committee approves, in
advance, all audit and permissible non-audit services to be performed by the independent auditor to
ensure that the independent auditor does not provide any non-audit services to the Company that are
prohibited by law or regulation.
In addition, the Audit Committee has established a policy regarding pre-approval of all audit and
permissible non-audit services provided by the independent auditor. Requests for services by the
independent auditor must be specific as to the particular services to be provided. The request may be
made with respect to either specific services or a type of service for predictable or recurring services.
During the year ended December 31, 2008, all services provided by the independent auditor were
approved, in advance, by the Audit Committee in compliance with these procedures.
The Board of Directors recommends that stockholders vote “FOR” the ratification of the
appointment of Beard Miller Company LLP as the Company’s independent registered public
accounting firm.
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EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides information concerning total compensation earned or paid to the
Chief Executive Officer and the two other most highly compensated executive officers of the Company
who served in such capacities at December 31, 2008. These three officers are referred to as the “named
executive officers” in this proxy statement.
Name and Principal Position
Kenneth A. Martinek
President and Chief Executive
Officer
Salvatore Randazzo
Executive Vice President and
Chief Financial Officer
Susan Barile
Executive Vice President and
Chief Mortgage Officer
Salary
Bonus
Nonequity
Incentive Plan
Compensation
All Other
Compensation(1)
$266,624
251,675
$ –
–
$ –
–
169,424
152,611
–
10,350
–
–
142,697
129,791
30,000
12,500
40,000(2)
–
$11,284
35,730
8,356
28,699
6,884
12,689
Total
$277,908
287,405
177,780
191,660
219,581
154,980
Year
2008
2007
2008
2007
2008
2007
(1) Amounts do not include perquisites which, in the aggregate, were less than $10,000 for each named executive
officer. For Mr. Martinek, Mr. Randazzo and Ms. Barile, amounts in 2008 consists solely of allocations under
the ESOP.
(2) Award made under the Bank’s Executive Incentive Deferral Plan. Award vests over a five year period (2009 –
10%, 2010 – 15%, 2011 – 20%, 2012 – 25% and 2013 – 30%).
Employment Agreements. The Company and the Bank each maintain employment agreements
with Kenneth A. Martinek and Salvatore Randazzo. The employment agreements with the Company and
the Bank for each executive, which have essentially identical terms, provide that the Company will make
any payments not made by the Bank, but the executives will not receive any duplicative payments. The
Company and the Bank have also entered into an employment agreement with Susan Barile. Ms. Barile’s
employment agreement provides that the Company will make any payments not made by the Bank. Mr.
Martinek, Mr. Randazzo and Ms. Barile are also referred to below as the “executives” or the “executive.”
The employment agreements with the executives provide for three-year terms, subject to annual
renewal by the board of directors. The current base salaries under the employment agreements are
$275,750 for Mr. Martinek, $175,100 for Mr. Randazzo and $150,000 for Ms. Barile. The agreements
also provide for participation in employee benefit plans and programs maintained for the benefit of senior
management personnel, including discretionary bonuses, participation in stock-based benefit plans, and
fringe benefits, including an automobile allowance for each executive.
Under the terms of the agreements, the executives are subject to a one year non-compete if they
terminate their employment for good reason (as defined in the agreement) or if they are terminated
without cause (as defined in the agreement). This non-compete provision shall not apply if the executives
are terminated within one year of a change of control.
See “Other Potential Post-Termination Benefits” for a discussion of the benefits and payments
the executives may receive under their employment agreements upon retirement or termination of
employment.
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Supplemental Executive Retirement Plan. Under the supplemental executive retirement plan, upon
termination of employment on or after the normal retirement age of 65, Messrs. Martinek and Randazzo each
receive an annual retirement benefit equal to fifty percent (50%) of average base salary over the three-year
period preceding termination of employment. Upon termination on or after age 60 and upon completing a
minimum of 20 years of service, Messrs. Martinek and Randazzo may receive an early retirement benefit equal
to the normal retirement benefit, reduced by .25% for each month by which the executive’s age at termination is
less than age 65. The early or normal retirement benefit is payable in equal monthly installments for the greater
of the executive’s lifetime or 15 years following retirement. See “Other Potential Post-Termination Benefits”
for payments that Mr. Martinek and Mr. Randazzo may receive under this plan upon termination of
employment for reasons other than retirement.
Executive Incentive Deferral Plan. The Bank sponsors the Executive Incentive Deferral Plan to
provide certain officers and employees with a deferred bonus opportunity based on the attainment of
specific financial or individual performance criteria. At present, Ms. Barile is the only named executive
officer who is a participant in the plan. The Board of the Bank establishes the applicable performance
criteria and target deferral opportunity for each participant by March 31 of each calendar year. If the
criteria are satisfied, the participant’s account is credited with an award as of the December 31 of the
calendar year. If made, the award is subject to vesting at a rate determined by the Board. Each award is
subject to a separate vesting period. However, all awards are fully vested in the event of a participant’s
death or disability, upon the occurrence of a change in control (as defined for purposes of Section 409A
of the Internal Revenue Code of 1986, as amended) or upon the participant’s retirement at or after age 65.
If a participant terminates employment, the vested portion of their plan account is distributed, at the
participant’s election, in a lump sum or in installment payments over a period of up to 10 years. Prior to
distribution, a participant’s deferred bonus account is credited with interest at the Bank’s one-year
certificate of deposit rate. The rate is adjusted annually on the first business day of the year. See “Other
Potential Post-Termination Benefits” for the payments that Ms. Barile may receive under this plan upon
termination of employment.
Other Potential Post-Termination Benefits
Payments Made Upon Termination for Cause. Under the employment agreements, an executive
who is terminated for cause will receive base salary through the date of termination and retain the rights
to any vested benefits subject to the terms of the plan or agreement under which those benefits are
provided.
In the event of her termination for cause, Ms. Barile would forfeit all benefits under the Executive
Incentive Deferral Plan.
Payments Made Upon Voluntarily Termination and Termination without Cause or for Good
Reason. If the Bank and the Company terminate the executives for reasons other than cause, or if the
executives terminate voluntarily under certain circumstances outlined in the agreements that constitute
constructive termination, the executives, or their beneficiaries should they die prior to receipt of payment,
each receive an amount equal to their base salary and employer contributions to benefit plans payable for
the remaining term of the agreement. The Bank and the Company also agree to continue and/or pay for
the executives’ life, health and dental coverage for the remaining term of the agreements.
In the event of her termination of employment for reasons other than death or disability,
following a change in control, or retirement at or after age 65, Ms. Barile would be entitled to receive the
vested balance of her Executive Incentive Deferral Plan account determined as of her termination date.
As of December 31, 2008, her vested account balance was $0.
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15
Payments Made Upon Disability. If the executives become disabled, the Bank and the Company
agree to provide them with monthly disability pay equal to 75% of their monthly base salaries (50% of
monthly base salary in the case of Ms. Barile) for a period ending on the earliest to occur of (1) a return to
full-time employment with the Bank and the Company; (2) death; (3) attainment of age 65; or (4) the
expiration of the agreement. The disability payments under the agreement would be reduced, however,
by the amount of any short- or long-term disability benefits that would become payable to the executives
under the terms of any disability insurance programs sponsored by the Bank and the Company.
In the event of termination due to disability, Mr. Martinek and Mr. Randazzo will receive the early
retirement benefit or normal retirement benefit due under the supplemental executive retirement plan if they
have reached age 60 or 65, respectively, prior to termination. If they have not attained early retirement age prior
to termination due to disability, they will receive a benefit equal to their accrued benefit under the plan as of the
date of termination.
In the event of a termination of employment by reason of her disability, Ms. Barile would be fully
vested in her Executive Incentive Deferral Plan account and would be entitled to an immediate
distribution. As of December 31, 2008, her account balance was $40,000.
Payments Made Upon Death. Upon the death of an executive, the executive’s employment
agreement terminates and the executive’s beneficiary will receive base salary and accrued benefits
through the last day of the month of death.
The supplemental executive retirement plan provides that upon the death of Mr. Martinek or Mr.
Randazzo while actively employed, they, or their beneficiary, would receive an actuarially equivalent lump sum
benefit, calculated as if the executive had attained age 65 prior to termination of employment.
In the event of a termination of employment by reason of her death, Ms. Barile would be fully
vested in her Executive Incentive Deferral Plan account and her beneficiary would be entitled to an
immediate distribution. As of December 31, 2008, her account balance was $40,000.
Payments Made Upon a Change in Control. Under the employment agreements, if an executive
is involuntarily or constructively terminated within one year of a change in control (as defined in the
agreements), the executive will receive a severance payment equal to three times his or her average
annual compensation over the five preceding years, as well as continued life, medical and dental benefits
for three years following termination of employment.
The benefits provided to the executives under the employment agreements upon a change in
control are limited to avoid adverse tax consequences to the Company and the Bank under Section 280G
of the Internal Revenue Code of 1986. The “280G Limits” provide that total payments and benefits to the
executives that are contingent upon a change in control shall not equal or exceed in the aggregate three
times the individual’s average annual taxable income over the five preceding years.
The supplemental executive retirement plan provides that upon termination in connection with a
change in control Mr. Martinek and Mr. Randazzo or their beneficiary, would receive an actuarially equivalent
lump sum benefit, calculated as if they had attained age 65 prior to termination of employment. All benefits
received under this plan count towards the executives’ 280G Limits.
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Upon the occurrence of a change in control, Ms. Barile would be fully vested in her Executive
Incentive Deferral Plan account. In the event of her subsequent termination of employment, other than
for cause, she would be entitled to an immediate distribution of her account balance. As of December 31,
2008, her account balance was $40,000.
Under the terms of our employee stock ownership plan, upon a change in control (as defined in
the plan), the plan will terminate and the plan trustee will repay in full any outstanding acquisition loan.
After repayment of the acquisition loan, all remaining shares of our stock held in the loan suspense
account, all other stock or securities, and any cash proceeds from the sale or other disposition of any
shares of our stock held in the loan suspense account will be allocated among the accounts of all
participants in the plan who were employed by us on the date immediately preceding the effective date of
the change in control. The allocations of shares or cash proceeds shall be credited to each eligible
participant in proportion to the opening balances in their accounts as of the first day of the valuation
period in which the change in control occurred. Payments under our employee stock ownership plan do
not count towards the executives’ 280G Limits.
OTHER INFORMATION RELATING TO
DIRECTORS AND EXECUTIVE OFFICERS
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers
and directors, and persons who own more than 10% of any registered class of the Company’s equity
securities, to file reports of ownership and changes in ownership with the Securities and Exchange
Commission. These individuals or entities are required by regulation to furnish the Company with copies
of all Section 16(a) reports they file.
Based solely on its review of the copies of the reports it has received and written representations
provided to the Company from the individuals required to file the reports, the Company believes that each
of its executive officers and directors has complied with applicable reporting requirements for
transactions in Company common stock during the fiscal year ended December 31, 2008.
Transactions with Related Persons
The Sarbanes-Oxley Act of 2002 generally prohibits loans by the Company to its executive
officers and directors. However, the Sarbanes-Oxley Act contains a specific exemption from such
prohibition for loans by the Bank to its executive officers and directors in compliance with federal
banking regulations. Federal regulations require that all loans or extensions of credit to executive officers
and directors of insured institutions must be made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with other persons and must not
involve more than the normal risk of repayment or present other unfavorable features. The Bank is
therefore prohibited from making any new loans or extensions of credit to executive officers and directors
at different rates or terms than those offered to the general public, except for loans made pursuant to
programs generally available to all employees. Notwithstanding this rule, federal regulations permit the
Bank to make loans to executive officers and directors at reduced interest rates if the loan is made under a
benefit program generally available to all other employees and does not give preference to any executive
officer or director over any other employee, although the Bank does not currently have such a program in
place.
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From time to time, the Bank makes loans and extensions of credit to its executive officers and
directors, and members of their immediate families. Such loans are made in the ordinary course of
business, are made on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable loans with persons not related to the Bank, and do not involve more
than the normal risk of collectibility or present other unfavorable features. These loans were performing
according to their terms at December 31, 2008.
Pursuant to the Company’s Audit Committee Charter, the Audit Committee will identify, review
and approve or ratify all transactions with Related Persons in accordance with the Company’s Policy and
Procedures Governing Related Person Transactions. Also, in accordance with banking regulations, the
Board of Directors reviews all loans made to a director or executive officer in an amount that, when
aggregated with the amount of all other loans to such person and his or her related interests, exceed the
greater of $25,000 or 5% of the Company’s capital and surplus (up to a maximum of $500,000) and such
loan must be approved in advance by a majority of the disinterested members of the Board of Directors.
Additionally, pursuant to the Company’s Code of Ethics and Business Conduct, all executive officers and
directors of the Company must disclose any existing or emerging conflicts of interest to the President and
Chief Executive Officer of the Company. Such potential conflicts of interest include, but are not limited
to, the following: (i) the Company conducting business with or competing against an organization in
which a family member of an executive officer or director has an ownership or employment interest and
(ii) the ownership of more than 1% of the outstanding securities or 5% of total assets of any business
entity that does business with or is in competition with the Company.
SUBMISSION OF BUSINESS PROPOSALS AND
STOCKHOLDER NOMINATIONS
The Company must receive proposals that stockholders seek to include in the proxy statement for
the Company’s next annual meeting no later than December 11, 2009. If next year’s annual meeting is
held on a date more than 30 calendar days from May 20, 2010, a stockholder proposal must be received
by a reasonable time before the Company begins to print and mail its proxy solicitation for such annual
meeting. Any stockholder proposals will be subject to the requirements of the proxy rules adopted by the
Securities and Exchange Commission.
The Company’s bylaws provide that, in order for a stockholder to make nominations for the
election of directors or proposals for business to be brought before the annual meeting, a stockholder must
deliver notice of such nominations and/or proposals to the Secretary not less than 30 days before the date
of the annual meeting. However, if less than 40 days’ notice or prior public disclosure of the date of the
annual meeting is given to stockholders, such notice of stockholder nominations or proposals must be
received not later than the close of business of the tenth day following the day on which notice of the date
of the annual meeting was mailed to stockholders or prior public disclosure of the meeting date was made.
A copy of the bylaws may be obtained from the Company.
STOCKHOLDER COMMUNICATIONS
The Company encourages stockholder communications to the Board of Directors and/or
individual directors. All communications from stockholders should be addressed to Northeast
Community Bancorp, Inc., 325 Hamilton Avenue, White Plains, New York 10601. Communications to
the Board of Directors should be in the care of Anne Stevenson-DeBlasi, Corporate Secretary.
Communications to individual directors should be sent to such director at the Company’s address.
Stockholders who wish to communicate with a Committee of the Board should send their
communications to the care of the Chairperson of the particular committee, with a copy to Linda M.
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Swan, the Chair of the Nominating/Corporate Governance Committee. It is in the discretion of the
Nominating/Corporate Governance Committee whether any communication sent to the full Board should
be brought before the full Board.
NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIALS
Important Notice Regarding the Availability of Proxy Materials for the Stockholders
Meeting to be held on May 20, 2009.
The Proxy Statement and Annual Report to Stockholders are available at
http://www.necommunitybank.com/proxy.asp
For the date, time and location of the Annual Meeting, please see “General Information.” For
information on how to vote in person at the Annual Meeting, an identification of the matters to be voted
upon at the Annual Meeting and the Board of Director’s recommendation regarding those matters, please
see “Information About Voting.”
MISCELLANEOUS
The Company will pay the cost of this proxy solicitation. The Company will reimburse
brokerage firms and other custodians, nominees and fiduciaries for reasonable expenses incurred by them
in sending proxy materials to the beneficial owners of the Company. Additionally, directors, officers and
other employees of the Company may solicit proxies personally or by telephone. None of these persons
will receive additional compensation for these activities.
The Company’s Annual Report to Stockholders has been included with this proxy statement.
Any stockholder as of March 31, 2009, who has not received a copy of the Annual Report may obtain a
copy by writing to the Corporate Secretary of the Company. The Annual Report is not to be treated as
part of the proxy solicitation material or as having been incorporated by reference into this proxy
statement.
If you and others who share your address own your shares in “street name,” your broker or other
holder of record may be sending only one annual report and proxy statement to your address. This
practice, known as “householding,” is designed to reduce our printing and postage costs. However, if a
stockholder residing at such an address wishes to receive a separate annual report or proxy statement in
the future, he or she should contact the broker or other holder of record. If you own your shares in “street
name” and are receiving multiple copies of our annual report and proxy statement, you can request
householding by contacting your broker or other holder of record.
Whether or not you plan to attend the annual meeting, please vote by marking, signing, dating and
promptly returning the enclosed proxy card in the enclosed envelope.
BY ORDER OF THE BOARD OF DIRECTORS
White Plains, New York
April 10, 2009
Anne Stevenson-DeBlasi
Corporate Secretary
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2008
[ ]
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
(State or other jurisdiction of
incorporation or organization)
06-1786701
(I.R.S. Employer Identification No.)
325 Hamilton Avenue, White Plains, New York
(Address of principal executive offices)
10601
(Zip Code)
Registrant’s telephone number, including area code: (914) 684-2500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $0.01 per share The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes
No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)
of the Act. Yes
No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[X]
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 the definitions of “accelerated filer,” “large accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
Accelerated filer [ ]
Large accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ X ]
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).
Yes
No X
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30,
2008 was approximately $66.2 million.
The number of shares outstanding of the registrant’s common stock as of March 23, 2009 was 13,225,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2009 Annual Meeting of Stockholders are incorporated by reference
in Part III of this Form 10-K.
INDEX
Part I
Page
Item 1.
Business ............................................................................................................................................ 1
Item 1A.
Risk Factors....................................................................................................................................... 17
Item 1B.
Unresolved Staff Comments ............................................................................................................. 22
Item 2.
Item 3.
Item 4.
Properties .......................................................................................................................................... 23
Legal Proceedings ............................................................................................................................. 24
Submission of Matters to a Vote of Security Holders ....................................................................... 24
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Item 6.
Item 7.
Purchases of Equity Securities ....................................................................................................... 24
Selected Financial Data..................................................................................................................... 25
Management’s Discussion and Analysis of Financial Condition and Results of Operations............ 27
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk .......................................................... 49
Item 8.
Financial Statements and Supplementary Data ................................................................................. 49
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure........... 49
Item 9A(T). Controls and Procedures ................................................................................................................... 49
Item 9B.
Other Information.............................................................................................................................. 50
Part III
Item 10.
Directors, Executive Officers and Corporate Governance ................................................................ 50
Item 11.
Executive Compensation................................................................................................................... 50
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ....................................................................................................................... 50
Item 13.
Certain Relationships and Related Transactions, and Director Independence .................................. 51
Item 14.
Principal Accounting Fees and Services ........................................................................................... 51
Part IV
Item 15.
Exhibits and Financial Statement Schedules..................................................................................... 52
SIGNATURES
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This report contains certain “forward-looking statements” within the meaning of the federal securities
laws. These statements are not historical facts; rather, they are statements based on Northeast Community
Bancorp, Inc.’s current expectations regarding its business strategies, intended results and future performance.
Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and
similar expressions.
Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain.
Factors which could affect actual results include interest rate trends, the general economic climate in the market
area in which Northeast Community Bancorp, Inc. operates, as well as nationwide, Northeast Community Bancorp,
Inc.’s ability to control costs and expenses, competitive products and pricing, loan delinquency rates and changes in
federal and state legislation and regulation. For further discussion of factors that may affect our results, see “Item
1A. Risk Factors” in this Annual Report on Form 10-K (“Form 10-K”). These factors should be considered in
evaluating the forward-looking statements and undue reliance should not be placed on such statements. Northeast
Community Bancorp, Inc. assumes no obligation to update any forward-looking statements.
Item 1.
BUSINESS
General
PART I
Northeast Community Bancorp, Inc. (“Northeast Community Bancorp” or the “Company”) is a federally
chartered stock holding company established on July 5, 2006 to be the holding company for Northeast Community
Bank (the “Bank”). Northeast Community Bancorp’s business activity is the ownership of the outstanding capital
stock of the Bank. Northeast Community Bancorp does not own or lease any property but instead uses the premises,
equipment and other property of the Bank with the payment of appropriate rental fees, as required by applicable law
and regulations, under the terms of an expense allocation agreement.
Northeast Community Bancorp, MHC (the “MHC”) is the Company’s federally chartered mutual holding
company parent. As a mutual holding company, the MHC is a non-stock company that has as its members the
depositors of Northeast Community Bank. The MHC does not engage in any business activity other than owning a
majority of the common stock of Northeast Community Bancorp. So long as we remain in the mutual holding
company form of organization, the MHC will own a majority of the outstanding shares of Northeast Community
Bancorp.
Northeast Community Bank has been conducting business throughout the New York metropolitan area for
more than 75 years. Northeast Community Bank was originally chartered in 1934. In 2006, Northeast Community
Bank changed its name from “Fourth Federal Savings Bank” to “Northeast Community Bank.”
We operate as a community-oriented financial institution offering traditional financial services to
consumers and businesses in our market area and our lending territory. We attract deposits from the general public
and use those funds to originate multi-family residential, mixed-use and non-residential real estate and consumer
loans, which we hold for investment. We have been originating multi-family and mixed-use real estate loans in the
New York metropolitan area for over half a century and expanded our lending territory to include all of New York,
Massachusetts, New Jersey, Connecticut, Pennsylvania, New Hampshire and Rhode Island, which we refer to
collectively in this Form 10-K as the “Northeastern United States.” In 2007, we established a new commercial loan
department and have increased this portfolio from no commercial loans at March 31, 2007 to $22.6 million of
commercials loans committed with $7.6 million drawn at December 31, 2008. We do not offer one- to four-family
residential loans.
In November 2007, we completed the acquisition of the operating assets of Hayden Financial Group, LLC,
an investment advisory firm located in Westport, Connecticut. This acquisition gives us the ability to offer
investment advisory and financial planning services under the name Hayden Wealth Management Group, a division
of the Bank, through a networking arrangement with a registered broker-dealer and investment advisor.
Available Information
Our website address is www.necommunitybank.com. Information on our website should not be considered
a part of this Form 10-K.
Market Area
We are headquartered in White Plains, New York, which is located in Westchester County and we operate
through our main office in White Plains and our five other full-service branch offices in the New York City
boroughs of Manhattan (New York County), Brooklyn (Kings County) and Bronx (Bronx County). We also operate
a loan production office in Wellesley, Massachusetts. We generate deposits through our main office and five branch
offices. We conduct lending activities throughout the Northeastern United States, including New York,
Massachusetts, New Jersey, Connecticut, Pennsylvania, New Hampshire and Rhode Island.
Our primary market area includes a population base with a broad cross section of wealth, employment and
ethnicity. We operate in markets that generally have experienced relatively slow demographic growth, a
characteristic typical of mature urban markets located throughout the Northeast region. New York County is a
relatively affluent market, reflecting the influence of Wall Street along with the presence of a broad spectrum of
Fortune 500 companies. Comparatively, Kings County and Bronx County are home to a broad socioeconomic
spectrum, with a significant portion of the respective populations employed in relatively low wage blue collar jobs.
Westchester County is also an affluent market, serving as a desired suburban location for commuting into New York
City as well as reflecting growth of higher paying jobs in the county, particularly in White Plains.
While each of the states in our lending area has different economic characteristics, our customer base in
these states tends to be similar to our customer base in New York and is comprised mostly of owners of low to
moderate income apartment buildings or non-residential real estate in low to moderate income areas. Outside the
State of New York, our largest concentration of real estate loans is in Massachusetts.
Competition
We face significant competition for the attraction of deposits. The New York metropolitan area has a
significant concentration of financial institutions, including large money center and regional banks, community
banks and credit unions. Over the past 10 years, consolidation of the banking industry in the New York
metropolitan area has continued, resulting in larger and increasingly efficient competitors. We also face competition
for depositors’ funds from money market funds, mutual funds and other corporate and government securities. At
June 30, 2008, which is the most recent date for which data is available from the Federal Deposit Insurance
Corporation, we held 0.08% or less of the deposits in Kings and New York counties, New York, and approximately
0.60% and 0.19% of the deposits in Bronx and Westchester Counties, New York, respectively.
We also face significant competition for the origination of loans. Our competition for loans comes
primarily from financial institutions in our lending territory, and, to a lesser extent, from other financial service
providers such as insurance companies, hedge funds and mortgage companies. As our lending territory is based
around densely populated areas surrounding urban centers, we face significant competition from regional banks,
savings banks and commercial banks in the New York metropolitan area as well as in the other ten states that we
designate as our lending territory. The competition for loans that we encounter, as well as the types of institutions
with which we compete, varies from time to time depending upon certain factors, including the general availability
of lendable funds and credit, general and local economic conditions, current interest rate levels, volatility in the
mortgage markets and other factors which are not readily predictable.
We expect competition to increase in the future as a result of legislative, regulatory and technological
changes and the continuing trend of consolidation in the financial services industry. Technological advances, for
example, have lowered the barriers to market entry, allowed banks and other lenders to expand their geographic
reach by providing services over the Internet and made it possible for non-depository institutions to offer products
and services that traditionally have been provided by banks. Changes in federal law permit affiliation among banks,
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securities firms and insurance companies, which promotes a competitive environment in the financial services
industry. Competition for deposits and the origination of loans could limit our future growth.
Lending Activities
General. We originate loans primarily for investment purposes. The largest segment of our loan portfolio
is multi-family residential real estate loans. We also originate mixed-use real estate loans and non-residential real
estate loans, and in 2007 we began originating commercial loans. To a limited degree, we make consumer loans and
purchase participation interests in construction loans. We currently do not originate one- to four-family residential
loans and have no present intention to do so in the future. We consider our lending territory to be the Northeastern
United States, including New York, Massachusetts, New Jersey, Connecticut, Pennsylvania, New Hampshire and
Rhode Island. We do not originate or purchase subprime loans.
Multi-family and Mixed-use Real Estate Loans. We offer adjustable rate mortgage loans secured by
multi-family and mixed-use real estate. These loans are comprised primarily of loans on low to moderate income
apartment buildings located in our lending territory and include, to a limited degree, loans on cooperative apartment
buildings (in the New York area), loans for Section 8 multi-family housing and loans for single room occupancy
(“SRO”) multi-family housing properties. In New York, most of the apartment buildings that we lend on are rent-
stabilized. Mixed-use real estate loans are secured by properties that are intended for both residential and business
use. Until 2004, our policy had been to originate multi-family and mixed-use real estate loans primarily in the New
York metropolitan area. In January 2004, we opened our first location outside of New York and now originate
multi-family and mixed-use real estate loans in several northeastern states.
