UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2018

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 001-36573

 

Meridian Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

Maryland

46-5396964

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

 

67 Prospect Street,

Peabody, Massachusetts

01960

(Address of Principal Executive Offices)

Zip Code

 

(617) 567-1500

(Registrant’s telephone number, including area code)

Not Applicable

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

 

Large accelerated filer

 

 

  

Accelerated filer

Non-accelerated filer

 

 

  

Small reporting company

 

 

 

 

 

Emerging Growth Company

 

 

If a n e m e r g i n g g r o w t h c o m p a ny , i nd i ca t e b y c h ec k m a rk i f t h e r e g i s t r a n t h a s e l ec t e d not t o u s e t h e e x t e nd e d t r a n s i t i o n p e r i o d f o r c o m p l y i n g w i t h a n y n e w o r r e v i s e d f i n a n c i a l acc oun t i ng s t a nd a r d s p r ov i d e d pu r s u a n t t o S ec t i o n 13 ( a ) o f t h e E x c h a ng e A c t .    

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

As of November 1, 2018, there were 54,157,365 outstanding shares of the Registrant’s common stock.

 

 

 


MERIDIAN BANCORP, INC.

FORM 10-Q

 

INDEX

 

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets at September 30, 2018 and December 31, 2017

 

3

 

 

 

 

 

 

 

Consolidated Statements of Net Income for the three and nine months ended September 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017

 

5

 

 

 

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2018 and 2017

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

 

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

39

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

40

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

41

 

 

 

 

 

Item 1A.

 

Risk Factors

 

41

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

41

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

41

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

41

 

 

 

 

 

Item 5.

 

Other Information

 

41

 

 

 

 

 

Item 6.

 

Exhibits

 

42

 

 

 

 

 

 

 

Signatures

 

44

 

 

 

 

 

 

 

Exhibit 10.21

 

 

 

 

 

 

 

 

 

Exhibit 31.1

 

 

 

 

 

 

 

 

 

Exhibit 31.2

 

 

 

 

 

 

 

 

 

Exhibit 32.0

 

 

 

 

2


PART I – FINANC IAL INFORMATION

 

ITEM 1.     FINANCIAL STATEMENTS

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

 

(Dollars in thousands)

 

ASSETS

 

Cash and due from banks

$

313,668

 

 

$

402,687

 

Certificates of deposit

 

20,891

 

 

 

69,326

 

Securities available for sale, at fair value

 

17,510

 

 

 

38,364

 

Equity securities, at fair value

 

16,135

 

 

 

 

Federal Home Loan Bank stock, at cost

 

31,100

 

 

 

24,947

 

Loans held for sale

 

843

 

 

 

3,772

 

Loans, net of fees and costs

 

5,275,510

 

 

 

4,667,983

 

Less: allowance for loan losses

 

(49,609

)

 

 

(45,185

)

Loans, net

 

5,225,901

 

 

 

4,622,798

 

Bank-owned life insurance

 

41,164

 

 

 

40,336

 

Premises and equipment, net

 

42,448

 

 

 

40,967

 

Accrued interest receivable

 

13,409

 

 

 

12,902

 

Deferred tax asset, net

 

15,998

 

 

 

15,244

 

Goodwill

 

19,638

 

 

 

19,638

 

Core deposit intangible

 

2,801

 

 

 

3,243

 

Other assets

 

13,822

 

 

 

5,231

 

Total assets

$

5,775,328

 

 

$

5,299,455

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Deposits:

 

 

 

 

 

 

 

Non interest-bearing

$

490,703

 

 

$

477,428

 

Interest-bearing

 

3,920,550

 

 

 

3,630,433

 

Total deposits

 

4,411,253

 

 

 

4,107,861

 

Short-term borrowings

 

40,000

 

 

 

 

Long-term debt

 

610,772

 

 

 

513,444

 

Accrued expenses and other liabilities

 

34,160

 

 

 

31,751

 

Total liabilities

 

5,096,185

 

 

 

4,653,056

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 50,000,000 shares authorized; none issued

 

 

 

 

 

Common stock, $0.01 par value, 100,000,000 shares authorized; 54,233,331 and

   54,039,316 shares issued and outstanding at September 30, 2018 and December 31,

   2017, respectively

 

542

 

 

 

540

 

Additional paid-in capital

 

392,545

 

 

 

395,716

 

Retained earnings

 

304,725

 

 

 

268,533

 

Accumulated other comprehensive income (loss)

 

(812

)

 

 

128

 

Unearned compensation - ESOP, 2,465,713 and 2,557,036 shares at September 30, 2018

   and December 31, 2017, respectively

 

(17,857

)

 

 

(18,518

)

Total stockholders' equity

 

679,143

 

 

 

646,399

 

Total liabilities and stockholders' equity

$

5,775,328

 

 

$

5,299,455

 

 

See accompanying notes to consolidated financial statements.

 

3


MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME

(Unaudited)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

(Dollars in thousands, except per share amounts)

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

$

55,849

 

 

$

46,597

 

 

$

159,738

 

 

$

130,281

 

Interest on debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

115

 

 

 

58

 

 

 

367

 

 

 

260

 

Tax-exempt

 

13

 

 

 

 

 

 

43

 

 

 

18

 

Dividends on equity securities

 

101

 

 

 

275

 

 

 

383

 

 

 

843

 

Interest on certificates of deposit

 

104

 

 

 

221

 

 

 

448

 

 

 

629

 

Other interest and dividend income

 

1,932

 

 

 

819

 

 

 

4,981

 

 

 

2,200

 

Total interest and dividend income

 

58,114

 

 

 

47,970

 

 

 

165,960

 

 

 

134,231

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

14,284

 

 

 

8,528

 

 

 

37,544

 

 

 

23,882

 

Interest on borrowings

 

2,463

 

 

 

1,388

 

 

 

6,154

 

 

 

3,486

 

Total interest expense

 

16,747

 

 

 

9,916

 

 

 

43,698

 

 

 

27,368

 

Net interest income

 

41,367

 

 

 

38,054

 

 

 

122,262

 

 

 

106,863

 

Provision for loan losses

 

226

 

 

 

2,458

 

 

 

4,285

 

 

 

5,574

 

Net interest income, after provision for loan losses

 

41,141

 

 

 

35,596

 

 

 

117,977

 

 

 

101,289

 

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer service fees

 

2,242

 

 

 

2,081

 

 

 

6,694

 

 

 

6,347

 

Loan fees

 

301

 

 

 

180

 

 

 

438

 

 

 

1,882

 

Mortgage banking gains, net

 

74

 

 

 

176

 

 

 

270

 

 

 

348

 

Gain on sales of securities available for sale, net

 

 

 

 

865

 

 

 

 

 

 

3,247

 

Gain on equity securities, net

 

781

 

 

 

 

 

 

632

 

 

 

 

Income from bank-owned life insurance

 

279

 

 

 

294

 

 

 

828

 

 

 

874

 

Gain on life insurance distribution

 

 

 

 

1,657

 

 

 

 

 

 

1,657

 

Other income

 

 

 

 

 

 

 

6

 

 

 

 

Total non-interest income

 

3,677

 

 

 

5,253

 

 

 

8,868

 

 

 

14,355

 

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

14,386

 

 

 

12,973

 

 

 

44,218

 

 

 

39,400

 

Occupancy and equipment

 

2,981

 

 

 

2,676

 

 

 

9,545

 

 

 

8,735

 

Data processing

 

1,747

 

 

 

1,528

 

 

 

5,083

 

 

 

4,381

 

Marketing and advertising

 

832

 

 

 

715

 

 

 

2,805

 

 

 

2,522

 

Professional services

 

683

 

 

 

624

 

 

 

2,648

 

 

 

2,865

 

Deposit insurance

 

851

 

 

 

660

 

 

 

2,430

 

 

 

2,164

 

Merger and acquisition

 

26

 

 

 

271

 

 

 

114

 

 

 

271

 

Other general and administrative

 

1,501

 

 

 

1,367

 

 

 

4,318

 

 

 

3,758

 

Total non-interest expenses

 

23,007

 

 

 

20,814

 

 

 

71,161

 

 

 

64,096

 

Income before income taxes

 

21,811

 

 

 

20,035

 

 

 

55,684

 

 

 

51,548

 

Provision for income taxes

 

4,454

 

 

 

6,702

 

 

 

12,271

 

 

 

17,624

 

Net income

$

17,357

 

 

$

13,333

 

 

$

43,413

 

 

$

33,924

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.34

 

 

$

0.26

 

 

$

0.84

 

 

$

0.66

 

Diluted

$

0.33

 

 

$

0.25

 

 

$

0.82

 

 

$

0.65

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

51,492,448

 

 

 

51,229,203

 

 

 

51,487,192

 

 

 

51,061,959

 

Diluted

 

52,732,340

 

 

 

52,672,962

 

 

 

52,894,503

 

 

 

52,541,752

 

 

See accompanying notes to consolidated financial statements.

 

4


MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

(In thousands)

 

Net income

$

17,357

 

 

$

13,333

 

 

$

43,413

 

 

$

33,924

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gain (loss)

 

(156

)

 

 

2,067

 

 

 

(654

)

 

 

4,621

 

Reclassification adjustment for gains realized in income (1)

 

 

 

 

(865

)

 

 

 

 

 

(3,247

)

Net unrealized gain (loss)

 

(156

)

 

 

1,202

 

 

 

(654

)

 

 

1,374

 

Tax effect

 

43

 

 

 

(485

)

 

 

217

 

 

 

(558

)

Total other comprehensive income (loss)

 

(113

)

 

 

717

 

 

 

(437

)

 

 

816

 

Comprehensive income

$

17,244

 

 

$

14,050

 

 

$

42,976

 

 

$

34,740

 

 

(1)

Amount is included in gain on sales of securities available for sale, net in the Consolidated Statements of Net Income. Provision for income tax associated with the reclassification adjustment for the three and nine months ended September 30, 2017 was $349,000 and $1.3 million, respectively.

See accompanying notes to consolidated financial statements.

 

5


MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September   30, 2018 and 2017

(Unaudited)

 

 

 

Shares of

Common   Stock

Outstanding

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Unearned

Compensation -

ESOP

 

 

Total

 

 

 

(Dollars in thousands)

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

54,039,316

 

 

$

540

 

 

$

395,716

 

 

$

268,533

 

 

$

128

 

 

$

(18,518

)

 

$

646,399

 

Cumulative effect of adopting Accounting

   Standards Update 2016-01

 

 

 

 

 

 

 

 

 

 

 

503

 

 

 

(503

)

 

 

 

 

 

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

43,413

 

 

 

(437

)

 

 

 

 

 

42,976

 

Dividends declared ($0.15 per share)

 

 

 

 

 

 

 

 

 

 

 

(7,724

)

 

 

 

 

 

 

 

 

(7,724

)

Repurchased stock related to buyback

   program

 

 

(314,010

)

 

 

(3

)

 

 

(6,058

)

 

 

 

 

 

 

 

 

 

 

 

(6,061

)

ESOP shares committed to be allocated (91,323 shares)

 

 

 

 

 

 

 

 

1,113

 

 

 

 

 

 

 

 

 

661

 

 

 

1,774

 

Share-based compensation expense -

   restricted stock, net of awards forfeited

 

 

7,100

 

 

 

 

 

 

2,110

 

 

 

 

 

 

 

 

 

 

 

 

2,110

 

Share-based compensation expense - stock

   options, net of awards forfeited

 

 

 

 

 

 

 

 

1,235

 

 

 

 

 

 

 

 

 

 

 

 

1,235

 

Shares surrendered related to tax

   withholdings on stock options exercised

 

 

(117,313

)

 

 

(1

)

 

 

(2,030

)

 

 

 

 

 

 

 

 

 

 

 

(2,031

)

Stock options exercised

 

 

618,238

 

 

 

6

 

 

 

459

 

 

 

 

 

 

 

 

 

 

 

 

465

 

Balance at September 30, 2018

 

 

54,233,331

 

 

$

542

 

 

$

392,545

 

 

$

304,725

 

 

$

(812

)

 

$

(17,857

)

 

$

679,143

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

 

53,596,105

 

 

$

536

 

 

$

390,065

 

 

$

234,290

 

 

$

1,806

 

 

$

(19,400

)

 

$

607,297

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

33,924

 

 

 

816

 

 

 

 

 

 

34,740

 

Dividends declared ($0.12 per share)

 

 

 

 

 

 

 

 

 

 

 

(6,135

)

 

 

 

 

 

 

 

 

(6,135

)

ESOP shares committed to be allocated (91,323 shares)

 

 

 

 

 

 

 

 

968

 

 

 

 

 

 

 

 

 

661

 

 

 

1,629

 

Share-based compensation expense -

   restricted stock, net of awards forfeited

 

 

255,196

 

 

 

2

 

 

 

1,629

 

 

 

 

 

 

 

 

 

 

 

 

1,631

 

Share-based compensation expense - stock

   options, net of awards forfeited

 

 

 

 

 

 

 

 

923

 

 

 

 

 

 

 

 

 

 

 

 

923

 

Stock options exercised

 

 

96,093

 

 

 

1

 

 

 

318

 

 

 

 

 

 

 

 

 

 

 

 

319

 

Balance at September 30, 2017

 

 

53,947,394

 

 

$

539

 

 

$

393,903

 

 

$

262,079

 

 

$

2,622

 

 

$

(18,739

)

 

$

640,404

 

 

See accompanying notes to consolidated financial statements.  

6


MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

43,413

 

 

$

33,924

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Net amortization (accretion) of acquisition fair value adjustments

 

 

72

 

 

 

(122

)

Amortization of core deposit intangible

 

 

442

 

 

 

 

ESOP shares expense

 

 

1,774

 

 

 

1,629

 

Provision for loan losses

 

 

4,285

 

 

 

5,574

 

Accretion of net deferred loan origination fees

 

 

(1,158

)

 

 

(913

)

Net amortization (accretion) of securities available for sale

 

 

40

 

 

 

(5

)

Depreciation and amortization expense

 

 

2,170

 

 

 

2,333

 

Gain on sales of securities available for sale, net

 

 

 

 

 

(3,247

)

Gain on equity securities, net

 

 

(632

)

 

 

 

Deferred income tax benefit

 

 

(537

)

 

 

(584

)

Income from bank-owned life insurance

 

 

(828

)

 

 

(874

)

Gain on life insurance distribution

 

 

 

 

 

(1,657

)

Share-based compensation expense

 

 

3,345

 

 

 

2,554

 

Net changes in:

 

 

 

 

 

 

 

 

Loans held for sale

 

 

2,929

 

 

 

237

 

Accrued interest receivable

 

 

(507

)

 

 

(1,199

)

Other assets

 

 

(8,591

)

 

 

(5,719

)

Accrued expenses and other liabilities

 

 

2,403

 

 

 

(1,410

)

Net cash provided by operating activities

 

 

48,620

 

 

 

30,521

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of certificates of deposit

 

 

(5,000

)

 

 

(5,000

)

Maturities of certificates of deposit

 

 

53,435

 

 

 

10,131

 

Activity in securities, at fair value:

 

 

 

 

 

 

 

 

Proceeds from maturities, calls and principal payments

 

 

2,385

 

 

 

16,454

 

Proceeds from sales

 

 

3,867

 

 

 

17,221

 

Purchases

 

 

(1,595

)

 

 

(6,361

)

Loans originated, net of principal payments received

 

 

(606,335

)

 

 

(609,507

)

Proceeds from bank-owned life insurance distribution

 

 

 

 

 

3,224

 

Purchases of premises and equipment

 

 

(3,589

)

 

 

(921

)

Purchase of Federal Home Loan Bank stock

 

 

(6,153

)

 

 

(4,801

)

Net cash used in investing activities

 

 

(562,985

)

 

 

(579,560

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net increase in deposits

 

 

303,348

 

 

 

469,646

 

Net change in borrowings with maturities less than three months

 

 

40,000

 

 

 

 

Proceeds from Federal Home Loan Bank advances with maturities of three months or more

 

 

325,000

 

 

 

260,625

 

Repayment of Federal Home Loan Bank advances with maturities of three months or more

 

 

(227,657

)

 

 

(112,068

)

Cash dividends paid on common stock

 

 

(7,718

)

 

 

(5,609

)

Stock options exercised, net of cash paid in connection with income taxes

 

 

(1,566

)

 

 

319

 

Repurchase of common stock

 

 

(6,061

)

 

 

 

Net cash provided by financing activities

 

 

425,346

 

 

 

612,913

 

Net change in cash and cash equivalents

 

 

(89,019

)

 

 

63,874

 

Cash and cash equivalents at beginning of period

 

 

402,687

 

 

 

236,423

 

Cash and cash equivalents at end of period

 

$

313,668

 

 

$

300,297

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Interest paid on deposits

 

$

37,030

 

 

$

23,690

 

Interest paid on borrowings

 

 

5,868

 

 

 

3,312

 

Income taxes paid, net of refunds

 

 

20,722

 

 

 

21,285

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Transfers from loans to foreclosed real estate

 

 

 

 

 

1,690

 

Net amounts due from broker on security transactions

 

 

 

 

 

316

 

 

See accompanying notes to consolidated financial statements.