For the year ended December 31, 2008, originations of multi-family real estate loans in states other than
New York represented 47.3% of our total multi-family mortgage loan originations, and originations of mixed-use
real estate loans in states other than New York represented 6.6% of our total mixed-use mortgage loan originations.
For the year ended December 31, 2007, originations of multi-family real estate loans in states other than New York
represented 60.8% of our total multi-family mortgage loan originations, and originations of mixed-use real estate
loans in states other than New York represented 16.7% of our total mixed-use mortgage loan originations. We
intend to continue our originations of multi-family and mixed-use real estate loans in the seven states in which we
are currently lending.
We originate a variety of adjustable-rate and balloon multi-family and mixed-use real estate loans. The
adjustable-rate loans have fixed rates for a period of up to five years and then adjust every three to five years
thereafter, based on the terms of the loan. Maturities on these loans can be up to 15 years, and typically they
amortize over a 20 to 30-year period. Interest rates on our adjustable-rate loans are adjusted to a rate that equals the
applicable three-year or five-year constant maturity treasury index plus a margin. The balloon loans have a
maximum maturity of five years. The lifetime interest rate cap is five percentage points over the initial interest rate
of the loan (four percentage points for loans with three-year terms). For a mixed-use property with commercial
space accounting for over 30% of the gross operating income of the building, competition permitting, the rate
offered is generally based on the rate we offer for non-residential real estate loans. Due to the nature of our
borrowers and our lending niche, the typical multi-family or mixed-use real estate loan refinances within the first
five-year period and, in doing so, generates prepayment penalties ranging from five points to one point of the
outstanding loan balance. Under our loan-refinancing program, borrowers who are current under the terms and
conditions of their contractual obligations can apply to refinance their existing loans to the rates and terms then
offered on new loans after the payment of their contractual prepayment penalties.
In making multi-family and mixed-use real estate loans, we primarily consider the net operating income
generated by the real estate to support the debt service, the financial resources, income level and managerial
expertise of the borrower, the marketability of the property and our lending experience with the borrower. We do
not typically require a personal guarantee of the borrower, but may do so depending on the location, building
condition or credit profile. We rate the property underlying the loan as Class A, B or C. Our current policy is to
require a minimum debt service coverage ratio (the ratio of earnings after subtracting all operating expenses to debt
service payments) of 1.20% to 1.50% depending on the rating of the underlying property. On multi-family and
mixed-use real estate loans, our current policy is to finance up to 75% of the lesser of the appraised value or
3
purchase price of the property securing the loan on purchases and refinances of Class A and B properties and up to
65% of the lesser of the appraised value or purchase price for properties that are rated Class C. Properties securing
multi-family and mixed-use real estate loans are appraised by independent appraisers, inspected by us and generally
require Phase 1 environmental surveys.
We have been originating multi-family and mixed-use real estate loans in the New York market area for
more than 50 years. In the New York market area, our ability to continue to grow our portfolio is dependent on the
continuation of our relationships with mortgage brokers, as the multi-family and mixed-use real estate loan market is
primarily broker driven. We have longstanding relationships with mortgage brokers in the New York market area,
who are familiar with our lending practices and our underwriting standards. During the past four years we have
developed similar relationships with mortgage brokers in the other states within our lending territory and will
continue to do so in order to grow our loan portfolio.
The majority of the multi-family real estate loans in our portfolio are secured by twenty unit to one hundred
unit apartment buildings. At December 31, 2008, the majority of our mixed-use real estate loans are secured by
properties that are at least 70% residential, but contain some non-residential space.
On December 31, 2008, the largest outstanding multi-family real estate loan had a balance of $8.7 million
and is performing according to its terms at December 31, 2008. This loan is secured by a 216 unit apartment
complex located in Philadelphia, Pennsylvania. The largest mixed-use real estate loan had a balance of $4.0 million
and is performing according to its terms at December 31, 2008. This loan is secured by a mixed-use building with
10 apartment units and 5 commercial units located in Jamaica, New York. As of December 31, 2008, the average
loan balance in our multi-family and mixed-use portfolio was approximately $637,000.
Non-residential Real Estate Loans. We offer adjustable-rate mortgage loans secured by non-residential
real estate in the same lending territory that we offer multi-family and mixed-use real estate loans. Our non-
residential real estate loans are generally secured by office buildings, medical facilities and retail shopping centers
that are primarily located in moderate income areas within our lending territory. We intend to continue to grow this
segment of our loan portfolio.
Our non-residential real estate loans are structured in a manner similar to our multi-family and mixed-use
real estate loans, typically at a fixed rate of interest for three to five years and then a rate that adjusts every three to
five years over the term of the loan, which is typically 15 years. Interest rates and payments on these loans generally
are based on the three-year or five-year constant maturity treasury index plus a margin. The lifetime interest rate
cap is five percentage points over the initial interest rate of the loan (four percentage points for loans with three-year
terms). Loans are secured by first mortgages that generally do not exceed 75% of the property’s appraised value.
Properties securing non-residential real estate loans are appraised by independent appraisers and inspected by us.
We also charge prepayment penalties, with five points of the outstanding loan balance generally being
charged on loans that refinance in the first year of the mortgage, scaling down to one point on loans that refinance in
year five. These loans are typically repaid or the term extended before maturity, in which case a new rate is
negotiated to meet market conditions and an extension of the loan is executed for a new term with a new
amortization schedule. Our non-residential real estate loans tend to refinance within the first five-year period.
Our assessment of credit risk and our underwriting standards and procedures for non-residential real estate
loans are similar to those applicable to our multi-family and mixed-use real estate loans. In reaching a decision on
whether to make a non-residential real estate loan, we consider the net operating income of the property, the
borrower’s expertise, credit history and profitability and the value of the underlying property. In addition, with
respect to rental properties, we will also consider the term of the lease and the credit quality of the tenants. We have
generally required that the properties securing non-residential real estate loans have debt service coverage ratios (the
ratio of earnings after subtracting all operating expenses to debt service payments) of at least 1.30%. Phase 1
environmental surveys and property inspections are required for all loans.
4
At December 31, 2008, we had $102.8 million in non-residential real estate loans outstanding, or 28.2% of
total loans. Originations in states other than New York represented 33.5% of our total originations of non-
residential real estate loans for the year ended December 31, 2008 and 22.8% for the year ended December 31, 2007.
At December 31, 2008, the largest outstanding non-residential real estate loan had an outstanding balance
of $4.5 million. This loan is secured by a multi-tenant office building located in Lawrenceville, New Jersey, and
was performing according to its terms at December 31, 2008. At December 31, 2008, the largest outstanding non-
residential real estate loan relationship with one borrower was comprised of six loans totaling $12.7 million secured
by six office buildings located in the Syracuse, New York area. These six loans were performing according to their
terms at December 31, 2008. As of December 31, 2008, the average balance of loans in our non-residential loan
portfolio was $1.2 million.
In addition, at December 31, 2008, we had one note, which is treated as a loan in our non-residential loan
portfolio with a net present value of $10.7 million that we received in connection with the sale of our First Avenue
branch office building. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Sale of New York City Branch Office.”
Equity Lines of Credit on Real Estate Loans. Northeast Community Bank offers equity lines of credit on
multi-family, mixed-use and non-residential real estate properties on which it holds the first mortgage.
For existing borrowers only, we offer an equity line of credit program secured by a second mortgage on the
borrower’s multi-family, mixed-use or non-residential property. All lines of credit are underwritten separately from
the first mortgage and support debt service ratios and loan-to-value ratios that when combined with the first
mortgage meet or exceed our current underwriting standards for multi-family, mixed-use and non-residential real
estate loans. Borrowers typically hold these lines in reserve and use them for ongoing property improvements or to
purchase additional properties when the opportunity arises.
Our equity lines of credit are typically interest only for the first five years and then the remaining term of
the line of credit is tied to the remaining term on the first mortgage on the multi-family, mixed-use or non-residential
property. After the first five years, a payment of both principal and interest is required. Interest rates and payments
on our equity lines of credit are indexed to the prime rate as published in The Wall Street Journal and adjusted as the
prime rate changes. Interest rate adjustments on equity lines of credit are limited to a specified maximum
percentage over the initial interest rate.
Commercial Loans. Continuing our plan to diversify our portfolio, both geographically and by product
type, in March 2007 we hired two individuals with significant commercial bank lending experience, a senior lending
officer and a commercial underwriter, for our new commercial lending department. Interest rates and payments on
our commercial loans are typically indexed to the prime rate as published in the Wall Street Journal and adjusted as
the prime rate changes. Our commercial loan portfolio increased from $5.5 million of commercial loans committed
with $3.0 million drawn at December 31, 2007 to $22.8 million of commercial loans committed with $7.6 million
drawn at December 31, 2008.
At December 31, 2008, the largest commercial loan was a line of credit totaling $6.0 million, with a zero
outstanding balance and a remaining available line of credit of $6.0 million. This loan is secured by the assets of a
construction business located in Astoria, New York.
The largest outstanding commercial loan was a line of credit of $2.4 million, with an outstanding balance
totaling $2.0 million and a remaining available line of credit of $371,000. The same borrower also has a
commercial term loan, with an outstanding balance of $34,000. These two loans are secured by the inventory of
numismatic coins that the borrower of these loans sells to the public via various telemarketing medias. The
borrower is located in Lakewood, New Jersey.
At December 31, 2008, the largest outstanding commercial loan relationship with one borrower was
comprised of two loans totaling $2.3 million, consisting of a line of credit of $3.3 million, with an outstanding
balance totaling $1.8 million and a remaining available line of credit of $1.5 million, and a term loan with an
5
outstanding balance of $480,000. The line of credit is secured by the assets of a construction business located in
Mineola, New York and the term loan is secured by a first mortgage on the nonresidential property occupied by the
business and the cash value of a whole life insurance policy on the owner of the business.
All the aforementioned commercial loans were performing according to their terms at December 31, 2008.
Construction Loans. We purchase participation interests in loans to finance the construction of multi-
family, mixed-use and non-residential buildings. We perform our own underwriting analysis on each of our
participation interests before purchasing such loans. Construction loans are typically for twelve to twenty-four
month terms and pay interest only during that period. All construction loans are underwritten as if they will be
rental properties and must meet our normal debt service and loan to value ratio requirements on an as completed
basis. The outstanding balance of construction loan participation interests purchased totaled $9.0 million at
December 31, 2008.
At December 31, 2008, the largest outstanding construction loan participation secured by one property was
comprised of three loans with an aggregate outstanding balance of $4.5 million (net of loans in process of $1.5
million) for a total potential exposure of $6.0 million. This balance represents our 25% participation ownership of
the loans. These loans are secured by a building undergoing renovation to become a hotel with 151 guestrooms
located in Long Beach, New York, and were performing according to their terms at December 31, 2008.
Consumer Loans. We offer loans secured by savings accounts or certificates of deposit (share loans) and
overdraft protection for checking accounts which is linked to statement savings accounts and has the ability to
transfer funds from the statement savings account to the checking account when needed to cover overdrafts. At
December 31, 2008, our portfolio of consumer loans was $114,000, or 0.03% of total loans.
Loan Underwriting Risks
Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects
of an increase in interest rates as compared to fixed-rate loans, the increased payments required of adjustable-rate
loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The
marketability of the underlying property also may be adversely affected in a high interest rate environment. In
addition, although adjustable-rate loans help make our loan portfolio more responsive to changes in interest rates,
the extent of this interest sensitivity is limited by the lifetime interest rate adjustment limits.
Multi-family, Mixed-use and Non-residential Real Estate Loans. Loans secured by multi-family, mixed-
use and non-residential real estate generally have larger balances and involve a greater degree of risk than one- to
four-family residential mortgage loans. Of primary concern in multi-family, mixed-use and non-residential real
estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments
on loans secured by income properties often depend on successful operation and management of the properties. As
a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse
conditions in the real estate market or the economy. To monitor cash flows on income producing properties, we
require borrowers to provide annual financial statements for all multi-family, mixed-use and non-residential real
estate loans. In reaching a decision on whether to make a multi-family, mixed-use or non-residential real estate
loan, we consider the net operating income of the property, the borrower’s expertise, credit history and profitability
and the value of the underlying property. In addition, with respect to non-residential real estate properties, we also
consider the term of the lease and the quality of the tenants. An appraisal of the real estate used as collateral for the
real estate loan is also obtained as part of the underwriting process. We have generally required that the properties
securing these real estate loans have debt service coverage ratios (the ratio of earnings after subtracting all operating
expenses to debt service payments) of at least 1.25%. In underwriting these loans, we take into account projected
increases in interest rates in determining whether a loan meets our debt service coverage ratios at the higher interest
rate under the adjustable rate mortgage. Environmental surveys and property inspections are utilized for all loans.
Commercial Loans. Unlike residential mortgage loans, which are generally made on the basis of a
borrower’s ability to make repayment from his or her employment or other income and are secured by real property
whose value tends to be more ascertainable, commercial loans are of higher risk and tend to be made on the basis of
6
a borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability
of funds for the repayment of commercial loans may depend substantially on the success of the business itself.
Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate
in value.
Construction Loans. We have purchased participation interests in loans to finance the construction of
multi-family, mixed-use and non-residential buildings. Construction financing affords the Bank the opportunity to
achieve higher interest rates and fees with shorter terms to maturity than do residential mortgage loans. However,
construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on
improved, occupied real estate due to (1) the increased difficulty at the time the loan is made of estimating the
building costs and the selling price of the property to be built; (2) the increased difficulty and costs of monitoring the
loan; (3) the higher degree of sensitivity to increases in market rates of interest; and (4) the increased difficulty of
working out loan problems. The Bank has sought to minimize this risk by limiting the amount of construction loan
participation interests outstanding at any time and by spreading the participations among multi-family, mixed-use
and non-residential projects. We perform our own underwriting analysis on each of our construction loan
participation interests before purchasing such loans and therefore believe there is no greater risk of default on these
obligations than on a construction loan originated by the Bank. See “Mortgage and Construction Loan Originations
and Participations” below.
Consumer Loans. Because the only consumer loans we offer are secured by passbook savings accounts,
certificates of deposit accounts or statement savings accounts, we do not believe these loans represent a risk of loss
to the Bank.
Mortgage and Construction Loan Originations and Participations. Our mortgage loan originations come
from a number of sources. The primary source of mortgage loan originations are referrals from brokers, existing
customers, advertising and personal contacts by our loan officers. Over the years, we have developed working
relationships with many mortgage brokers in our lending territory. Under the terms of the agreements with such
brokers, the brokers refer potential loans to us. The loans are underwritten and approved by us utilizing our
underwriting policies and standards. The mortgage brokers typically receive a fee from the borrower upon the
funding of the loans by us. Historically, mortgage brokers have been the source of the majority of the multi-family,
mixed-use and non-residential real estate loans originated by us. We generally retain for our portfolio all of the
loans that we originate.
During 2008, we purchased participation interests in loans to finance the construction of multi-family,
mixed-use and non-residential properties. The outstanding balance of the construction loan participation interests
purchased totaled $9.0 million at December 31, 2008. We perform our own underwriting analysis on each of our
participation interests before purchasing such loans and therefore believe there is no greater risk of default on these
obligations. However, in a purchased participation loan, we do not service the loan and thus are subject to the
policies and practices of the lead lender with regard to monitoring delinquencies, pursuing collections and instituting
foreclosure proceedings, all of which are reviewed and approved in advance of any participation transaction. We
review all of the documentation relating to any loan in which we participate, including annual financial statements
provided by a borrower. Additionally, we receive monthly statements on the loan from the lead lender.
We intend to continue to consider, on a case-by-case basis, additional participation purchases that conform
to our underwriting standards.
Commercial Loan Originations. We originate commercial loans from contacts made by our commercial
loan officer. Our commercial lending department does not utilize the services of loan brokers.
The Bank will consider granting credit to commercial and industrial businesses located within our lending
area which is defined as the Northeastern United States. The Bank will consider the credit needs of businesses
located in our lending area if we can effectively service the credit and if the customer has a strong financial position.
7
We will consider loans to small businesses with revenues normally not to exceed $65.0 million. The small
business may be one that manufactures wholesale or retail products and/or services. Generally, we will consider
loans to small businesses such as: retail sales and services, such as grocery, restaurants, clothing, furniture,
appliances, hardware, automotive parts, automobiles and trucks; wholesale businesses, such as automotive parts and
industrial parts and equipment; manufacturing businesses, such as tool and die shops and commercial manufacturers
and contractors with strong financials and well-known principals.
Mortgage and Construction Loan Approval Procedures and Authority. Our lending activities follow
written, non-discriminatory, underwriting standards and loan origination procedures established by our board of
directors and management. The board has granted the Mortgage Loan Origination Group (which is comprised of
our chief mortgage officer, all our loan officers and our staff attorney) with loan approval authority for mortgage
loans on income producing property and construction loans in amounts of up to $1.0 million.
Mortgage and construction loans in amounts between $1.0 million and $2.0 million, in addition to being
approved by the Loan Origination Group, must be approved by the president. Mortgage and construction loans in
amounts greater than $2.0 million, in addition to being approved by the Loan Origination Group, must be approved
by the president, the chief financial officer and a majority of the non-employee directors. At each monthly meeting
of the board of directors, the board ratifies all commitments issued, regardless of size.
Commercial Loan Approval Procedures and Authority. Our commercial lending activities follow written,
non-discriminatory, underwriting standards and loan origination procedures established by our board of directors
and management. The board has granted the Commercial Loan Origination Group (which is comprised of our
commercial loan officer, our commercial loan underwriter, our chief financial officer and our president) with loan
approval authority for commercial loans up to $2.0 million.
Loans in amounts greater than $2.0 million, in addition to being approved by the Commercial Loan
Origination Group, must be approved by a majority of the non-employee directors. At each monthly meeting of the
board of directors, the board ratifies all commitments issued, regardless of size.
Loan Commitments. We issue commitments for adjustable-rate loans conditioned upon the occurrence of
certain events. Commitments to originate adjustable-rate loans are legally binding agreements to lend to our
customers. Generally, our adjustable-rate loan commitments expire after 60 days.
Investment Activities
We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies and municipal governments, deposits at the Federal Home Loan Bank of New
York and certificates of deposit of federally insured institutions. Within certain regulatory limits, we also may
invest a portion of our assets in mutual funds. While we have the authority under applicable law to invest in
derivative securities, we had no investments in derivative securities at December 31, 2008.
At December 31, 2008, our securities and short-term investments totaled $39.2 million and consisted
primarily of $28.9 million in interest-earning deposits with the Federal Home Loan Bank of New York, $5.5 million
in short-term deposits, $2.3 million in mortgage-backed securities issued primarily by Fannie Mae, Freddie Mac and
Ginnie Mae, and $2.4 million in Federal Home Loan Bank of New York stock. At December 31, 2008, we had no
investments in callable securities.
Our securities and short-term investments are primarily viewed as a source of liquidity. Our investment
management policy is designed to provide adequate liquidity to meet any reasonable decline in deposits and any
anticipated increase in the loan portfolio through conversion of secondary reserves to cash and to provide safety of
principal and interest through investment in securities under limitations and restrictions prescribed in banking
regulations. Consistent with liquidity and safety requirements, our policy is designed to generate a significant
amount of stable income and to provide collateral for advances and repurchase agreements. The policy is also
designed to serve as a counter-cyclical balance to earnings in that the investment portfolio will absorb funds when
loan demand is low and will infuse funds when loan demand is high.
8
Deposit Activities and Other Sources of Funds
General. Deposits, borrowings and loan repayments are the major sources of our funds for lending and
other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.
Deposit Accounts. Except for certificates of deposit obtained through two nationwide listing services, as
described below, substantially all of our depositors are residents of the State of New York. We offer a variety of
deposit accounts with a range of interest rates and terms. Our deposits principally consist of interest-bearing
demand accounts (such as NOW and money market accounts), regular savings accounts, noninterest-bearing
demand accounts (such as checking accounts) and certificates of deposit. At December 31, 2008, we did not utilize
brokered deposits. Deposit account terms vary according to the minimum balance required, the time periods the
funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit
accounts, we consider the rates offered by our competition, our liquidity needs, profitability to us, maturity matching
deposit and loan products, and customer preferences and concerns. We generally review our deposit mix and
pricing weekly. Our current strategy is to offer competitive rates and to be in the middle of the market for rates on
all types of deposit products.
Our deposits are typically obtained from customers residing in or working in the communities in which our
branch offices are located, and we rely on our long-standing relationships with our customers and competitive
interest rates to retain these deposits. In the future, as we open new branches in other states, we expect our deposits
will also be obtained from those states. We may also, in the future, utilize our website to attract deposits.
During 2008, we offered non-brokered certificates of deposit through two nationwide certificate of deposit
listing services. Certificates of deposit are accepted from banks, credit unions, non-profit organizations and certain
corporations in amounts greater then $75,000 and less than $100,000.
Borrowings. We may utilize advances from the Federal Home Loan Bank of New York to supplement our
supply of investable funds. The Federal Home Loan Bank functions as a central reserve bank providing credit for its
member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank
and are authorized to apply for advances on the security of such stock and certain of our whole first mortgage loans
and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided
certain standards related to creditworthiness have been met. Advances are made under several different programs,
each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s
assessment of the institution’s creditworthiness.
Investment Advisory and Financial Planning Activities
In November 2007, Northeast Community Bank purchased for $2.0 million the operating assets of Hayden
Financial Group, LLC. The Bank formed a Division within the Bank known as Hayden Wealth Management
Group, and the Division offers investment advisory and financial planning services through a networking
arrangement with a registered broker-dealer and investment advisor.
Hayden Wealth Management Group performs a wide range of financial planning and investment advisory
services based on the needs of a diversified client base including, but not limited to: wealth management based on a
clients’ time dimension, risk aversion/tolerance, value system and specific purposes of a portfolio; transition
planning from one career to another, especially the transition to retirement; conducting risk assessment and
management on issues related to various kinds of insurance covered contingencies; and providing assistance relating
to the ultimate disposition of assets. In this capacity, Hayden Wealth Management Group coordinates with estate
planning attorneys as needed.
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Personnel
As of December 31, 2008, we had 88 full-time employees and two part-time employees, none of whom is
represented by a collective bargaining unit. We believe our relationship with our employees is good.
Legal Proceedings
From time to time, we may be party to various legal proceedings incident to our business. At December
31, 2008, we were not a party to any pending legal proceedings that we believe would have a material adverse effect
on our financial condition, results of operations or cash flows.
Subsidiaries
Northeast Community Bancorp’s only subsidiary is Northeast Community Bank. The Bank has one wholly
owned subsidiary, New England Commercial Properties LLC, a New York limited liability company. New England
Commercial Properties was formed in October 2007 to facilitate the purchase or lease of real property by the Bank
and to hold real estate owned acquired by the Bank through foreclosure or deed-in-lieu of foreclosure. As of
December 31, 2008, New England Commercial Properties, LLC had $1.2 million in assets including $832,00 related
to two foreclosed multi-family properties, one located in Hampton, New Hampshire which was subsequently sold in
March 2009, and one located in Newark, New Jersey.
General
REGULATION AND SUPERVISION
Northeast Community Bank, as an insured federal savings association, is subject to extensive regulation,
examination and supervision by the Office of Thrift Supervision, as its primary federal regulator, and the Federal
Deposit Insurance Corporation, as its deposits insurer. Northeast Community Bank is a member of the Federal
Home Loan Bank System and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund
managed by the Federal Deposit Insurance Corporation. Northeast Community Bank must file reports with the
Office of Thrift Supervision and the Federal Deposit Insurance Corporation concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. There are periodic examinations by the Office of Thrift
Supervision and, under certain circumstances, the Federal Deposit Insurance Corporation to evaluate Northeast
Community Bank’s safety and soundness and compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes. Any change in such policies, whether by the Office of Thrift Supervision, the
Federal Deposit Insurance Corporation or Congress, could have a material adverse impact on Northeast Community
Bancorp, Northeast Community Bancorp, MHC and Northeast Community Bank and their operations. Northeast
Community Bancorp and Northeast Community Bancorp, MHC, as savings and loan holding companies, are
required to file certain reports with, are subject to examination by, and otherwise must comply with the rules and
regulations of the Office of Thrift Supervision. Northeast Community Bancorp also is subject to the rules and
regulations of the Securities and Exchange Commission under the federal securities laws.
Certain of the regulatory requirements that are applicable to Northeast Community Bank, Northeast
Community Bancorp and Northeast Community Bancorp, MHC are described below. This description of statutes
and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on
Northeast Community Bank, Northeast Community Bancorp and Northeast Community Bancorp, MHC and is
qualified in its entirety by reference to the actual statutes and regulations.
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Regulation of Federal Savings Associations
Business Activities. Federal law and regulations govern the activities of federal savings banks, such as
Northeast Community Bank. These laws and regulations delineate the nature and extent of the business activities in
which federal savings banks may engage. In particular, certain lending authority for federal savings banks, e.g.,
commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the
institution’s capital or assets.
Capital Requirements. The Office of Thrift Supervision’s capital regulations require federal savings
institutions to meet three minimum capital standards: a 1.5% tangible capital to total assets ratio, a 4% leverage
ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system) and an 8% risk-
based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the
CAMELS system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard.
The Office of Thrift Supervision regulations also require that, in meeting the tangible, leverage and risk-based
capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard requires federal savings institutions to maintain Tier 1 (core) and total
capital (which is defined as core capital and supplementary capital, less certain specified deductions from total
capital such as reciprocal holdings of depository institution capital, instruments and equity investments) to risk-
weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, recourse obligations, residual interests and direct credit substitutes, are
multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation
based on the risks believed inherent in the type of asset. Core (Tier 1) capital is generally defined as common
stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related
surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of supplementary (Tier 2) capital currently
include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of
1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The Office of Thrift Supervision also has authority to establish individual minimum capital requirements in
appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of the
particular circumstances. At December 31, 2008, Northeast Community Bank exceeded each of these capital
requirements.
Prompt Corrective Regulatory Action. The Office of Thrift Supervision is required to take certain
supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree
of undercapitalization. Generally, a savings institution that has a ratio of total capital to risk weighted assets of less
than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total
assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be
“undercapitalized.” A savings institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio
of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and a
savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically
undercapitalized.” Subject to a narrow exception, the Office of Thrift Supervision is required to appoint a receiver
or conservator within specified time frames for an institution that is “critically undercapitalized.” An institution
must file a capital restoration plan with the Office of Thrift Supervision within 45 days of the date it receives notice
that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the
plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring
by regulators and restrictions on growth, capital distributions and expansion. “Significantly undercapitalized” and
“critically undercapitalized” institutions are subject to more extensive mandatory regulatory actions.
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The Office of Thrift Supervision could also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive officers and directors.
At December 31, 2008, the Bank met the criteria for being considered “well-capitalized.”
Community Reinvestment Act and Fair Lending Laws. All savings associations have a responsibility
under the Community Reinvestment Act and related regulations of the Office of Thrift Supervision to help meet the
credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its
examination of a federal savings association, the Office of Thrift Supervision is required to assess the association’s
record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the
Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics
specified in those statutes. An association’s failure to comply with the provisions of the Community Reinvestment
Act could result in denial of certain corporate applications, such as branches or mergers, or restrictions on its
activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in
enforcement actions by the Office of Thrift Supervision, as well as other Federal regulatory agencies and the
Department of Justice. The Bank received an “Outstanding” Community Reinvestment Act rating in its most recent
Federal examination.
Loans to One Borrower. Federal law provides that savings institutions are generally subject to the limits
on loans to one borrower applicable to national banks. Generally, subject to certain exceptions, savings institution
may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured
by specified readily-marketable collateral.
Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines
prescribing Standards for Safety and Soundness in various areas such as internal controls and information systems,
internal audit, loan documentation and credit underwriting, interest rate exposure, asset growth and quality, earnings
and compensation, fees and benefits. The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository institutions before capital becomes
impaired. If the Office of Thrift Supervision determines that a savings institution fails to meet any standard
prescribed by the guidelines, the Office of Thrift Supervision may require the institution to submit an acceptable
plan to achieve compliance with the standard.
Limitation on Capital Distributions. Office of Thrift Supervision regulations impose limitations upon all
capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and
payments to stockholders of another institution in a cash-out merger. Under the regulations, an application to and
the prior approval of the Office of Thrift Supervision is required before any capital distribution if the institution does
not meet the criteria for “expedited treatment” of applications under Office of Thrift Supervision regulations (i.e.,
generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital
distributions for the calendar year exceed net income for that year plus the amount of retained net income for the
preceding two years, the institution would be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with the Office of Thrift Supervision. If an application is
not required, the institution must still provide prior notice to the Office of Thrift Supervision of the capital
distribution if, like Northeast Community Bank, it is a subsidiary of a holding company. If Northeast Community
Bank’s capital were ever to fall below its regulatory requirements or the Office of Thrift Supervision notified it that
it was in need of increased supervision, its ability to make capital distributions could be restricted. In addition, the
Office of Thrift Supervision could prohibit a proposed capital distribution that would otherwise be permitted by the
regulation, if the agency determines that such distribution would constitute an unsafe or unsound practice.
Qualified Thrift Lender Test. Federal law requires savings institutions to meet a qualified thrift lender
test. Under the test, a savings association is required to either qualify as a “domestic building and loan association”
under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified
liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to
conduct business) in certain “qualified thrift investments” (primarily multi-family residential mortgages and related
12
investments, including certain mortgage-backed securities but also including education, credit card and small
business loans) in at least 9 months out of each 12 month period.
A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and
may be required to convert to a bank charter. As of December 31, 2008, Northeast Community Bank maintained
90.0% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test.
Transactions with Related Parties. Federal law permits Northeast Community Bank to lend to, and engage
in certain other transactions with (collectively, “covered transactions”), “affiliates” (i.e., generally, any company that
controls or is under common control with an institution), including Northeast Community Bancorp and Northeast
Community Bancorp, MHC and their other subsidiaries. The aggregate amount of covered transactions with any
individual affiliate is limited to 10% of the capital and surplus of the savings institution. The aggregate amount of
covered transactions with all affiliates is limited to 20% of the savings institution’s capital and surplus. Loans and
other specified transactions with affiliates are required to be secured by collateral in an amount and of a type
described in federal law. The purchase of low quality assets from affiliates is generally prohibited. Transactions
with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding
companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.
The Sarbanes-Oxley Act generally prohibits loans by Northeast Community Bancorp to its executive
officers and directors. However, the Sarbanes-Oxley Act contains a specific exemption from such prohibition for
loans by Northeast Community Bank to its executive officers and directors in compliance with federal banking
regulations. Federal regulations require that all loans or extensions of credit to executive officers and directors of
insured institutions must be made on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and must not involve more than the normal risk
of repayment or present other unfavorable features. Northeast Community Bank is therefore prohibited from
making any new loans or extensions of credit to executive officers and directors at different rates or terms than those
offered to the general public. Notwithstanding this rule, federal regulations permit Northeast Community Bank to
make loans to executive officers and directors at reduced interest rates if the loan is made under a benefit program
generally available to all other employees and does not give preference to any executive officer or director over any
other employee. Loans to executive officers are subject to additional limitations based on the type of loan involved.
In addition, loans made to a director or executive officer in an amount that, when aggregated with the
amount of all other loans to the person and his or her related interests, are in excess of the greater of $25,000 or 5%
of Northeast Community Bank’s capital and surplus, up to a maximum of $500,000, must be approved in advance
by a majority of the disinterested members of the board of directors.
Enforcement. The Office of Thrift Supervision has primary enforcement responsibility over federal
savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties,
including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range
from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution
of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations
and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The Federal Deposit
Insurance Corporation has authority to recommend to the Director of the Office of Thrift Supervision that
enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the
Federal Deposit Insurance Corporation has authority to take such action under certain circumstances. Federal law
also establishes criminal penalties for certain violations.
Assessments. Federal savings banks are required to pay assessments to the Office of Thrift Supervision to
fund its operations. The general assessments, paid on a semi-annual basis, are based upon the savings institution’s
total assets, including consolidated subsidiaries, financial condition and complexity of its portfolio. The Office of
Thrift Supervision assessments paid by Northeast Community Bank for the year ended December 31, 2008 totaled
$88,000.
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Insurance of Deposit Accounts. Northeast Community Bank’s deposits are insured up to applicable limits
by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation. The Deposit Insurance Fund is the
successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006.
Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned
to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors,
with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to
which it is assigned. For 2008, assessments ranged from five to forty-three basis points of assessable deposits. Due
to losses incurred by the Deposit Insurance Fund in 2008 as a result of failed institutions, and anticipated future
losses, the Federal Deposit Insurance Corporation has proposed to adopt an across the board seven basis point
increase in the assessment range for the first quarter of 2009. The Federal Deposit Insurance Corporation has
adopted further refinements to its risk-based assessment system that are effective April 1, 2009 and effectively make
the range seven to 77 1/2 basis points. The Federal Deposit Insurance Corporation has also imposed a special
emergency assessment of up to 20 basis points of assessable deposits, as of June 30, 2009, in order to cover the
losses to the Deposit Insurance Fund. The Federal Deposit Insurance Corporation may adjust rates uniformly from
one quarter to the next, except that no adjustment can exceed three basis points without notice and comment
rulemaking. No institution may pay a dividend if in default of the FDIC assessment.
Federal law also provided for a one-time credit for eligible institutions based on their assessment base as of
December 31, 1996. Subject to certain limitations, credits could be used beginning in 2007 to offset assessments
until exhausted. Northeast Community Bank’s one-time credit approximated $308,000, of which $191,923 was
used to offset assessments in 2007 and 2008, and $116,077 remains to offset 2009 assessments. The Federal
Deposit Insurance Reform Act of 2005 also provided for the possibility that the Federal Deposit Insurance
Corporation may pay dividends to insured institutions once the Deposit Insurance fund reserve ratio equals or
exceeds 1.35% of estimated insured deposits.
In addition to the assessment for deposit insurance, institutions are required to make payments on bonds
issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. That
payment is established quarterly and during the calendar year ending December 31, 2008 averaged 1.2 basis points
of assessable deposits.
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant
increase in insurance premiums would likely have an adverse effect on the operating expenses and results of
operations of Northeast Community Bank. Management cannot predict what insurance assessment rates will be in
the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that
the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit
Insurance Corporation or the Office of Thrift Supervision. The management of Northeast Community Bank does
not know of any practice, condition or violation that might lead to termination of deposit insurance.
Federal Home Loan Bank System. Northeast Community Bank is a member of the Federal Home Loan
Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member institutions. Northeast Community Bank, as a member of the Federal
Home Loan Bank of New York, is required to acquire and hold shares of capital stock in that Federal Home Loan
Bank. Northeast Community Bank was in compliance with this requirement with an investment in Federal Home
Loan Bank stock at December 31, 2008 of $2.4 million. Federal Home Loan Bank advances must be secured by
specified types of collateral.
The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts in the
late 1980s and to contribute funds for affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan
Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on
future Federal Home Loan Bank advances increased, our net interest income would likely also be reduced.
14
Federal Reserve System. The Federal Reserve Board regulations require savings institutions to maintain
non-interest earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (NOW)
and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate
transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $43.9
million; a 10% reserve ratio is applied above $43.9 million. The first $9.3 million of otherwise reservable balances
are exempted from the reserve requirements. The amounts are adjusted annually. Northeast Community Bank
complies with the foregoing requirements.
Recent Legislation
Troubled Asset Relief Program. On October 3, 2008, the Emergency Economic Stabilization Act of 2008
(“EESA”) was enacted establishing the Troubled Asset Relief Program (“TARP”). On October 14, 2008, Treasury
announced its intention to inject capital into U.S. financial institutions under the TARP Capital Purchase Program
(“CPP”) and since has injected capital into many financial institutions. The Board of Directors of the Company
determined not to participate in the CPP.
Temporary Liquidity Guarantee Program. On November 21, 2008, the Board of Directors of the FDIC
adopted a final rule relating to the Temporary Liquidity Guarantee Program (“TLG Program”). The TLG Program
was announced by the FDIC on October 14, 2008, preceded by the determination of systemic risk by Treasury, as an
initiative to counter the system-wide crisis in the nation’s financial sector. Under the TLG Program the FDIC will
(i) guarantee, through the earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt issued by
participating institutions and (ii) provide full FDIC deposit insurance coverage for non-interest bearing transaction
deposit accounts, Negotiable Order of Withdrawal accounts paying less than 0.5% interest per annum and Interest
on Lawyers Trust Accounts held at participating FDIC-insured institutions through December 31, 2009. Coverage
under the TLG Program was available for the first 30 days without charge. The fee assessment for coverage of
senior unsecured debt ranges from 50 basis points to 100 basis points per annum, depending on the initial maturity
of the debt. The fee assessment for deposit insurance coverage is 10 basis points per quarter on amounts in covered
accounts exceeding $250,000. The Bank elected to participate in the unlimited non-interest bearing transaction
account coverage and the Bank and its holding companies elected to not participate in the unsecured debt guarantee
program.
American Recovery and Reinvestment Act of 2009. On February 17, 2009, the American Recovery and
Reinvestment Act of 2009 (“ARRA”) was enacted. The ARRA, commonly known as the economic stimulus or
economic recovery package, includes a wide variety of programs intended to stimulate the economy and provide for
extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain new executive
compensation and corporate expenditure limits on all current and future TARP recipients until the institution has
repaid Treasury, which is now permitted under ARRA without penalty and without the need to raise new capital,
subject to Treasury’s consultation with the recipient’s appropriate regulatory agency.
Future Legislation. Various legislation affecting financial institutions and the financial industry is from
time to time introduced in Congress. Such legislation may change banking statutes and the operating environment
of the Company and its subsidiaries in substantial and unpredictable ways, and could increase or decrease the cost of
doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any
of this potential legislation will be enacted, and if enacted, the effect that it or any implementing regulations, would
have on the financial condition or results of operations of the Company or any of its subsidiaries. With the recent
enactments of EESA and ARRA, the nature and extent of future legislative and regulatory changes affecting
financial institutions is very unpredictable at this time.
Holding Company Regulation
General. Northeast Community Bancorp and Northeast Community Bancorp, MHC are savings and loan
holding companies within the meaning of federal law. As such, they are registered with the Office of Thrift
Supervision and are subject to Office of Thrift Supervision regulations, examinations, supervision, reporting
requirements and regulations concerning corporate governance and activities. In addition, the Office of Thrift
Supervision has enforcement authority over Northeast Community Bancorp and Northeast Community Bancorp,
15
MHC and their non-savings institution subsidiaries. Among other things, this authority permits the Office of Thrift
Supervision to restrict or prohibit activities that are determined to be a serious risk to Northeast Community Bank.
Restrictions Applicable to Mutual Holding Companies. According to federal law and Office of Thrift
Supervision regulations, a mutual holding company, such as Northeast Community Bancorp, MHC, may generally
engage in the following activities: (1) investing in the stock of a bank; (2) acquiring a mutual association through
the merger of such association into a bank subsidiary of such holding company or an interim bank subsidiary of such
holding company; (3) merging with or acquiring another holding company, one of whose subsidiaries is a bank; and
(4) any activity approved by the Federal Reserve Board for a bank holding company or financial holding company
or previously approved by Office of Thrift Supervision for multiple savings and loan holding companies. In
addition, mutual holding companies may engage in activities permitted for financial holding companies. Financial
holding companies may engage in a broad array of financial service activities including insurance and securities.
Federal law prohibits a savings and loan holding company, including a federal mutual holding company,
from directly or indirectly, or through one or more subsidiaries, acquiring more than 5% of the voting stock of
another savings association, or its holding company, without prior written approval of the Office of Thrift
Supervision. Federal law also prohibits a savings and loan holding company from acquiring more than 5% of a
company engaged in activities other than those authorized for savings and loan holding companies by federal law, or
acquiring or retaining control of a depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating applications by holding companies to acquire savings associations, the Office of Thrift
Supervision must consider the financial and managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.
The Office of Thrift Supervision is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings associations in more than one state, except: (1) the
approval of interstate supervisory acquisitions by savings and loan holding companies, and (2) the acquisition of a
savings association in another state if the laws of the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company
acquisitions.
Stock Holding Company Subsidiary Regulation. The Office of Thrift Supervision has adopted regulations
governing the two-tier mutual holding company form of organization and subsidiary stock holding companies that
are controlled by mutual holding companies. Northeast Community Bancorp is the stock holding company
subsidiary of Northeast Community Bancorp, MHC. Northeast Community Bancorp is permitted to engage in
activities that are permitted for Northeast Community Bancorp, MHC subject to the same restrictions and
conditions.
Waivers of Dividends by Northeast Community Bancorp, MHC. Office of Thrift Supervision regulations
require Northeast Community Bancorp, MHC to notify the Office of Thrift Supervision if it proposes to waive
receipt of dividends from Northeast Community Bancorp. The Office of Thrift Supervision reviews dividend
waiver notices on a case-by-case basis, and, in general, does not object to any such waiver if: (i) the waiver would
not be detrimental to the safe and sound operation of the savings association; and (ii) the mutual holding company’s
board of directors determines that such waiver is consistent with such directors’ fiduciary duties to the mutual
holding company’s members. Northeast Community Bancorp, MHC waived receipt of dividends from Northeast
Community Bancorp in 2008.
Conversion of Northeast Community Bancorp, MHC to Stock Form. Office of Thrift Supervision
regulations permit Northeast Community Bancorp, MHC to convert from the mutual form of organization to the
capital stock form of organization. There can be no assurance when, if ever, a conversion transaction will occur, and
the board of directors has no current intention or plan to undertake a conversion transaction. In a conversion
transaction, a new holding company would be formed as the successor to Northeast Community Bancorp, Northeast
Community Bancorp, MHC’s corporate existence would end, and certain depositors of Northeast Community Bank
would receive the right to subscribe for additional shares of the new holding company. In a conversion transaction,
each share of common stock held by stockholders other than Northeast Community Bancorp, MHC would be
16
automatically converted into a number of shares of common stock of the new holding company based on an
exchange ratio designed to ensure that stockholders other than Northeast Community Bancorp, MHC own the same
percentage of common stock in the new holding company as they owned in Northeast Community Bancorp
immediately before conversion. The total number of shares held by stockholders other than Northeast Community
Bancorp, MHC after a conversion transaction would be increased by any purchases by such stockholders in the
stock offering conducted as part of the conversion transaction.
Acquisition of Control. Under the federal Change in Bank Control Act, a notice must be submitted to the
Office of Thrift Supervision if any person (including a company), or group acting in concert, seeks to acquire direct
or indirect “control” of a savings and loan holding company or savings association. An acquisition of “control” can
occur upon the acquisition of 10% or more of the voting stock of a savings and loan holding company or savings
institution or as otherwise defined by the Office of Thrift Supervision. Under the Change in Bank Control Act, the
Office of Thrift Supervision has 60 days from the filing of a complete notice to act, taking into consideration certain
factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition.
Any company that so acquires control would then be subject to regulation as a savings and loan holding company.
Federal Securities Laws
Northeast Community Bancorp’s common stock is registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934. Northeast Community Bancorp is subject to the
information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act
of 1934.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors annually elects the executive officers of Northeast Community Bancorp, MHC,
Northeast Community Bancorp and Northeast Community Bank, who serve at the Board’s discretion. Our executive
officers are:
Name
Kenneth A. Martinek
Salvatore Randazzo
Susan Barile
Position
President and Chief Executive Officer of the MHC, the
Company and the Bank
Executive Vice President and Chief Financial Officer of the
MHC, the Company and the Bank
Executive Vice President and Chief Mortgage Officer of the
Bank
Below is information regarding our executive officer who is not also a director. Age presented is as of
December 31, 2008.
Susan Barile has served as Executive Vice President and Chief Mortgage Officer of the Bank since October
2006. Prior to serving in this position, Ms. Barile spent 11 years as a multi-family, mixed-use and non-residential
loan officer at the Bank. Age 43.
ITEM 1A. RISK FACTORS
Changes in interest rates may hurt our earnings and asset value.
Our net interest income is the interest we earn on loans and investment less the interest we pay on our
deposits and borrowings. Our net interest margin is the difference between the yield we earn on our assets and the
interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could
adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our
assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise
17
or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in
duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest
rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to
contract until the yield catches up. Changes in the slope of the “yield curve”—or the spread between short-term and
long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping,
meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than
our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as
our cost of funds increases relative to the yield we can earn on our assets. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Risk Management—Interest Rate Risk Management.”
Our emphasis on multi-family residential, mixed-use and non-residential real estate lending and our
expansion into commercial lending and participations in construction loans could expose us to increased
lending risks.
Our primary business strategy centers on continuing our emphasis on multi-family, mixed-use and non-
residential real estate loans. We have grown our loan portfolio in recent years with respect to these types of loans
and intend to continue to emphasize these types of lending. At December 31, 2008, $347.3 million, or 95.3%, of our
loan portfolio consisted of multi-family residential, mixed-use and non-residential real estate loans. As a result, our
credit risk profile will be higher than traditional thrift institutions that have higher concentrations of one- to four-
family residential loans.
Loans secured by multi-family, mixed-use and non-residential real estate generally expose a lender to
greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the
loans often depends on the successful operation of the property and the income stream of the underlying property.
Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to
one- to four-family residential mortgage loans. Accordingly, an adverse development with respect to one loan or
one credit relationship can expose us to greater risk of loss compared to an adverse development with respect to a
one- to four-family residential mortgage loan. We seek to minimize these risks through our underwriting policies,
which require such loans to be qualified on the basis of the property’s net income and debt service ratio; however,
there is no assurance that our underwriting policies will protect us from credit-related losses.
As with loans secured by multi-family, mixed-use and non-residential real estate, commercial loans tend to
be of higher risk than one- to-four family residential mortgage loans. We seek to minimize the risks involved in
commercial lending by underwriting such loans on the basis of the cash flows produced by the business; by
requiring that such loans be collateralized by various business assets, including inventory, equipment, and accounts
receivable, among others; and by requiring personal guarantees, whenever possible. However, the capacity of a
borrower to repay a commercial loan is substantially dependent on the degree to which his or her business is
successful. In addition, the collateral underlying such loans may depreciate over time, may not be conducive to
appraisal, or may fluctuate in value, based upon the business’ results. At December 31, 2008, $7.6 million, or 2.1%,
of our loan portfolio consisted of commercial loans.
Our participation interests in construction loans present a greater level of risk than loans secured by
improved, occupied real estate due to: (1) the increased difficulty at the time the loan is made of estimating the
building costs and the selling price of the property to be built; (2) the increased difficulty and costs of monitoring the
loan; (3) the higher degree of sensitivity to increases in market rates of interest; and (4) the increased difficulty of
working out loan problems. We have sought to minimize this risk by limiting the amount of construction loan
participation interests outstanding at any time and spreading the participations between multi-family, mixed-use and
non-residential projects. At December 31, 2008, the outstanding balance of our construction loan participation
interests totaled $9.0 million, or 2.5% of our total loan portfolio.
18
Our expanded lending territory could expose us to increased lending risks.
We have expanded our lending territory beyond the New York metropolitan area to include all of New
York, Massachusetts, New Jersey, Connecticut, Pennsylvania, New Hampshire and Rhode Island. In January 2004,
we opened a loan production office in Wellesley, Massachusetts which serves Massachusetts, New Hampshire and
Rhode Island. We relocated this office to Danvers, Massachusetts in March 2009. We expect to open a full service
branch at this location in April 2009 and expect to open another full service branch in Plymouth, Massachusetts in
the second quarter of 2009. In 2008, approximately 40.1% of our total loan originations were outside the state of
New York. While we have over fifty years of experience in multi-family and mixed-use real estate lending in the
New York metropolitan area and have significant expertise in non-residential real estate lending, our experience in
our expanded lending territory is more limited. We have experienced loan officers throughout our lending area and
we apply the same underwriting standards to all of our loans, regardless of their location. However, there is no
assurance that our loss experience in the New York metropolitan area will be the same in our expanded lending
territory. Because we only recently increased the number of out-of-state real estate loans in our portfolio, the lack of
delinquencies and defaults in our loan portfolio over the past five years might not be representative of the level of
delinquencies and defaults that could occur as we continue to expand our real estate loan originations outside of the
New York metropolitan area.
We may not be able to successfully implement our plans for growth.
At December 31, 2008, we operated out of our main office, our five other full-service branch offices in the
New York metropolitan area, and our loan production office in Wellesley, Massachusetts. Recently, we began to
implement a growth strategy that expands our presence in other select markets in the Northeastern United States.
We relocated the loan production office to Danvers, Massachusetts in March 2009. We expect to open a full service
branch at this location in April 2009 and expect to open another full service branch in Plymouth, Massachusetts in
the second quarter of 2009. We expect to incur approximately $300,000 in expenses relating to these two new
branches and anticipate that we will incur approximately $50,000 in expenses relating to our search for possible
additional locations.
We intend to continue to pursue opportunities to expand our branch network and our lending operations. In
connection with the expansion of our branch network and lending operations, we would need to hire new retail
branch personnel, mortgage lending, mortgage servicing and other employees to support our expanded
infrastructure. Our ability to operate successfully in new markets will be dependent, in part, on our ability to
identify and retain personnel familiar with the new markets. There is no assurance that we will be successful in
implementing our expansion plans or that we will be able to hire the employees necessary to implement our plans.
If we do not achieve profitability on new branches, the new branches may hurt our earnings.
As we expand our branch and lending network, there is no assurance that our expansion strategy will be
accretive to our earnings. Numerous factors will affect our expansion strategy, such as our ability to select suitable
locations for branches and loan production offices, real estate acquisition costs, competition, interest rates,
managerial resources, our ability to hire and retain qualified personnel, the effectiveness of our marketing strategy
and our ability to attract deposits. We can provide no assurance that we will be successful in increasing the volume
of our loans and deposits by expanding our branch and lending network. Building and staffing new branch offices
and loan production offices will increase our operating expenses. We can provide no assurance that we will be able
to manage the costs and implementation risks associated with this strategy so that expansion of our branch and
lending network will be profitable.
Our allowance for loan losses may be inadequate, which could hurt our earnings.
When borrowers default and do not repay the loans that we make to them, we may lose money. The
allowance for loan losses is the amount estimated by management as necessary to cover probable 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
19
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. If our estimates and judgments regarding such matters
prove to be incorrect, our allowance for loan losses might not be sufficient, and additional loan loss provisions might
need to be made. Depending on the amount of such loan loss provisions, the adverse impact on our earnings could
be material.
In addition, bank regulators may require us to make a provision for loan losses or otherwise recognize
further loan charge-offs following their periodic review of our loan portfolio, our underwriting procedures, and our
loan loss allowance. Any increase in our allowance for loan losses or loan charge-offs as required by such
regulatory authorities could have a material adverse effect on our financial condition and results of operations.
Please see “Allowance for Loan Losses” under “Critical Accounting Policies” in Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” for a discussion of the procedures we follow in
establishing our loan loss allowance.
Strong competition within our primary market area and our lending territory could hurt our profits and slow
growth.
We face intense competition both in making loans in our lending territory and attracting deposits in our
primary market area. This competition has made it more difficult for us to make new loans and at times has forced
us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on our loans
and paying more on our deposits, which would reduce net interest income. Competition also makes it more difficult
to grow loans and deposits. As of June 30, 2008, the most recent date for which information is available from the
Federal Deposit Insurance Corporation, we held less than 0.08% of the deposits in Kings and New York counties,
New York, and approximately 0.60% and 0.19% of the deposits in Bronx and Westchester Counties, New York,
respectively. Competition also makes it more difficult to hire and retain experienced employees. Some of the
institutions with which we compete have substantially greater resources and lending limits than we have and may
offer services that we do not provide. We expect competition to increase in the future as a result of legislative,
regulatory and technological changes and the continuing trend of consolidation in the financial services industry.
Our profitability depends upon our continued ability to compete successfully in our primary market area and our
lending territory.
Changes in economic conditions could cause an increase in delinquencies and non-performing assets,
including loan charge-offs, which could hurt our income and growth.
Our loan portfolio includes primarily real estate secured loans, demand for which may decrease during
economic downturns as a result of, among other things, an increase in unemployment, a decrease in real estate
values or increases in interest rates. These factors could depress our earnings and consequently our financial
condition because customers may not want or need our products and services; borrowers may not be able to repay
their loans; the value of the collateral securing our loans to borrowers may decline; and the quality of our loan
portfolio may decline. Any of the latter three scenarios could cause an increase in delinquencies and non-
performing assets or require us to “charge-off” a percentage of our loans and/or increase our provisions for loan
losses, which would reduce our earnings. We have recently experienced an increase in non-performing and
classified assets. For more information, see Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Risk Management.”