7


MERIDIAN BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 . BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Meridian Bancorp, Inc. (the “Company”) and all other entities in which it has a controlling financial interest. The Company owns 100% of the outstanding shares of East Boston Savings Bank (the “Bank”). The Bank’s subsidiaries include: (1) Prospect, Inc., which engages in securities transactions on its own behalf; (2) EBOSCO, LLC, which can hold foreclosed real estate; and (3) East Boston Investment Services, Inc., which is authorized for third-party investment sales and is currently inactive. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by such generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Such adjustments were of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the entire year or any other interim period. For additional information, refer to the financial statements and footnotes thereto of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the Securities and Exchange Commission (“SEC”) on March 1, 2018, and is available through the SEC’s website at www.sec.gov .

In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the evaluation of securities for other-than-temporary impairment.

 

2. RECENT ACCOUNTING PRONOUNCEMENTS

Adopted During the Period

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The objective of this ASU is to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance does not apply to revenue associated with financial instruments, including loans and investment securities that are accounted for under GAAP, which comprise a significant portion of our revenue stream. ASU 2014-09 became effective for the Company on January 1, 2018 and had no material effect on how the Company recognizes revenue in our consolidated financial statements and disclosures.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments — Overall, (Subtopic 825-10). The amendments in this update address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Targeted changes to GAAP include the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income and the elimination of the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost. The ASU required a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption to reclassify the cumulative change in fair value of equity securities previously recognized in Accumulated Other Comprehensive Income (“AOCI”). ASU 2016-01 become effective for the Company on January 1, 2018. The adoption of the guidance resulted in an insignificant cumulative-effect adjustment that increased retained earnings, with an offsetting adjustment to deferred taxes and AOCI. See Note 4 – Securities for disclosures related to equity securities.

 

 

8


To be Adopted in Future Periods

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update is intended to improve financial reporting about leasing transactions and the key provision impacting the Company is the requirement for a lessee to record a right-to-use asset and liability representing the obligation to make lease payments for long-term operating leases. The update will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. As of December 31, 2017, the Company had future minimum lease payments of $15.5 million, all under operating lease agreements. Upon adoption, the Company expects its assets and liabilities to increase based on the present value of the future minimum lease payments, using the discount rate applicable at the outset of the lease agreement. However, the adoption of this ASU is not expected to be material to the Company’s results of operations or financial position.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments, including loans, held-to-maturity debt securities and commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology, referred to as Current Expected Credit Loss, or CECL, that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to formulate credit loss estimates. Credit losses on available-for-sale debt securities will be measured in a manner similar to current GAAP, but will be recognized through an allowance rather than as a direct write-down. This update will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is developing a project plan to facilitate the implementation of CECL. This plan considers enhancements to internal controls, loan pool segmentation, loan loss estimation methodology, data gathering resources, data analytics and necessary disclosures. The adoption of this ASU may result in material changes to the allowance for loan losses with a resulting adjustment to retained earnings, however any potential adjustment will be dependent on the credit risks within the portfolio and the economic environment at the time of adoption.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350). The update intends to simplify the subsequent measurement of goodwill by requiring an entity to compare the fair value of a reporting unit to its carrying value, including goodwill. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the impairment charge should not exceed the total amount of goodwill allocated to that reporting unit. This update will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of this ASU is not expected to be material to the Company’s results of operations or financial position.

 

 

3. EARNINGS PER SHARE

Basic earnings per share excludes dilution and is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Rights to dividends on unvested stock awards are non-forfeitable, therefore these unvested stock awards are considered outstanding in the computation of basic earnings per share. Diluted earnings per share is computed in a manner similar to that of basic earnings per share except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury method) that would have been outstanding if all potentially dilutive common stock equivalents (such as options) were issued during the period. Unallocated common shares held by the ESOP are shown as a reduction in stockholders’ equity and are not included in the weighted-average number of common shares outstanding for either basic or diluted earnings per share calculations.

Basic and diluted earnings per share have been computed based on the following:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands, except per share amounts)

 

Net income available to common stockholders

 

$

17,357

 

 

$

13,333

 

 

$

43,413

 

 

$

33,924

 

Basic weighted average shares outstanding

 

 

51,492,448

 

 

 

51,229,203

 

 

 

51,487,192

 

 

 

51,061,959

 

Effect of dilutive stock options

 

 

1,239,892

 

 

 

1,443,759

 

 

 

1,407,311

 

 

 

1,479,793

 

Diluted weighted average shares outstanding

 

 

52,732,340

 

 

 

52,672,962

 

 

 

52,894,503

 

 

 

52,541,752

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.34

 

 

$

0.26

 

 

$

0.84

 

 

$

0.66

 

Diluted

 

$

0.33

 

 

$

0.25

 

 

$

0.82

 

 

$

0.65

 

 

9


For the three and nine months ended September 30, 2018, options for the exercise of 116,246 shares and 71,077 shares, respectively, were not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive. For the three and nine months ended September 30, 2017, options for the exercise of 79,802 and 26,601 shares, respecti vely, were not included in the calculation of diluted earnings per share because to do so would have been ant-dilutive. An anti-dilutive option exists when the average stock price for the period is less than the exercise price of the option.

4. SECURITIES

Securities Available for Sale

The amortized cost and fair values of securities available for sale, with gross unrealized gains and losses, follows:

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

(In thousands)

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises

 

$

1,909

 

 

$

 

 

$

(90

)

 

$

1,819

 

Municipal bonds

 

 

2,096

 

 

 

 

 

 

(86

)

 

 

2,010

 

Residential mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises

 

 

13,276

 

 

 

93

 

 

 

(391

)

 

 

12,978

 

Private label

 

 

646

 

 

 

63

 

 

 

(6

)

 

 

703

 

Total securities available for sale

 

$

17,927

 

 

$

156

 

 

$

(573

)

 

$

17,510

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises

 

$

1,942

 

 

$

 

 

$

 

 

$

1,942

 

Municipal bonds

 

 

2,424

 

 

 

2

 

 

 

 

 

 

2,426

 

Residential mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises

 

 

15,916

 

 

 

231

 

 

 

(2

)

 

 

16,145

 

Private label

 

 

70

 

 

 

6

 

 

 

 

 

 

76

 

Total debt securities

 

 

20,352

 

 

 

239

 

 

 

(2

)

 

 

20,589

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stocks:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic materials

 

 

3,498

 

 

 

207

 

 

 

(250

)

 

 

3,455

 

Consumer products and services

 

 

5,832

 

 

 

377

 

 

 

(415

)

 

 

5,794

 

Financial services

 

 

1,241

 

 

 

294

 

 

 

 

 

 

1,535

 

Healthcare

 

 

1,933

 

 

 

111

 

 

 

(137

)

 

 

1,907

 

Industrials

 

 

2,939

 

 

 

469

 

 

 

 

 

 

3,408

 

Technology

 

 

1,628

 

 

 

194

 

 

 

(156

)

 

 

1,666

 

Total common stocks

 

 

17,071

 

 

 

1,652

 

 

 

(958

)

 

 

17,765

 

Money market mutual funds

 

 

10

 

 

 

 

 

 

 

 

 

10

 

Total equity securities

 

 

17,081

 

 

 

1,652

 

 

 

(958

)

 

 

17,775

 

Total securities available for sale

 

$

37,433

 

 

$

1,891

 

 

$

(960

)

 

$

38,364

 

 

At September 30, 2018, debt securities with a fair value of $2.7 million and $301,000 were pledged as collateral for Federal Home Loan Bank of Boston (“FHLB”) borrowings and for the Federal Reserve Bank discount window borrowings, respectively.

10


The amortized cost and fair value of debt securities by contractual maturity at September 30, 2018 are as follows. Expected maturities may differ from contractual maturitie s because issuers may have the right to call or prepay obligations with or without prepayment penalties.

 

 

 

 

 

 

After One Year

 

 

 

 

 

 

 

 

 

One Year or Less

 

 

Through Five Years

 

 

After Five Years

 

 

Total

 

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

 

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

 

 

(In thousands)

 

Government-sponsored enterprises

 

$

 

 

$

 

 

$

 

 

$

 

 

$

1,909

 

 

$

1,819

 

 

$

1,909

 

 

$

1,819

 

Municipal bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,096

 

 

 

2,010

 

 

 

2,096

 

 

 

2,010

 

Residential mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises

 

 

 

 

 

 

 

 

335

 

 

 

326

 

 

 

12,941

 

 

 

12,652

 

 

 

13,276

 

 

 

12,978

 

Private label

 

 

 

 

 

 

 

 

 

 

 

 

 

 

646

 

 

 

703

 

 

 

646

 

 

 

703

 

Total

 

$

 

 

$

 

 

$

335

 

 

$

326

 

 

$

17,592

 

 

$

17,184

 

 

$

17,927

 

 

$

17,510

 

 

Information pertaining to securities available for sale as of September 30, 2018 and December 31, 2017, with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

 

 

Less Than Twelve Months

 

 

Twelve Months or Longer

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

 

(In thousands)

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises

 

$

90

 

 

$

1,819

 

 

$

 

 

$

 

Municipal bonds

 

 

53

 

 

 

1,244

 

 

 

33

 

 

 

766

 

Residential mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises

 

 

389

 

 

 

9,642

 

 

 

2

 

 

 

165

 

Private label

 

 

6

 

 

 

165

 

 

 

 

 

 

 

Total temporarily impaired securities

 

$

538

 

 

$

12,870

 

 

$

35

 

 

$

931

 

 

 

 

Less Than Twelve Months

 

 

Twelve Months or Longer

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

 

(In thousands)

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises

 

$

 

 

$

 

 

$

2

 

 

$

171

 

Total debt securities

 

 

 

 

 

 

 

 

2

 

 

 

171

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stocks:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic materials

 

 

87

 

 

 

791

 

 

 

163

 

 

 

641

 

Consumer products and services

 

 

24

 

 

 

1,196

 

 

 

391

 

 

 

1,273

 

Healthcare

 

 

137

 

 

 

1,102

 

 

 

 

 

 

 

Technology

 

 

100

 

 

 

408

 

 

 

56

 

 

 

426

 

Total equity securities

 

 

348

 

 

 

3,497

 

 

 

610

 

 

 

2,340

 

Total temporarily impaired securities

 

$

348

 

 

$

3,497

 

 

$

612

 

 

$

2,511

 

 

The Company determined no debt securities were other-than-temporarily impaired for the nine months ended September 30, 2018 and 2017. Management evaluates debt securities for other-than-temporary impairment on a quarterly basis, with more frequent evaluation for selected issuers or when economic or market concerns warrant such evaluations.

 

11


Equity Securities

Equity securities consist of common stocks and money market mutual funds. The Company held equity securities with an aggregate fair value of $16.1 million and $17.8 million at September 30, 2018 and December 31, 2017, respectively. Prior to January 1, 2018, equity securities were stated at fair value with unrealized gains and losses reported as a separate component of AOCI, net of tax.  At December 31, 2017, net unrealized gains of $694,000 had been recognized in AOCI. On January 1, 2018 these unrealized gains and losses were reclassified out of AOCI and into retained earnings with subsequent changes in fair value being recognized in net income.

The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and nine months ended September 30, 2018:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30, 2018

 

 

September 30, 2018

 

 

(In thousands)

 

Net gains recognized during the period on equity securities

   sold during the period

$

399

 

 

$

553

 

Unrealized gains recognized during the reporting period on

   equity securities still held at the reporting date

 

382

 

 

 

79

 

Net gains recognized during the period on equity securities

$

781

 

 

$

632

 

 

5. LOANS

A summary of loans follows:

 

 

September 30, 2018

 

 

 

December 31, 2017

 

 

 

Amount

 

 

Percent

 

 

 

Amount

 

 

Percent

 

 

 

(Dollars in thousands)

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

$

636,419

 

 

 

12.1

 

%

 

$

603,680

 

 

 

12.9

 

%

Home equity lines of credit

 

46,534

 

 

 

0.9

 

 

 

 

48,393

 

 

 

1.0

 

 

Multi-family

 

969,628

 

 

 

18.4

 

 

 

 

779,637

 

 

 

16.7

 

 

Commercial real estate

 

2,438,139

 

 

 

46.1

 

 

 

 

2,063,781

 

 

 

44.2

 

 

Construction

 

594,611

 

 

 

11.2

 

 

 

 

641,306

 

 

 

13.7

 

 

Total real estate loans

 

4,685,331

 

 

 

88.7

 

 

 

 

4,136,797

 

 

 

88.5

 

 

Commercial and industrial

 

585,215

 

 

 

11.1

 

 

 

 

525,604

 

 

 

11.3

 

 

Consumer

 

10,934

 

 

 

0.2

 

 

 

 

10,761

 

 

 

0.2

 

 

Total loans

 

5,281,480

 

 

 

100.0

 

%

 

 

4,673,162

 

 

 

100.0

 

%

Allowance for loan losses

 

(49,609

)

 

 

 

 

 

 

 

(45,185

)

 

 

 

 

 

Net deferred loan origination fees

 

(5,970

)

 

 

 

 

 

 

 

(5,179

)

 

 

 

 

 

Loans, net

$

5,225,901

 

 

 

 

 

 

 

$

4,622,798

 

 

 

 

 

 

 

The Company has transferred a portion of its originated commercial real estate loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying balance sheets. The Company and participating lenders share ratably in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments to participating lenders and disburses required escrow funds to relevant parties. At September 30, 2018 and December 31, 2017, the Company was servicing loans for participants aggregating $195.9 million and $247.8 million, respectively.

At September 30, 2018, multi-family and commercial real estate loans with carrying values totaling $390.2 million and $875.0 million, respectively, were pledged as collateral for FHLB borrowings.

12


An analysis of the allowance for loan losses and related information follows:

 

 

 

Three Months Ended September 30, 2018

 

 

 

One- to

four-

family

 

 

Multi-

family

 

 

Home

equity

lines

of credit

 

 

Commercial

real estate

 

 

Construction

 

 

Commercial

and

industrial

 

 

Consumer

 

 

Total

 

 

 

(In thousands)

 

Balance at June 30, 2018

 

$

1,016

 

 

$

7,408

 

 

$

63

 

 

$

25,293

 

 

$

9,164

 

 

$

6,367

 

 

$

90

 

 

$

49,401

 

Provision (credit) for loan

   losses

 

 

(1

)

 

 

465

 

 

 

1

 

 

 

543

 

 

 

(392

)

 

 

(448

)

 

 

58

 

 

 

226

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(66

)

 

 

(66

)

Recoveries

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

28

 

 

 

 

 

 

19

 

 

 

48

 

Balance at September 30, 2018

 

$

1,015

 

 

$

7,873

 

 

$

65

 

 

$

25,836

 

 

$

8,800

 

 

$

5,919

 

 

$

101

 

 

$

49,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2017

 

 

 

One- to

four-

family

 

 

Multi-

family

 

 

Home

equity

lines

of credit

 

 

Commercial

real estate

 

 

Construction

 

 

Commercial

and

industrial

 

 

Consumer

 

 

Total

 

 

 

(In thousands)

 

Balance at June 30, 2017

 

$

1,167

 

 

$

5,549

 

 

$

71

 

 

$

20,598

 

 

$

8,846

 

 

$

6,901

 

 

$

97

 

 

$

43,229

 

Provision (credit) for loan

   losses

 

 

(100

)

 

 

(44

)

 

 

(9

)

 

 

1,343

 

 

 

1,245

 

 

 

(52

)

 

 

75

 

 

 

2,458

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(99

)

 

 

(99

)

Recoveries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

30

 

 

 

24

 

 

 

55

 

Balance at September 30, 2017

 

$

1,067

 

 

$

5,505

 

 

$

62

 

 

$

21,941

 

 

$

10,092

 

 

$

6,879

 

 

$

97

 

 

$

45,643

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

One- to

four-

family

 

 

Multi-

family

 

 

Home

equity

lines

of credit

 

 

Commercial

real estate

 

 

Construction

 

 

Commercial

and

industrial

 

 

Consumer

 

 

Total

 

 

 

(In thousands)

 

Balance at December 31, 2017

 

$

1,001

 

 

$

6,263

 

 

$

62

 

 

$

21,513

 

 

$

10,166

 

 

$

6,084

 

 

$

96

 

 

$

45,185

 

Provision (credit) for loan

   losses

 

 

(54

)

 

 

1,610

 

 

 

 

 

 

4,313

 

 

 

(1,569

)

 

 

(165

)

 

 

150

 

 

 

4,285

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(225

)

 

 

(225

)

Recoveries

 

 

68

 

 

 

 

 

 

3

 

 

 

10

 

 

 

203

 

 

 

 

 

 

80

 

 

 

364

 

Balance at September 30, 2018

 

$

1,015

 

 

$

7,873

 

 

$

65

 

 

$

25,836

 

 

$

8,800

 

 

$

5,919

 

 

$

101

 

 

$

49,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

One- to

four-

family

 

 

Multi-

family

 

 

Home

equity

lines

of credit

 

 

Commercial

real estate

 

 

Construction

 

 

Commercial

and

industrial

 

 

Consumer

 

 

Total

 

 

 

(In thousands)

 

Balance at December 31, 2016

 

$

1,367

 

 

$

4,514

 

 