Future FDIC Assessments Will Hurt Our Earnings.
In February 2009, the FDIC adopted an interim final rule imposing a special assessment on all insured
institutions due to recent bank and savings association failures. The emergency assessment, of up to 20 basis points
of assessed deposits as of June 30, 2009, will be collected on September 30, 2009. The special assessment will
negatively impact the Company’s earnings and the Company expects that non-interest expenses will increase as
much as $522,000 in 2009 as compared to 2008 as a result of this special assessment. In addition, the interim rule
would also permit the FDIC to impose additional emergency special assessments after June 30, 2009, of up to 10
basis points per quarter if necessary to maintain public confidence in federal deposit insurance, or as a result of
20
deterioration in the deposit insurance fund reserve ratio due to institution failures. Any additional emergency special
assessment imposed by the FDIC will further hurt the Company’s earnings.
The market price of our common stock may be materially adversely affected by market volatility.
Many publicly traded financial services companies have recently experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating performance or prospects of such
companies. We may experience market fluctuations that are not directly related to our operating performance but
are influenced by the market’s perception of the state of the financial services industry in general and, in particular,
the market’s assessment of general credit quality conditions, including default and foreclosure rates in the industry.
The loss of our President and Chief Executive Officer could hurt our operations.
We rely heavily on our President and Chief Executive Officer, Kenneth A. Martinek. The loss of Mr.
Martinek could have an adverse effect on us because, as a small community bank, Mr. Martinek has more
responsibility than would be typical at a larger financial institution with more employees. In addition, as a small
community bank, we have fewer senior management-level personnel who are in position to succeed and assume the
responsibilities of Mr. Martinek.
We operate in a highly regulated environment and we may be adversely affected by changes in laws and
regulations.
We are subject to extensive regulation, supervision and examination by the Office of Thrift Supervision,
our primary federal regulator, and by the Federal Deposit Insurance Corporation, as insurer of our deposits.
Northeast Community Bancorp, MHC, Northeast Community Bancorp and Northeast Community Bank are all
subject to regulation and supervision by the Office of Thrift Supervision. Such regulation and supervision governs
the activities in which an institution and its holding company may engage, and are intended primarily for the
protection of the insurance fund and the depositors and borrowers of Northeast Community Bank rather than for
holders of Northeast Community Bancorp common stock. Regulatory authorities have extensive discretion in their
supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification
of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and
oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a
material impact on our operations.
Northeast Community Bancorp, MHC’s majority control of our common stock will enable it to exercise
voting control over most matters put to a vote of stockholders and will prevent stockholders from forcing a
sale or a second-step conversion transaction you may like.
Northeast Community Bancorp, MHC, owns a majority of Northeast Community Bancorp’s common stock
and, through its board of directors, will be able to exercise voting control over most matters put to a vote of
stockholders. The same directors and officers who manage Northeast Community Bancorp and Northeast
Community Bank also manage Northeast Community Bancorp, MHC. As a federally chartered mutual holding
company, the board of directors of Northeast Community Bancorp, MHC must ensure that the interests of depositors
of Northeast Community Bank are represented and considered in matters put to a vote of stockholders of Northeast
Community Bancorp. Therefore, the votes cast by Northeast Community Bancorp, MHC may not be in your
personal best interests as a stockholder. For example, Northeast Community Bancorp, MHC may exercise its voting
control to defeat a stockholder nominee for election to the board of directors of Northeast Community Bancorp. In
addition, stockholders will not be able to force a merger or second-step conversion transaction without the consent
of Northeast Community Bancorp, MHC. Some stockholders may desire a sale or merger transaction, since
stockholders typically receive a premium for their shares, or a second-step conversion transaction, since fully
converted institutions tend to trade at higher multiples than mutual holding companies.
21
The Office of Thrift Supervision policy on remutualization transactions could prohibit acquisition of
Northeast Community Bancorp, which may adversely affect our stock price.
Current Office of Thrift Supervision regulations permit a mutual holding company to be acquired by a
mutual institution in a remutualization transaction. However, the Office of Thrift Supervision has issued a policy
statement indicating that it views remutualization transactions as raising significant issues concerning disparate
treatment of minority stockholders and mutual members of the target entity and raising issues concerning the effect
on the mutual members of the acquiring entity. Under certain circumstances, the Office of Thrift Supervision
intends to give these issues special scrutiny and reject applications providing for the remutualization of a mutual
holding company unless the applicant can clearly demonstrate that the Office of Thrift Supervision’s concerns are
not warranted in the particular case. Should the Office of Thrift Supervision prohibit or otherwise restrict these
transactions in the future, our per share stock price may be adversely affected. In addition, Office of Thrift
Supervision regulations prohibit, for three years following completion of our initial public offering in July 2006, the
acquisition of more than 10% of any class of equity security issued by us without the prior approval of the Office of
Thrift Supervision.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
22
ITEM 2.
PROPERTIES
We conduct our business through our main office and five other full-service branch offices. The following
table sets forth certain information relating to these facilities as of December 31, 2008.
Location
Corporate Headquarters and
Main Office:
325 Hamilton Avenue
White Plains, New York 10601
Branch Offices:
1470 First Avenue
New York, NY 10021(1)
590 East 187th Street
Bronx, New York 10458
2047 86th Street
Brooklyn, New York 11214
242 West 23rd Street (2)
New York, NY 10011
1751 Second Avenue
New York, NY 10128
Other Properties:
300 Hamilton Avenue
White Plains, New York 10601
1353-55 First Avenue
New York, NY 10021(3)
40 Grove Street (4)
Wellesley, Massachusetts 02482
830 Post Road East
Westport, Connecticut 06880
Year
Opened
Date of Lease
Expiration
Owned/
Leased
Net Book Value
(Dollars in thousands)
1994
N/A
Owned
$ 1,027
2006
04/30/2011
Leased
1972
1988
1996
N/A
N/A
Owned
Owned
N/A
Owned/Leased
1978
09/30/2015
Leased
152
517
883
967
36
2000
05/31/2010
Leased
52
1946
2109
Leased
2004
02/28/2009
Leased
2007
4/30/2010
Leased
-
1
-
(1) The Bank has temporarily relocated its branch office at 1353-55 First Avenue to this property due to the sale
and renovation of the building located at 1353-55 First Avenue. See footnote 3 below.
(2) This property is owned by us, but is subject to a 99 year ground lease, the term of which expires in 2084.
(3) In June 2007, the Bank sold this building and temporarily relocated its branch office located at 1353-55 First
Avenue to 1470 First Avenue, New York, New York, while 1353-55 First Avenue is being renovated. On June
30, 2007, the Bank entered into a 99 year lease agreement for office space on the first floor of the building at
1353-55 First Avenue so that the Bank may continue to operate a branch office at this location after the building
has been renovated. The lease will commence upon completion of construction at 1353-55 First Avenue, which
is presently expected to be in 2011.
(4) The loan production office at this location was relocated to Danvers, Massachusetts on March 6, 2009. The
Bank is scheduled to open a full service branch at the Danvers location in April 2009. In addition, the Bank
expects to open a full service branch in Plymouth, Massachusetts in the second quarter of 2009. The Bank will
own the properties at both new locations.
23
ITEM 3.
LEGAL PROCEEDINGS
Legal Proceedings
From time to time, we may be party to various legal proceedings incident to our business. At December
31, 2008, we were not a party to any pending legal proceedings that we believe would have a material adverse effect
on our financial condition, results of operations or cash flows.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is listed on the Nasdaq Global Market (“NASDAQ”) under the trading
symbol “NECB.” The following table sets forth the high and low sales prices of the common stock, as reported by
NASDAQ, and the dividends paid by the Company during each quarter of the two most recent fiscal years. See
Item 1, “Business—Regulation and Supervision—Regulation of Federal Savings Institutions—Limitation on Capital
Distributions” and Note 2 in the Notes to the Consolidated Financial Statements for more information relating to
restrictions on dividends.
2008:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2007:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividends
High
Low
$0.03
0.03
0.03
0.03
N/A
N/A
$0.03
0.03
$12.50
11.98
11.47
9.51
$12.47
12.60
12.18
12.89
$11.40
11.24
8.00
6.00
$11.50
11.35
9.25
10.00
Northeast Community Bancorp, MHC, the Company’s majority stockholder, has waived receipt of all
dividends declared by the Company. During 2008, the aggregate amount of dividends waived was $873,000.
As of March 8, 2009, there were approximately 304 holders of record of the Company’s common stock.
The Company did not repurchase any of its common stock during the fourth quarter of 2008 and, at
December 31, 2008, we had no publicly announced repurchase plans or programs.
24
ITEM 6.
SELECTED FINANCIAL DATA
Financial Condition Data:
Total assets..............................................................
Cash and cash equivalents.......................................
Securities held to maturity.......................................
Securities available for sale .....................................
Loans receivable, net...............................................
Bank owned life insurance ......................................
Deposits...................................................................
Federal Home Loan Bank advances ........................
Total stockholders’ equity .......................................
Operating Data:
Interest income .........................................................
Interest expense........................................................
Net interest income...................................................
Provision for loan losses...........................................
Net interest income after provision for loan losses...
Gain (loss) on sale of premises and equipment ........
Noninterest income ..................................................
Noninterest expenses................................................
Income before income taxes.....................................
Provision for income taxes .......................................
Net income ...............................................................
At or For the Years Ended December 31,
2008
2007
2006
2005
2004
(Dollars in thousands, except per share data)
$ 424,228
36,534
$ 343,895
39,146
$ 288,417
36,749
$ 238,821 $ 237,300
48,555
27,389
2,078
182
363,616
8,902
261,430
40,000
110,502
2,875
320
283,133
8,515
225,978
–
108,829
27,455
355
201,306
8,154
188,592
–
96,751
12,228
362
190,896
–
193,314
–
43,120
11,395
473
167,690
–
193,617
–
41,146
$ 21,947
8,550
13,397
411
12,986
–
1,794
11,500
3,280
1,178
$ 2,102
$ 17,602
5,918
11,684
338
11,346
18,962
805
9,826
21,287
9,150
$ 12,137
$ 15,348
4,493
10,855
–
10,855
(5)
624
8,870
2,604
1,046
$ 1,558
$ 13,652
3,110
10,542
–
10,542
(19)
553
7,515
3,561
1,571
$ 1,990
$ 12,885
2,494
10,391
–
10,391
(136)
559
8,078
2,736
1,173
$ 1,563
Net income per share – basic and diluted (1)............
0.16
$ 0.95
$ 0.06
N/A
N/A
Dividends declared per share....................................
$ 0.12
$ 0.06
$ –
$ –
$ –
(1) The Company completed its initial public stock offering on July 5, 2006.
25
Performance Ratios:
Return on average assets (1).......................
Return on average equity (1) ......................
Interest rate spread (2)................................
Net interest margin (3) ...............................
Noninterest expense to average assets........
Efficiency ratio (1) (4) ...............................
Average interest-earning assets to
average interest-bearing liabilities...........
Average equity to average assets................
Capital Ratios - Bank:
Tangible capital..........................................
Core capital ................................................
Total risk-based capital ..............................
Asset Quality Ratios:
Allowance for loan losses as a percent of
total loans ................................................
Allowance for loan losses as a percent of
nonperforming loans ...............................
Net charge-offs to average outstanding
loans during the period...........................
Non-performing loans as a percent
of total loans............................................
Other Data:
Number of:
Real estate loans outstanding ...................
Deposit accounts ......................................
Offices (5) ................................................
At or For the Years Ended December 31,
2008
2007
2006
2005
2004
0.54%
1.91
2.73
3.63
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2.24
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4.24
3.26
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4.69
4.27
4.55
3.13
67.85
0.66%
3.80
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4.58
3.42
74.70
138.82
28.35
146.61
33.67
133.99
25.57
120.33
17.65
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19.45
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25.46
44.58
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17.92
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17.05
35.71
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N/M
N/M
N/M
0.00
0.00
0.00
0.00
0.00
0.00
491
14,449
9
485
15,025
9
400
15,898
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364
18,251
7
(1) 2007 operations included a non-recurring gain of $18,962,000 from the gain on sale of the building in which our First
Avenue branch was located. If such gain, net of income taxes at the 2007 marginal income tax rate, were removed, return
on average assets, return on average equity and the efficiency ratio would be 0.43%, 1.28%, and 78.68%, respectively.
(2) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(3) Represents net interest income as a percent of average interest-earning assets.
(4) Represents noninterest expense divided by the sum of net interest income and noninterest income.
(5) At December 31, 2008, includes our main office, our five other full-service branch offices, our loan production office in
Wellesley, Massachusetts, our investment advisory service office in Westport, Connecticut, and an office that houses our
processing center.
N/M – not meaningful as non-performing loans were negligible as of these dates.
26
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Income. Our primary source of pre-tax income is net interest income. Net interest income is the difference
between interest income, which is the income that we earn on our loans and investments, and interest expense,
which is the interest that we pay on our deposits and borrowings. Other significant sources of pre-tax income are
prepayment penalties on multi-family, mixed-use and non-residential real estate loans and service charges – mostly
from service charges on deposit accounts – and fees for various services.
Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for losses inherent in
the loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When
additional allowances are necessary, a provision for loan losses is charged to earnings.
Expenses. The noninterest expenses we incur in operating our business consist of salary and employee
benefits expenses, occupancy and equipment expenses, advertising expenses, federal insurance premiums and other
miscellaneous expenses.
Salary and employee benefits consist primarily of the salaries and wages paid to our employees, payroll
taxes and expenses for health insurance, retirement plans and other employee benefits.
Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment,
consist primarily of depreciation charges, ATM and data processing expenses, furniture and equipment expenses,
maintenance, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using the
straight-line method based on the useful lives of the related assets, which range from three to 40 years. Leasehold
improvements are amortized over the shorter of the useful life of the asset or term of the lease.
Advertising expenses include expenses for print, promotions, third-party marketing services and premium
items.
Federal insurance premiums are payments we make to the Federal Deposit Insurance Corporation for
insurance of our deposit accounts.
Other expenses include expenses for professional services, office supplies, postage, telephone, insurance,
charitable contributions, regulatory assessments and other miscellaneous operating expenses.
Critical Accounting Policies
We consider accounting policies involving significant judgments and assumptions by management that
have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting
policies. We consider the following to be our critical accounting policies: allowance for loan losses and deferred
income taxes.
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as
necessary to cover probable credit losses in the loan portfolio at the statement of financial condition date. The
allowance is established through the provision for loan losses, which is charged to income. Determining the amount
of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates
required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on
impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the
portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the
allowance on a quarterly basis and establishes the provision for loan losses based upon an evaluation of the
portfolio, past loss experience, current economic conditions and other factors related to the collectibility of the loan
portfolio.
27
Although we believe that we use the best information available to establish the allowance for loan losses,
future adjustments to the allowance may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. In addition, the Office of Thrift Supervision, as an integral part of its
examination process, periodically reviews our allowance for loan losses. The Office of Thrift Supervision could
require us to recognize adjustments to the allowance based on its judgments about information available to it at the
time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the
allowance, which would negatively affect earnings. For additional discussion, see note 1 of the notes to the
consolidated financial statements included elsewhere in this filing.
Deferred Income Taxes. We use the asset and liability method of accounting for income taxes as
prescribed in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under this
method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If
current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is
established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. We exercise
significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets.
These judgments require us to make projections of future taxable income. The judgments and estimates we make in
determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory
and business factors change. Any reduction in estimated future taxable income may require us to record a valuation
allowance against our deferred tax assets. A valuation allowance would result in additional income tax expense in
the period, which would negatively affect earnings.
Sale of New York City Branch Office
In June 2007, the Bank completed the sale of its branch office building located at 1353-55 First Avenue,
New York, New York. The purchase price for the building was $28.0 million. The Bank received $10.0 million in
cash at closing and an $18.0 million zero coupon promissory note recorded at its then present value of $16.3 million
(the “Original Note”). The Original Note was payable in two $9.0 million installments due on the first and second
anniversaries of the Original Note. On July 31, 2008, as payment of the first installment due under the Original
Note, the Bank received $2.0 million in cash and a new $7.0 million note bearing interest at 7% per annum and
payable over a five-month period ending on December 31, 2008 (the “New Note”). On December 31, 2008, the
Original Note and the remaining $1.9 million balance on the New Note were rolled into a new $10.9 million note
payable on July 31, 2009 (the “Combined Note”). The Combined Note is secured by 100% of the interests in the
companies owning the Property. In addition, the Combined Note is secured by a pocket mortgage on the Property,
which is held in escrow by the Bank. This note is not treated as a loan or extension of credit subject to the
regulatory limits on loans to one borrower.
The sale of the branch office resulted in a pre-tax gain of $19.0 million, or a net gain of $10.8 million after
providing for $8.2 million in income taxes. The sale also provided an increase in total assets of $19.0 million
represented by increases of $9.1 million in cash and $16.3 million in loans receivable partially offset by decreases of
$6.2 million in property and equipment and $263,000 in other assets. The sale resulted in the accrual of $8.2 million
of income taxes on the sale gain.
In connection with the sale of the branch office building, the Bank entered into a 99-year lease agreement
to enable the Bank to retain a branch office at 1353-55 First Avenue. This lease will be effective upon the
completion of the renovation of the property (projected to be in 2011). We have temporarily relocated our First
Avenue branch office to 1470 First Avenue while 1353-55 First Avenue is being renovated.
Acquisition of the Business Assets of Hayden Financial Group LLC
On November 16, 2007, the Bank acquired the operating assets of Hayden Financial Group LLC
(“Hayden”), an investment advisory firm located in Connecticut, at a cost of $2.0 million. The Bank paid $1.3
million at closing, and $700,000 will be paid in four annual installments of $175,000. The acquisition of these
business assets has enabled the Bank to expand the services it provides to include investment advisory and financial
28
planning services to the then-existing Hayden customer base as well as future customers through a networking
arrangement with a registered broker-dealer and investment adviser. In connection with this transaction, we
acquired intangible assets related to customer relationships of $710,000 and goodwill of $1,310,000 and booked a
note payable with a present value of $625,000. The intangible asset has been determined to have an 11.7-year life
and, absent impairment issues, will be amortized to operations over that period using the straight-line method. Both
the intangible assets and goodwill will be subject to impairment review on no less than an annual basis. The note is
payable in four annual installments, one on each succeeding note anniversary date, of $175,000. The note was
initially recorded at $625,000, assuming a 4.60% discount rate. The note payable balance at December 31, 2008
was $481,000 and note discount accreted during 2008 totaled $29,000. The acquired business is being operated as a
division of the Bank and, during 2008, generated total revenues of approximately $878,000 and pre-tax income of
approximately $17,000.
Balance Sheet Analysis
Overview. Total assets at December 31, 2008, increased $80.3 million, or 23.4%, to $424.2 million from
total assets of $343.9 million at December 31, 2007. The increase was primarily due to an increase of $80.5 million
in loans receivable, net. The increase in loans was funded with increases of $40.0 million in Federal Home Loan
Bank advances, $35.5 million in deposits, and $3.7 million in advance payments by borrowers for taxes and
insurance. As of December 31, 2008, the Company, on a consolidated basis, had stockholders equity of $110.5
million, or 26.05% of assets.
Loans. Our primary lending activity is the origination of loans secured by real estate. We originate real
estate loans secured by multi-family residential real estate, mixed-use real estate and non-residential real estate. To
a much lesser extent, we originate commercial and consumer loans and purchase participation interests in
construction loans. At December 31, 2008, loans receivable, net, totaled $363.6 million, an increase of $80.5
million, or 28.4%, from total loans receivable, net, of $283.1 million at December 31, 2007. The promissory notes
that the Bank received in connection with the sale of the Bank’s branch office building located at 1353-55 First
Avenue, which had a $10.7 million and $16.9 million balance at December 31, 2008 and 2007, respectively, are
included in the non-residential segment of our real estate loan portfolio for both 2008 and 2007.
The largest segment of our real estate loans is multi-family residential loans. As of December 31, 2008,
these loans totaled $186.2 million, or 51.1% of our total loan portfolio, compared to $138.8 million, or 49.0% of our
total loan portfolio at December 31, 2007. As of December 31, 2008, mixed-use loans totaled $58.3 million, or
16.0% of our total loan portfolio, compared to $52.6 million, or 18.5% of our total loan portfolio at December 31,
2007. Non-residential real estate loans totaled $102.8 million, or 28.2% of our total loan portfolio at December 31,
2008, compared to $79.3 million, or 28.0% of our total loan portfolio at December 31, 2007. At December 31, 2008
and 2007, one- to four-family residential real estate loans totaled $275,000 and $304,000, or 0.1% and 0.1% of our
total loan portfolio, respectively.
At December 31, 2008, our commercial loan portfolio totaled $22.8 million in committed loans, with $7.6
million drawn against such commitments, compared to $5.5 million in committed loans, with $3.0 million drawn
against such commitments at December 31, 2007. In both 2008 and 2007 we also purchased participation interests
in construction loans secured by multi-family, mixed-use and non-residential properties. We perform our own
underwriting analysis on each of our participation interests before purchasing such loans. The outstanding balance
of construction loan participation interests purchased totaled $9.0 million, or 2.5% of our total loan portfolio at
December 31, 2008 compared to $9.5 million or 3.3% of our total loan portfolio at December 31, 2007.
In addition, we also originate several types of consumer loans secured by savings accounts or certificates of
deposit (share loans) and overdraft protection for checking accounts which is linked to statement savings accounts
and has the ability to transfer funds from the statement savings account to the checking account when needed to
cover overdrafts. Consumer loans totaled $114,000 and represented 0.03% of total loans at December 31, 2008
compared to $88,000, or 0.03%, of total loans at December 31, 2007.
29
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The following table sets forth certain information at December 31, 2008 regarding the dollar amount of
loans repricing or maturing during the periods indicated. The table does not include any estimate of prepayments
which significantly shorten the average life of all loans and may cause our actual repayment experience to differ
from that shown below. Demand loans having no stated maturity are reported as due in one year or less.
At December 31, 2008
Residential
Real Estate
Loans
Non-
Residential
Real Estate
Loans
Commercial
Loans
(In thousands)
Construction
Loans
Consumer
and other
Loans
Total
Loans
One year or less..................................... $ 57,162
More than one year to five years...........
182,295
5,334
More than five years .............................
Total ................................................... $ 244,791
$ 43,111
59,674
-
$ 102,785
$ 6,878
742
-
$ 7,620
$ 9,025
-
-
$ 9,025
$ 114
-
-
$ 114
$ 116,290
242,711
5,334
$364,335
The following table sets forth the dollar amount of all loans at December 31, 2008 that are due after
December 31, 2009 and have either fixed or adjustable interest rates.
Fixed Rates
Adjustable Rates
(In thousands)
Total
Residential real estate:
One- to four-family................................................
Multi-family ..........................................................
Mixed-use ..............................................................
Non-residential real estate .......................................
Construction loans ...................................................
Commercial loans ....................................................
Consumer and other loans .......................................
Total...................................................................
$ 132
6,597
4,061
2,976
-
742
-
$ 14,508
$ -
136,266
40,573
56,698
-
-
-
$ 233,537
$ 132
142,863
44,634
59,674
-
742
-
$ 248,045
31
The following table shows loan origination, purchase and sale activity during the periods indicated.
Total loans at beginning
of period ..............................
Loans originated:
Residential real estate:
One- to four-family............
Multi-family ......................
Mixed-use..........................
Non-residential real estate ...
Construction loans...............
Commercial loans................
Consumer and other loans ...
Total loans originated .......
Construction loan participation
purchased .........................
Permanent loan participation
purchased .........................
Loan from sale of building......
Deduct:
Loan principal repayments ..
Loan sales ............................
Total deductions ....................
Other increases........................
Total loans at end of period ...
2008
2007
2006
(In thousands)
2005
2004
$283,456
$201,591
$191,436 $168,675
$155,557
–
70,450
6,616
42,954
–
4,794
87
124,901
–
43,376
16,098
24,451
–
3,012
17
86,954
5,406
11,695
2,971
–
–
16,341
–
19,409
7,304
9,010
–
–
80
35,803
–
–
–
–
24,551
9,794
23,831
–
–
–
58,176
–
–
–
–
34,939
11,801
6,957
–
–
63
53,760
–
–
–
44,069
7,045
51,114
(1,285)
$364,335
32,109
1,505
33,614
489
$283,456
25,648
–
25,648
–
35,415
–
35,415
–
$201,591 $191,436
40,642
–
40,642
–
$168,675
Securities. Our securities portfolio consists primarily of mortgage-backed securities. Securities decreased
$935,000, or 29.3%, from $3.2 million at December 31, 2007, to $2.3 million at December 31, 2008. The decrease
was primarily due to maturities and repayments of $882,000.
The following table sets forth the amortized cost and fair values of our securities portfolio at the dates
indicated.
2008
Amortized
Cost
Fair
Value
At December 31,
2007
Amortized
Cost
(In thousands)
Fair
Value
2006
Amortized
Cost
Fair
Value
Securities available for sale:
Fannie Mae common stock ...................................... $ 4
Mortgage-backed securities .....................................
183
Total...................................................................... $ 187
$ 1
181
182
$ 4
273
$ 277
$ 46
274
$ 320
$ 4
281
$ 285
$ 72
283
$ 355
Securities held to maturity:
$ –
U.S. Government and agency securities...................
Mortgage-backed securities .....................................
2,078
Total....................................................................... $ 2,078
$ –
2,050
$ 2,050
$ –
2,875
$ 2,875
$ –
2,890
$ 2,890
$22,904
4,551
$ 27,455
$22,904
4,564
$ 27,468
At December 31, 2008, we had no investments in a single company or entity that had an aggregate book
value in excess of 10% of our equity.
32
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33
Deposits. Our primary source of funds is retail deposit accounts which are comprised of savings accounts,
demand deposits and certificates of deposit held primarily by individuals and businesses within our primary market
area and non-broker certificates of deposit gathered through two nationwide certificate of deposit listing services.
The non-broker certificates of deposits are accepted from banks, credit unions, non-profit organizations and certain
corporations in amounts greater then $75,000 and less then $100,000.