$

73

 

 

$

18,725

 

 

$

8,931

 

 

$

6,452

 

 

$

87

 

 

$

40,149

 

Provision (credit) for loan

   losses

 

 

(333

)

 

 

990

 

 

 

(11

)

 

 

3,216

 

 

 

1,112

 

 

 

397

 

 

 

203

 

 

 

5,574

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

(265

)

 

 

(267

)

Recoveries

 

 

33

 

 

 

1

 

 

 

 

 

 

 

 

 

51

 

 

 

30

 

 

 

72

 

 

 

187

 

Balance at September 30, 2017

 

$

1,067

 

 

$

5,505

 

 

$

62

 

 

$

21,941

 

 

$

10,092

 

 

$

6,879

 

 

$

97

 

 

$

45,643

 

13


 

 

 

One- to

four-

family

 

 

Multi-

family

 

 

Home

equity

lines

of credit

 

 

Commercial

real estate

 

 

Construction

 

 

Commercial

and

industrial

 

 

Consumer

 

 

Total

 

 

 

(In thousands)

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of allowance for loan

   losses for loans deemed to be

   impaired

 

$

46

 

 

$

126

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

172

 

Amount of allowance for loan

   losses for loans not deemed to

   be impaired

 

 

969

 

 

 

7,747

 

 

 

65

 

 

 

25,836

 

 

 

8,800

 

 

 

5,919

 

 

 

101

 

 

 

49,437

 

 

 

$

1,015

 

 

$

7,873

 

 

$

65

 

 

$

25,836

 

 

$

8,800

 

 

$

5,919

 

 

$

101

 

 

$

49,609

 

Loans deemed to be impaired

 

$

1,202

 

 

$

1,282

 

 

$

 

 

$

799

 

 

$

 

 

$

1,584

 

 

$

 

 

$

4,867

 

Loans not deemed to be impaired

 

 

635,217

 

 

 

968,346

 

 

 

46,534

 

 

 

2,437,340

 

 

 

594,611

 

 

 

583,631

 

 

 

10,934

 

 

 

5,276,613

 

 

 

$

636,419

 

 

$

969,628

 

 

$

46,534

 

 

$

2,438,139

 

 

$

594,611

 

 

$

585,215

 

 

$

10,934

 

 

$

5,281,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of allowance for loan

   losses for loans deemed to

   be impaired

 

$

51

 

 

$

133

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

184

 

Amount of allowance for loan

   losses for loans not deemed to

   be impaired

 

 

950

 

 

 

6,130

 

 

 

62

 

 

 

21,513

 

 

 

10,166

 

 

 

6,084

 

 

 

96

 

 

 

45,001

 

 

 

$

1,001

 

 

$

6,263

 

 

$

62

 

 

$

21,513

 

 

$

10,166

 

 

$

6,084

 

 

$

96

 

 

$

45,185

 

Loans deemed to be impaired

 

$

1,245

 

 

$

1,315

 

 

$

 

 

$

846

 

 

$

 

 

$

1,539

 

 

$

 

 

$

4,945

 

Loans not deemed to be impaired

 

 

602,435

 

 

 

778,322

 

 

 

48,393

 

 

 

2,062,935

 

 

 

641,306

 

 

 

524,065

 

 

 

10,761

 

 

 

4,668,217

 

 

 

$

603,680

 

 

$

779,637

 

 

$

48,393

 

 

$

2,063,781

 

 

$

641,306

 

 

$

525,604

 

 

$

10,761

 

 

$

4,673,162

 

 

The following table provides information about the Company’s past due and non-accrual loans:

 

 

30-59

 

 

60-89

 

 

90 Days

 

 

 

 

 

 

 

 

 

 

Days

 

 

Days

 

 

or Greater

 

 

Total

 

 

Loans on

 

 

Past Due

 

 

Past Due

 

 

Past Due

 

 

Past Due

 

 

Non-accrual

 

 

(In thousands)

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

$

174

 

 

$

565

 

 

$

2,488

 

 

$

3,227

 

 

$

6,977

 

Home equity lines of credit

 

63

 

 

 

49

 

 

 

 

 

 

112

 

 

 

 

Commercial real estate

 

701

 

 

 

93

 

 

 

161

 

 

 

955

 

 

 

353

 

Total real estate loans

 

938

 

 

 

707

 

 

 

2,649

 

 

 

4,294

 

 

 

7,330

 

Commercial and industrial

 

 

 

 

 

 

 

515

 

 

 

515

 

 

 

676

 

Consumer

 

922

 

 

 

582

 

 

 

 

 

 

1,504

 

 

 

 

Total

$

1,860

 

 

$

1,289

 

 

$

3,164

 

 

$

6,313

 

 

$

8,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

$

1,537

 

 

$

664

 

 

$

1,532

 

 

$

3,733

 

 

$

6,890

 

Home equity lines of credit

 

195

 

 

 

42

 

 

 

521

 

 

 

758

 

 

 

562

 

Commercial real estate

 

98

 

 

 

 

 

 

 

 

 

98

 

 

 

388

 

Total real estate loans

 

1,830

 

 

 

706

 

 

 

2,053

 

 

 

4,589

 

 

 

7,840

 

Commercial and industrial

 

5

 

 

 

 

 

 

523

 

 

 

528

 

 

 

523

 

Consumer

 

887

 

 

 

568

 

 

 

 

 

 

1,455

 

 

 

 

Total

$

2,722

 

 

$

1,274

 

 

$

2,576

 

 

$

6,572

 

 

$

8,363

 

14


 

At September 30, 2018 and December 31, 2017, the Company did not have any accruing loans past due 90 days or more.

The following tables provide information with respect to the Company’s impaired loans:

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

 

 

 

Unpaid

 

 

 

 

 

 

 

 

 

 

Unpaid

 

 

 

 

 

 

Recorded

 

 

Principal

 

 

Related

 

 

Recorded

 

 

Principal

 

 

Related

 

 

Investment

 

 

Balance

 

 

Allowance

 

 

Investment

 

 

Balance

 

 

Allowance

 

 

(In thousands)

 

Impaired loans without a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

$

661

 

 

$

987

 

 

 

 

 

 

$

693

 

 

$

1,007

 

 

 

 

 

Multi-family

 

48

 

 

 

48

 

 

 

 

 

 

 

59

 

 

 

59

 

 

 

 

 

Commercial real estate

 

799

 

 

 

799

 

 

 

 

 

 

 

846

 

 

 

846

 

 

 

 

 

Commercial and industrial

 

1,584

 

 

 

1,914

 

 

 

 

 

 

 

1,539

 

 

 

1,870

 

 

 

 

 

Total

 

3,092

 

 

 

3,748

 

 

 

 

 

 

 

3,137

 

 

 

3,782

 

 

 

 

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

541

 

 

 

541

 

 

$

46

 

 

 

552

 

 

 

552

 

 

$

51

 

Multi-family

 

1,234

 

 

 

1,234

 

 

 

126

 

 

 

1,256

 

 

 

1,256

 

 

 

133

 

Total

 

1,775

 

 

 

1,775

 

 

 

172

 

 

 

1,808

 

 

$

1,808

 

 

 

184

 

Total impaired loans

$

4,867

 

 

$

5,523

 

 

$

172

 

 

$

4,945

 

 

$

5,590

 

 

$

184

 

 

 

Three Months Ended September 30,

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Interest

 

 

 

 

 

 

 

 

 

 

Interest

 

 

Average

 

 

Interest

 

 

Income

 

 

Average

 

 

Interest

 

 

Income

 

 

Recorded

 

 

Income

 

 

Recognized

 

 

Recorded

 

 

Income

 

 

Recognized

 

 

Investment

 

 

Recognized

 

 

on Cash Basis

 

 

Investment

 

 

Recognized

 

 

on Cash Basis

 

 

(In thousands)

 

One- to four-family

$

1,364

 

 

$

12

 

 

$

10

 

 

$

1,607

 

 

$

18

 

 

$

13

 

Multi-family

 

1,286

 

 

 

13

 

 

 

 

 

 

1,331

 

 

 

13

 

 

 

 

Commercial real estate

 

807

 

 

 

9

 

 

 

4

 

 

 

2,547

 

 

 

10

 

 

 

10

 

Construction

 

 

 

 

 

 

 

 

 

 

173

 

 

 

2

 

 

 

2

 

Commercial and industrial

 

1,607

 

 

 

22

 

 

 

8

 

 

 

1,600

 

 

 

16

 

 

 

 

Total impaired loans

$

5,064

 

 

$

56

 

 

$

22

 

 

$

7,258

 

 

$

59

 

 

$

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Interest

 

 

 

 

 

 

 

 

 

 

Interest

 

 

Average

 

 

Interest

 

 

Income

 

 

Average

 

 

Interest

 

 

Income

 

 

Recorded

 

 

Income

 

 

Recognized

 

 

Recorded

 

 

Income

 

 

Recognized

 

 

Investment

 

 

Recognized

 

 

on Cash Basis

 

 

Investment

 

 

Recognized

 

 

on Cash Basis

 

 

(In thousands)

 

One- to four-family

$

1,374

 

 

$

39

 

 

$

32

 

 

$

1,488

 

 

$

63

 

 

$

47

 

Multi-family

 

1,298

 

 

 

39

 

 

 

 

 

 

1,342

 

 

 

40

 

 

 

 

Commercial real estate

 

823

 

 

 

28

 

 

 

13

 

 

 

2,695

 

 

 

43

 

 

 

43

 

Construction

 

 

 

 

 

 

 

 

 

 

445

 

 

 

6

 

 

 

6

 

Commercial and industrial

 

1,628

 

 

 

50

 

 

 

8

 

 

 

1,676

 

 

 

48

 

 

 

 

Total impaired loans

$

5,123

 

 

$

156

 

 

$

53

 

 

$

7,646

 

 

$

200

 

 

$

96

 

 

15


The following table summarizes the Company ’s troubled debt restructurings (“TDRs”) at the dates indicated:

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

TDRs on accrual status:

 

 

 

 

 

 

 

 

One- to four-family

 

$

1,940

 

 

$

2,125

 

Multi-family

 

 

1,282

 

 

 

1,315

 

Commercial real estate

 

 

8,998

 

 

 

9,200

 

Commercial and industrial

 

 

14

 

 

 

20

 

Total TDRs on accrual status

 

 

12,234

 

 

 

12,660

 

TDRs on non-accrual status:

 

 

 

 

 

 

 

 

One- to four-family

 

 

1,008

 

 

 

1,046

 

Total TDRs on non-accrual status

 

 

1,008

 

 

 

1,046

 

Total TDRs

 

$

13,242

 

 

$

13,706

 

 

The Company generally places loans modified as TDRs on non-accrual status for a minimum period of six months. Loans modified as TDRs qualify for return to accrual status once they have demonstrated performance with the modified terms of the loan agreement for a minimum of six consecutive months and future payments are reasonably assured. TDRs are initially reported as impaired loans with an allowance established as part of the allocated component of the allowance for loan losses when the discounted cash flows of the impaired loan is lower than the carrying value of that loan. TDRs may be removed from impairment disclosures in the year following the restructure if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring.

The Company utilizes a ten-grade internal loan rating system for multi-family, commercial real estate, construction, and commercial and industrial loans as follows:

 

Loans rated 1, 2, 3, 4, 5 and 6:     Loans in these categories are considered “pass” rated loans with low to average risk.

 

Loans rated 7:     Loans in these categories are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

 

Loans rated 8:     Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

 

Loans rated 9:     Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

 

Loans rated 10:     Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

On an annual basis, or more often if needed, the Company formally reviews the ratings on multi-family, commercial real estate, construction, and commercial and industrial loans. The Company also engages an independent third-party to review a significant portion of loans within these segments on at least an annual basis. Management uses the results of these reviews as part of its annual review process.

 

16


The following tables provide the Company’s risk-rated loans by class:

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

residential

 

 

Commercial

 

 

 

 

 

 

and

 

 

residential

 

 

Commercial

 

 

 

 

 

 

and

 

 

 

real estate

 

 

real estate

 

 

Construction

 

 

industrial

 

 

real estate

 

 

real estate

 

 

Construction

 

 

industrial

 

 

 

(In thousands)

 

Loans rated 1 - 6

 

$

965,347

 

 

$

2,420,648

 

 

$

594,611

 

 

$

557,587

 

 

$

774,919

 

 

$

2,045,905

 

 

$

641,306

 

 

$

471,793

 

Loans rated 7

 

 

 

 

 

16,692

 

 

 

 

 

 

4,056

 

 

 

275

 

 

 

17,030

 

 

 

 

 

 

6,380

 

Loans rated 8

 

 

4,281

 

 

 

799

 

 

 

 

 

 

23,572

 

 

 

4,443

 

 

 

846

 

 

 

 

 

 

47,431

 

Loans rated 9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans rated 10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

969,628

 

 

$

2,438,139

 

 

$

594,611

 

 

$

585,215

 

 

$

779,637

 

 

$

2,063,781

 

 

$

641,306

 

 

$

525,604

 

 

For one- to four-family residential real estate loans, home equity lines of credit and consumer loans, management uses delinquency reports as the key credit quality indicator.

6. DEPOSITS

A summary of deposit balances, by type, follows:

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

 

(In thousands)

 

Noninterest-bearing demand deposits

$

490,703

 

 

$

477,428

 

Interest-bearing demand deposits

 

1,151,955

 

 

 

1,004,155

 

Money market deposits

 

844,183

 

 

 

921,895

 

Regular savings and other deposits

 

327,721

 

 

 

333,774

 

Total non-certificate accounts

 

2,814,562

 

 

 

2,737,252

 

Term certificates less than $250,000

 

1,162,852

 

 

 

999,531

 

Term certificates $250,000 and greater

 

433,839

 

 

 

371,078

 

Total certificate accounts

 

1,596,691

 

 

 

1,370,609

 

Total deposits

$

4,411,253

 

 

$

4,107,861

 

 

A summary of term certificates, by maturity, follows:

 

 

 

September 30, 2018

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

 

Maturing

 

Amount

 

 

Average Rate

 

 

 

Amount

 

 

Average Rate

 

 

 

 

(Dollars in thousands)

Within 1 year

 

$

843,346

 

 

 

1.81

 

%

 

$

600,012

 

 

 

1.23

 

%

Over 1 year to 2 years

 

 

585,677

 

 

 

2.15

 

 

 

 

356,203

 

 

 

1.60

 

 

Over 2 years to 3 years

 

 

103,341

 

 

 

2.01

 

 

 

 

290,909

 

 

 

2.05

 

 

Over 3 years to 4 years

 

 

47,275

 

 

 

2.09

 

 

 

 

78,461

 

 

 

1.88

 

 

Over 4 years to 5 years

 

 

16,931

 

 

 

2.90

 

 

 

 

44,798

 

 

 

2.34

 

 

Greater than 5 years

 

 

121

 

 

 

1.39

 

 

 

 

226

 

 

 

2.13

 

 

 

 

$

1,596,691

 

 

 

1.97

 

%

 

$

1,370,609

 

 

 

1.57

 

%

 

17


The Company had certificate of deposit accounts obtained through a listing service, included in term certificates in the table above, totaling $54.8 million with a weight ed average rate of 2.37% and $943,000 with a weighted average rate of 1.28% at September 30, 2018 and December 31, 2017, respectively. The Company had brokered certificates of deposit, which are included in term certificates in the table above, totaling $3 12.2 million with a weighted average rate of 2.03% and $232.7 million with a weighted average rate of 1.73% at September 30, 2018 and December 31, 2017, respectively. In addition, the Company had $150.2 million and $100.0 million in brokered interest-beari ng demand deposits at September 30, 2018 and December 31, 2017, respectively. At September 30, 2018 and December 31, 2017, the Company had interest-bearing demand deposits totaling $648.3 million and $569.4 million, respectively, representing reciprocal de posits received from other financial institutions through Authorized Bank Deposit Placement Network Sponsor to facilitate full federal deposit insurance coverage for certain Bank customers. The “Economic Growth, Regulatory Relief, and Consumer Protection A ct”, enacted on May 24, 2018, added a limited exception from brokered deposit disclosure for reciprocal deposits. Under the terms of this law our reciprocal deposits were not considered to be brokered at September 30, 2018.

7. BORROWINGS

At September 30, 2018, short-term borrowings with an original maturity of less than one year consisted of an FHLB advance totaling $40.0 million with a rate of 2.37% that matures on October 26, 2018. The Company had no short term borrowings at December 31, 2017. The Company has an available line of credit of $9.4 million with the FHLB at an interest rate that adjusts daily and $301,000 of borrowing capacity at the Federal Reserve Bank discount window. No amounts were drawn on the line of credit and no borrowings were outstanding with the Federal Reserve Bank discount window as of September 30, 2018 or December 31, 2017.

Long-term debt consists of FHLB advances as follows:

 

 

 

September 30, 2018

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

 

 

 

Amount

 

 

Average Rate

 

 

 

Amount

 

 

Average Rate

 

 

 

 

(Dollars in thousands)

 

 

Fixed rate advances maturing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

$

3,000

 

 

 

1.63

 

%

 

$

48,000

 

 

 

1.26

 

%

2019

 

 

4,687

 

 

 

1.79

 

 

 

 

6,268

 

 

 

1.66

 

 

2020

 

 

67,460

 

 

 

2.37

 

 

 

 

53,551

 

 

 

1.80

 

 

2021

 

 

25,000

 

 

 

1.70

 

 

 

 

45,000

 

 

 

1.46

 

 

2022

 

 

105,625

 

 

 

1.79

 

 

 

 

105,625

 

 

 

1.79

 

 

2023

 

 

75,000

 

 

 

2.50

 

 

 

 

 

 

 

 

 

Thereafter

 

 

20,000

 

 

 

1.36

 

 

 

 

100,000

 

 

 

1.21

 

 

 

 

 

300,772

 

 

 

2.06

 

 

 

 

358,444

 

 

 

1.51

 

 

Variable rate advances maturing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

 

 

 

 

 

 

 

35,000

 

 

 

0.82

 

 

2022

 

 

70,000

 

 

 

1.87

 

 

 

 

100,000

 

 

 

0.43

 

 

2023

 

 

220,000

 

 

 

0.87

 

 

 

 

 

 

 

 

 

Thereafter

 

 

20,000

 

 

 

1.32

 

 

 

 

20,000

 

 

 

0.49

 

 

 

 

 

310,000

 

 

 

1.12

 

 

 

 

155,000

 

 

 

0.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total advances

 

$

610,772

 

 

 

1.59

 

%

 

$

513,444

 

 

 

1.22

 

%

 

18


Variable rate advances adjust based on the following :

 

 

September 30, 2018

 

 

December 31, 2017

 

 

(Dollars in thousands)

 

Variable rate advances adjusting during the first year:

 

 

 

 

 

 

 

3 Month Libor less 75bp

$

25,000

 

 

$

25,000

 

3 Month Libor less 100bp

 

70,000

 

 

 

55,000

 

3 Month Libor less 125bp

 

25,000

 

 

 

 

3 Month Libor less 130bp

 

105,000

 

 

 

20,000

 

3 Month Libor less 200bp

 

50,000

 

 

 

 

3 Month Libor less 230bp

 

15,000

 

 

 

 

 

 

290,000

 

 

 

100,000

 

Variable rate advances adjusting during the first two years:

 

 

 

 

 

 

 

3 Month Libor less 60bp

 

 

 

 

35,000

 

3 Month Libor less 100bp

 

20,000

 

 

 

20,000

 

 

 

20,000

 

 

 

55,000

 

 

 

 

 

 

 

 

 

Total variable rate advances

$

310,000

 

 

$

155,000

 

 

 

All borrowings from the FHLB are secured by investment securities and qualified collateral, consisting of a blanket lien on one- to four-family loans and certain multi-family and commercial real estate loans held in the Company’s portfolio. At September 30, 2018, the Company pledged multi-family and commercial real estate loans with carrying values totaling $390.2 million and $875.0 million, respectively.

8. COMMITMENTS AND CONTINGENCIES AND DERIVATIVES

In the normal course of business, there are outstanding commitments and contingencies which are not reflected in the accompanying consolidated financial statements.

Loan Commitments

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the accompanying consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for loan commitments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.

A summary of outstanding loan commitments whose contract amounts represent credit risk is as follows:

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

 

(In thousands)

 

Unadvanced portion of existing loans:

 

 

 

 

 

 

 

Construction

$

550,905

 

 

$

603,557

 

Home equity lines of credit

 

52,809

 

 

 

46,352

 

Other lines and letters of credit

 

354,835

 

 

 

301,285

 

Commitments to originate:

 

 

 

 

 

 

 

One- to four-family

 

18,201

 

 

 

25,432

 

Commercial real estate

 

139,498

 

 

 

116,314

 

Construction

 

142,533

 

 

 

81,937

 

Commercial and industrial

 

52,374

 

 

 

30,589

 

Total loan commitments outstanding

$

1,311,155

 

 

$

1,205,466

 

 

19


Commitments to originate loans are agreements to lend to a customer provided 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 . Since a portion of the commitments are expected to expire without being drawn upon, the total commitments do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case by case basis. The amount o f collateral obtained, if deemed necessary by the Company for the extension of credit, is based upon management’s credit evaluation of the borrower. Collateral held includes, but is not limited to, residential real estate and deposit accounts.

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. These lines of credit are collateralized if deemed necessary and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Interest Rate Swaps

The Company is a party to interest rate derivatives that are not designated as hedging instruments. These derivatives relate to interest rate swaps that the Company enters into with commercial business customers to synthetically convert their loans from a variable rate to a fixed rate. The Company pays interest to the customer at a floating rate on the notional amount and receives interest from the customer at a fixed rate for the same notional amount. Concurrently, the Company enters into an offsetting interest rate swap with a third party financial institution. In the offsetting swap, the Company pays the other financial institution interest at the same fixed rate on the same notional amount as the swap entered into with the customer, and receives interest from the financial institution for the same floating rate on the same notional amount. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating and probability of default. At September 30, 2018 and December 31, 2017, the Company had $1.3 million in cash pledged for collateral on its interest rate swaps with the third-party financial institution. Derivative assets and liabilities are included in other assets and other liabilities on the consolidated balance sheets.

Summary information regarding these derivatives is presented below:

 

 

 

 

 

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

Maturity

 

Interest Rate Paid

 

Interest Rate Received

 

Notional

Amount

 

 

Fair Value

Asset (Liability)

 

 

Notional

Amount

 

 

Fair Value

Asset (Liability)

 

 

 

 

 

 

(Dollars in thousands)

 

Customer interest rate swap

06/07/32

 

1 Mo. Libor + 200bp

 

Fixed (4.40%)

 

$

64,389

 

 

$

(3,478

)

 

$

65,514

 

 

$

486

 

Third-party interest rate swap

06/07/32

 

Fixed (4.40%)

 

1 Mo. Libor + 200bp

 

 

64,389

 

 

 

3,478

 

 

 

65,514

 

 

 

(486

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer interest rate swap

10/17/33

 

1 Mo. Libor + 175bp

 

Fixed (4.1052%)

 

$

10,526

 

 

$

245

 

 

$

10,709

 

 

$

720

 

Third-party interest rate swap

10/17/33

 

Fixed (4.1052%)

 

1 Mo. Libor + 175bp

 

 

10,526

 

 

 

(245

)

 

 

10,709

 

 

 

(720

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer interest rate swap

12/13/26

 

1 Mo. Libor + 205bp

 

Fixed (3.82%)

 

$

2,766

 

 

$

(177

)

 

$

2,884

 

 

$

(78

)

Third-party interest rate swap

12/13/26

 

Fixed (3.82%)

 

1 Mo. Libor + 205bp

 

 

2,766

 

 

 

177

 

 

 

2,884

 

 

 

78

 

 

Other Commitments

As of September 30, 2018, the Company has an outstanding commitment of $14.1 million with its core data processing provider through December 2021.

Employment and Change in Control Agreements

The Company has entered into employment agreements with certain senior executives which provide for a minimum annual salary, subject to increase at the discretion of the Board of Directors, and other benefits. The agreements may be terminated for cause by the Company without further liability on the part of the Company, or by the executives with prior written notice to the Board of Directors. The Company also has change in control agreements with several officers which provide a severance payment in the event employment is terminated in conjunction with a defined change in control.

Legal Claims

Various legal claims may arise from time to time in the normal course of business, but in the opinion of management, these claims are not expected to have a material effect on the Company’s consolidated financial statements.

20


9. FAIR VALUES OF ASSETS AND LIABILITIES

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of assets and liabilities is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various assets and liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the asset or liability.

The following methods and assumptions were used by the Company in estimating fair value disclosures:

Securities, at fair value — All fair value measurements are obtained from a third party pricing service and are not adjusted by management. Equity securities are measured at fair value utilizing quoted market prices (Level 1). Corporate bonds, obligations of government-sponsored enterprises, U.S. treasury securities, municipal bonds and mortgage-backed securities are determined by pricing models that consider standard input factors such as observable market data, benchmark yields, reported trades, broker/dealer quotes, credit spreads, benchmark securities, as well as new issue data, monthly payment information, and collateral performance, among others (Level 2).

Loan level interest rate swaps – The fair value is based on settlement values adjusted for credit risks associated with the counterparties and the Company and observable market interest rate curves.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis are summarized as follows. There were no liabilities measured at fair value on a recurring basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

 

(In thousands)

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

$

 

 

$

17,510

 

 

$

 

 

$

17,510

 

Equity securities

 

16,135

 

 

 

 

 

 

 

 

 

16,135

 

Loan level interest rate swaps

 

 

 

 

 

 

 

3,900

 

 

 

3,900

 

Total assets

$

16,135

 

 

$

17,510

 

 

$

3,900

 

 

$

37,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan level interest rate swaps

$

 

 

$

 

 

$

3,900

 

 

$

3,900

 

Total liabilities

$

 

 

$

 

 

$

3,900

 

 

$

3,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

 

(In thousands)

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

$

 

 

$

20,589

 

 

$

 

 

$

20,589

 

Equity securities

 

17,775

 

 

 

 

 

 

 

 

 

17,775

 

Loan level interest rate swaps

 

 

 

 

 

 

 

1,284

 

 

 

1,284

 

Total assets

$

17,775

 

 

$

20,589

 

 

$

1,284

 

 

$

39,648

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan level interest rate swaps

$

 

 

$

 

 

$

1,284

 

 

$

1,284

 

Total liabilities

$

 

 

$

 

 

$

1,284

 

 

$

1,284

 

 

Assets Measured at Fair Value on a Non-recurring Basis

The Company may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from the application of lower-of-cost-or market accounting or write-downs of individual assets.

21


Certain impaired loans wer e adjusted to fair value, less cost to sell, of the underlying collateral securing these loans resulting in losses. The loss is not recorded directly as an adjustment to current earnings, but rather as a component in determining the allowance for loan loss es. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties. Impaired loans measured at fair value at September 30, 2018 and December 31, 2017 were $ 2 . 1 milli on and $1.9 million, respectively.  

 

 

 

Summary of Fair Values of Financial Instruments

The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein do not represent the underlying fair value of the Company.

 

 

Carrying

 

 

Fair Value

 

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

(In thousands)

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

$

313,668

 

 

$

313,668

 

 

$

 

 

$

 

 

$

313,668

 

Certificates of deposit

 

20,891

 

 

 

 

 

 

21,007

 

 

 

 

 

 

21,007

 

Securities available for sale, at fair value

 

17,510

 

 

 

 

 

 

17,510

 

 

 

 

 

 

17,510

 

Equity securities, at fair value

 

16,135

 

 

 

16,135

 

 

 

 

 

 

 

 

 

16,135

 

Federal Home Loan Bank stock

 

31,100

 

 

 

 

 

 

 

 

 

31,100

 

 

 

31,100

 

Loans and loans held for sale, net

 

5,226,744

 

 

 

 

 

 

 

 

 

5,147,960

 

 

 

5,147,960

 

Accrued interest receivable

 

13,409

 

 

 

 

 

 

 

 

 

13,409

 

 

 

13,409

 

Loan level interest rate swaps

 

3,900

 

 

 

 

 

 

 

 

 

3,900

 

 

 

3,900

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

4,411,253

 

 

 

 

 

 

 

 

 

4,165,076

 

 

 

4,165,076

 

Borrowings

 

650,772

 

 

 

 

 

 

644,148

 

 

 

 

 

 

644,148

 

Accrued interest payable

 

2,781

 

 

 

 

 

 

 

 

 

2,781

 

 

 

2,781

 

Loan level interest rate swaps

 

3,900

 

 

 

 

 

 

 

 

 

3,900

 

 

 

3,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

Fair Value

 

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

(In thousands)

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

$

402,687

 

 

$

402,687

 

 

$

 

 

$

 

 

$

402,687

 

Certificates of deposit

 

69,326

 

 

 

 

 

 

69,615

 

 

 

 

 

 

69,615

 

Securities available for sale, at fair value

 

38,364

 

 

 

17,775

 

 

 

20,589

 

 

 

 

 

 

38,364

 

Federal Home Loan Bank stock

 

24,947

 

 

 

 

 

 

 

 

 

24,947

 

 

 

24,947

 

Loans and loans held for sale, net

 

4,626,570

 

 

 

 

 

 

 

 

 

4,590,543

 

 

 

4,590,543

 

Accrued interest receivable

 

12,902

 

 

 

 

 

 

 

 

 

12,902

 

 

 

12,902

 

Loan level interest rate swaps

 

1,284

 

 

 

 

 

 

 

 

 

1,284

 

 

 

1,284

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

4,107,861

 

 

 

 

 

 

 

 

 

3,995,215

 

 

 

3,995,215

 

Borrowings

 

513,444

 

 

 

 

 

 

508,411

 

 

 

 

 

 

508,411

 

Accrued interest payable

 

2,025

 

 

 

 

 

 

 

 

 

2,025

 

 

 

2,025

 

Loan level interest rate swaps

 

1,284

 

 

 

 

 

 

 

 

 

1,284

 

 

 

1,284

 

 

22


ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. You should read the information in this section in conjunction with our business and financial information and the Consolidated Financial Statements and related notes that are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC.

Forward Looking Statements

This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements, which can be identified by the use of words such as “will”, “continue”, “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. The Company’s ability to predict results or actual effect of future plans is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to:

 

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or the origination levels in our lending business, or increase the level of defaults, losses and prepayments on loans we have made and make whether held in portfolio or sold in the secondary markets;

 

competition among depository and other financial institutions;

 

changes in consumer spending, borrowing and savings habits;

 

our ability to enter new markets successfully and capitalize on growth opportunities;

 

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

changes in monetary or fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;

 

changes in the financial condition, results of operations or future prospects of issuers of securities that we own;

 

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the SEC;

 

changes in the level and trends of loan delinquencies and charge-offs and changes in estimates of the adequacy of the allowance for loan losses;

 

our ability to access cost-effective funding;

 

fluctuations in real estate values and both residential and commercial real estate market conditions;

 

demand for loans and deposits in our market area;

 

our ability to implement and changes in our business strategies;

 

adverse changes in the securities or secondary mortgage markets;

 

our ability to manage market risk, credit risk and operational risk in the current economic conditions;

 

failure or breaches of our IT security systems;

 

our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we have acquired or may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

 

technological changes that may be more difficult or expensive than expected;

 

the ability of third-party providers to perform their obligations to us;

 

the ability of the U.S. Government to manage federal debt limits;

 

our ability to successfully introduce new products and services; and

 

our ability to retain key employees.

23


Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the fiscal yea r ended December 31, 2017 filed with the SEC on March 1, 2018, under “Risk Factors,” which is available through the SEC’s website at www.sec.gov , as updated by subsequent filings with the SEC. These risks and uncertaintie s should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to relea se publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Critical Accounting Policies

A summary of significant accounting policies is described in Note 1 to the Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2017. Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Management believes that the most critical accounting policies are the determination of the allowance for loan losses and the evaluation of securities for other-than-temporary impairment.

Comparison of Financial Condition at September 30, 2018 and December 31, 2017

Assets . Total assets increased $475.9 million, or 9.0%, to $5.775 billion at September 30, 2018 from $5.299 billion at December 31, 2017. Net loans increased $603.1 million, or 13.0%, to $5.226 billion at September 30, 2018 from $4.623 billion at December 31, 2017. Cash and due from banks decreased $89.0 million, or 22.1%, to $313.7 million at September 30, 2018 from $402.7 million at December 31, 2017. Certificates of deposit decreased $48.4 million, or 69.9%, to $20.9 million at September 30, 2018 from $69.3 million at December 31, 2017, primarily due to maturities of $53.4 million, partially offset by purchases of $5.0 million. Securities at fair value decreased $4.7 million, or 12.3%, to $33.6 million at September 30, 2018 from $38.4 million at December 31, 2017.

Loan Portfolio Analysis. At September 30, 2018, net loans were $5.226 billion, or 90.5% of total assets. During the nine months ended September 30, 2018, net loans increased $603.1 million, or 13.0%. Loan originations totaled $1.114 billion during the nine months ended September 30, 2018. The increase in net loans resulted primarily from increases of $374.4 million in commercial real estate loans, $190.0 million in multi-family loans, $59.6 million in commercial and industrial loans and $32.7 million in one- to four-family loans. Refer to Note 5, Loans, in Notes to the Unaudited Consolidated Financial Statements within this report for more detail regarding the loans held in the Company’s loan portfolio.

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. Management of asset quality is accomplished by internal controls, monitoring and reporting of key risk indicators, and both internal and independent third-party loan reviews. The primary objective of our loan review process is to measure borrower performance and assess risk for the purpose of identifying loan weakness in order to minimize loan loss exposure. From the time of loan origination through final repayment, multi-family, commercial real estate, construction, and commercial and industrial loans are assigned a risk rating based on pre-determined criteria and levels of risk. The risk rating is monitored annually for most loans; however, it may change during the life of the loan as appropriate.

Internal and independent third-party loan reviews vary by loan type, as well as the size and complexity of the loan. Depending on the size and complexity of the loan, some loans may warrant detailed individual review, while other loans may have less risk based upon size, or be of a homogeneous nature reducing the need for detailed individual analysis. Assets with these characteristics, such as consumer loans and loans secured by residential real estate, may be reviewed on the basis of risk indicators such as delinquency or credit rating. In cases of significant concern, a total re-evaluation of the loan and associated risks are documented by completing a loan risk assessment and action plan. Some loans may be re-evaluated in terms of their fair market value or net realizable value in order to determine the likelihood of potential loss exposure and, consequently, the adequacy of specific and general loan loss reserves.