Deposits increased by $35.5 million, or 15.7%, in the year ended December 31, 2008. The increase in
deposits is primarily attributable to the Bank’s use of two nationwide certificate of deposit listing services. At
December 31, 2008, the Bank had a total of $63.6 million in certificates of deposits that had been obtained through
the two nationwide certificate of deposits listing services. Also contributing to the increase in deposits was the
Bank’s offering of competitive interest rates in our retail branches.
The following table sets forth the balances of our deposit products at the dates indicated.
At December 31,
2008
2007
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
2006
Now and money market deposit accounts..... $ 24,595
56,987
Savings accounts...........................................
6,209
Noninterest bearing demand deposits ...........
173,639
Certificates of deposit ...................................
9.4% $ 21,839
57,346
21.8
1,745
2.4
145,048
66.4
9.6% $ 21,137 11.2%
25.4
0.8
64.2
60,755 32.2
0.8
105,261 55.8
1,439
Total........................................................ $ 261,430 100.0% $ 225,978 100.0% $ 188,592 100.0%
The following table indicates the amount of certificates of deposit with balances of $100,000 or greater by
time remaining until maturity as of December 31, 2008. We do not solicit jumbo certificates of deposit nor do we
offer special rates for jumbo certificates. The minimum deposit to open a certificate of deposit ranges from $500 to
$2,500.
Maturity Period
Three months or less ................................................
Over three through six months .................................
Over six through twelve months...............................
Over twelve months..................................................
Total.....................................................................
Certificates
of Deposit
(In thousands)
$ 5,945
6,831
14,130
7,855
$ 34,761
Borrowings. We may utilize borrowings from a variety of sources to supplement our supply of funds for
loans and investments and to meet deposit withdrawal requirements. Advances from the Federal Home Loan Bank
of New York (“FHLB”) increased to $40.0 million as of December 31, 2008 from no FHLB advances outstanding as
of December 31, 2007. The proceeds were used to fund loan originations.
34
The following table sets forth certain information regarding FHLB advances for the periods indicated:
At or for the
Years Ended December 31,
2008
2007
2006
(Dollars in Thousands)
Federal Home Loan Bank advances:
Average balance outstanding during the period...........
Average interest rate during the period........................
Maximum amount outstanding at any
month-end during the period .....................................
Balance outstanding at end of period...........................
Weighted average interest rate at end of period...........
$
20,620
$
3.55%
$
352
5.97%
$
40,000
40,000
$
3.04%
$
4,000
-
-%
-
-%
-
-
-%
The contractual maturities of FHLB advances at December 31, 2008 are as follows:
Advances maturing in:
One year or less
After one to two years
After two to three years
After four to five years
Weighted
Average
Interest
Rate
2.14%
3.58%
3.30%
3.70%
Amount
$ 15,000
10,000
5,000
10,000
$ 40,000
3.04%
In conjunction with the Hayden acquisition on November 16, 2007, the Company incurred a four-year zero-
coupon note payable of $700,000. The note is payable in four annual installments, one on each succeeding note
anniversary date, of $175,000. The note was initially recorded at $625,000, assuming a 4.60% discount rate. The
note payable balance at December 31, 2008 was $481,000 and note discount accreted during 2008 totaled $29,000.
Stockholders’ Equity. Stockholders’ equity increased $1.7 million, or 1.5%, to $110.5 million at
December 31, 2008, from $108.8 million at December 31, 2007. The increase was primarily due to net income of
$2.1 million. In addition, stockholders’ equity increased by $263,000 due to earned ESOP shares, reduced by
$659,000 of cash dividends declared to minority stockholders. Northeast Community Bancorp, MHC, the
Company’s majority stockholder, received approval of the Office of Thrift Supervision to waive its right to receive
its share of cash dividends declared by the Company in 2008, which totaled approximately $873,000, and for similar
quarterly cash dividends, if any, to be paid for the first and second quarters of 2009. We anticipate that the MHC
will continue to waive receipt of all dividends declared by the Company, subject to applicable regulatory approvals.
35
Results of Operations for the Years Ended December 31, 2008 and 2007
Overview.
2008
2007
(Dollars in thousands)
% Change
2008/2007
Net income......................................... $ 2,102
Return on average assets....................
Return on average equity ...................
Average equity to average assets .......
0.54%
1.91
28.35
$ 12,137
3.94%
11.70
33.67
(82.7)%
(86.3)
(83.7)
(15.8)
Net income for the year ended December 31, 2008 decreased by $10.0 million, or 82.7%, to $2.1 million
from $12.1 million in 2007. The decrease was primarily the result of the $19.0 million gain ($10.8 million net of
income taxes) from the disposition in June 2007 of the Bank’s branch office building located at 1353-55 First
Avenue. Excluding the effect of the branch sale, net income in 2008 increased by $776,000, or 58.5%, primarily
due to a $1.7 million increase in net interest income and a $989,000 increase in noninterest income (excluding effect
of the branch sale), partially offset by a $1.7 million increase in noninterest expense, a $73,000 increase in the
provision for loan losses, and a $179,000 increase in income tax (excluding the effect of the branch sale).
Net Interest Income. Net interest income increased by $1.7 million, or 14.7%, to $13.4 million for the year
ended December 31, 2008, from $11.7 million for the year ended December 31, 2007. The increase in net interest
income resulted primarily from the increased average balance of net interest-earning assets of $12.3 million due
primarily to increased loan originations. The effect of increased balances was partially offset by a 39 basis point
decrease in our net interest rate spread to 2.73% for the year ended December 31, 2008, from 3.13% for the year
ended December 31, 2007. The net interest margin decreased 46 basis points to 3.63% for the year ended December
31, 2008, from 4.09% for the year ended December 31, 2007.
The decrease in the interest rate spread and net interest margin in 2008 was due to a decrease in the yield
earned on our interest-earning assets and an increase in the cost of our interest-bearing liabilities. The yield on our
interest-earning assets decreased by 22 basis points to 5.94% for the year ended December 31, 2008, from 6.16% for
the year ended December 31, 2007 and the cost of our interest-bearing liabilities increased by 18 basis points to
3.21% for the year ended December 31, 2008, from 3.03% for the year ended December 31, 2007.
The increase in our cost of funds was due to a change in the mix of our interest-bearing liabilities. Higher
cost borrowings and certificates of deposit increased to 69.5% of our interest-bearing liabilities at December 31,
2008, from 59.2% at December 31, 2007.
36
Average Balances and Yields. The following table presents information regarding average balances of
assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets,
the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized
average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense
by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table,
average balances have been calculated using average daily balances. Average loan balances include nonaccrual
loans, which were not material to any period presented. Loan fees are included in interest income on loans. Interest
income on loans and investment securities has not been calculated on a tax equivalent basis because the impact
would be insignificant.
Year Ended December 31,
2008
Interest
and
Dividends
Average
Balance
Yield/
Cost
Average
Balance
2007
Interest
and
Dividends
Yield/
Cost
Average
Balance
2006
Interest
and
Dividends
Yield/
Cost
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans....................................................... $ 326,472
4,074
Securities.................................................
Other interest-earning assets...................
38,749
369,295
Total interest-earning assets .............
(1,558)
Allowance for loan losses..........................
20,967
Noninterest-earning assets .........................
Total assets........................................ $ 388,704
Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand ......................... $ 21,817
59,392
Savings and club accounts......................
164,196
Certificates of deposit .............................
245,405
Total interest-bearing deposits.............
Borrowings..............................................
Total interest-bearing liabilities...........
Noninterest-bearing demand......................
Other liabilities ..........................................
Total liabilities ..................................
20,620
266,025
2,646
9,850
278,521
110,183
Stockholders’ equity ..................................
Total liabilities and
Stockholders’ equity .......................... $ 388,704
Net interest income .................................
Interest rate spread ..................................
Net interest margin .................................
Net interest-earning assets ...................... $ 103,270
Interest-earning assets to interest-
bearing liabilities ..................................
138.82%
$ 21,008
201
738
21,947
6.43% $232,496
16,664
4.93
36,813
1.90
285,973
5.94
(1,362)
23,535
$308,146
$14,894
839
1,869
17,602
6.41%
5.03
5.08
6.16
$ 117
415
5,365
5,897
21
5,918
0.57%
0.70
4.66
3.03
5.97
3.03
$ 144
450
7,224
7,818
0.66% $ 20,704
58,963
0.76
115,032
4.50
194,699
3.19
732
8,550
3.55
3.21
352
195,051
1,753
7,583
204,387
103,759
$308,146
$200,683
22,913
32,390
255,986
(1,200)
17,145
$271,931
$ 22,363
66,951
101,732
191,046
–
191,046
7,806
3,559
202,411
69,520
$271,931
$12,771
1,064
1,513
15,348
6.36%
4.64
4.67
6.00
111
469
3,913
4,493
–
4,493
0.50%
0.70
3.85
2.35
0.00
2.35
$ 13,397
$11,684
$10,855
2.73
3.63
$ 90,922
146.61%
3.13
4.09
3.65
4.24
$ 64,940
133.99%
37
Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net
interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by
prior volume). The volume column shows the effects attributable to changes in volume (changes in volume
multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table,
changes attributable to changes in both rate and volume that cannot be segregated have been allocated
proportionately based on the changes due to rate and the changes due to volume.
2008 Compared to 2007
2007 Compared to 2006
Increase (Decrease)
Due to
Volume
Rate
Increase (Decrease)
Due to
Volume Rate
Net
(In thousands)
Net
Interest and dividend income:
Loans receivable ............................................. $ 6,047
(621)
Investment securities ......................................
94
Other interest-earning assets...........................
5,520
Total interest-earning assets ........................
$ 67
(17)
(1,225)
(1,175)
$6,114
(638)
(1,131)
4,345
$2,037
(309)
218
1,946
$ 86
84
138
308
$2,123
(225)
356
2,254
Interest expense:
Interest-bearing demand deposits ...................
Savings accounts.............................................
Certificates of deposit.....................................
Borrowings .....................................................
Total interest-bearing liabilities ...................
7
3
2,179
723
2,912
20
32
(320)
(12)
(280)
27
35
1,859
711
2,632
(9)
(56)
553
–
488
15
2
900
21
938
6
(54)
1,453
21
1,426
Net change in interest income......................... $ 2,608
$ (895)
$1,713
$1,458
$(630)
$ 828
Provision for Loan Losses. In 2008, a $411,000 provision was made to the allowance for loan losses due
primarily to the increase in mortgage loan balances outstanding. The effect of the provision for loan losses was
partially offset by a charge-off of $35,000 on a mixed-use mortgage loan that was subsequently foreclosed and sold
during 2008. In 2007, a $338,000 provision was made to the allowance for loan losses due primarily to an increase
in mortgage loan balances outstanding. The effect of the provision for loan losses was partially offset by a charge-
off of $49,000 on a mixed-use mortgage loan that was subsequently foreclosed and sold during 2007. The
allowance for loan losses as of December 31, 2008 represented 0.51% of total loans, compared to 0.53% as of
December 31, 2007.
There were no recoveries during the years ended December 31, 2008 and 2007.
Noninterest Income. The following table shows the components of noninterest income for the years ended
December 31, 2008 and 2007.
2008
2007
% Change
2008/2007
(Dollars in thousands)
Service charges ................................................. $ 478
Net gain from premises and equipment ............
-
386
Earnings on bank owned life insurance............
878
Investment advisory fees...................................
52
Other .................................................................
Total ............................................................ $ 1,794
$ 358
18,962
361
69
17
$19,767
33.5%
(100.0)
6.9
1,172.5
205.9
(90.9)
38
Non-interest income decreased $18.0 million, or 90.9%, to $1.8 million for the year ended December 31,
2008, from $19.8 million for the year ended December 31, 2007. The decrease was primarily the result of the $19.0
million gain from the sale of the Bank’s branch office building located at 1353-55 First Avenue that occurred in
June 2007. Excluding the effect of the branch sale, non-interest income in 2008 increased by $989,000, or 122.9%,
primarily due to an $809,000 increase in investment advisory fees, a $120,000 increase in service charges, and a
$25,000 increase in earnings on bank owned life insurance.
Noninterest Expense. The following table shows the components of noninterest expense and the
percentage changes for the years ended December 31, 2008 and 2007.
Salaries and employee benefits.......................
Net occupancy expense of premises ...............
Equipment.......................................................
Outside data processing ..................................
Advertising .....................................................
REO expenses.................................................
Service contracts.............................................
Insurance...........................................................
Audit and accounting .......................................
Directors compensation ...................................
Telephone ........................................................
Office supplies and stationary .........................
Director, officer, and employee expenses .......
Legal fees ........................................................
Other ...............................................................
Total noninterest expenses..............................
N/M – Not meaningful
Year Ended December 31,
2008
2007
(Dollars in thousands)
$ 5,189
1,107
462
650
84
–
205
165
214
219
167
209
235
277
642
$9,826
$ 5,872
1,140
517
826
225
381
212
163
267
287
165
218
269
290
668
$ 11,500
% Change
2008/2007
13.2%
3.0
11.9
27.1
167.9
N/M
3.2
(1.2)
24.4
31.0
(1.0)
4.6
14.1
4.7
4.1
17.0
Noninterest expense increased $1.7 million, or 17.0%, to $11.5 million for the year ended December 31,
2008, from $9.8 million for the year ended December 31, 2007. The increase resulted primarily from an increase of
$683,000 in salaries and employee benefits, $176,000 in outside data processing expense, $141,000 in advertising
expense, and $381,000 in real estate owned expenses. All other categories of noninterest expense increased in the
aggregate by $293,000 or 7.5%.
Salaries and employee benefits increased by $683,000, or 13.2%, to $5.9 million for the year ended
December 31, 2008 from $5.2 million for the year ended December 31, 2007 due to the hiring of employees in
connection with our acquisition of the operating assets of Hayden Financial Group, LLC in November 2007 and the
addition of one loan officer in December 2007.
Outside data processing expense increased $176,000, or 27.1%, to $826,000 for the year ended December
31, 2008 from $650,000 for the year ended December 31, 2007 due primarily to a one time payment of $148,000 to
terminate the item processing contract with a third party vendor and an increase in the Company’s core data
processing expense.
Advertising expense increased by $141,000, or 167.9%, to $225,000 for the year ended December 31, 2008
from $84,000 for the year ended December 31, 2007 due to an increased effort to market the Bank’s loan, deposit,
and investment products and services.
39
Real estate owned expenses increased to $381,000 due primarily to an impairment loss of $369,000 in 2008
on a foreclosed multi-family property as a result of a fair value calculation based upon a recent appraisal and a
recent purchase offer on the property. The Bank did not have any foreclosed property and real estate owned
expenses in 2007.
All other components of noninterest expense increased in the aggregate by $293,000, or 7.5%, to $4.2
million for the year ended December 31, 2008 from $3.9 million for the year ended December 31, 2007 due mainly
to increases in audit and accounting fees, directors’ compensation, directors, officers and employee expenses, and
the amortization expense of intangible assets. These increases were partially offset by decreases in insurance and
telephone expenses.
Income Taxes. Income tax expense decreased by $8.0 million, or 87.1%, to $1.2 million for the year ended
December 31, 2008, from $9.2 million for the year ended December 31, 2007. The decrease resulted primarily from
the $18.0 million decrease in pre-tax income in 2008 compared to 2007. The effective tax rate was 35.9% or the
year ended December 31, 2008, compared to 43.0% for 2007. The decreased effective tax rate was due to the
decreased level of pre-tax income and the resultant increased impact of tax-exempt income from bank-owned life
insurance.
Risk Management
Overview. Managing risk is an essential part of successfully managing a financial institution. Our most
prominent risk exposures are credit risk, interest rate risk and operational risk. Credit risk is the risk of not
collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the
potential reduction of net interest income as a result of changes in interest rates. Operational risks include risks
related to fraud, regulatory compliance, processing errors, technology and disaster recovery. Other risks that we
face are market risk, liquidity risk and reputation risk. Market risk arises from fluctuations in interest rates that may
result in changes in the values of financial instruments, such as available-for-sale securities, that are accounted for
on a mark-to-market basis. Liquidity risk is the possible inability to fund obligations to depositors, lenders or
borrowers. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in
our customer base or revenue.
Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit
policies and uniform underwriting criteria and providing prompt attention to potential problem loans. We
underwrite each mortgage loan application on its merits, applying risk factors to insure that each transaction is
considered on an equitable basis.
When a borrower fails to make a required loan payment, we take a number of steps to attempt to have the
borrower cure the delinquency and restore the loan to current status. When the ten day grace period expires and the
payment has not been received, a late payment notice is mailed and telephone contact is initiated. Throughout the
rest of the month that payment is due, the borrower is called several times. If the payment has not been received by
the end of the month, the borrower is informed that the loan will be placed in foreclosure within two weeks. On the
45th day after payment is due, the loan is forwarded to the problem loan officer who will review the file and
authorize an acceleration letter. Once a foreclosure action has been instituted, a written agreement between the
Bank and the debtor will be required to discontinue the foreclosure action. We may consider loan workout
arrangements with certain borrowers under certain circumstances. If no satisfactory resolution to the delinquency is
forthcoming, the note and mortgage may be sold prior to a foreclosure sale or the real property securing the loan
would be sold at foreclosure.
Management reports to the board of directors monthly regarding the amount of loans past-due more than
30 days.
Analysis of Nonperforming and Classified Assets. We generally consider repossessed assets and loans
that are 90 days or more past due to be nonperforming assets. It is generally our policy to continue to accrue interest
on past-due loans and loans in foreclosure as long management determines that there is a reasonable expectation of
collection. When a loan is placed on nonaccrual status, the accrual of interest ceases and the allowance for any
40
uncollectible accrued interest is established and charged against operations. Typically, payments received on a
nonaccrual loan are applied in the following order; to late charges, interest, escrow and outstanding principal.
Real estate that we acquire as a result of a foreclosure action or by deed-in-lieu of foreclosure is classified
as foreclosed real estate until it is sold. When property is acquired, it is initially recorded at fair market value at the
date of foreclosure. Holding costs and declines in fair value after acquisition of the property result in charges
against income.
The following table provides information with respect to our nonperforming assets at the dates indicated.
We did not have any troubled debt restructurings at the dates presented.
2007
At December 31,
2006
(Dollars in thousands)
2005
2004
Nonaccrual loans:
Residential real estate: ...............................
One- to four-family .................................
Multi-family............................................
Mixed-use ...............................................
Non-residential real estate..........................
Construction...............................................
Consumer and other loans..........................
Total.....................................................
Accruing loans past due 90 days or more:
Residential real estate:
One- to four-family .................................
Multi-family............................................
Mixed-use ...............................................
Non-residential real estate..........................
Consumer and other loans..........................
Total.....................................................
Total of nonaccrual and 90 days or
more past due loans...........................
2008
$ –
261
–
1,614
–
–
1,875
–
–
–
–
–
–
$ –
666
–
1,200
–
1
1,867
–
407
–
–
–
407
1,875
2,274
Foreclosed real estate....................................
Other nonperforming loans (1) .....................
Total nonperforming assets..................
832
1,345
4,052
–
–
2,274
Troubled debt restructurings .........................
–
–
$ –
–
–
–
–
–
–
$ –
–
–
–
–
–
–
$ –
–
–
–
–
–
–
–
–
–
–
2
2
2
–
–
2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Troubled debt restructurings and
total nonperforming assets .........................
Total nonperforming loans to total loans ......
Total nonperforming loans to total assets .....
Total nonperforming assets and troubled
debt restructurings to total assets ...............
$4,052
$2,274
$ 2
$ –
$ –
0.88%
0.76%
0.80%
0.66%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.96%
0.66%
0.00%
0.00%
0.00%
(1) Other non-performing loans consist of loans which were not 90 days or more delinquent, but where management has
serious doubts about the borrowers abilities to comply with contractual loan terms.
At December 31, 2008, we had one nonaccrual multi-family mortgage loan and two nonaccrual non-
residential mortgage loans totaling $1.9 million. The nonaccrual multi-family mortgage loan had an outstanding
41
balance of $261,000 and is secured by an eleven unit apartment building located in Elizabeth, New Jersey. We are
in the process of foreclosing on this property. Based on a recent fair value analysis of the property, the Bank does
not expect a loss on the disposition of the property.
One of the nonaccrual non-residential mortgage loans had an outstanding balance of $845,000 and is
secured by an office building located in Mamaroneck, New York. The other nonaccrual non-residential mortgage
loan had an outstanding balance of $769,000 at December 31, 2008 and is secured by two gasoline stations and an
automobile repair facility located in Putnam and Westchester Counties, New York. We are in the process of
foreclosing on both properties. Based on a recent fair value analysis of the properties, the Bank does not expect a
loss on the disposition of these properties.
Interest income that would have been recorded for the year ended December 31, 2008 had nonaccruing
loans been current to their original terms amounted to approximately $142,000. During the year ended December
31, 2008, the Bank recognized interest income of approximately $1,000 on the nonaccrual loans.
At December 31, 2008, one of the foreclosed properties had a net balance of $369,000 and consisted of a
14 unit multi-family building located in Hampton, New Hampshire. This property was subsequently sold in March
2009. The other foreclosed property had a net balance of $463,000 and consisted of a 6 unit multi-family building
located in Newark, New Jersey. We are renovating this property for purposes of leasing all the units, with the
eventual goal of marketing the property when the real estate market has stabilized.
Other nonperforming loans consisted of two loans. The first had an outstanding balance of $1.2 million
and is secured by a 7 unit multi-family building located in Cambridge, Massachusetts. The second nonperforming
loan had an outstanding balance of $181,000 and is secured by a 6 unit multi-family building located in
Philadelphia, Pennsylvania. As of December 31, 2008, both loans were 60 days delinquent and classified as
substandard. We have started foreclosure proceedings on both properties and we do not anticipate any loss on the
disposition of these properties.
Federal regulations require us to review and classify our assets on a regular basis. In addition, the Office of
Thrift Supervision has the authority to identify problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: substandard, doubtful and loss. “Substandard assets” must have
one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the
deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered
uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations
also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient
degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close
attention. We recognize a loss as soon as a reasonable determination of that loss can be made. We directly charge,
against earnings, that portion of the asset that is determined to be uncollectible. If an accurate determination of the
loss is impossible, for any reason, we will establish an allowance in an amount sufficient to absorb the most
probable loss expected. In cases where a reasonable determination of a loss cannot be made, we will adjust our
allowance to reflect a potential loss until a more accurate determination can be made.
The following table shows the aggregate amounts of our classified assets at the dates indicated.
2008
At December 31,
2007
(In thousands)
Special mention assets..............................
Substandard assets ...................................
Doubtful and loss assets ...........................
Total classified assets............................
$ –
3,220
–
$ 3,220
$ 865
1,866
–
$2,731
2006
$ –
–
–
$ –
42
Delinquencies. The following table provides information about delinquencies in our loan portfolio at the
dates indicated.
2008
At December 31,
2007
2006
30-59
Days
Past Due
60-89
Days
Past Due
30-59
Days
Past Due
60-89
Days
Past Due
30-59
Days
Past Due
60-89
Days
Past Due
(In thousands)
Residential real estate:
One- to four-family...................
Multi-family..............................
Mixed-use .................................
Non-residential real estate...........
Construction................................
Commercial.................................
Consumer and other loans...........
Total........................................
$ –
–
–
–
–
–
–
$ –
$ –
1,345
–
–
–
–
–
$ 1,345
$ –
–
–
–
–
–
4
$ 4
$ –
458
–
–
–
–
–
$ 458
$ –
–
–
–
–
–
–
$ –
$ –
–
–
–
–
–
2
$ 2
Analysis and Determination of the Allowance for Loan Losses. The allowance for loan losses is a
valuation allowance for probable credit losses in the loan portfolio. We evaluate the need to establish allowances
against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is
charged to earnings. The recommendations for increases or decreases to the allowance are presented by
management to the board of directors.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of: (1) a
specific allowance on identified impaired and problem loans, if appropriate; and (2) a general valuation allowance
on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance
separately, the entire allowance for loan losses is available for the entire portfolio.
Specific Allowance Required for Identified Impaired and Problem Loans. We establish an allowance on
certain identified impaired and problem loans when the loan balance exceeds the fair market value, when collection
of the full amount outstanding becomes improbable and when an accurate estimate of the loss can be documented.
General Valuation Allowance on the Remainder of the Loan Portfolio. We establish a general allowance
for loans that are not delinquent to recognize the inherent losses associated with lending activities. This general
valuation allowance is determined by segregating the loans by loan category and assigning percentages to each
category. The percentages are adjusted for significant factors that, in management’s judgment, affect the
collectibility of the portfolio as of the evaluation date. These significant factors may include changes in existing
general economic and business conditions affecting our primary lending areas and the national economy, staff
lending experience, recent loss experience in particular segments of the portfolio, collateral value, loan volumes and
concentration, specific reserve and classified asset trends, delinquency trends and risk rating trends. These loss
factors are subject to ongoing evaluation to ensure their relevance in the current economic environment.
We also establish a general allowance for loans identified by the internal loan review process and loans not
performing according to contractual terms. These loans typically do not pose significant risk of loss, but do
demonstrate a higher level of risk than the average loan in our portfolio. These could include loans 30 days or more
past due, properties with vacant apartments or commercial spaces other then temporarily vacant due to tenant
turnover or renovation, or the death of the obligator causing delinquency until a court appointed executor takes
control of the property. We separate these loans by property type and assign a risk factor to each category based on
its risk potential as compared to the other categories and the portfolio as a whole. Loans classified special mention
or substandard would typically be candidates for treatment under this category.
43
We also identify loans that may need to be charged off as a loss by reviewing all delinquent loans,
classified loans and other loans that management may have concerns about collectibility. For individually reviewed
loans, the borrower’s inability to make payments under the terms of the loan or a shortfall in collateral value would
result in our allocating a portion of the allowance to the loan that was impaired or to an addition to the general
valuation allowance to reflect the higher risk associated with the identified loan.
At December 31, 2008, our allowance for loan losses was $1.9 million and represented 0.51% of total gross
loans. At December 31, 2007, our allowance for loan losses was $1.5 million and represented 0.53% of total gross
loans. At December 31, 2006, our allowance for loan losses was $1.2 million and represented 0.60% of total gross
loans. The increase in our allowance for loan losses is due primarily to the increase in mortgage loan balances
outstanding as of December 31, 2008.
The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates
indicated.