When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status, including contacting the borrower by letter and phone at regular intervals. When the borrower is in default, we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Management informs the Executive Committee monthly of the amount of loans delinquent more than 30 days. Management provides detailed information to the Board of Directors on loans 60 or more days past due and all loans in foreclosure and repossessed property that we own.

24


Delinquencies. Total past due loans decreased $259,000, or 3.9%, to $6.3 million at September 30, 2018 from $6.6 million at D ecember 31, 2017, reflecting a net decrease of $847,000 in loans 30 to 89 days past due, partially offset by a $588,000 increase in loans 90 days or greater past due. At September 30, 2018, non-accrual loans exceeded loans 90 days or greater past due prima rily due to loans which were placed on non-accrual status based on a determination that the ultimate collection of all principal and interest due was not expected and certain loans remain on non-accrual status until they attain a sustained contractual paym ent history of six consecutive months.

Non-performing Assets. Non-performing assets include loans that are 90 or more days past due or on non-accrual status, including TDRs on non-accrual status, and real estate and other loan collateral acquired through foreclosure and repossession. Loans 90 days or greater past due may remain on an accrual basis if adequately collateralized and in the process of collection. At September 30, 2018 we did not have any accruing loans past due 90 days or greater. For non-accrual loans, interest previously accrued but not collected is reversed and charged against income at the time a loan is placed on non-accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Real estate that we acquire as a result of foreclosure 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 the fair value, less estimated costs to sell, at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value after acquisition of the property result in charges against income. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction totaled $1.4 million at September 30, 2018.

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

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands)

Loans accounted for on a non-accrual basis:

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

One- to four-family

$

6,977

 

 

$

6,890

 

 

Home equity lines of credit

 

 

 

 

562

 

 

Commercial real estate

 

353

 

 

 

388

 

 

Total real estate loans

 

7,330

 

 

 

7,840

 

 

Commercial and industrial

 

676

 

 

 

523

 

 

Total non-accrual loans (1)

 

8,006

 

 

 

8,363

 

 

Total non-performing assets

$

8,006

 

 

$

8,363

 

 

Non-accrual loans to total loans

 

0.15

 

%

 

0.18

 

%

Non-accrual loans to total assets

 

0.14

 

%

 

0.16

 

%

Non-performing assets to total assets

 

0.14

 

%

 

0.16

 

%

 

(1)

TDRs on accrual status not included above totaled $12.2 million at September 30, 2018 and $12.7 million at December 31, 2017.

Non-accrual loans decreased $357,000, or 4.3%, to $8.0 million, or 0.15% of total loans outstanding at September 30, 2018, from $8.4 million, or 0.18% of total loans outstanding at December 31, 2017, primarily due to a decrease of $562,000 in non-accrual, home equity lines of credit.

Achieving and maintaining a moderate risk profile by aggressively managing troubled assets has been and will continue to be a primary focus for us. At September 30, 2018, our allowance for loan losses was $49.6 million, or 0.94% of total loans and 619.65% of non-accrual loans, compared to $45.2 million, or 0.97% of total loans and 540.30% of non-accrual loans at December 31, 2017. We increased our allowance primarily as a result of growth in the loan portfolio, and in particular, commercial loans. Included in our allowance at September 30, 2018 was a general component of $49.4 million, which is based upon our evaluation of various factors relating to loans not deemed to be impaired. We continue to believe our level of non-performing loans and assets, which declined significantly during the past two years, is manageable and we believe that we have sufficient capital and human resources to manage the collection of our non-performing assets in an orderly fashion.

25


At September 30, 2 018 and December 31, 2017, the Company did not hold any foreclosed real estate. We continue to be actively engaged with our borrowers in resolving remaining problem assets and with the effective management of real estate owned as a result of foreclosures.

Troubled Debt Restructurings. In the course of resolving loans to borrowers with financial difficulties, we may choose to restructure the contractual terms of certain loans, with terms modified to fit the ability of the borrower to repay in line with its current financial status. A loan is considered a TDR if, for reasons related to the debtor’s financial difficulties, a concession is granted to the debtor that would not otherwise be considered.

Total TDRs decreased $464,000 to $13.2 million at September 30, 2018 from $13.7 million at December 31, 2017, reflecting principal pay downs. Modifications of TDRs consist of rate reductions, loan term extensions or provisions for interest-only payments for specified periods up to 12 months. We have generally been successful with the concessions we have offered to borrowers to date. We generally return TDRs to accrual status when they have sustained payments for six consecutive months based on the restructured terms and future payments are reasonably assured.

Potential Problem Loans. Certain loans are identified during our loan review process that are currently performing in accordance with their contractual terms and we ultimately expect to receive payment in full of principal and interest, but it is deemed probable that we will be unable to collect all the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. This may result from deteriorating conditions such as cash flows, collateral values or creditworthiness of the borrower. These loans are classified as impaired but are not accounted for on a non-accrual basis.

Other potential problem loans are those loans that are currently performing, but where known information about possible credit problems of the borrowers causes us to have concerns as to the ability of such borrowers to comply with contractual loan repayment terms. These other potential problem loans are generally loans classified as “substandard” or 8-rated loans in accordance with our ten-grade internal loan rating system that is consistent with guidelines established by banking regulators. At September 30, 2018 other potential problem loans totaled $25.0 million, including a $22.0 million commercial and industrial loan relationship and $3.0 million of multi-family loans. The $22.0 million commercial and industrial loan relationship classified as substandard consists of loans to a non-profit educational organization in eastern Massachusetts that was identified during our loan review process as having possible financial issues that, if not corrected, could result in some loss to the Company. It was determined that this loan relationship is performing in accordance with the terms of the loans with the current expectation that we will be repaid in full in accordance with those terms, but with continual credit monitoring of the relationship.

Allowance for Loan Losses. The allowance for loan losses is maintained at levels considered adequate by management to provide for probable loan losses inherent in the loan portfolio as of the consolidated balance sheet reporting dates. The allowance for loan losses is based on management’s assessment of various factors affecting the loan portfolio, including portfolio composition, delinquent and non-accrual loans, national and local business conditions and loss experience and an overall evaluation of the quality of the underlying collateral.

26


Changes in the allowance for loan losses during the periods indicated were as follows:

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands)

Beginning balance

$

45,185

 

 

$

40,149

 

 

Provision for loan losses

 

4,285

 

 

 

5,574

 

 

Charge-offs:

 

 

 

 

 

 

 

 

Construction

 

 

 

 

(2

)

 

Consumer

 

(225

)

 

 

(265

)

 

Total charge-offs

 

(225

)

 

 

(267

)

 

Recoveries:

 

 

 

 

 

 

 

 

One- to four-family

 

68

 

 

 

33

 

 

Multi-family

 

 

 

 

1

 

 

Commercial real estate

 

10

 

 

 

 

 

Construction

 

203

 

 

 

51

 

 

Commercial and industrial

 

3

 

 

 

30

 

 

Consumer

 

80

 

 

 

72

 

 

Total recoveries

 

364

 

 

 

187

 

 

Net recoveries (charge-offs)

 

139

 

 

 

(80

)

 

Ending balance

$

49,609

 

 

$

45,643

 

 

Allowance to non-accrual loans

 

619.65

 

%

 

497.31

 

%

Allowance to total loans outstanding

 

0.94

 

%

 

1.00

 

%

Net recoveries (charge-offs) to average loans outstanding

 

0.00

 

%

 

(0.00

)

%

 

Our provision for loan losses was $4.3 million for the nine months ended September 30, 2018 compared to $5.6 million for the nine months ended September 30, 2017.  For the nine months ended September 30, 2018 the increase in the provision for loan losses was primarily due to growth in the commercial loan categories. The allowance for loan losses was $49.6 million or 0.94% of total loans at September 30, 2018, compared to $45.2 million or 0.97% of total loans at December 31, 2017. The changes in the provision and the allowance for loan losses coverage ratio were based on management’s assessment of loan portfolio growth and composition changes, declines in historical charge-off trends, reduced levels of problem loans and other improving asset quality trends. The increase in the allowance for loan losses at September 30, 2018 compared to December 31, 2017 was primarily due to increases in the commercial real estate, multi-family and commercial and industrial loan categories, partially offset by a decrease in the construction category. Such changes reflected the conversion of construction loans to permanent status in the commercial real estate and commercial and industrial loan portfolios totaling $312.2 million during the nine months ended September 30, 2018. Generally, multi-family, commercial real estate, construction and commercial and industrial loan categories have higher inherent credit risks than one- to four- family loans and home equity lines of credit. We continue to assess the adequacy of our allowance for loan losses in accordance with established policies.

27


The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated:

 

 

September 30, 2018

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Percent of

 

 

 

 

 

 

 

 

 

 

 

 

Percent of

 

 

 

 

 

 

 

Percent of

 

 

 

Loans in

 

 

 

 

 

 

 

Percent of

 

 

 

Loans in

 

 

 

 

 

 

 

Allowance

 

 

 

Category

 

 

 

 

 

 

 

Allowance

 

 

 

Category

 

 

 

 

 

 

 

to Total

 

 

 

of Total

 

 

 

 

 

 

 

to Total

 

 

 

of Total

 

 

 

Amount

 

 

Allowance

 

 

 

Loans

 

 

 

Amount

 

 

Allowance

 

 

 

Loans

 

 

 

(Dollars in thousands)

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

$

1,015

 

 

 

2.0

 

%

 

 

12.1

 

%

 

$

1,001

 

 

 

2.2

 

%

 

 

12.9

 

%

Multi-family

 

7,873

 

 

 

15.9

 

 

 

 

18.4

 

 

 

 

6,263

 

 

 

13.9

 

 

 

 

16.7

 

 

Home equity lines of credit

 

65

 

 

 

0.1

 

 

 

 

0.9

 

 

 

 

62

 

 

 

0.1

 

 

 

 

1.0

 

 

Commercial real estate

 

25,836

 

 

 

52.2

 

 

 

 

46.1

 

 

 

 

21,513

 

 

 

47.6

 

 

 

 

44.2

 

 

Construction

 

8,800

 

 

 

17.7

 

 

 

 

11.2

 

 

 

 

10,166

 

 

 

22.5

 

 

 

 

13.7

 

 

Total real estate loans

 

43,589

 

 

 

87.9

 

 

 

 

88.7

 

 

 

 

39,005

 

 

 

86.3

 

 

 

 

88.5

 

 

Commercial and industrial

 

5,919

 

 

 

11.9

 

 

 

 

11.1

 

 

 

 

6,084

 

 

 

13.5

 

 

 

 

11.3

 

 

Consumer

 

101

 

 

 

0.2

 

 

 

 

0.2

 

 

 

 

96

 

 

 

0.2

 

 

 

 

0.2

 

 

Total loans

$

49,609

 

 

 

100.0

 

%

 

 

100.0

 

%

 

$

45,185

 

 

 

100.0

 

%

 

 

100.0

 

%

 

The allowance consists of general and allocated components. The general component relates to pools of non-impaired loans and is based on historical loss experience adjusted for qualitative factors. The allocated component relates to loans that are classified as impaired. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

We had impaired loans totaling $4.9 million as of September 30, 2018 and December 31, 2017. At September 30, 2018, impaired loans totaling $1.8 million had a valuation allowance of $172,000. Impaired loans totaling $1.8 million had a valuation allowance of $184,000 at December 31, 2017. Our average investment in impaired loans was $5.1 million and $7.6 million for the nine months ended September 30, 2018 and 2017, respectively.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment based on payment status. Accordingly, we do not separately identify individual one- to four-family residential real estate, home equity lines of credit and consumer loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring. We periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a TDR. All TDRs are initially classified as impaired.

Management has reviewed the collateral value for all impaired and non-accrual loans that were collateral-dependent as of September 30, 2018 and considered any probable loss in determining the allowance for loan losses.

For residential loans measured for impairment based on the collateral value, we will do the following:

 

When a loan becomes seriously delinquent, generally 60 days past due, we obtain third-party appraisals that are generally the basis for charge-offs when a loss is indicated, prior to the foreclosure sale, but usually no later than when such loans are 180 days past due. We generally are able to complete the foreclosure process within six to nine months from receipt of the third-party appraisal.

 

We make adjustments to appraisals based on updated economic information, if necessary, prior to the foreclosure sale. We review current market factors to determine whether, in management’s opinion, downward adjustments to the most recent appraised values may be warranted. If so, we use our best estimate to apply an estimated discount rate to the appraised values to reflect current market factors.

 

Appraisals we receive are based on comparable property sales.

28


For commercial loans measured for impairment based on the collateral value, we will do the following:

 

We obtain a third party appraisal at the time a loan is deemed to be in a workout situation and there is no indication that the loan will return to performing status, generally when the loan is 90 days or more past due. One or more updated third party appraisals are obtained prior to foreclosure depending on the foreclosure timeline. In general we order new appraisals annually on loans in the process of foreclosure.

 

We make downward adjustments to appraisals when conditions warrant. Adjustments are made by applying a discount to the appraised value based on occupancy, recent changes in condition to the property and certain other factors. Adjustments are also made to appraisals for construction projects involving residential properties based on recent sales of units. Losses are recognized if the appraised value less estimated costs to sell is less than our carrying value of the loan.

 

Appraisals we receive are generally based on a reconciliation of comparable property sales and income capitalization approaches. For loans on construction projects involving residential properties, appraisals are generally based on a discounted cash flow analysis assuming a bulk sale to a single buyer.

Loans that are partially charged off generally remain on non-accrual status until foreclosure or such time that they are performing in accordance with the terms of the loan and have a sustained contractual payment history of at least six consecutive months. The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. Loan losses are charged against the allowance when we believe the uncollectability of a loan balance is confirmed; for collateral-dependent loans, generally when appraised values (as adjusted values, if applicable), less estimated costs to sell, are less than our carrying values.

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 generally accepted accounting principles in the United States of America, there can be no assurance that regulators, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or 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.

Securities Portfolio . At September 30, 2018 our securities portfolio was $33.6 million, or 0.6% of total assets, compared to $38.4 million, or 0.7% of total assets, at December 31, 2017. During the nine months ended September 30, 2018, the securities portfolio decreased $4.7 million, or 12.3%, primarily due to $2.4 million in maturities, calls and principal payments and $3.9 million in sales, partially offset by $1.6 million in purchases. At September 30, 2018, the securities portfolio consisted of $17.5 million, or 52.0%, in debt securities and $16.1 million, or 48.0%, in equity securities. The debt securities within the portfolio are government-sponsored enterprises, municipal bonds, and mortgage-backed securities issued by government-sponsored enterprises and private companies. Included in marketable equity securities are common stocks and money market mutual funds. We purchase equity securities with the intent to generate long-term capital gains through purchasing investment grade dividend paying securities in companies with relatively low long-term debt and a history of sustained earnings and above-average growth. We typically initiate a securities position based on market opportunities. At September 30, 2018 we had no investments in a single company or entity that had an aggregate book value in excess of 10% of our stockholders’ equity. Refer to Note 4, Securities, in Notes to the Unaudited Consolidated Financial Statements within this report for more detail regarding our securities portfolio.

Deposits . Deposits are a major source of our funds for lending and other investment purposes. Deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Our deposit base is comprised of demand, interest-bearing checking, money market, regular savings and other deposits, and certificates of deposit, which include brokered certificates of deposit. We consider demand, interest-bearing checking, money market, and regular savings and other deposits to be core deposits. Total deposits increased $303.4 million, or 7.4%, to $4.411 billion at September 30, 2018 from $4.108 billion at December 31, 2017. Our continuing focus on the acquisition and expansion of core deposit relationships resulted in net growth in core deposits of $77.3 million, or 2.8%, to $2.815 billion, or 63.8% of total deposits. Refer to Note 6, Deposits, in Notes to the Unaudited Consolidated Financial Statements within this report for more detail regarding our deposits.

29


The following table sets forth the average balances of deposits for th e periods indicated.

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

Average

 

 

Average

 

 

 

of Total

 

 

 

Average

 

 

Average

 

 

 

of Total

 

 

 

Balance

 

 

Rate

 

 

 

Deposits

 

 

 

Balance

 

 

Rate

 

 

 

Deposits

 

 

 

(Dollars in thousands)

Noninterest-bearing demand deposits

$

488,597

 

 

 

 

%

 

 

11.1

 

%

 

$

444,324

 

 

 

 

%

 

 

11.6

 

%

Interest-bearing demand deposits

 

1,090,516

 

 

 

1.26

 

 

 

 

26.1

 

 

 

 

743,531

 

 

 

0.84

 

 

 

 

22.7

 

 

Money market deposits

 

867,272

 

 

 

1.09

 

 

 

 

19.1

 

 

 

 

988,884

 

 

 

0.90

 

 

 

 

24.7

 

 

Regular savings and other deposits

 

334,605

 

 

 

0.14

 

 

 

 

7.5

 

 

 

 

316,463

 

 

 

0.14

 

 

 

 

8.2

 

 

Certificates of deposit

 

1,480,331

 

 

 

1.79

 

 

 

 

36.2

 

 

 

 

1,150,472

 

 

 

1.41

 

 

 

 

32.8

 

 

Total

$

4,261,321

 

 

 

1.18

 

%

 

 

100.0

 

%

 

$

3,643,674

 

 

 

0.88

 

%

 

 

100.0

 

%

 

Borrowings . We use borrowings from the FHLB to supplement our supply of funds for loans and investments. At September 30, 2018 and December 31, 2017, FHLB advances totaled $650.8 million and $513.4 million, respectively, with a weighted average rate of 1.63% and 1.22%, respectively. Total borrowings increased $137.3 million, or 26.7%, during the nine months ended September 30, 2018. During the nine months ended September 30, 2018 the Bank entered into a short-term advance with a term of one month and a fixed rate of 2.37% and long-term advances with the FHLB totaling $325.0 million with original terms ranging from two to five years and initial interest rates ranging from 0.04% to 2.84%. The maturing advances with the FHLB during the nine months ended September 30, 2018 totaled $45.0 million and consisted of long term advances with original terms of two years and fixed interest rates ranging from 1.21% to 1.35%. The advances called by the FHLB during the nine months ended September 30, 2018 totaled $180.0 million and consisted of long term advances with original terms ranging from four to 15 years and interest rates at the time of call ranging from 0.42% to 1.87%. At September 30, 2018, we also had an available line of credit of $9.4 million with the FHLB at an interest rate that adjusts daily, none of which was outstanding at that date. Refer to Note 7, Borrowings, in Notes to the Unaudited Consolidated Financial Statements within this report for more detail regarding our borrowings.

Information relating to borrowings is detailed in the following table.

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

 

2017

 

 

 

(Dollars in thousands)

 

 

Balance outstanding at end of period

$

650,772

 

 

 

$

471,069

 

 

Average amount outstanding during the period

$

575,375

 

 

 

$

385,696

 

 

Weighted average interest rate during the period

 

1.43

 

%

 

 

1.21

 

%

Maximum outstanding at any month end

$

650,772

 

 

 

$

474,015

 

 

Weighted average interest rate at end of period

 

1.63

 

%

 

 

1.16

 

%

 

Stockholders’ Equity . Total stockholders’ equity increased $32.7 million, or 5.1%, to $679.1 million at September 30, 2018, from $646.4 million at December 31, 2017. The increase for the nine months ended September 30, 2018 was due primarily to net income of $43.4 million and $3.3 million related to stock-based compensation plans, partially offset by the repurchase of 314,010 shares of the Company’s stock at a total cost of $6.1 million, dividends of $0.15 per share totaling $7.7 million, the surrender of 117,313 shares of the Company’s stock related to the tax withholdings resulting from stock option exercises at a total cost of $2.0 million and $437,000 in accumulated other comprehensive loss, reflecting a decrease in the fair value of available-for-sale securities. Stock options exercised by employees and directors totaled 544,869 during the third quarter of 2018 and 762,332 shares during the nine months ended September 30, 2018, including 706,610 shares from stock options granted in 2008 and exercised prior to expiration. Stockholders’ equity to assets was 11.76% at September 30, 2018, compared to 12.20% at December 31, 2017. Book value per share increased to $12.52 at September 30, 2018 from $11.96 at December 31, 2017. At September 30, 2018, the Company and the Bank continued to exceed all regulatory capital requirements. Refer to “- Capital Management ” within this report for more information regarding capital requirements and actual capital amounts and ratios for the Bank and the Company.

30


Results of Operations for the Three and Nine Months Ended September 30, 2018 and 2017

Net Income. Our primary source of 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. Changes in levels of interest rates affect our net interest income. A secondary source of income is non-interest income, which includes revenue that we receive from providing products and services. The majority of our non-interest income generally comes from customer service fees, loan fees, bank-owned life insurance, mortgage banking gains and gains on sales of securities.

Net income information is as follows:

 

 

Three Months Ended September 30,

 

 

Change

 

 

 

Nine Months Ended September 30,

 

 

Change

 

 

 

2018

 

 

2017

 

 

Amount

 

 

Percent

 

 

 

2018

 

 

2017

 

 

Amount

 

 

Percent

 

 

 

(Dollars in thousands)

Net interest income

$

41,367

 

 

$

38,054

 

 

$

3,313

 

 

 

8.7

 

%

 

$

122,262

 

 

$

106,863

 

 

$

15,399

 

 

 

14.4

 

%

Provision for loan losses

 

226

 

 

 

2,458

 

 

 

(2,232

)

 

 

(90.8

)

 

 

 

4,285

 

 

 

5,574

 

 

 

(1,289

)

 

 

(23.1

)

 

Non-interest income

 

3,677

 

 

 

5,253

 

 

 

(1,576

)

 

 

(30.0

)

 

 

 

8,868

 

 

 

14,355

 

 

 

(5,487

)

 

 

(38.2

)

 

Non-interest expenses

 

23,007

 

 

 

20,814

 

 

 

2,193

 

 

 

10.5

 

 

 

 

71,161

 

 

 

64,096

 

 

 

7,065

 

 

 

11.0

 

 

Net income

 

17,357

 

 

 

13,333

 

 

 

4,024

 

 

 

30.2

 

 

 

 

43,413

 

 

 

33,924

 

 

 

9,489

 

 

 

28.0

 

 

Basic earnings per share

 

0.34

 

 

 

0.26

 

 

 

0.08

 

 

 

29.5

 

 

 

 

0.84

 

 

 

0.66

 

 

 

0.18

 

 

 

26.9

 

 

Diluted earnings per share

 

0.33

 

 

 

0.25

 

 

 

0.08

 

 

 

30.0

 

 

 

 

0.82

 

 

 

0.65

 

 

 

0.18

 

 

 

27.1

 

 

Return on average assets

 

1.22

 

%

 

1.10

 

%

 

0.12

 

%

 

10.9

 

 

 

 

1.05

 

%

 

0.97

 

%

 

0.08

 

%

 

8.2

 

 

Return on average equity

 

10.28

 

%

 

8.40

 

%

 

1.88

 

%

 

22.4

 

 

 

 

8.72

 

%

 

7.25

 

%

 

1.47

 

%

 

20.3

 

 

 

31


Net Interest Income.

Average Balance Sheets and Related Yields and Rates . 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 daily average balances, and include non-accrual loans and purchase accounting related premium and discounts. The loan yields include the effect of amortization or accretion of deferred loan fees/costs and purchase accounting premiums/discounts to interest and fees on loans.

 

 

Three Months Ended September 30,

 

 

 

2018

 

 

 

2017

 

 

 

Average

Balance

 

 

Interest (1)

 

 

Yield

Cost (1)(6)

 

 

 

Average

Balance

 

 

Interest (1)

 

 

Yield

Cost (1)(6)

 

 

 

(Dollars in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (2)

$

5,213,832

 

 

$

56,488

 

 

 

4.30

 

%

 

$

4,402,966

 

 

$

47,855

 

 

 

4.31

 

%

Securities and certificates of deposits

 

57,489

 

 

 

355

 

 

 

2.45

 

 

 

 

132,972

 

 

 

658

 

 

 

1.96

 

 

Other interest-earning assets (3)

 

310,622

 

 

 

1,932

 

 

 

2.47

 

 

 

 

208,193

 

 

 

819

 

 

 

1.56

 

 

Total interest-earning assets

 

5,581,943

 

 

 

58,775

 

 

 

4.18

 

 

 

 

4,744,131

 

 

 

49,332

 

 

 

4.13

 

 

Noninterest-earning assets

 

118,253

 

 

 

 

 

 

 

 

 

 

 

 

115,491

 

 

 

 

 

 

 

 

 

 

Total assets

$

5,700,196

 

 

 

 

 

 

 

 

 

 

 

$

4,859,622

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

$

1,133,916

 

 

 

4,032

 

 

 

1.41

 

 

 

$

819,965

 

 

 

1,874

 

 

 

0.91

 

 

Money market deposits

 

869,248

 

 

 

2,658

 

 

 

1.21

 

 

 

 

966,340

 

 

 

2,240

 

 

 

0.92

 

 

Regular savings and other deposits

 

329,586

 

 

 

114

 

 

 

0.14

 

 

 

 

323,621

 

 

 

113

 

 

 

0.14

 

 

Certificates of deposit

 

1,557,998

 

 

 

7,480

 

 

 

1.90

 

 

 

 

1,169,264

 

 

 

4,301

 

 

 

1.46

 

 

Total interest-bearing deposits

 

3,890,748

 

 

 

14,284

 

 

 

1.46

 

 

 

 

3,279,190

 

 

 

8,528

 

 

 

1.03

 

 

Borrowings

 

612,171

 

 

 

2,463

 

 

 

1.60

 

 

 

 

468,642

 

 

 

1,388

 

 

 

1.18

 

 

Total interest-bearing liabilities

 

4,502,919

 

 

 

16,747

 

 

 

1.48

 

 

 

 

3,747,832

 

 

 

9,916

 

 

 

1.05

 

 

Noninterest-bearing demand deposits

 

494,366

 

 

 

 

 

 

 

 

 

 

 

 

450,890

 

 

 

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

27,388

 

 

 

 

 

 

 

 

 

 

 

 

26,228

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

5,024,673

 

 

 

 

 

 

 

 

 

 

 

 

4,224,950

 

 

 

 

 

 

 

 

 

 

Total stockholders' equity

 

675,523

 

 

 

 

 

 

 

 

 

 

 

 

634,672

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

$

5,700,196

 

 

 

 

 

 

 

 

 

 

 

$

4,859,622

 

 

 

 

 

 

 

 

 

 

Net interest-earning assets

$

1,079,024

 

 

 

 

 

 

 

 

 

 

 

$

996,299

 

 

 

 

 

 

 

 

 

 

Fully tax-equivalent net interest income

 

 

 

 

 

42,028

 

 

 

 

 

 

 

 

 

 

 

 

39,416

 

 

 

 

 

 

Less: tax-equivalent adjustments

 

 

 

 

 

(661

)

 

 

 

 

 

 

 

 

 

 

 

(1,362

)

 

 

 

 

 

Net interest income

 

 

 

 

$

41,367

 

 

 

 

 

 

 

 

 

 

 

$

38,054

 

 

 

 

 

 

Interest rate spread (1)(4)

 

 

 

 

 

 

 

 

 

2.70

 

%

 

 

 

 

 

 

 

 

 

 

3.08

 

%

Net interest margin (1)(5)

 

 

 

 

 

 

 

 

 

2.99

 

%

 

 

 

 

 

 

 

 

 

 

3.30

 

%

Average interest-earning assets to average

   interest-bearing liabilities

 

 

 

 

 

123.96

 

%

 

 

 

 

 

 

 

 

126.58

 

%

 

 

Supplemental Information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits, including noninterest-bearing

   demand deposits

$

4,385,114

 

 

$

14,284

 

 

 

1.29

 

%

 

$

3,730,080

 

 

$

8,528

 

 

 

0.91

 

%

Total deposits and borrowings, including

   noninterest-bearing demand deposits

$

4,997,285

 

 

$

16,747

 

 

 

1.33

 

%

 

$

4,198,722

 

 

$

9,916

 

 

 

0.94

 

%

 

(1)

Income on debt securities, equity securities and revenue bonds included in commercial real estate loans, as well as resulting yields, interest rate spread and net interest margin, are presented on a tax-equivalent basis. The tax-equivalent adjustments are deducted from tax-equivalent net interest income to agree to amounts reported in the consolidated statements of net income. For the three months ended September 30, 2018 and 2017, yields on loans before tax-equivalent adjustments were 4.25% and 4.20%, respectively, yields on securities and certificates of deposit before tax-equivalent adjustments were 2.30% and 1.65%, respectively, and yields on total interest-earning assets before tax-equivalent adjustments were 4.13% and 4.01%, respectively. Interest rate spread before tax-equivalent adjustments for the three months ended September 30, 2018 and 2017 was 2.65% and 2.96%, respectively, while net interest margin before tax-equivalent adjustments for the three months ended September 30, 2018 and 2017 was 2.94% and 3.18%, respectively.

32


(2)

Loans on non-accrual status are included in average balances.

(3)

Includes FHLB stock and associated dividends.

(4)

Interest rate spread represents the difference between the tax-equivalent yield on interest-earning assets and the cost of interest-bearing liabilities.

(5)

Net interest margin represents net interest income (tax-equivalent basis) divided by average interest-earning assets.

(6)

Annualized.

 

 

Nine Months Ended September 30,

 

 

 

2018

 

2017

 

 

 

Average

Balance

 

 

Interest (1)

 

 

Yield

Cost (1)(6)

 

 

 

Average

Balance

 

 

Interest (1)

 

 

Yield

Cost (1)(6)

 

 

 

(Dollars in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (2)

$

5,012,959

 

 

$

161,552

 

 

 

4.31

 

%

 

$

4,196,281

 

 

$

133,976

 

 

 

4.27

 

%

Securities and certificates of deposits

 

74,575

 

 

 

1,321

 

 

 

2.37

 

 

 

 

140,277

 

 

 

2,076

 

 

 

1.98

 

 

Other interest-earning assets (3)

 

319,028

 

 

 

4,981

 

 

 

2.09

 

 

 

 

230,291

 

 

 

2,200

 

 

 

1.28

 

 

Total interest-earning assets

 

5,406,562

 

 

 

167,854

 

 

 

4.15

 

 

 

 

4,566,849

 

 

 

138,252

 

 

 

4.05

 

 

Noninterest-earning assets

 

120,139

 

 

 

 

 

 

 

 

 

 

 

 

112,600

 

 

 

 

 

 

 

 

 

 

Total assets

$

5,526,701

 

 

 

 

 

 

 

 

 

 

 

$

4,679,449

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

$

1,090,516

 

 

 

10,309

 

 

 

1.26

 

 

 

$

743,531

 

 

 

4,691

 

 

 

0.84

 

 

Money market deposits

 

867,272

 

 

 

7,041

 

 

 

1.09

 

 

 

 

988,884

 

 

 

6,689

 

 

 

0.90

 

 

Regular savings and other deposits

 

334,605

 

 

 

346

 

 

 

0.14

 

 

 

 

316,463

 

 

 

335

 

 

 

0.14

 

 

Certificates of deposit

 

1,480,331

 

 

 

19,848

 

 

 

1.79

 

 

 

 

1,150,472

 

 

 

12,167

 

 

 

1.41

 

 

Total interest-bearing deposits

 

3,772,724

 

 

 

37,544

 

 

 

1.33

 

 

 

 

3,199,350

 

 

 

23,882

 

 

 

1.00

 

 

Borrowings

 

575,375

 

 

 

6,154

 

 

 

1.43

 

 

 

 

385,696

 

 

 

3,486

 

 

 

1.21

 

 

Total interest-bearing liabilities

 

4,348,099

 

 

 

43,698

 

 

 

1.34

 

 

 

 

3,585,046

 

 

 

27,368

 

 

 

1.02

 

 

Noninterest-bearing demand deposits

 

488,597

 

 

 

 

 

 

 

 

 

 

 

 

444,324

 

 

 

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

26,559

 

 

 

 

 

 

 

 

 

 

 

 

26,421

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

4,863,255

 

 

 

 

 

 

 

 

 

 

 

 

4,055,791

 

 

 

 

 

 

 

 

 

 

Total stockholders' equity

 

663,446

 

 

 

 

 

 

 

 

 

 

 

 

623,658

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

$

5,526,701

 

 

 

 

 

 

 

 

 

 

 

$

4,679,449

 

 

 

 

 

 

 

 

 

 

Net interest-earning assets

$

1,058,463

 

 

 

 

 

 

 

 

 

 

 

$

981,803

 

 

 

 

 

 

 

 

 

 

Fully tax-equivalent net interest income

 

 

 

 

 

124,156

 

 

 

 

 

 

 

 

 

 

 

 

110,884

 

 

 

 

 

 

Less: tax-equivalent adjustments

 

 

 

 

 

(1,894

)

 

 

 

 

 

 

 

 

 

 

 

(4,021

)

 

 

 

 

 

Net interest income

 

 

 

 

$

122,262

 

 

 

 

 

 

 

 

 

 

 

$

106,863

 

 

 

 

 

 

Interest rate spread (1)(4)

 

 

 

 

 

 

 

 

 

2.81

 

%

 

 

 

 

 

 

 

 

 

 

3.03

 

%

Net interest margin (1)(5)

 

 

 

 

 

 

 

 

 

3.07

 

%

 

 

 

 

 

 

 

 

 

 

3.25

 

%

Average interest-earning assets to average

   interest-bearing liabilities

 

 

 

 

 

124.34

 

%

 

 

 

 

 

 

 

 

127.39

 

%

 

 

Supplemental Information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits, including noninterest-bearing

   demand deposits

$

4,261,321

 

 

$

37,544

 

 

 

1.18

 

%

 

$

3,643,674

 

 

$

23,882

 

 

 

0.88

 

%

Total deposits and borrowings, including

   noninterest-bearing demand deposits

$

4,836,696

 

 

$

43,698

 

 

 

1.21

 

%

 

$

4,029,370

 

 

$

27,368

 

 

 

0.91

 

%

 

(1)

Income on debt securities, equity securities and revenue bonds included in commercial real estate loans, as well as resulting yields, interest rate spread and net interest margin, are presented on a tax-equivalent basis. The tax-equivalent adjustments are deducted from tax-equivalent net interest income to agree to amounts reported in the consolidated statements of net income. For the nine months ended September 30, 2018 and 2017, yields on loans before tax-equivalent adjustments were 4.26% and 4.15%, respectively, yields on securities and certificates of deposit before tax-equivalent adjustments were 2.22% and 1.67%, respectively, and yields on total interest-earning assets before tax-equivalent adjustments were 4.10% and 3.93%, respectively. Interest rate spread before tax-equivalent adjustments for the nine months ended September 30, 2018 and 2017 was 2.76% and 2.91%, respectively, while net interest margin before tax-equivalent adjustments for the nine months ended September 30, 2018 and 2017 was 3.02% and 3.13%, respectively.