2008
% of
Allowance
to Total
Allowance
Amount
At December 31,
2007
% of
Loans in
Category
to Total
Loans Amount
% of
Allowance
to Total
Allowance
(Dollars in thousands)
% of
Loans in
Category
to Total
Loans Amount
2006
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
Residential real estate:
One- to four-family .................. $ –
604
Multi-family .............................
319
Mixed-use.................................
841
Non-residential real estate...........
21
Construction ................................
Commercial .................................
80
Consumer and other loans........... –
Total allowance for loan losses ... $ 1,865
0.0%
32.4
17.1
45.1
1.1
4.3
0.0
100.0%
0.1%
51.1
16.0
28.2
2.5
2.1
0.0
100.0%
$ –
472
250
691
50
25
–
$ 1,489
0.0%
31.7
16.8
46.4
3.4
1.7
0.0
100.0%
0.1% $ –
395
49.0
251
18.5
554
28.0
–
3.3
–
1.1
0.0
–
100.0% $ 1,200
0.0%
32.9
20.9
46.2
0.0
0.0
0.0
100.0%
0.2%
54.8
21.1
23.7
0.0
0.0
0.2
100.0%
At December 31,
2005
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
Amount
(Dollars in thousands)
2004
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
0.0%
36.9
23.1
40.0
0.0
0.0
0.0
0.3% $ 2
520
290
388
–
–
52.4
22.9
24.2
0.0
0.0
0.2%
0.5%
43.3
24.2
32.3
0.0
0.0
58.9
22.7
17.7
0.0
0.0
0.2
–
0.0
0.2
Amount
Residential real estate:
One- to four-family ................... $ –
443
Multi-family ..............................
277
Mixed-use..................................
Non-residential real estate............
480
Construction ................................. –
Commercial .................................. –
Consumer and other loans............ –
Total allowance for loan losses.... $1,200
100.0%
100.0% $1,200
100.0%
100.0%
Although we believe that we use the best information available to establish the allowance for loan losses,
future adjustments to the allowance for loan losses may be necessary and our results of operations could be
adversely affected if circumstances differ substantially from the assumptions used in making the determinations.
Furthermore, while we believe we have established our allowance for loan losses in conformity with U.S. generally
accepted accounting principles, there can be no assurance that the Office of Thrift Supervision, in reviewing our
loan portfolio, will not request us to increase our allowance for loan losses. The Office of Thrift Supervision may
require us to increase our allowance for loan losses based on judgments different from ours. In addition, because
44
future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that
increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above.
Any material increase in the allowance for loan losses may adversely affect our financial condition and results of
operations.
Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan
losses for the periods indicated.
Allowance at beginning of period ...............
Provision for loan losses..............................
$1,489
411
2008
2007
Year Ended December 31,
2006
(Dollars in thousands)
$1,200
–
$1,200
–
2005
$1,200
338
2004
$1,200
–
Charge offs:
Residential real estate:
One- to four-family ...............................
–
Multi-family ..........................................
–
Mixed-use..............................................
(35)
–
Non-residential real estate ........................
Construction ............................................. –
Consumer and other loans ........................
–
(35)
Total charge-offs ................................
–
–
(49)
–
–
–
(49)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Recoveries:
Residential real estate:
One- to four-family ...............................
Multi-family ..........................................
Mixed-use..............................................
Non-residential real estate ........................
Construction .............................................
Consumer and other loans ........................
Total recoveries ..................................
Net charge-offs .........................................
–
–
–
–
–
–
–
(35)
–
–
–
–
–
–
–
(49)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Allowance at end of period.....................
$1,865
$1,489
$1,200
$1,200
$1,200
Allowance to nonperforming loans .............
Allowance to total loans outstanding
at the end of the period ..............................
Net charge-offs to average
loans outstanding during the period...........
57.92%
65.48%
N/M
N/M
N/M
0.51%
0.53%
0.60%
0.63%
0.71%
0.01%
0.02%
0.00%
0.00%
0.00%
Interest Rate Risk Management. We manage the interest rate sensitivity of our interest-bearing liabilities
and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment.
Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the
shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while
decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we
have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable
interest rate spread. Our strategy for managing interest rate risk emphasizes: originating mortgage real estate loans
that reprice to market interest rates in three to five years; purchasing securities that typically reprice within a three
year time frame to limit exposure to market fluctuations; and, where appropriate, offering higher rates on long term
certificates of deposit to lengthen the repricing time frame of our liabilities. We currently do not participate in
hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments.
We have an Asset/Liability Committee, comprised of our chief executive officer, chief financial officer,
chief mortgage officer, chief retail banking officer, and treasurer, whose function is to communicate, coordinate and
control all aspects involving asset/liability management. The committee establishes and monitors the volume,
45
maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources
to provide results that are consistent with liquidity, growth, risk limits and profitability goals.
Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net
interest income and net income.
Net Portfolio Value Analysis. We use a net portfolio value analysis prepared by the Office of Thrift
Supervision to review our level of interest rate risk. This analysis measures interest rate risk by computing changes
in net portfolio value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. Net portfolio value represents the market value of portfolio equity and is
equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet
items. These analyses assess the risk of loss in market risk-sensitive instruments in the event of a sudden and
sustained 50 to 300 basis point increase or 50 and 100 basis point decrease in market interest rates with no effect
given to any steps that we might take to counter the effect of that interest rate movement.
The following table presents the change in our net portfolio value at December 31, 2008 that would occur
in the event of an immediate change in interest rates based on the Office of Thrift Supervision assumptions, with no
effect given to any steps that we might take to counteract that change.
Net Portfolio Value
(Dollars in thousands)
$
Change
$
Amount
%
Change
$89,838
91,315
92,562
93,146
93,698
94,182
93,972
$(3,860)
(2,382)
(1,136)
(551)
-
485
275
(4)%
(3)%
(1)%
(1)%
1%
0%
Net Portfolio Value
as % of
Portfolio Value of
Assets
NPV
Ratio
21.46%
21.59%
21.67%
21.70%
21.72%
21.73%
21.63%
Change
(26) bp
(13) bp
(5) bp
(2) bp
1 bp
(9) bp
Basis Point (“bp”)
Change in Rates
300
200
100
50
0
(50)
(100)
We and the Office of Thrift Supervision use various assumptions in assessing interest rate risk. These
assumptions relate to interest rates, loan prepayment rates, deposit decay rates and the market values of certain
assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk,
certain shortcomings are inherent in the methods of analyses presented in the foregoing tables. For example,
although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes
in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict
changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in
interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table. Prepayment rates can have a significant impact on interest
income. Because of the large percentage of loans we hold, rising or falling interest rates have a significant impact
on the prepayment speeds of our earning assets that in turn affect the rate sensitivity position. When interest rates
rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. Our asset sensitivity would be
reduced if prepayments slow and vice versa. While we believe these assumptions to be reasonable, there can be no
assurance that assumed prepayment rates will approximate actual future loan repayment activity.
Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-
term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of
securities and borrowings from the Federal Home Loan Bank of New York. While maturities and scheduled
46
amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our assessment of: (1) expected loan
demand; (2) expected deposit flows; (3) yields available on interest-earning deposits and securities; and (4) the
objectives of our asset/liability management policy.
Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating,
financing, lending and investing activities during any given period. Cash and cash equivalents totaled $36.5 million
at December 31, 2008 and consist primarily of deposits at other financial institutions (Predominantly the Federal
Home Loan Bank of New York) and miscellaneous cash items. Securities classified as available-for-sale provide an
additional source of liquidity. Total securities classified as available-for-sale were $182,000 at December 31, 2008
and $320,000 at December 31, 2007.
At December 31, 2008, we had $53.3 million in loan commitments outstanding. At December 31, 2008,
this consisted of $32.3 million of real estate loan origination commitments, $15.4 million in unused commercial loan
lines, $3.9 million in unused real estate equity lines of credit, $1.5 million in construction loans in process, and
$181,000 in unused consumer lines of credit. Certificates of deposit due within one year of December 31, 2008
totaled $138.9 million. This represented 80.0% of certificates of deposit at December 31, 2008. We believe the
large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their
funds for long periods in the current low interest rate environment. If these maturing deposits do not remain with us,
we will be required to seek other sources of funds, including other certificates of deposit and borrowings.
Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than
we currently pay on the certificates of deposit due on or before December 31, 2009. We believe, however, based on
past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to
attract and retain deposits by adjusting the interest rates offered.
Our primary investing activities are the origination of loans and the purchase of securities. Our primary
financing activities consist of activity in deposit accounts. At December 31, 2008, we had the ability to borrow an
additional $51.4 million from the Federal Home Loan Bank of New York, which included two available overnight
lines of credit of $5.6 million each. Deposit flows are affected by the overall level of interest rates, the interest rates
and products offered by us and our local competitors and other factors. We generally manage the pricing of our
deposits to be competitive and to maintain or increase our core deposit relationships depending on our level of real
estate loan and commercial loan commitments outstanding. Occasionally, we offer promotional rates on certain
deposit products to attract deposits or to lengthen repricing time frames.
47
The following table presents our primary investing and financing activities during the periods indicated.
2008
Year Ended December 31,
2007
(In thousands)
2006
Investing activities:
Loans disbursed or closed ........................ $(124,901)
(8,377)
Purchase of loan participations ...............
44,069
Loan principal repayments.......................
7,045
Sale of loans.............................................
Proceeds from maturities and principal
repayments of securities.........................
Purchases of securities .............................
Purchase of bank owned life insurance
Purchase of FHLB-NY stock ...................
Proceeds from sale of premises and
equipment ........................................
Purchases of premises and equipment
Purchase of business ...............................
882
–
–
(1,937)
–
(396)
–
Financing activities:
Increase (decrease) in deposits.................
Proceeds from FHLB-NY advances.........
Initial stock offering, net of ESOP shares
35,452
40,000
–
$(86,954)
(11,695)
32,109
1,505
$(35,803)
–
25,648
–
29,676
(5,000)
–
(15)
9,082
(198)
(1,384)
37,386
–
–
35,682
(50,335)
(8,000)
(42)
–
(6,726)
–
(4,727)
–
52,444
Capital Management. We are subject to various regulatory capital requirements administered by the
Office of Thrift Supervision, including a risk-based capital measure. The risk-based capital guidelines include both
a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and
off-balance sheet items to broad risk categories. At December 31, 2008, we exceeded all of our regulatory capital
requirements. We are considered “well capitalized” under regulatory guidelines.
The capital from our initial public offering increased our liquidity and capital resources. In addition, the
sale of our First Avenue branch office building in the second quarter of 2007 further increased our capital in 2007.
Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering and the sale of the
branch office building are used for general corporate purposes, including the funding of lending activities. Our
financial condition has been enhanced by the capital from the offering, resulting in increased net interest-earning
assets. However, the large increase in equity resulting from the capital raised in the offering and the branch office
building sale will, initially, have an adverse impact on our return on equity. From time to time, we may consider
capital management tools such as cash dividends and common stock repurchases.
Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial
transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial
statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such
transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments
and lines of credit. For information about our loan commitments and unused lines of credit, see Note 4 of the Notes
to the Consolidated Financial Statements. We currently have no plans to engage in hedging activities in the future.
For the years ended December 31, 2008 and 2007, we engaged in no off-balance sheet transactions
reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
Effect of Inflation and Changing Prices
The financial statements and related financial data presented in this Form 10-K have been prepared in
accordance with U.S. generally accepted accounting principles, which require the measurement of financial position
and operating results in terms of historical dollars without considering the change in the relative purchasing power
48
of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased
operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s
performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the
same extent as the prices of goods and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by reference to Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included herein beginning on page F-1.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
(a)
Disclosure Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal
financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and
procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange
Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal
executive officer and principal financial officer concluded that, as of the end of the period covered
by this report, the Company’s disclosure controls and procedures were effective for the purpose of
ensuring that the information required to be disclosed in the reports that the Company files or
submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is
recorded, processed, summarized and reported within the time periods specified in the SEC’s rules
and forms, and (2) is accumulated and communicated to the Company’s management, including
its principal executive and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure.
(b)
Internal Controls Over Financial Reporting
Management’s annual report on internal control over financial reporting is incorporated herein by
reference to the Company’s audited Consolidated Financial Statements in this Annual Report on
Form 10-K.
This annual report does not include an attestation report of the Company’s independent registered
public accounting firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by the Company’s independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that permit the Company
to provide only management’s report in this annual report.
(c)
Changes to Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the three
months ended December 31, 2008 that have materially affected, or are reasonable likely to
materially affect, the Company’s internal control over financial reporting.
49
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE
GOVERNANCE
For information concerning Northeast Community Bancorp’s directors, the information contained under the
section captioned “Item 1—Election of Directors” in Northeast Community Bancorp’s Proxy Statement for the 2008
Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference.
Executive Officers
For information relating to officers of Northeast Community Bancorp, the section captioned “Item 1—Election of
Directors” in the Proxy Statement, and Part I, Item 1, “Business—Executive Officers of the Registrant” in this
Annual Report on Form 10-K, are incorporated by reference.
Compliance with Section 16(a) of the Exchange Act
For information regarding compliance with Section 16(a) of the Exchange Act, the information contained under the
section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement is
incorporated herein by reference.
Disclosure of Code of Ethics
Northeast Community Bancorp has adopted a Code of Ethics and Business Conduct, a copy of which can be found
in the investor relations section of the Company’s website at www.necommunitybank.com.
Corporate Governance
For information regarding the audit committee and its composition and the audit committee financial expert, the
section captioned “Corporate Governance and Board Matters” in the Proxy Statement is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation is incorporated herein by reference to the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDERS MATTERS
(a)
Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the section captioned
“Stock Ownership” in the Proxy Statement.
(b)
Security Ownership of Management
Information required by this item is incorporated herein by reference to the section captioned
“Stock Ownership” in the Proxy Statement.
50
(c)
Changes in Control
Management of Northeast Community Bancorp knows of no arrangements, including any pledge
by any person or securities of Northeast Community Bancorp, the operation of which may at a
subsequent date result in a change in control of the registrant.
(d)
Equity Compensation Plan Information
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information relating to certain relationships and related transactions is incorporated herein by reference
to the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information relating to the principal accountant fees and expenses is incorporated herein by reference
to the Proxy Statement.
51
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(1)
(2)
The financial statements required in response to this item are incorporated by reference from Item
8 of this report.
All financial statement schedules are omitted because they are not required or applicable, or the
required information is shown in the consolidated financial statements or the notes thereto.
(3)
Exhibits
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
21.0
23.0
31.1
31.2
32.0
Amended and Restated Charter of Northeast Community Bancorp, Inc. (1)
Amended and Restated Bylaws of Northeast Community Bancorp, Inc. (2)
Specimen Stock Certificate of Northeast Community Bancorp, Inc. (1)
Northeast Community Bank Employee Severance Compensation Plan (1)
Northeast Community Bank Supplemental Executive Retirement Plan and Participation
Agreements with Kenneth A. Martinek and Salvatore Randazzo (1)*
Northeast Community Bancorp, Inc. Employment Agreement for Kenneth A. Martinek
and Salvatore Randazzo (1)*
Northeast Community Bank Employment Agreement for Kenneth A. Martinek and
Salvatore Randazzo (1)*
Employment Agreement between Northeast Community Bancorp, Inc., Northeast
Community Bank and Susan Barile (3)*
Northeast Community Bank Directors’ Retirement Plan (1)*
Northeast Community Bank Directors’ Deferred Compensation Plan (1)*
Northeast Community Bank Executive Incentive Deferral Plan*(4)
List of Subsidiaries
Consent of Beard Miller Company LLP
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Section 1350 Certification of Chief Executive Officer and Chief Financial
Officer
* Management contract or compensatory plan, contract or arrangement.
(1) Incorporated herein by reference to the Company’s Registration Statement on Form S-1, as
amended, initially filed with the SEC on March 12, 2006.
(2) Incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-
K filed with the SEC on October 30, 2007.
(3) Incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
10-Q for the quarter ended September 30, 2006.
(4) Incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
10-Q for the quarter ended September 30, 2008.
52
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 26, 2009
NORTHEAST COMMUNITY BANCORP, INC.
By:
/s/ Kenneth A. Martinek
Kenneth A. Martinek
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Kenneth A. Martinek
Kenneth A. Martinek
/s/ Salvatore Randazzo
Salvatore Randazzo
/s/ Diane B. Cavanaugh
Diane B. Cavanaugh
/s/ Arthur M. Levine
Arthur M. Levine
/s/ Charles A. Martinek
Charles A. Martinek
/s/ John F. McKenzie
John F. McKenzie
/s/ Linda M. Swan
Linda M. Swan
/s/ Harry (Jeff) A.S Read
Harry (Jeff) A.S. Read
/s/ Kenneth H. Thomas
Kenneth H. Thomas
President, Chief Executive Officer
and Director
(principal executive officer)
March 26, 2009
Executive Vice President, Chief
Financial Officer and Director
(principal accounting and
financial officer)
Director
Director
Director
Director
Director
Director
Director
March 26, 2009
March 26, 2009
March 26, 2009
March 26, 2009
March 26, 2009
March 26, 2009
March 26, 2009
March 26, 2009
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting. The internal control process has been designed under our supervision to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements
for external reporting purposes in accordance with accounting principles generally accepted in the United States of
America.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008, utilizing the framework established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this
assessment, management has determined that the Company’s internal control over financial reporting as of
December 31, 2008 is effective.
Our internal control over financial reporting includes policies and procedures that pertain to the
maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets;
and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the United States; (2) receipts and
expenditures are being made only in accordance with authorizations of management and the directors of the
Company; and (3) unauthorized acquisition, use, or disposition of the Company’s assets that could have a material
effect on the Company’s financial statements are prevented or timely detected.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
This annual report does not include an attestation report of the Company’s registered public accounting
firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this annual report.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Northeast Community Bancorp, Inc. and Subsidiaries
White Plains, New York
We have audited the accompanying consolidated statements of financial condition of Northeast
Community Bancorp, Inc. and Subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the
related consolidated statements of income, stockholders’ equity, and cash flows for the years then ended. The
Company’s management is responsible for these consolidated financial statements. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we
express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Northeast Community Bancorp, Inc. and Subsidiaries as of
December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with accounting principles generally accepted in the United States of
America.
Beard Miller Company LLP
Clark, New Jersey
March 27, 2009
F-1
Northeast Community Bancorp, Inc.
Consolidated Statements of Financial Condition
Assets
Cash and amounts due from depository institutions
Interest-bearing deposits
Cash and cash equivalents
Certificates of deposit
Securities available-for-sale
Securities held-to-maturity
Loans receivable, net of allowance for loan losses $1,865 and $1,489,
respectively
Premises and equipment, net
Federal Home Loan Bank of New York stock, at cost
Bank owned life insurance
Accrued interest receivable
Goodwill
Intangible assets
Real estate owned
Other assets
Total Assets
Liabilities and Stockholders’ Equity
December 31,
2008
2007
(In thousands, except share and per share data)
$ 2,368
34,166
36,534
498
182
2,078
363,616
4,365
2,350
8,902
1,785
1,310
649
832
1,127
$ 424,228
$ 1,878
37,268
39,146
-
320
2,875
283,133
4,529
414
8,515
1,340
1,310
710
-
1,603
$ 343,895
Liabilities:
Deposits:
Non-interest-bearing deposits
Interest-bearing deposits
Total deposits
Advance payments by borrowers for taxes and insurance
Federal Home Loan Bank Advances
Accounts payable and accrued expenses
Note payable
Total Liabilities
Commitments and Contingencies
Stockholders’ Equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued
Common stock, $0.01 par value; 19,000,000 shares authorized; issued and
outstanding: 13,225,000 shares
Additional paid-in capital
Unearned Employee Stock Ownership Plan (“ESOP”) shares
Retained earnings
Accumulated comprehensive loss
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See notes to consolidated financial statements.
F-2
$ 6,209
255,221
261,430
6,624
40,000
5,191
481
313,726
$ 1,745
224,233
225,978
2,884
-
5,577
627
235,066
-
-
-
-
132
57,560
(4,407)
57,399
(182)
110,502
$ 424,228
132
57,555
(4,665)
55,956
(149)
108,829
$ 343,895
Northeast Community Bancorp, Inc.
Consolidated Statements of Income
Interest Income:
Loans
Interest-earning deposits
Securities - taxable
Total Interest Income
Interest Expense:
Deposits
Borrowings
Total Interest Expense
Net Interest Income
Provision for Loan Losses
Years Ended December 31,
2007
(In thousands, except per share data)
2008
$ 21,008
738
201
$ 14,894
1,869
839
21,947
17,602
7,818
732
8,550
5,897
21
5,918
13,397
11,684
411
338
Net Interest Income after Provision for Loan Losses
12,986
11,346
Non-Interest Income:
Other loan fees and service charges
Net gain from premises and equipment
Earnings on bank owned life insurance
Investment advisory fees
Other
Total Non-Interest Income
Non-Interest Expenses:
Salaries and employee benefits
Net occupancy expense
Equipment
Outside data processing
Advertising
Real estate owned expenses
Other
Total Non-Interest Expenses
Income before Provision for Income Taxes
Provision for Income Taxes
Net Income
478
-
386
878
52
1,794
5,872
1,140
517
826
225
381
2,539
11,500
3,280
1,178
358
18,962
361
69
17
19,767
5,189
1,107
462
650
84
-
2,334
9,826
21,287
9,150
$ 2,102
$ 12,137
Net Income per Common Share – Basic
$ 0.16
$ 0.95
Weighted Average Number of Common Shares
Outstanding – Basic
12,771
12,745
Dividends Declared per Common Share
$ 0.12
$ 0.06
See notes to consolidated financial statements.
F-3
Northeast Community Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2008 and 2007
Common
Stock
Additional
Paid- in
Capital
Unearned
ESOP
Shares
Retained
Earnings
Accumu-
lated
Other
Compre-
hensive
Income
(Loss)
Total
Equity
Comprehensive
Income
Balance - December 31, 2006
$ 132
$ 57,513
$ (4,925)
$ 44,147
$ (116)
$ 96,751
(In thousands)
Comprehensive income:
Net income
Unrealized loss on securities
available for sale, net of taxes of
$(10)
Pension liability – DRP, net of
taxes of $(13)
Cash dividends declared ($0.06 per
share)
ESOP shares earned
Total Comprehensive Income
Balance - December 31, 2007
Comprehensive income:
Net income
Unrealized loss on securities
available for sale, net of taxes of
$(18)
Pension liability – DRP, net of
taxes of $(1)
Cash dividends declared ($0.12 per
share)
ESOP shares earned
Total Comprehensive Income
Balance - December 31, 2008
-
-
-
-
-
-
-
-
-
42
-
12,137
-
12,137
$ 12,137
-
-
-
-
-
260
(328)
-
(17)
(16)
-
-
(17)
(16)
(328)
302
(17)
(16)
$ 12,104
132
57,555
(4,665)
55,956
(149)
108,829
-
-
-
-
-
-
-
-
-
5
-
-
-
-
-
-
258
(659)
-
2,102
-
2,102
$ 2,102
(30)
(3)
-
-
(30)
(3)
(659)
263
(30)
(3)
$ 2,069
$ 132
$ 57,560
$ (4,407)
$ 57,399
$ (182)
$ 110,502
See notes to consolidated financial statements.
F-4
Northeast Community Bancorp, Inc.
Consolidated Statements of Cash Flows
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Net amortization (accretion) of securities premiums and discounts
Provision for loan losses
Provision for depreciation
Net (accretion) amortization of deferred discounts, fees and costs
Amortization other
Deferred income tax expense (benefit)
(Gain) from dispositions of premises and equipment
Impairment losses on real estate owned
Earnings on bank owned life insurance
(Increase) in accrued interest receivable
(Increase) decrease in other assets
Increase (decrease) in accrued interest payable
Increase in other liabilities
ESOP shares earned
Net Cash Provided by (Used in) Operating Activities
Cash Flows from Investing Activities:
Purchase of loans
Net increase in loans
Purchase of securities held-to-maturity
Principal repayments on securities available-for-sale
Principal repayments on securities held-to-maturity
Purchases of certificates of deposit
Purchase of Federal Home Loan Bank of New York stock
Purchases of premises and equipment
Proceeds from sale of premises and equipment
Purchase of business
Capitalized costs on real estate owned
Net Cash (Used in) Investing Activities
Cash Flows from Financing Activities:
Net increase in deposits
Proceeds from FHLB of NY advances
Repayment of note payable
Increase in advance payments by borrowers for taxes and insurance
Cash dividends paid to minority shareholders
Net Cash Provided by Financing Activities
Net (Decrease) Increase in Cash and Cash Equivalents
Cash and Cash Equivalents - Beginning
Years Ended December 31,
2007
2008
(In Thousands)
$ 2,102
$ 12,137
5
411
560
151
90
(2,679)
-
369
(386)
(445)
474
(7)
2,317
263
3,225
(8,377)
(73,787)
-
89
793
(498)
(1,937)
(396)
-
-
(82)
(84,195)
35,452
40,000
175
3,740
(659)
78,358
(2,612)
39,146
(88)
338
589
(424)
-
5,053
(18,962)
-
(361)
(239)
(1,080)
8
184
302
(2,543)
(11,695)
(53,703)
(5,000)
8
29,668
-
(15)
(198)
9,082
(1,384)
-
(33,237)
37,386
-
-
955
(164)
38,177
2,397
36,749
Cash and Cash Equivalents - Ending
$ 36,534
$ 39,146
See notes to consolidated financial statements.
F-5
Northeast Community Bancorp, Inc.
Consolidated Statements of Cash Flows (Continued)
Supplementary Cash Flows Information:
Income taxes paid
Interest paid
Supplementary Disclosure of Non-Cash Investing
and Financing Activities:
Loan made to facilitate the sale of real estate owned
Real estate owned received in settlement of loans
Loan receivable originated in connection with building sale
Assets acquired (liabilities incurred) in connection with the
acquisition of a business:
Intangible Assets
Goodwill
Note Payable
Years Ended December 31,
2007
2008
(In Thousands)
$ 1,195
$ 4,865
$ 8,557
$ 5,910
$ 311
$ 1,430
$ -
$ -
$ -
$ 16,341
$ -
-
-
$ 710
1,310
(625)
See notes to consolidated financial statements.
F-6
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
The following is a description of our business and significant accounting and reporting policies:
Nature of Business and Significant Estimates
Northeast Community Bancorp, Inc. (the “Company”) is a Federally-chartered corporation that was organized
to be a mid-tier holding company for Northeast Community Bank (the “Bank”) in conjunction with the
Bank’s reorganization from a mutual savings bank to a mutual holding company structure on July 5, 2006.