33


(2)

Loans on non-accrual status are included in average balances.

(3)

Includes FHLB stock and associated dividends.

(4)

Interest rate spread represents the difference between the tax-equivalent yield on interest-earning assets and the cost of interest-bearing liabilities.

(5)

Net interest margin represents net interest income (tax-equivalent basis) divided by average interest-earning assets.

(6)

Annualized.

Rate/Volume Analysis . The following table sets forth the effects of changing rates and volumes on our fully tax-equivalent 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 proportionally based on the changes due to rate and the changes due to volume.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2018 Compared to 2017

 

 

2018 Compared to 2017

 

 

Increase (Decrease) Due to

 

 

Increase (Decrease) Due to

 

 

Volume

 

 

Rate

 

 

Net

 

 

Volume

 

 

Rate

 

 

Net

 

 

(In thousands)

 

 

(In thousands)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

$

8,786

 

 

$

(153

)

 

$

8,633

 

 

$

26,308

 

 

$

1,268

 

 

$

27,576

 

Securities and certificates of deposit

 

(438

)

 

 

135

 

 

 

(303

)

 

 

(1,107

)

 

 

352

 

 

 

(755

)

Other interest-earning assets

 

510

 

 

 

603

 

 

 

1,113

 

 

 

1,051

 

 

 

1,730

 

 

 

2,781

 

Total

 

8,858

 

 

 

585

 

 

 

9,443

 

 

 

26,252

 

 

 

3,350

 

 

 

29,602

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

2,297

 

 

 

3,459

 

 

 

5,756

 

 

 

5,823

 

 

 

7,839

 

 

 

13,662

 

Borrowings

 

495

 

 

 

580

 

 

 

1,075

 

 

 

1,943

 

 

 

725

 

 

 

2,668

 

Total

 

2,792

 

 

 

4,039

 

 

 

6,831

 

 

 

7,766

 

 

 

8,564

 

 

 

16,330

 

Change in fully tax-equivalent net interest

   income

$

6,066

 

 

$

(3,454

)

 

$

2,612

 

 

$

18,486

 

 

$

(5,214

)

 

$

13,272

 

 

The interest rate spread and net interest margin on a tax-equivalent basis were 2.70% and 2.99%, respectively, for the three months ended September 30, 2018 compared to 3.08% and 3.30%, respectively, for the three months ended September 30, 2017. For the nine months ended September 30, 2018 the interest rate spread and net interest margin on a tax-equivalent basis were 2.81% and 3.07%, respectively, compared to 3.03% and 3.25%, respectively, for the nine months ended September 30, 2017. Net interest income increased 8.7% and 14.4% for the three and nine months ended September 30, 2018, respectively, compared to the respective prior periods and was primarily due to growth in average loan balances and yields on interest-earning assets, partially offset by growth in in the average balances of deposits and borrowings along with an increase in the cost of funds. The interest rate spread and interest rate margin on a tax-equivalent basis for the three and nine months ended September 30, 2018 reflect the reduction in the statutory federal income tax rate to 21% from 35%.

The yield on interest-earning assets on a tax-equivalent basis increased five basis points to 4.18% for the for the three months ended September 30, 2018, compared to 4.13% for the three months ended September 30, 2017, while the cost of funds increased 39 basis points to 1.33% from 0.94% for the three months ended September 30, 2018 and 2017, respectively. The increase in interest income was primarily due to growth in the Company’s average loan balances of $810.9 million, or 18.4%, to $5.214 billion, partially offset by declines in the yield on loans to 4.30% on a tax-equivalent basis, reflecting reductions in prepayment fees of $440,000 compared to the third quarter of 2017. The yields on loans and interest-earning assets on a tax-equivalent basis for the three months ended September 30, 2018, reflect the reduction in the statutory federal income tax rate to 21% from 35%. The increase in interest expense on deposits was primarily due to the growth in average total deposits of $655.0 million, or 17.6%, to $4.385 billion and an increase in the average total cost of deposits of 38 basis points to 1.29% for the three months ended September 30, 2018 compared to the same period in 2017. The increase in interest expense on borrowings was primarily due to the increase in average borrowings of $143.5 million, or 30.6%, to $612.2 million, and an increase in the cost of average borrowings of 42 basis points to 1.60% for the three months ended September 30, 2018 compared to 1.18% for the three months ended September 30, 2017.

34


The yield on interest-earning assets on a tax-equivalent basis increased 10 basis points to 4.15% for the nine months ended September 30, 2018 compared to 4.05% for the nine months ended Septem ber 30, 2017, while the cost of funds increased 30 basis points to 1.21% from 0.91% for the nine months ended September 30, 2018 and 2017, respectively. The increase in interest income was primarily due to growth in the Company’s average loan balances of $ 816.7 million, or 19.5%, to $5.013 billion, and an increase in the yield on loans on a tax-equivalent basis of four basis points to 4.31% for the nine months ended September 30, 2018 compared to 4.27% for the nine months ended September 30, 2017. The yield s on loans and interest-earning assets on a tax-equivalent basis for the nine months ended September 30, 2018 reflect the reduction in the statutory federal income tax rate to 21% from 35%. The increase in interest expense on deposits was primarily due to the growth in average total deposits of $617.6 million, or 17.0%, to $4.261 billion and an increase in the average total cost of deposits of 30 basis points to 1.18% for the nine months ended September 30, 2018 compared the same period in September 30, 201 7. The increase in interest expense on borrowings was primarily due to the increase in average borrowings of $189.7 million, or 49.2%, to $575.4 million, and an increase in the cost of average borrowings of 22 basis points to 1.43% for the nine months ende d September 30, 2018 compared to 1.21% for the nine months ended September 30, 2017.

Provision for Loan Losses. The provision for loan losses was $226,000 for the three months ended September 30, 2018 compared to $2.5 million for the three months ended September 30, 2017, reflecting reductions in the allocated general component of the allowance for loan losses due to the conversion of construction loans to permanent status in the commercial real estate and commercial and industrial loan portfolios totaling $90.3 million during the three months ended September 30, 2018. For the nine months ended September 30, 2018, the provision for loan losses was $4.3 million compared to $5.6 million for the nine months ended September 30, 2017. For further discussion of the changes in the provision and allowance for loan losses, refer to “- Comparison of Financial Condition at September 30, 2018 and December 31, 2017 - Allowance for Loan Losses .”

Non-Interest Income. Non-interest income information is as follows:

 

 

Three Months Ended September 30,

 

 

Change

 

 

 

Nine Months Ended September 30,

 

 

Change

 

 

 

2018

 

 

2017

 

 

Amount

 

 

Percent

 

 

 

2018

 

 

2017

 

 

Amount

 

 

Percent

 

 

 

(Dollars in thousands)

 

(Dollars in thousands)

Customer service fees

$

2,242

 

 

$

2,081

 

 

$

161

 

 

 

7.7

 

%

 

$

6,694

 

 

$

6,347

 

 

$

347

 

 

 

5.5

 

%

Loan fees

 

301

 

 

 

180

 

 

 

121

 

 

 

67.2

 

 

 

 

438

 

 

 

1,882

 

 

 

(1,444

)

 

 

(76.7

)

 

Mortgage banking gains, net

 

74

 

 

 

176

 

 

 

(102

)

 

 

(58.0

)

 

 

 

270

 

 

 

348

 

 

 

(78

)

 

 

(22.4

)

 

Gain on sales of securities

   available for sale, net

 

 

 

 

865

 

 

 

(865

)

 

 

(100.0

)

 

 

 

 

 

 

3,247

 

 

 

(3,247

)

 

 

(100.0

)

 

Gain (loss) on equity

   securities, net

 

781

 

 

 

 

 

 

781

 

 

 

 

 

 

 

632

 

 

 

 

 

 

632

 

 

 

 

 

Income from bank-owned life

   insurance

 

279

 

 

 

294

 

 

 

(15

)

 

 

(5.1

)

 

 

 

828

 

 

 

874

 

 

 

(46

)

 

 

(5.3

)

 

Gain on life insurance

   distribution

 

 

 

 

1,657

 

 

 

(1,657

)

 

 

(100.0

)

 

 

 

 

 

 

1,657

 

 

 

(1,657

)

 

 

(100.0

)

 

Other income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

6

 

 

 

 

 

Total non-interest

   income

$

3,677

 

 

$

5,253

 

 

$

(1,576

)

 

 

(30.0

)

%

 

$

8,868

 

 

$

14,355

 

 

$

(5,487

)

 

 

(38.2

)

%

 

The decrease in non-interest income for the three and nine months ended September 30, 2018 reflects a gain on life insurance distribution of $1.7 million related to a bank-owned life insurance claim recognized in the third quarter of 2017 and decreases in gains on sales of securities available for sale, net of $865,000 and $3.2 million during the three and nine months ended September 30, 2017, respectively, partially offset by increases in gain of equity securities, net of $781,000 and $632,000 for the three and nine months ended September 30, 2018, respectively.  The decrease in loan fees for the nine months ended September 30, 2018 was primarily due to $1.3 million of loan swap fee income recognized in the second quarter of 2017. Equity securities sold during the three and nine months ended September 30, 2018 resulted in gains of $399,000 and $553,000, respectively. In addition, unrealized gain on equity securities of $382,000 and $79,000 were recognized during the three and nine months ended September 30, 2018, respectively, for equity securities held in the portfolio at fair value as of September 30, 2018. This change in reporting classification is due to the implementation of ASU 2016-01 on January 1, 2018. See “Note 4 – Securities” in the Notes to the Unaudited Consolidated Financial Statements for additional disclosures.

35


Non-Interest Expense. Non-interest expense information is as follows:

 

 

Three Months Ended September 30,

 

 

Change

 

 

 

Nine Months Ended September 30,

 

 

Change

 

 

 

2018

 

 

2017

 

 

Amount

 

 

Percent

 

 

 

2018

 

 

2017

 

 

Amount

 

 

Percent

 

 

 

(Dollars in thousands)

 

(Dollars in thousands)

Salaries and employee

   benefits

$

14,386

 

 

$

12,973

 

 

$

1,413

 

 

 

10.9

 

%

 

$

44,218

 

 

$

39,400

 

 

$

4,818

 

 

 

12.2

 

%

Occupancy and equipment

 

2,981

 

 

 

2,676

 

 

 

305

 

 

 

11.4

 

 

 

 

9,545

 

 

 

8,735

 

 

 

810

 

 

 

9.3

 

 

Data processing

 

1,747

 

 

 

1,528

 

 

 

219

 

 

 

14.3

 

 

 

 

5,083

 

 

 

4,381

 

 

 

702

 

 

 

16.0

 

 

Marketing and advertising

 

832

 

 

 

715

 

 

 

117

 

 

 

16.4

 

 

 

 

2,805

 

 

 

2,522

 

 

 

283

 

 

 

11.2

 

 

Professional services

 

683

 

 

 

624

 

 

 

59

 

 

 

9.5

 

 

 

 

2,648

 

 

 

2,865

 

 

 

(217

)

 

 

(7.6

)

 

Deposit insurance

 

851

 

 

 

660

 

 

 

191

 

 

 

28.9

 

 

 

 

2,430

 

 

 

2,164

 

 

 

266

 

 

 

12.3

 

 

Merger and acquisition

 

26

 

 

 

271

 

 

 

(245

)

 

 

(90.4

)

 

 

 

114

 

 

 

271

 

 

 

(157

)

 

 

(57.9

)

 

Other general and

   administrative

 

1,501

 

 

 

1,367

 

 

 

134

 

 

 

9.8

 

 

 

 

4,318

 

 

 

3,758

 

 

 

560

 

 

 

14.9

 

 

Total non-interest

   expenses

$

23,007

 

 

$

20,814

 

 

$

2,193

 

 

 

10.5

 

%

 

$

71,161

 

 

$

64,096

 

 

$

7,065

 

 

 

11.0

 

%

 

The increases in salaries and employee benefits expense reflects annual increases in employee compensation and health benefits during the first quarter of 2018. In addition, the increases in salaries and employee benefits, occupancy and equipment expenses and data processing include costs associated with the expansion of our branch and support staff, including two branches acquired from Meetinghouse Bank on December 29, 2017, one new branch opened in the first quarter of 2018, another new branch opened in October 2018 and two new branch openings planned for later in 2018. Professional services decreased primarily due to additional costs incurred in the nine months ended September 30, 2017 related to regulatory compliance projects undertaken to enhance our regulatory compliance infrastructure. Other general and administrative expenses reflect core deposit intangible amortization of $147,000 and $442,000 for the three and nine months ended September 30, 2018.

 

Income Tax Provision. The Company recorded a provision for income taxes of $4.5 million for the three months ended September 30, 2018, reflecting an effective tax rate of 20.4%, compared to $6.7 million, or a 33.5% effective tax rate, for the three months ended September 30, 2017. For the nine months ended September 30, 2018, the provision for income taxes was $12.3 million, reflecting an effective tax rate of 22.0%, compared to $17.6 million, or an effective tax rate of 34.2% for the nine months ended September 30, 2017. The reductions in the provision for income taxes and the effective tax rate for the quarter and nine months ended September 30, 2018 reflect the decrease in the statutory federal income tax rate to 21% from 35% effective January 1, 2018 as a result of the Tax Cuts and Jobs Act.

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, sales, maturities and payments on investment securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage 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 due from banks, and certificates of deposit with other banks. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At September 30, 2018, cash and due from banks totaled $313.7 million and certificates of deposit totaled $20.9 million. In addition, at September 30, 2018, we had $307.8 million of available borrowing capacity with the FHLB, including a $9.4 million line of credit. On September 30, 2018, we had $650.8 million of advances outstanding. We periodically pledge additional multi-family and commercial real estate loans held in the Bank’s portfolio as qualified collateral to increase our borrowing capacity with the FHLB.

Our primary investing activities are the origination of loans and the purchase and sale of securities. Our primary financing activities consist of activity in deposit accounts and FHLB advances. 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. Occasionally, we offer promotional rates on certain deposit products to attract deposits.

36


A significant use of our liquidity is the funding of loan originations. At September 30, 2018 and December 31, 2017, we had total loan commitments outstanding of $1.311 billion and $1.205 billion, respectively. Historically, many of the commitments expire without being full y drawn; therefore the total amount of commitments does not necessarily represent future cash requirements. Refer to Note 8, Commitments and Derivatives, in Notes to the Unaudited Consolidated Financial Statements within this report for more detail regardi ng our outstanding commitments.

Another significant use of our liquidity is the funding of deposit withdrawals. Certificates of deposit due within one year of September 30, 2018 totaled $843.3 million, or 52.8% of total certificates of deposit. If these maturing deposits do not remain with us, we will be required to utilize other sources of funds. Historically, a significant portion of certificates of deposit that mature have remained with us. We have the ability to attract and retain deposits by adjusting the interest rates offered and accepting brokered certificates of deposit when it is deemed cost effective.  

Meridian Bancorp, Inc. is a separate legal entity from East Boston Savings Bank and it must provide for its own liquidity to pay dividends and repurchase its common stock and for other corporate purposes. Meridian Bancorp, Inc.’s primary source of liquidity is the remaining proceeds from the 2014 second-step offering, and to a lesser extent dividend payments received from East Boston Savings Bank. The ability of East Boston Savings Bank to pay dividends is subject to regulatory requirements. At September 30, 2018, Meridian Bancorp, Inc. (on an unconsolidated basis) had cash and cash equivalents, certificates of deposit and equity securities totaling $79.9 million.

Capital Management. Both the Company and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board and the Federal Deposit Insurance Corporation, respectively, 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 September 30, 2018, both the Company and the Bank exceeded all of their respective regulatory capital requirements. The Bank is considered “well capitalized” under regulatory guidelines.

Federal banking regulations include minimum capital requirements for financial institutions. The regulation includes a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6% and a minimum leverage ratio of 4% for all banking organizations. Additionally, financial institutions must maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total to risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonuses. The capital conservation buffer is being phased in over three years, beginning on January 1, 2016. Also, certain new deductions from and adjustments to regulatory capital will be phased in over several years. Management believes that the Company will remain characterized as “well-capitalized” throughout the phase-in periods.

As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies are required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%. A financial institution can elect to be subject to this new definition.