The Company’s primary activity is the ownership and operation of the Bank.
The Bank is principally engaged in the business of attracting deposits and investing those funds into mortgage
and commercial loans. When demand for loans is low, the Bank invests in debt securities. Currently the
Bank conducts banking operations from its Headquarters in White Plains, New York gathering deposits
nationwide and lending from Pittsburgh, Pennsylvania to southern Maine. The Bank also has a Loan
Production Office in the Boston, Massachusetts area.
The Bank also offers investment advisory and financial planning services under the name Hayden Wealth
Management Group, a division of the Bank, through a networking arrangement with a registered broker-
dealer and investment advisor.
New England Commercial Properties LLC (“NECP”), a New York limited liability company and wholly
owned subsidiary of the Bank, was formed in October 2007 to facilitate the purchase or lease of real property
by the Bank. New England Commercial Properties, LLC currently owns two foreclosed multi-family
properties, one located in Hampton, New Hampshire and another located in Newark, New Jersey.
The consolidated financial statements include the accounts of the Company, the Bank, and NECP and have
been prepared in conformity with accounting principles generally accepted in the United States of America.
All significant inter-company accounts and transactions have been eliminated in consolidation.
The preparation of consolidated financial statements, in conformity with U.S. generally accepted accounting
principles, requires management to make estimates and assumptions that affect certain recorded amounts and
disclosures. Accordingly, actual results could differ from those estimates.
The most significant estimate pertains to the allowance for loan losses. The borrowers ability to meet
contractual obligations and collateral value are the most significant assumptions used to arrive at the estimate.
The risks associated with such estimates arise when unforeseen conditions affect the borrowers ability to meet
the contractual obligations of the loan and result in a decline in the value of the supporting collateral. Such
unforeseen changes may have an adverse effect on the consolidated results of operations and financial
position of the Company.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review
the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments about information available to them at the time of their examination.
Additionally, we are exposed to significant changes in market interest rates. Such changes could have an
adverse effect on our earning capacity and consolidated financial position, particularly in those situations in
which the maturities or re-pricing of assets are different than the maturities or re-pricing of the supporting
liabilities.
F-7
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from depository institutions and interest-bearing
deposits in other banks, all with original maturities of three months or less.
Securities
Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in
Debt and Equity Securities” requires financial institutions to classify their securities among three categories:
held to maturity, trading, and available for sale. Management determines the appropriate classification at the
time of purchase. Held to maturity securities are those debt securities which management has the intent and
the Bank has the ability to hold to maturity and are reported at amortized cost (unless value is other than
temporarily impaired). Trading securities are those debt and equity securities which are bought and held
principally for the purpose of selling them in the near term and are reported at fair value, with unrealized
gains and losses included in earnings. Available for sale securities are those debt and equity securities which
are neither held to maturity securities nor trading securities and are reported at fair value, with unrealized
gains and losses, net of the related income tax effect, excluded from earnings and reported in a separate
component of stockholders’ equity. The Company does not have trading securities in its portfolio.
Individual securities are considered impaired when fair value is less than amortized cost. Management
evaluates on a monthly basis whether any securities are other-than-temporarily impaired. In making this
determination, we consider the extent and duration of the impairment, the nature and financial health of the
issuer, other factors relevant to specific securities, and our ability and intent to hold securities for a period of
time sufficient to allow for any anticipated recovery in fair value. If a security is determined to be other-than-
temporarily impaired, an impairment loss is charged to operations.
Premiums and discounts on all securities are amortized/accreted to maturity by use of the level-yield method.
Gain or loss on sales of securities is based on the specific identification method.
Loans and Allowance for Loan Losses
Loans are stated at unpaid principal balances plus net deferred loan origination fees and costs less an
allowance for loan losses which is maintained at a level that represents management’s best estimate of losses
known and inherent in the loan portfolio that are both probable and reasonable to estimate. The allowance is
decreased by loan charge-offs, increased by subsequent recoveries of loans previously charged off, and then
adjusted, via either a charge or credit to operations, to an amount determined by management to be necessary.
Loans or portions thereof, are charged off when, after collection efforts are exhausted, they are determined to
be un-collectible. Management of the Bank, in determining the allowance for loan losses, considers the losses
inherent in its loan portfolio and changes in the nature and volume inherent in its loan activities, along with
the general economic and real estate market conditions. The Bank utilizes a two tier approach: (1)
identification of impaired loans and establishment of specific loss allowances on such loans; and (2)
establishment of general valuation allowances on the remainder of its loan portfolio. The Bank maintains a
loan review system, which allows for a periodic review of its loan portfolio and the early identification of
potential impaired loans. Such system takes into consideration, among other things, delinquency status, size
of loans, type of collateral and financial condition of the borrowers. Specific loan loss allowances are
established for identified loans based on a review of such information and/or appraisals of the underlying
collateral. General loan losses are based upon a combination of factors including, but not limited to, actual
loan loss experience, composition of the loan portfolio, current economic conditions and management’s
judgment.
F-8
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
Loans and Allowance for Loan Losses (Continued)
Although management believes that specific and general loan losses are established in accordance with
management’s best estimate, actual losses are dependent upon future events and, as such, further additions to
the level of loan loss allowances may be necessary. A loan evaluated for impairment is deemed to be
impaired when, based on current information and events, it is probable that the Bank will be unable to collect
all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are
evaluated independently. The Bank does not aggregate such loans for evaluation purposes. Payments
received on impaired loans are applied first to interest receivable, second to late charges, third to escrow, and
fourth to principal.
Loan Origination Fees and Costs
Net loan origination fees and costs are deferred and amortized into income over the contractual lives of the
related loans by use of the level yield method.
Loan Interest and the Allowance for Uncollected Interest
Interest on loans receivable is recorded on the accrual basis. An allowance for uncollected interest is
established on loans where management has determined that the borrowers may be unable to meet contractual
principal and/or interest obligations or where interest or principal is 90 days or more past due, unless the loans
are well secured and there is a reasonable expectation of collection. When a loan is placed on nonaccrual, an
allowance for uncollected interest is established and charged against current income. Thereafter, interest
income is not recognized unless the financial condition and payment record of the borrower warrant the
recognition of interest income. Interest on loans that have been restructured is accrued according to the
renegotiated terms.
Concentration of Risk
The Bank’s lending activity is concentrated in loans secured by multi-family and non-residential real estate
located primarily in the Northeast and Mid-Atlantic regions of the United States. The Bank also had deposits
in excess of the FDIC insurance limit at other financial institutions. At December 31, 2008, such deposits
totaled $29.2 million, of which $28.9 million was held by the Federal Home Loan Bank of New York.
Generally, deposits in excess of $250,000 are not insured by the FDIC.
Premises and Equipment
Land is stated at cost. Buildings and improvements, leasehold improvements and furnishings and equipment
are stated at cost less accumulated depreciation and amortization computed on the straight-line method over
the following useful lives:
Buildings
Building improvements
Leasehold improvements
Furnishings and equipment
Years
30 - 50
10 - 50
1 - 15
3 - 50
Maintenance and repairs are charged to operations in the years incurred.
F-9
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
Bank Owned Life Insurance (“BOLI”)
The Bank owns life insurance on the lives of certain of its officers. The cash surrender value is recorded as an
asset and the change in cash surrender value is included in non-interest income and is exempt from federal,
state and city income taxes. The BOLI is invested in a General Account Portfolio and a Yield Portfolio
account and is managed by an independent investment firm.
Federal Home Loan Bank of New York Stock
Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to hold stock of
its district FHLB according to a predetermined formula. The stock carried at cost.
Business Combinations
Amounts paid for acquisitions are allocated to the tangible assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. The Company then allocates the purchase price in excess
of net tangible assets acquired to identifiable intangible assets. The fair value of identifiable intangible assets
is based on detailed valuations that use information and assumptions provided by management. The Company
allocates any excess purchase price over the fair value of the net tangible and intangible assets acquired to
goodwill.
Intangible Assets
Intangible assets at December 31, 2008 and 2007, totaled $649,000 and $710,000, respectively, and consist of
the value of customer relationships acquired in the business combination completed by the Company in
November 2007. The Company recorded these intangible assets at cost and is amortizing them, using the
straight-line method, over 11.7 years. Amortization expense is included in other non-interest expenses. The
Company evaluates the remaining useful life of intangible assets on a periodic basis to determine whether
events and circumstances warrant a revision to the remaining useful life. If the estimate of an intangible
asset’s remaining useful life is changed, the Company will amortize the remaining carrying value of the
intangible asset prospectively over the revised remaining useful life. The Company reviews intangible assets
subject to amortization for impairment whenever events or circumstances indicate that the carrying value of
these assets may not be recoverable. The Company assesses the recoverability of intangible assets using
undiscounted cash flows. If intangible assets are found to be impaired, the amount recognized for impairment
is equal to the difference between the carrying value and fair value. The fair value is estimated based upon the
present value of discounted future cash flows or other reasonable estimates of fair value.
Goodwill
Goodwill at December 31, 2008 and 2007, totaled $1.3 million and consists of goodwill acquired in the
business combination completed by the Company in November 2007. The Company tests goodwill during
the fourth quarter of each year for impairment, or more frequently if certain indicators are present or changes
in circumstances suggest that impairment may exist. The Company utilizes a two-step approach. The first step
requires a comparison of the carrying value of the reporting unit to the fair value of the unit. The Company
estimates the fair value of the reporting unit through internal analyses and external valuation, which utilizes
an income approach based on the present value of future cash flows. If the carrying value of the reporting unit
exceeds its fair value, the Company will perform the second step of the goodwill impairment test to measure
the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied
fair value of a reporting unit’s goodwill with its carrying value.
F-10
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
Goodwill (Continued)
The implied fair value of goodwill is determined in the same manner that the amount of goodwill recognized
in a business combination is determined. The Company allocates the fair value of the reporting unit to all of
the assets and liabilities of that unit, including intangible assets, as if the reporting unit had been acquired in a
business combination. Any excess of the value of a reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of goodwill.
Real Estate Owned
Real estate owned is carried at the lower of fair value of the related property, as determined by current
appraisals less estimated costs to sell, or the recorded investment in the property. Write-downs on these
properties, which occur after the initial transfer from the loan portfolio, are recorded as operating
expenses. Costs of holding such properties are charged to expense in the current period. Gains, to the extent
allowable, and losses on the disposition of these properties are reflected in current operations.
Income Taxes
The Company, the Bank and NECP file a consolidated federal income tax return. Income taxes are allocated
to the Company, Bank and NECP based upon their respective income or loss included in the consolidated
income tax return. The Company, the Bank and NECP file combined or separate state and city income tax
returns depending on the particular requirements of each jurisdiction.
Federal, state and city income tax expense has been provided on the basis of reported income. The amounts
reflected on the tax returns differ from these provisions due principally to temporary differences in the
reporting of certain items for financial reporting and income tax reporting purposes. The tax effect of these
temporary differences is accounted for as deferred taxes applicable to future periods. Deferred income tax
expense or (benefit) is determined by recognizing deferred tax assets and liabilities for the estimated future
tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in earnings in the period that includes the enactment date. The realization of deferred tax assets is
assessed and a valuation allowance provided, when necessary, for that portion of the asset, which is not more
likely than not to be realized.
The Company recognizes income tax related penalties and interest incurred as a component of income tax
expense. Such amounts have been immaterial.
Advertising Costs
Advertising costs are expensed as incurred. The direct response advertising conducted by the Bank is
immaterial and has not been capitalized. Advertising costs are included in “non-interest expenses” on the
Statements of Income.
F-11
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
Other Comprehensive Income
The Company records in accumulated other comprehensive income (loss), net of related deferred income
taxes, unrealized gains and losses on available for sale securities and the prior service cost and actuarial gains
and losses of the Outside Directors Retirement Plan (“DRP”) that have not yet been recognized in expense.
Realized gains and losses, if any, are reclassified to non-interest income upon the sale of the related securities
or upon the recognition of a security impairment loss. A portion of the prior service cost and actuarial losses
of the DRP is recorded in expense annually. At December 31, 2008, accumulated other comprehensive loss
totaled $(182,000) and included $(5,000) of net losses on available for sale securities with no related deferred
tax and $(318,000) in prior service cost and actuarial losses of the DRP less $141,000 of related deferred
income taxes. At December 31, 2007, accumulated other comprehensive loss totaled $(149,000) and included
$43,000 of net gains on available for sale securities less $(18,000) of related deferred income taxes and
$(316,000) in prior service cost of the DRP less $142,000 of related deferred income taxes.
The Company has elected to report the effects of other comprehensive income in the consolidated statements
of stockholders’ equity.
Net Income Per Common Share
Basic net income per common share is calculated by dividing the net income available to common
stockholders by the weighted-average number of common shares outstanding during the period. Diluted net
income per common share is computed in a manner similar to basic net income per common share except that
the weighted average number of common shares outstanding is increased to include the incremental common
shares (as computed using the treasury stock method) that would have been outstanding if all potentially
dilutive common stock equivalents were issued during the period. Common stock equivalents may include
restricted stock awards and stock options. The Company has not granted any restricted stock awards or stock
options and had no potentially dilutive common stock equivalents. Unallocated common shares held by the
Employee Stock Ownership Plan ("ESOP") are not included in the weighted-average number of common
shares outstanding for purposes of calculating both basic and diluted net income per common share until they
are committed to be released.
Interest Rate Risk
The Bank is principally engaged in the business of attracting deposits from the general public and using these
deposits, together with other funds, to purchase securities and to make loans secured by real estate. The
potential for interest-rate risk exists as a result of the generally shorter duration of interest-sensitive liabilities
compared to the generally longer duration of interest-sensitive assets. In a rising rate environment, liabilities
will re-price faster than assets, thereby reducing net interest income. For this reason, management regularly
monitors the maturity structure of the Bank’s assets and liabilities in order to measure its level of interest-rate
risk and to plan for future volatility.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, we enter into off-balance-sheet financial instruments consisting of
commitments to extend credit. Such financial instruments are recorded in the consolidated statement of
financial condition when funded.
F-12
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
Reclassification
Certain amounts for prior periods have been reclassified to conform to the current year’s presentation. Such
reclassifications had no effect on net income.
Note 2 – Mutual Holding Company Reorganization and Regulatory Matters
On July 5, 2006, the Company reorganized from a mutual savings bank to a mutual holding company
structure. In the reorganization, the Company sold 5,951,250 shares of its common stock to the public and
issued 7,273,750 shares of its common stock to Northeast Community Bancorp, MHC (“MHC”). The net
proceeds received from the common stock offering were $57.6 million. Costs incurred in connection with the
common stock offering were recorded as a reduction of gross proceeds from the offering and totaled
approximately $1.9 million. The Company also provided a term loan to the Bank’s Employee Stock
Ownership Plan to enable it to purchase 518,420 shares of Company common stock at $10.00 per share as
part of the reorganization. The MHC, which owned 55.0% of the Company’s common stock as of December
31, 2008, must hold at least 50.1% of the Company’s stock so long as the MHC exists.
All depositors who had membership or liquidation rights with respect to the Bank as of the effective date of
the reorganization will continue to have such rights solely with respect to the MHC as long as they continue
to hold deposit accounts with the Bank. In addition, all persons who become depositors of the Bank
subsequent to the date of the transaction will have such membership and liquidation rights with respect to the
MHC. Borrowers of the Bank as of the date of the transaction will have the same membership rights in the
MHC that they had in the Bank immediately prior to the date of the transaction as long as their existing
borrowings remain outstanding.
Office of Thrift Supervision (“OTS”) regulations impose limitations upon all capital distributions, including
cash dividends, by savings institutions such as the Bank. Under these regulations, an application to and a prior
approval of the OTS are required before any capital distribution if (1) the institution does not meet the criteria
for “expedited treatment” of applications under OTS regulations; (2) total capital distributions for the calendar
year exceed net income for that year plus the amount of retained net income for the preceding two years; (3)
the institution would be undercapitalized following the distribution; or (4) the distribution would otherwise be
contrary to statute, regulation or agreement with the OTS. If an application is not required, the Bank would
still be required to provide the OTS with prior notification. The Company’s ability to pay dividends, should
any be declared, may depend on the ability of the Bank to pay dividends to the Company.
OTS regulations require the MHC to notify the OTS if it proposes to waive the receipt of dividends declared
by the Company. The OTS reviews dividend waiver requests on a case-by-case basis and, generally, has not
objected to such waivers if (1) the waiver would not be detrimental to the safe and sound operation of the
institution; (2) the MHC’s board of directors has determined that such waiver is consistent with such
directors’ fiduciary duties to MHC’s members; and (3) the MHC certifies that the dividends declared
(distributed and waived) for the current year plus prior two calendar quarters does not exceed cumulative net
income during that period.
During 2008 and 2007, the MHC filed notice with the OTS, which did not object, of its intention to waive
dividends declared by the Company. The OTS approval received in 2008 applies also to quarterly cash
dividends, if any, to be paid for the first and second quarters of 2009. Dividends declared by the Company in
2008 and 2007 and waived by the MHC totaled approximately $873,000 and $436,000, respectively. As of
F-13
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 2 – Mutual Holding Company Reorganization and Regulatory Matters (Continued)
December 31, 2008, total dividends waived by the MHC aggregated $1,309,000. We anticipate that the MHC
will continue to waive receipt of all dividends declared by the Company.
The Bank is required to maintain certain levels of capital in accordance with the Financial Institutions
Reform, Recovery and Enforcement Act (FIRREA) and OTS regulations. Under these capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.
Under the OTS regulations, the Bank must have: (1) tangible capital equal to 1.5% of tangible assets, (2) core
capital equal 3% of tangible assets, and (3) total (risk-based) capital equal to 8% of risk-weighted assets.
Tangible capital consists generally of stockholders’ equity less most intangible assets. Core capital consists
of tangible capital plus certain intangible assets such as qualifying purchased mortgage-servicing rights.
Risk-based capital consists of core capital plus the general allowance for loan losses.
Under the prompt corrective action rule issued by the federal banking authorities, an institution must have a
leverage ratio of 4% or greater, a tier 1 capital ratio of 4% or greater and a total risk-based capital ratio of 8%
or greater in order to be considered adequately capitalized. The Bank is in compliance with these
requirements at December 31, 2008.
The following tables present a reconciliation of capital per generally accepted accounting principles
(“GAAP”) and regulatory capital and information about the Bank’s capital levels at the dates presented:
GAAP capital
Less: Goodwill and intangible assets
Directors retirement plan AOCI
Unrealized loss (gain) on securities available for sale
Disallowed deferred tax assets
Core and Tangible Capital
Add: General valuation allowances
Total Capital
December 31,
2008
2007
(In Thousands)
$ 81,312
(1,959)
177
5
(64)
$ 79,282
(2,020)
174
(25)
(1,003)
79,471
76,408
1,865
1,489
$ 81,336
$ 77,897
F-14
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 2 – Mutual Holding Company Reorganization and Regulatory Matters (Continued)
Actual
Amount
Ratio
For Capital Adequacy
Purposes
Amount
Ratio
(Dollars in Thousands)
To be Well Capitalized
under Prompt
Corrective Action
Provisions
Amount
Ratio
As of December 31, 2008:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Core (Tier 1) capital (to adjusted total
assets
Tangible capital (to adjusted total assets)
As of December 31, 2007:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Core (Tier 1) capital (to adjusted total
assets
Tangible capital (to adjusted total assets)
$ 81,336
79,471
79,471
79,471
$ 77,897
76,408
76,408
76,408
30.65 %
29.95
$ ≥21,230
≥ -
≥8.00 %
≥ -
$ ≥26,538
≥15,923
≥10.00 %
≥ 6.00
19.45
19.45
≥16,339
≥ 6,127
≥4.00
≥1.50
≥20,424
≥ -
≥ 5.00
≥ -
37.50 %
36.78
$ ≥16,617
≥ -
≥8.00 %
≥ -
$ ≥20,772
≥12,463
≥10.00 %
≥ 6.00
24.18
24.18
≥12,641
≥ 4,740
≥4.00
≥1.50
≥15,801
≥ -
≥ 5.00
≥ -
Based on the most recent notification by the OTS, the Bank was categorized as well capitalized under the
regulatory framework for prompt corrective action. There have been no conditions or events that have
occurred since notification that management believes have changed the Bank’s category.
The Bank’s management believes that, with respect to regulations under FIRREA, the Bank will continue to
meet its minimum capital requirements in the foreseeable future. However, events beyond the control of the
Bank, such as increased interest rates or a downturn in the economy in areas where the Bank has most of its
loans, could adversely affect future earnings and, consequently, the ability of the Bank to meet its future
minimum capital requirements.
Note 3 - Acquisition
On November 16, 2007, the Company acquired the operating assets of Hayden Financial Group LLC
(“Hayden”), an investment advisory firm located in Connecticut, at a cost of $2,020,000, including $95,000 of
expenses directly related to the transaction. The acquisition of these business assets has enabled the Bank to
expand the services it provides to include investment advisory and financial planning services to the then-
existing Hayden customer base as well as future customers. In connection with this transaction, the Company
recorded intangible assets related to customer relationships of $710,000, goodwill of $1,310,000 and a note
payable with a present value of $625,000. The acquired business is being operated as a division of the Bank
and, during 2008 and 2007, generated total revenues of approximately $878,000 and $69,000, respectively,
and income before taxes of approximately $17,000 and $2,000, respectively.
F-15
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 4 - Financial Instruments with Off-Balance Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments are commitments to extend credit.
Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statements of financial condition.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit
Construction loans in process
Commitments to fund unused lines of credit:
Commercial lines
Consumer lines
December 31,
2008
2007
(In Thousands)
$ 32,348
1,471
$ 44,071
582
19,256
181
5,379
191
$ 53,256
$ 50,223
At December 31, 2008, all of the financial instruments noted above carry adjustable or floating interest rates.
Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. The amount of collateral obtained, if deemed
necessary by the Bank, is based on management’s credit evaluation of the borrower.
Note 5 – Certificates of Deposit
Due within one year
December 31,
2008
2007
(In Thousands)
$ 498
$ -
$ 498
$ -
F-16
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 6 - Securities Available for Sale
Amortized
Cost
December 31, 2008
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair Value
Federal National Mortgage Association
common stock
$ 4
$ -
$ 3
$ 1
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation
Federal National Mortgage Association
124
59
183
-
-
-
1
1
2
123
58
181
$ 187
$ -
$ 5
$ 182
Amortized
Cost
December 31, 2007
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair Value
Federal National Mortgage Association
common stock
$ 4
$ 42
$ -
$ 46
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation
Federal National Mortgage Association
Collateralized Mortgage Obligations
187
82
4
273
1
-
-
1
-
-
-
-
188
82
4
274
$ 277
$ 43
$ -
$ 320
There were no sales of securities available for sale during the years ended December 31, 2008 and 2007.
F-17
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 6 - Securities Available for Sale (Continued)
Contractual maturities of mortgage-backed securities were as follows:
December 31,
2008
2007
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
(In Thousands)
Due within one year
Due after ten years
$ -
183
$ -
181
$ 4
269
$ 4
270
$ 183
$ 181
$ 273
$ 274
The maturities shown above are based upon contractual maturity. Actual maturities will differ from
contractual maturities due to scheduled monthly repayments and due to the underlying borrowers having the
right to prepay their obligations.
The age of unrealized losses and the fair value of related securities available for sale were as follows:
Less than 12 Months
Gross
Unrealized
Losses
(In Thousands)
12 Months or More
Gross
Unrealized
Losses
Fair
Value
Fair
Value
Total
Fair
Value
Gross
Unrealized
Losses
December 31, 2008:
FNMA common stock
Mortgage-backed
securities
$ 1
$ 3 $ -
$ -
$ 1
$ 3
125
$ 126
2
$ 5
-
$ -
-
$ -
125
$ 126
2
$ 5
At December 31, 2008, one equity security and seven mortgage-backed securities had unrealized losses.
Management concluded that the unrealized losses reflected above for mortgage-backed securities were
temporary in nature since they were primarily related to market interest rates and not related to the underlying
credit quality of the issuers of the securities. Additionally, the Bank has the ability and intent to hold these
securities for the time necessary to recover the amortized cost.
F-18
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 7 - Securities Held to Maturity
Mortgage-backed securities:
Government National Mortgage
Association
Federal Home Loan Mortgage
Corporation
Federal National Mortgage Association
Collateralized Mortgage Obligations
Private Pass-through Securities
Amortized
Cost
December 31, 2008
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair Value
$ 960
$ 1
$ 19
$ 942
495
562
57
4
1
4
-
-
8
5
1
1
488
561
56
3
$ 2,078
$ 6
$ 34
$ 2,050
Amortized
Cost
December 31, 2007
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair Value
Mortgage-backed securities:
Government National Mortgage
Association
Federal Home Loan Mortgage
Corporation
Federal National Mortgage Association
Collateralized Mortgage Obligations
Private Pass-through Securities
$ 1,341
$ 9
$ 2
$ 1,348
668
746
116
4
$ 2,875
4
9
1
-
$ 23
4
2
-
-
$ 8
668
753
117
4
$ 2,890
There were no sales of securities held to maturity during the years ended December 31, 2008 and 2007.
F-19
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 7 - Securities Held to Maturity (Continued)
Contractual maturities of mortgage-backed securities were as follows:
December 31,
2008
2007
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
(In Thousands)
Due within one year
Due after one but within five years
Due after five but within ten years
Due after ten years
$ -
15
339
1,724
$ -
15
337
1,698
$ 50
46
303
2,476
$ 50
47
303
2,490
$ 2,078
$ 2,050
$ 2,875
$ 2,890
The maturities shown above are based upon contractual maturity. Actual maturities will differ from
contractual maturities due to scheduled monthly repayments and due to the underlying borrowers having the
right to prepay their obligations.
The age of unrealized losses and the fair value of related securities held to maturity were as follows:
Less than 12 Months
Gross
Unrealized
Losses
(In Thousands)
12 Months or More
Gross
Unrealized
Losses
Fair
Value
Fair
Value
Total
Fair
Value
Gross
Unrealized
Losses
December 31, 2008:
Mortgage-backed
securities
December 31, 2007:
Mortgage-backed
securities
$ -
$ -
$ 1,656
$ 34
$ 1,656
$ 34
$ 74
$ 1
$ 961
$ 7
$ 1,035
$ 8
At December 31, 2008, 46 mortgage-backed securities had unrealized losses. As of December 31, 2008 and
2007, management concluded that the unrealized losses reflected above were temporary in nature since they
were primarily related to market interest rates and not related to the underlying credit quality of the issuers of
the securities. Additionally, the Bank has the ability and intent to hold these securities for the time necessary
to recover the amortized cost.
F-20
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 8 - Loans Receivable, Net
Real estate mortgage:
One-to-four family
Multi-family
Mixed use
Commercial
Construction:
Multi-family
Commercial
Commercial Business:
Lines of Credit
Term
Consumer:
Line of credit
Passbook or certificate
Total Loans
Allowance for loan losses
Deferred loan fees and costs
December 31,
2008
2007
(In Thousands)
$ 275
186,199
58,317
102,785
$ 304
138,767
52,559
79,305
347,576
270,935
9,025
-
9,025
6,398
1,222
7,620
57
57
114
7,538
1,918
9,456
2,322
655
2,977
69
19
88
364,335
283,456
(1,865)
1,146
(1,489)
1,166
$ 363,616
$ 283,133
Loans serviced for the benefit of others totaled approximately $11,346,000 and $4,407,000 at December 31,
2008 and 2007, respectively.
At December 31, 2008 and December 31, 2007, we had three non-accrual loans totaling $1,875,000 and three
non-accrual loans totaling $1,867,000, respectively. Interest income on such loans is recognized only when
actually collected. During the years ended December 31, 2008 and December 31, 2007, the Bank recognized
interest income of approximately $1,000 and $21,000, respectively, on the non-accrual loans. Interest income
that would have been recorded had the loans been on the accrual status would have amounted to
approximately $142,000 and $153,000 for the year ended December 31, 2008 and December 31, 2007,
F-21
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 8 - Loans Receivable, Net (Continued)
respectively. The Bank is not committed to lend additional funds to borrowers whose loans have been placed
on the non-accrual status.
At December 31, 2008, impaired loans totaled $3,220,000 and were not subject to specific loan loss
allowances. For the year ended December 31, 2008, the average recorded investment in impaired loans
totaled approximately $2,517,000. Interest income recognized on impaired loans during 2008 totaled
$76,000.
At December 31, 2007, impaired loans totaled $1,866,000 and were not subject to specific loan loss
allowances. For the year ended December 31, 2007, the average recorded investment in impaired loans
totaled approximately $1,114,000. No interest income was recognized on impaired loans during the period of
impairment.
The following is an analysis of the allowance for loan losses:
Years Ended December 31,
2008
2007
(In Thousands)
$ 1,489
411
(35)
$ 1,200
338
(49)
$ 1,865
$ 1,489
December 31,
2008
2007
(In Thousands)
$ 534
7,234
736
5,301
$ 534
7,183
736
4,977
13,805
(9,440)
13,430
(8,901)
$ 4,365
$ 4,529
Balance, beginning
Provision charged to operations
Losses charged to allowance
Balance, ending
Note 9 - Premises and Equipment, Net
Land
Buildings and improvements
Leasehold improvements
Furnishings and equipment
Accumulated depreciation and amortization
F-22
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 9 - Premises and Equipment, Net (Continued)
On June 29, 2007, the Bank closed on the sale of premises and equipment having an aggregate carrying value
of $6,195,000, receiving net proceeds of $25,157,000 (gross proceeds of $25,423,000 less transaction costs of
$266,000) and recognizing a net gain of $18,962,000. The assets sold related to a branch located in New
York City and consisted of the following: land of $52,000, air rights of $6,088,000, building of $5,000 and
furnishings and equipment of $50,000. The proceeds received included cash of $9,082,000 and a two-year
zero-coupon note with a then present value of $16,341,000.
Note 10 - Accrued Interest Receivable, Net
Loans
Securities
Allowance for uncollected interest
December 31,
2008
2007
(In Thousands)
$ 1,998
8
2,006
(221)
$ 1,785
$ 1,456
16
1,472
(132)
$ 1,340
Note 11 - Goodwill and Intangible Assets
Goodwill and intangible assets at December 31 are summarized as follows (in thousands):
Goodwill
Customer relationships intangible
Total
$1,310
649
$1,959
$1,310
710
$2,020
2008
2007
Amortization expense of intangible assets was $61,000 and $-0- for the years ended December 31, 2008 and
2007, respectively. Scheduled amortization for each of the next five years and thereafter is as follows (in
thousands):
$
2009
2010
2011
2012
2013
Thereafter
61
61
61
61
61
344
F-23
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 12 - Real Estate Owned (“REO”)
The Company held two properties valued at approximately $832,000 at December 31, 2008. During the year
ended December 31, 2008,
these
the Company recorded $369,000 of
properties. Further declines in real estate values may result in additional impairment charges in the
future. Routine holding costs are charged to expense as incurred and improvements to real estate owned that
enhance the value of the real estate are capitalized. REO expenses during 2008 amounted to $381,000,
including net holding expenses of $12,000. The Company did not own any REO at or during the year ended
December 31, 2007.
impairment
losses on
Note 13 - Deposits
December 31,
2008
2007
Weighted
Average
Interest
Rate
Weighted
Average
Interest
Rate
Amount
(Dollars in Thousands)
Amount
Demand deposits:
Non-interest bearing
NOW and money market
$ 6,209
24,595
30,804
0.00 %
0.57 %
0.45 %
$ 1,745
21,839
23,584
0.00 %
0.84 %
0.77 %
Savings accounts
56,987
0.68 %
57,346
0.73 %
Certificates of deposit maturing in:
One year or less
After one to two years
After two to three years
After three to four years
After four to five years
138,934
20,331
6,645
5,907
1,822
3.96 %
4.46 %
5.03 %
5.11 %
3.33 %
95,341
24,531
14,412
5,099
5,665
4.83 %
4.76 %
4.78 %
5.27 %
5.15 %
173,639
4.09 %
145,048
4.84 %
$ 261,430
2.93 %
$ 225,978
3.37 %
F-24
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 13 – Deposits (Continued)
As of December 31, 2008 and 2007, certificates of deposits over $100,000 totaled $33,061,000 and
$26,846,000, respectively.
Interest expense on deposits consists of the following:
Demand deposits
Savings accounts
Certificates of deposit
Note 14 – Advances from Federal Home Loan Bank of New York (“FHLB”)
Years Ended December 31,
2008
2007
(In Thousands)
$ 144
450
7,224
$ 117
415
5,365
$ 7,818
$ 5,897
December 31,
2008
2007
Weighted
Average
Interest
Rate
Weighted
Average
Interest
Rate
Amount
(Dollars in Thousands)
Amount
$ 15,000
10,000
5,000
10,000
2.14 %
3.58 %
3.30 %
3.70 %
$ -
-
-
-
$ 40,000
3.04 %
$ -
-
-
-
-
-
%
%
%
%
%
Advances maturing in:
One year or less
After one to two years
After two to three years
After four to five years
At December 31, 2008, none of the above advances were subject to early call or redemption features.
At December 31, 2008, the advances were secured by a pledge of the Bank’s investment in the capital stock
of the FHLB and a blanket assignment of the Bank’s unpledged qualifying mortgage loans.
F-25
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 15 - Note Payable
In conjunction with the Hayden acquisition on November 16, 2007, the Company incurred a four-year, zero-
coupon note payable of $700,000. The note is payable in four annual installments, one on each succeeding
note anniversary date, of $175,000. The note was initially recorded at $625,000, assuming a 4.60% discount
rate. The note payable balance at December 31, 2008 and 2007, was $481,000 and $627,000, respectively,
and the note discount accreted during 2008 and 2007 totaled $29,000 and $2,000, respectively.
Note 16 - Income Taxes
The Bank qualifies as a savings institution under the provisions of the Internal Revenue Code and was,
therefore, prior to January 1, 1996, permitted to deduct from taxable income an allowance for bad debts based
upon eight percent of taxable income before such deduction, less certain adjustments. Retained earnings at
December 31, 2008 and 2007, include approximately $4.1 million of such bad debt deductions which, in
accordance with SFAS No. 109, “Accounting for Income Taxes,” is considered a permanent difference
between the book and income tax basis of loans receivable, and for which income taxes have not been
provided. If such amount is used for purposes other than for bad debt losses, including distributions in
liquidation, it will be subject to income tax at the then current rate.
The components of income taxes are summarized as follows:
Current tax expense
Deferred tax expense (benefit)
Income Tax Expense
Years Ended December 31,
2008
2007
(In Thousands)
$ 3,857
(2,679)
$ 4,097
5,053
$ 1,178
$ 9,150
The following table presents a reconciliation between the reported income taxes and the income taxes, which
would be computed by applying normal federal income tax rates to income before taxes:
Federal income tax at statutory rates
State and City tax, net of federal income tax
effect
Non-taxable income on bank owned life
insurance
Other
Income Tax Expense
Effective Income Tax Rate
F-26
Years Ended December 31,
2008
(Dollars In Thousands)
2007
$ 1,115
$ 7,238
172
(131)
22
1,945
(123)
90
$ 1,178
$ 9,150
35.9%
43.0%
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 16 - Income Taxes (continued)
The tax effects of significant items comprising the net deferred tax asset are as follows:
Deferred tax assets:
Allowance for loan losses
Reserve for uncollected interest
Unrealized losses on REO
Depreciation
Benefit plans
Accumulated other comprehensive loss - DRP
Total Deferred Tax Assets
Deferred tax liability:
Unrealized gain on securities available for sale
Goodwill
Gain on sale of building
Other
Total Deferred Tax Liabilities
December 31,
2008
2007
(In Thousands)
$ 788
93
151
183
381
141
$ 657
-
-
168
223
142
1,737
1,190
-
37
2,926
99
3,062
18
-
5,179
14
5,211
Net Deferred Tax (Liability)
$ (1,325)
$ (4,021)
The net deferred tax liability is included in Accounts Payable and Accrued Expenses in the consolidated
statements of financial condition.
Note 17 - Other Non-Interest Expenses
The following is an analysis of other non-interest expenses:
Service contracts
Insurance
Audit and accounting
Directors compensation
Telephone
Office supplies and stationary
Director, officer, and employee expenses
Legal fees
Other
F-27
Years Ended December 31,
2008
2007
(In Thousands)
$ 212
163
267
287
165
218
269
290
668
$ 2,539
$ 205
165
214
219
167
209
235
277
642
$ 2,334
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 18 - Benefits Plans
Outside Director Retirement Plan (“DRP”)
Effective January 1, 2006, the Bank implemented the DRP. This plan is a non-contributory defined benefit
pension plan covering all non-employee directors meeting eligibility requirements as specified in the plan
document. The DRP is accounted for under Statements of Financial Accounting Standards Nos. 132 and 158.
The following table sets forth the funded status of the DRP and components of net periodic expense:
Benefit Obligation – beginning
Service cost
Interest cost
Actuarial loss
Prior service cost
Benefit Obligation – ending
Funded Status – Accrued liability included in Accounts Payable and
Accrued Expenses
Discount rate
Salary increase rate
Net pension expense:
Service cost
Interest cost
Actuarial loss recognized
Prior service liability recognized
Years Ended December 31,
2008
(Dollars In Thousands)
2007
$ 476
49
31
29
-
$ 358
43
25
49
1
$ 585
$ 476
$ 585
$ 476
6.00%
2.00%
6.00%
2.00%
$ 49
31
5
21
$ 43
25
-
21
Total pension expense included in Other Non-Interest Expenses
$ 106
$ 89
Discount rate
Salary increase rate
6.00%
2.00%
6.00%
2.00%
At December 31, 2008, prior service cost of $245,000 and actuarial losses of $74,000 have been recorded in
Accumulated Other Comprehensive Loss. Approximately $21,000 and $8,000 of those amount are expected
to be included in pension expense in 2009.
F-28
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 18 - Benefits Plans (Continued)
Benefit payments, which reflect expected future service as appropriate, are expected to be paid for the years
ended December 31 as follows (in thousands):
2009
2010
2011
2012
2013
2014 – 2018
$ -
-
31
63
63
451
Supplemental Executive Retirement Plan (“SERP”)
Effective January 1, 2006, the Bank implemented the SERP. This plan is a non-contributory defined benefit
plan accounted for under SFAS 106. The SERP covers both the Bank’s Chief Executive Officer and Chief
Financial Officer. Under the SERP, each of these individuals will be entitled to receive, upon retirement at
age 65, an annual benefit, paid in monthly installments, equal to 50% of his average base salary in the three-
year period preceding retirement. Each individual may also retire early and receive a reduced benefit (0.25%
reduction in benefit for each month by which retirement age is less than 65 years) upon the attainment of both
age 60 and 20 years of service. Additional terms related to death while employed, death after retirement,
disability before retirement and termination of employment are fully described within the plan document. The
benefit payment term is the greater of 15 years or the executives remaining life. No benefits are expected to
be paid during the next ten years.
During the years ended December 31, 2008 and 2007, expenses of $142,000 and $135,000, respectively, were
recorded for this plan and are reflected in the Consolidated Statements of Income under Salaries and
Employee Benefits. At December 31, 2008 and 2007, a liability for this plan of $391,000 and $249,000,
respectively, is included in the Consolidated Statements of Financial Condition under Accounts Payable and
Accrued Expenses.
401(k) Plan
The Bank maintains a 401(k) plan for all eligible employees. Participants are permitted to contribute from
1% to 15% of their annual compensation up to the maximum permitted under the Internal Revenue Code.
The Bank through August 2006, made matching contributions equal to 100% of the employees contribution
up to 5% of annual compensation. In September 2006, the Bank ceased making matching contributions to the
401(k) plan. Employer contributions fully vest after 6 years.
Employee Stock Ownership Plan (“ESOP”)
In conjunction with the Company’s initial public stock offering, the Bank established an ESOP for all eligible
employees (substantially all full-time employees). The ESOP borrowed $5,184,200 from the Company and
used those funds to acquire 518,420 shares of Company common stock at $10.00 per share. The loan from the
Company carries an interest rate of 8.25% and is repayable in twenty annual installments through 2025. Each
year, the Bank intends to make discretionary contributions to the ESOP equal to the principal and interest
payment required on the loan from the Company. The ESOP may further pay down the principal balance of
the loan by using dividends paid, if any, on the shares of Company common stock it owns. The balance
remaining on the ESOP loan was $4,638,000 and $4,762,000 at December 31, 2008 and 2007, respectively.
F-29
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 18 - Benefits Plans (Continued)
Shares purchased with the loan proceeds serve as collateral for the loan and are held in a suspense account for
future allocation among ESOP participants. As the loan principal is repaid, shares will be released from the
suspense account and become eligible for allocation. The allocation among plan participants will be as
described in the ESOP governing document.
The ESOP is accounted for in accordance with Statement of Position 93-6, “Accounting for Employee Stock
Ownership Plans”, which was issued by the American Institute of Certified Public Accountants. Accordingly,
ESOP shares initially pledged as collateral were recorded as unearned ESOP shares in the stockholders’
equity section of the consolidated statement of financial condition. Thereafter, on a monthly basis over a 240
month period, approximately 2,160 shares are committed to be released and compensation expense recorded
equal to the shares committed to be released multiplied by the average closing price of the Company’s stock
during that month. ESOP expense during the years ended December 31, 2008 and 2007, totaled
approximately $263,000 and $302,000, respectively. Dividends on unallocated shares, which totaled
approximately $57,000 and $15,000 during 2008 and 2007, respectively, are recorded as a reduction of the
ESOP loan. Dividends on allocated shares, which totaled approximately $5,000 and $1,000 during 2008 and
2007, respectively, are charged to retained earnings. ESOP shares are summarized as follows:
ESOP shares are summarized as follows:
Allocated shares
Shares committed to be released
Unearned shares
December 31,
2008
51,842
25,921
440,657
2007
25,921
25,921
466,578
Total ESOP Shares
518,420
518,420
Fair value of unearned shares
$ 3,238,000
$ 5,520,000
Note 19 - Commitments and Contingencies
Lease Commitments
Rentals under operating leases for certain branch offices and land amounted to $359,000 and $297,000 for the
years ended December 31, 2008 and 2007, respectively. At December 31, 2008, the minimum rental
commitments under all non-cancelable leases with initial or remaining terms of more than one year are as
follows (in thousands):
Year ending December 31,
2009
2010
2011
2012
2013
Thereafter
$ 341
270
162
64
64
1,241
$ 2,142
F-30
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 19 - Commitments and Contingencies (Continued)
Available Credit Facilities
The Bank has the ability to borrow up to $11.2 million from the Federal Home Loan Bank of New York,
consisting of a $5.6 million Overnight Line of Credit and a $5.6 million Companion (DRA) Commitment,
both of which expire on July 31, 2008. At December 31, 2008 and 2007, no amounts were outstanding under
these credit facilities.
Other
The Company and Bank are also subject to claims and litigation that arise primarily in the ordinary course of
business. Based on information presently available and advice received from legal counsel representing the
Company and Bank in connection with such claims and litigation, it is the opinion of management that the
disposition or ultimate determination of such claims and litigation will not have a material adverse effect on
the consolidated financial position, results of operations or liquidity of the Company.
Note 20 - Fair Value Disclosures
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, Fair
Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair
value under GAAP, and expands disclosures about fair value measurements. SFAS 157 applies to other
accounting pronouncements that require or permit fair value measurements. The Company adopted SFAS
157 effective for its fiscal year beginning January 1, 2008.
In December 2007, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No. 157
(“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and liabilities,
except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal
years beginning after November 15, 2008 and interim periods within those fiscal years. As such, the
Company only partially adopted the provisions of SFAS 157, and will begin to account and report for non-
financial assets and liabilities in 2009. In October 2008, the FASB issued FASB Staff Position 157-3,
Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active (“FSP 157-3”),
to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would
determine fair value in an inactive market. FSP 157-3 is effective immediately and applies to the Company’s
December 31, 2008 consolidated financial statements. The adoption of SFAS 157 and FSP 157-3 had no
impact on the amounts reported in the financial statements.
SFAS 157 establishes 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 under SFAS 157 are as follows:
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.
F-31
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 20- Fair Value Disclosures (continued)
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 basis, the fair value measurements by level within
the fair value hierarchy used at December 31, 2008 are as follows:
Description
December 31,
2008
(Level 1)
Quoted Prices
in Active
Markets for
Identical Assets
(Level 2)
Significant
Other
Observable
Inputs
(In Thousands)
(Level 3)
Significant
Unobservable
Inputs
Securities available for sale
$ 182
$ -
$
182
$ -
At December 31, 2008, the Company had no financial assets measured at fair value on a nonrecurring basis.
As discussed above, the Company has delayed its disclosure requirements of non-financial assets and
liabilities. Certain real estate owned with write-downs subsequent to foreclosure are carried at fair value at
the consolidated statement of financial condition date for which the Company has not yet adopted the
provisions of SFAS 157.
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 December 31, 2008 and 2007:
F-32
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 20- Fair Value Disclosures (continued)
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
For both available for sale and held to maturity securities, fair values are based on quoted market prices.
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. The total loan portfolio
is first divided into performing and 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 market rate that reflects the credit and interest-rate risks inherent in the loans. The
discounted value of the cash flows is reduced by a credit risk adjustment based on internal loan
classifications.
For non-performing loans, fair value is calculated by 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.
Impaired loans are those that are accounted for under FASB Statement No. 114, Accounting by Creditors for
Impairment of a Loan (“SFAS 114”), in which the Bank has measured 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. At December 31, 2008 and 2007, accrued interest payable of $20,000 and $27,000, respectively, is
included in deposit liabilities.
F-33
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 20 - Fair Value Disclosures (Continued)
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 Bank could currently obtain
similar financing.
Off-Balance-Sheet Financial Instruments
The fair value of commitments to extend credit is estimated based on an analysis of the interest rates and fees
currently charged to enter into similar transactions, considering the remaining terms of the commitments and
the credit-worthiness of the potential borrowers. At December 31, 2008 and 2007, the estimated fair values of
these off-balance-sheet financial instruments were immaterial.
The carrying amounts and estimated fair value of our financial instruments are as follows:
December 31,
2008
2007
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
(In Thousands)
$ 36,534
498
182
2,078
363,616
2,350
1,785
$ 36,534
498
182
2,050
381,444
2,350
1,785
$ 39,146
-
320
2,875
283,133
414
1,340
$ 39,146
-
320
2,890
286,213
414
1,340
261,430
40,000
481
267,168
42,330
481
225,978
-
627
228,605
-
627
Financial assets:
Cash and cash equivalents
Certificates of deposit
Securities available for sale
Securities held to maturity
Loans receivable
FHLB stock
Accrued interest receivable
Financial liabilities:
Deposits
FHLB advances
Note payable
F-34
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 21 – Parent Company Only Financial Information
The following are the condensed financial statements for Northeast Community Bancorp (Parent company
only) as of December 31, 2008 and 2007 and for the years then ended.
Statements of Financial Condition
Assets
Cash and due from banks
Investment in subsidiary
ESOP loan receivable
Other assets
Total Assets
December 31,
2008
2007
(In Thousands)
$ 25,104
81,312
4,638
2
$ 111,056
$ 25,187
79,282
4,762
-
$ 109,231
Liabilities and Stockholders’ Equity
Accounts payable and accrued expense
Total Liabilities
$ 554
554
$ 402
402
Total Stockholders’ Equity
110,502
108,829
Total Liabilities and Stockholders’ Equity
$ 111,056
$ 109,231
Statements of Income
Interest income – securities
Interest income – interest- earning deposits
Interest income – ESOP loan
Operating expenses
Income before Income Tax Expense and Equity in
Undistributed Earnings of Subsidiary
Income tax expense
Income before Equity in Undistributed
Earnings of Subsidiary
Years Ended December 31,
2008
2007
(In Thousands)
$ -
372
394
(262)
$ 402
780
402
(276)
504
1,308
201
522
303
786
Equity in undistributed earnings of subsidiary
1,799
11,351
Net Income
$ 2,102
$ 12,137
F-35
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 21 - Parent Only Financial Information (Continued)
Statements of Cash Flow
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Years Ended December 31,
2007
2008
(In Thousands)
$ 2,102
$ 12,137
Equity in undistributed earnings of subsidiary
Amortization of securities discount
(Increase) decrease in other assets
Increase (decrease) in other liabilities
(1,799)
-
(2)
151
(11,351)
(84)
3
(2)
Net Cash Provided by Operating Activities
452
703
Cash Flows from Investing Activities
Purchase of securities held to maturity
Maturities of securities held to maturity
Repayment of ESOP loan
-
-
124
(5,000)
20,000
115
Net Cash Provided by Investing Activities
124
15,115
Cash Flows from Financing Activities
Cash dividends paid
(659)
(164)
Net Cash (Used in) Financing Activities
(659)
(164)
Net Increase (Decrease) in Cash and Cash Equivalents
(83)
15,654
Cash and Cash Equivalents - Beginning
25,187
9,533
Cash and Cash Equivalents - Ending
$ 25,104
$ 25,187
F-36
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 22 - Recent Accounting Pronouncements
FASB Statement No. 141(R)
FASB Statement No. 141 (R) “Business Combinations” was issued in December of 2007. This Statement
establishes principles and requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest
in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in
the business combination and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. This new pronouncement
will impact the Company’s accounting for business combinations completed beginning January 1, 2009.
FSP FAS 142-3
In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life
of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP is to
improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the
period of expected cash flows used to measure the fair value of the asset under SFAS 141R, and other GAAP.
This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating
the potential impact the new pronouncement will have on its consolidated financial statements.
F-37
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 23 - Quarterly Financial Data (Unaudited)
Quarter Ended
March 31,
2008
June 30,
2008
September 30,
2008
December 31,
2008
(In Thousands, except for per share data)
Interest Income
Interest Expense
$ 5,282
2,053
$ 5,304
2,087
$ 5,563
2,209
Net Interest Income
3,229
3,217
3,354
Provision for Loan Losses
-
79
147
Net Interest Income after
Provision for Loan Losses
Non-Interest Income
Non-Interest Expenses
Income before Income Taxes
Income Taxes
Net Income
Net Income per common share
– Basic
Weighted average numbers of
common shares outstanding –
basic
Dividends declared per share
$ 5,798
2,201
3,597
185
3,412
537
3,145
804
217
3,229
3,138
3,207
428
2,772
885
357
399
2,821
716
271
430
2,762
875
333
$ 528
$ 445
$ 542
$ 587
$ 0.04
$ 0.03
$ 0.04
$ 0.05
12,761
$ 0.03
12,768
$ 0.03
12,775
$ 0.03
12,781
$ 0.03
F-38
Northeast Community Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 23 - Quarterly Financial Data (Unaudited) (Continued)
Quarter Ended
March 31,
2007
June 30,
2007
September 30,
2007
December 31,
2007
(In Thousands, except for per share data)
Interest Income
Interest Expense
$ 3,969
1,284
$ 4,126
1,332
$ 4,562
1,504
$ 4,945
1,798
Net Interest Income
2,685
2,794
3,058
3,147
Provision for Loan Losses
-
338
-
-
Net Interest Income after
Provision for Loan Losses
Non-Interest Income
Non-Interest Expenses
Income before Income Taxes
Income Taxes
Net Income
Net Income per common share
– Basic
Weighted average numbers of
common shares outstanding –
basic
Dividends declared per share
2,685
2,456
3,058
182
2,259
608
218
19,141
2,739
18,858
8,235
195
2,362
891
337
3,147
249
2,466
930
360
$ 390
$ 10,623
$ 554
$ 570
$ 0.03
$ 0.83
$ 0.04
$ 0.04
12,736
12,742
$ -
$ -
12,749
$ 0.03
12,758
$ 0.03
F-39
NORTHEAST COMMUNITY BANCORP, INC.
Board of Directors
Kenneth A. Martinek
Salvatore Randazzo
Diane B. Cavanaugh
Harry (Jeff) A.S. Read
Arthur M. Levine
Charles A. Martinek
John F. McKenzie
Linda M. Swan
Kenneth H. Thomas
Executive Officers of Northeast Community Bancorp, Inc.
Kenneth A. Martinek
Chairman of the Board, President and Chief Executive Officer
Salvatore Randazzo
Executive Vice President and Chief Financial Officer
Executive Officers of Northeast Community Bank
Kenneth A. Martinek
Chairman of the Board, President and Chief Executive Officer
Salvatore Randazzo
Executive Vice President and Chief Financial Officer
Susan Barile
Executive Vice President and Chief Mortgage Officer