The Company may use capital management tools such as cash dividends and common share repurchases. We are subject to the Federal Reserve Board’s notice provisions for stock repurchases. In August 2015, the Company received regulatory approval from the Massachusetts Commissioner of Banks and a non-objection from the Federal Reserve Bank to adopt a stock repurchase program for up to 5% of its common stock. As of September 30, 2018, the Company had repurchased 2,373,621 shares of its stock at an average price of $14.45 per share, or 86.7% of the 2,737,334 shares authorized for repurchase under the Company’s repurchase program. During the nine months ended September 30, 2018 the Company’s Board of Directors declared three quarterly cash dividends of $0.05 per common share on March 1, 2018, June 1, 2018 and August 29, 2018. The dividend declared on August 29, 2018 was paid on October 2, 2018 to stockholders of record at the close of business on September 18, 2018. On October 23, 2018, the Company announced that its Board of Directors intends to increase the quarterly dividend by $0.02 per share, or 40%, to $0.07 per share in the fourth quarter of 2018.

37


The Company’s and the Bank’s actual capital amounts and ratios follow:

 

 

Actual

 

 

 

Minimum

Capital

Requirement

 

 

 

Minimum to be Well

Capitalized Under Prompt

Corrective Action Provisions

 

 

 

Amount

 

 

Ratio

 

 

 

Amount

 

 

Ratio

 

 

 

Amount

 

 

Ratio

 

 

 

(Dollars in thousands)

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk Weighted Assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

$

707,125

 

 

 

12.8

 

%

 

$

440,283

 

 

8.0

 

%

 

N/A

 

 

N/A

 

 

Bank

 

608,444

 

 

 

11.1

 

 

 

 

439,925

 

 

8.0

 

 

 

$

549,906

 

 

 

10.0

 

%

Tier 1 Capital (to Risk Weighted Assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

657,516

 

 

 

11.9

 

 

 

 

330,212

 

 

 

6.0

 

 

 

N/A

 

 

N/A

 

 

Bank

 

558,835

 

 

 

10.2

 

 

 

 

329,943

 

 

 

6.0

 

 

 

 

439,925

 

 

 

8.0

 

 

Common Equity Tier 1 Capital (to Risk

   Weighted Assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

657,516

 

 

 

11.9

 

 

 

 

247,659

 

 

 

4.5

 

 

 

N/A

 

 

N/A

 

 

Bank

 

558,835

 

 

 

10.2

 

 

 

 

247,458

 

 

 

4.5

 

 

 

 

357,439

 

 

 

6.5

 

 

Tier 1 Capital (to Average Assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

657,516

 

 

 

11.5

 

 

 

 

227,799

 

 

 

4.0

 

 

 

N/A

 

 

N/A

 

 

Bank

 

558,835

 

 

 

9.9

 

 

 

 

226,092

 

 

 

4.0

 

 

 

 

282,615

 

 

 

5.0

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk Weighted Assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

$

669,536

 

 

 

13.6

 

%

 

$

393,875

 

 

8.0

 

%

 

N/A

 

 

N/A

 

 

Bank

 

555,737

 

 

 

11.3

 

 

 

 

392,729

 

 

8.0

 

 

 

$

490,911

 

 

 

10.0

 

%

Tier 1 Capital (to Risk Weighted Assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

624,039

 

 

 

12.7

 

 

 

 

295,406

 

 

 

6.0

 

 

 

N/A

 

 

N/A

 

 

Bank

 

510,240

 

 

 

10.4

 

 

 

 

294,546

 

 

 

6.0

 

 

 

 

392,729

 

 

 

8.0

 

 

Common Equity Tier 1 Capital (to Risk

   Weighted Assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

624,039

 

 

 

12.7

 

 

 

 

221,554

 

 

 

4.5

 

 

 

N/A

 

 

N/A

 

 

Bank

 

510,240

 

 

 

10.4

 

 

 

 

220,910

 

 

 

4.5

 

 

 

 

319,092

 

 

 

6.5

 

 

Tier 1 Capital (to Average Assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

624,039

 

 

 

12.1

 

 

 

 

206,293

 

 

 

4.0

 

 

 

N/A

 

 

N/A

 

 

Bank

 

510,240

 

 

 

10.1

 

 

 

 

202,224

 

 

 

4.0

 

 

 

 

252,780

 

 

 

5.0

 

 

 

A reconciliation of the Company’s and Bank’s stockholders’ equity to regulatory capital follows:

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

 

Consolidated

 

 

Bank

 

 

Consolidated

 

 

Bank

 

 

(In thousands)

 

Total stockholders' equity per financial statements

$

679,143

 

 

$

580,462

 

 

$

646,399

 

 

$

532,600

 

Adjustments to Tier 1 and Common Equity Tier 1

   capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss (income)

 

812

 

 

 

812

 

 

 

(128

)

 

 

(128

)

Goodwill disallowed

 

(19,638

)

 

 

(19,638

)

 

 

(19,638

)

 

 

(19,638

)

Core deposit intangible, net of deferred tax liability

   disallowed

 

(2,801

)

 

 

(2,801

)

 

 

(2,594

)

 

 

(2,594

)

Total Tier 1 and Common Equity Tier 1 capital

 

657,516

 

 

 

558,835

 

 

 

624,039

 

 

 

510,240

 

Adjustments to total capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

49,609

 

 

 

49,609

 

 

 

45,185

 

 

 

45,185

 

45% of net unrealized gains on  marketable equity

   securities

 

 

 

 

 

 

 

312

 

 

 

312

 

Total regulatory capital

$

707,125

 

 

$

608,444

 

 

$

669,536

 

 

$

555,737

 

 

38


Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting pr inciples in the United States of America, 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 the nine months ended September 30, 2018, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest Rate Risk Management. Our earnings and the market value of our assets and liabilities are subject to fluctuations caused by changes in the level of interest rates. 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 loans with adjustable interest rates; selling the residential real estate fixed-rate loans with terms greater than 10 years that we originate; promoting core deposit products; and adjusting the interest rates and maturities of funding sources, as necessary.

We have an Asset/Liability Management Committee to coordinate all aspects of asset/liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

Net Interest Income Simulation Analysis. We analyze our interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income simulation. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest sensitive.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period.

Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income. Interest income simulations are completed quarterly and presented to the Asset/Liability Committee and the Board of Directors. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. The numerous assumptions used in the simulation process are reviewed by the Asset/Liability Committee and the Executive Committee on a quarterly basis. Changes to these assumptions can significantly affect the results of the simulation. The simulation incorporates assumptions regarding the potential timing of the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.

Simulation analysis is only an estimate of our interest rate risk exposure at a particular point in time. We continually review the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.

The simulation uses projected repricing of assets and liabilities on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a significant impact on interest income simulation. 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 such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.

The following table reflects changes in estimated net interest income for the Bank due to immediate non-parallel changes in interest rates for the subsequent one year period as of the dates indicated.

 

Increase (Decrease)

 

September 30, 2018

 

 

December 31, 2017

 

 

in Market Interest Rates

 

Amount

 

 

Change

 

 

Percent

 

 

Amount

 

 

Change

 

 

Percent

 

 

 

 

(Dollars in thousands)

300

 

$

149,285

 

 

$

(15,361

)

 

 

(9.33

)

%

$

149,829

 

 

$

(6,785

)

 

 

(4.30

)

%

Flat

 

 

164,646

 

 

 

 

 

 

 

 

 

 

 

156,614

 

 

 

 

 

 

 

 

 

 

-100

 

 

168,266

 

 

 

3,620

 

 

 

2.20

 

 

 

159,112

 

 

 

2,498

 

 

 

1.60

 

 

 

39


ITEM 4.     CONTRO LS AND PROCEDURES

 

(a)

Conclusion Regarding the Effectiveness of 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 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, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

(b)

Changes in Internal Controls over Financial Reporting There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

40


PART II – OTHE R INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are 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 1A.     RISK FACTORS

For information regarding our risk factors, see “Risk Factors,” in the Company’s 2017 Annual Report on Form 10-K, filed with the SEC on March 1, 2018, which is available through the SEC’s website at www.sec.gov . As of September 30, 2018, our risk factors had not changed materially from those reported in the annual report. The risks described in the Annual Report are not the only risks that we face. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a.)

Not applicable

 

(b.)

Not applicable

 

(c.)

The following table sets forth information with respect to any purchase made by or on behalf of the Company during the indicated periods:

 

Period

 

(a)

Total Number of

Shares (or Units)

Purchased

 

 

(b)

Average Price Paid

Per Share (or Unit)

 

 

(c)

Total Number of

Shares (or Units)

Purchased as Part of

Publicly Announced

Plans or Programs  (1)

 

 

(d)

Maximum Number (or

Approximate Dollar

Value) of Shares (or

Units) that May Yet Be

Purchased Under the

Plans or Programs

 

July 1 – 31, 2018

 

 

 

 

$

 

 

 

 

 

 

363,713

 

August 1 – 31, 2018

 

 

 

 

$

 

 

 

 

 

 

363,713

 

September 1 – 30, 2018

 

 

 

 

$

 

 

 

 

 

 

363,713

 

 

 

 

 

 

$

 

 

 

 

 

 

363,713

 

 

(1)

In August 2015, the Company’s Board of Directors voted to adopt a stock repurchase program of up to 5% of its outstanding common stock, or 2,737,334 shares of its common stock. The program has no set expiration or termination date.

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.     MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.     OTHER INFORMATION

Not applicable.  

41


ITEM 6.     EXHIBITS

 

    3.1

Articles of Incorporation of Meridian Bancorp, Inc. (Incorporated by reference to the Registration Statement on Form S-1 of Meridian Bancorp, Inc. (File No. 333-194454), originally filed with the Securities and Exchange Commission on March 10, 2014)

 

 

    3.2

Bylaws of Meridian Bancorp, Inc. (Incorporated by reference to the Registration Statement on Form S-1 of Meridian Bancorp, Inc. (File No. 333-194454), originally filed with the Securities and Exchange Commission on March 10, 2014)

 

 

    4

Form of Common Stock Certificate of Meridian Bancorp, Inc. (Incorporated by reference to the Registration Statement on Form S-1 of Meridian Bancorp, Inc. (File No. 333-194454), originally filed with the Securities and Exchange Commission on March 10, 2014)

 

 

  10.1

Meridian Bancorp, Inc. 2015 Equity Incentive Plan (Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement for the Annual Meeting of Stockholders (File No. 001-36573), filed with the Securities and Exchange Commission on August 18, 2015)

 

 

  10.2

Form of Employee Stock Option Agreement under the Meridian Bancorp, Inc. 2015 Equity Incentive Plan filed as an exhibit to Form 8-K filed on November 5, 2015

 

 

  10.3

Form of Director Stock Option Agreement under the Meridian Bancorp, Inc. 2015 Equity Incentive Plan filed as an exhibit to Form 8-K filed on November 5, 2015

 

 

  10.4

Amended and Restated Employment Agreement with Richard J. Gavegnano and East Boston Savings Bank dated July 28, 2014 filed as an exhibit to Form 10-Q filed on November 10, 2014

 

 

  10.5

East Boston Savings Bank Amended and Restated Employee Severance Compensation Plan filed as an exhibit to Form 10-Q filed on November 10, 2014

 

 

  10.6

Form of Amended and Restated Supplemental Executive Retirement Agreements with Directors Domenic A. Gambardella, Gregory F. Natalucci, and James G. Sartori filed as an exhibit to Form 10-Q filed on November 10, 2014

 

 

  10.7

Amended and Restated Supplemental Executive Retirement Agreement with Richard J. Gavegnano filed as an exhibit to Form 10-Q filed on November 10, 2014

 

 

  10.8

2008 Equity Incentive Plan (Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement for its 2008 Annual Meeting, as filed with the Securities and Exchange Commission on July 11, 2008)

 

 

  10.9

Termination Amendment for the Amended and Restated Employment Agreement between Edward J. Merritt and East Boston Savings Bank dated December 10, 2015 filed as an exhibit to Form 8-K filed on December 10, 2015

 

 

  10.10

Amended and Restated Supplemental Executive Retirement Agreement between East Boston Savings Bank and Edward J. Merritt dated July 28, 2014 filed as an exhibit to Form 10-Q filed on November 10, 2014

 

 

  10.11

Joint Beneficiary Designation Agreement between Edward J. Merritt and Mt. Washington Co-operative Bank (Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 16, 2010)

 

 

  10.12

First Amendment to Joint Beneficiary Designation Agreement between Edward J. Merritt and Mt. Washington Co-operative Bank (Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 16, 2010)

 

 

  10.13

Amended and Restated Two-Year Change in Control Agreement between Mark Abbate and East Boston Savings Bank dated July 28, 2014 filed as an exhibit to Form 10-Q filed on November 10, 2014

 

 

  10.14

Incentive Compensation Plan filed as an exhibit to Form 10-K filed on March 17, 2014

 

 

  10.15

Amended and Restated Two-Year Change in Control Agreement between John Migliozzi and East Boston Savings Bank dated July 28, 2014 filed as an exhibit to Form 10-Q filed on November 10, 2014

 

 

  10.16

East Boston Non-Qualified Supplemental Employee Stock Ownership Plan dated October 1, 2014 filed as an exhibit to Form 10-Q filed on November 10, 2014

 

 

  10.17

Amended and Restated Two-Year Change in Control Agreement between Frank Romano and East Boston Savings Bank dated July 28, 2014 filed as an exhibit to Form 10-K filed on March 13, 2015

 

 

42


  10.18

Form of Restricted Stock Award Agreement under the Meridian Bancorp, Inc. 2015 Equity Incentive Plan filed as an exhibit to Form 8-K filed on November 5, 2015

 

 

  10.19

Two-Year Change in Control Agreement between Edward J. Merritt and East Boston Savings Bank dated December 10, 2015 filed as an exhibit to Form 8-K filed on December 10, 2015

 

 

   10.20

Freeze Amendment to the Amended and Restated Supplemental Executive Retirement Agreement between East Boston Savings Bank and Edward J. Merritt dated December 10, 2015 filed as an exhibit to Form 8-K filed on December 10, 2015

 

 

   10.21

Amendment Number One to Meridian Bancorp, Inc. 2008 Equity Incentive Plan dated August 15, 2018

 

 

  21

Subsidiaries of Registrant filed as an exhibit to Form 10-Q filed on November 10, 2014

 

 

  31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

  31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

  32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

101

The following financial statements formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Net Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements.

 

 

101.INS

XBRL Instance Document

 

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

 

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

43


SIGNAT URES

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.

 

 

 

MERIDIAN BANCORP, INC.

(Registrant)

 

 

 

 

 

Date: November 9, 2018

 

By:

/s/    Richard J. Gavegnano

 

 

 

Richard J. Gavegnano

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

Date: November 9, 2018

 

By:

/s/    Mark L. Abbate

 

 

 

Mark L. Abbate

 

 

 

Executive Vice President, Treasurer and

Chief Financial Officer

 

 

 

(Principal Financial and Accounting Officer)

 

44

EXHIBIT 10.21

 

AMENDMENT NUMBER ONE

TO

MERIDIAN BANCORP, INC.

2008 EQUITY INCENTIVE PLAN

 

WHEREAS , Meridian Bancorp, Inc. (the “ Company ”) maintains the Meridian Bancorp, Inc. 2008 Equity Incentive Plan (the “ Plan ”); and

WHEREAS , the Plan provides that stock options will expire no later than ten years after the date of grant (the “ Expiration Date ”) and if an option holder fails to exercise his or her stock options prior to the Expiration Date, such options may no longer be exercised; and

WHEREAS , the Company previously granted stock options on October 13, 2008 and October 27, 2009, respectively, which will expire on October 13, 2018 and October 27, 2019, respectively, unless exercised earlier; and

WHEREAS , the Company has recognized compensation expenses for previously granted stock options and the Company may realize a tax deduction upon the exercise of certain stock options; and

WHEREAS , to avoid a situation whereby in-the-money stock options may expire, the Company desires to amend the Plan to provide for the automatic exercise of in-the-money stock options on the day prior to the Expiration Date; and

WHEREAS , Section 6.1 of the Plan provides that the Board of Directors of the Company (the “ Board ”) may amend the Plan at any time, provided, however, that an amendment may not:

 

materially increase the benefits accruing to participants under the Plan;

 

materially increase the aggregate number of securities which may be issued under the Plan, or

 

materially modify the requirements for participation in the Plan,

 

unless such amendment is approved by the Company’s stockholders (collectively, the “ NASDAQ Requirements ”); and

WHEREAS , this Amendment Number One does not require stockholder approval as determined under the NASDAQ Requirements.

NOW THEREFORE , the Plan is hereby amended as follows effective as of December 1, 2017:

A new Section 7.18 is added to the Plan to read in its entirety as follows:

Section 7.18 Automatic Exercise .  In the sole discretion of the Committee exercised in accordance with Section 5.2 above, any Stock Options that are exercisable but unexercised as of the day immediately before the tenth anniversary of the date of grant may be automatically

 


exercised, in accordance with procedures established for this purpose by the Committee, but only if the exercise price is less than the Fair Market Value of a share of Stock on such date and the automatic exercise will result in the issuance of at least one (1) whole share of Stock to the Participant after payment of the exercise price and any applicable tax withholding requirements.  Payment of the exercise price and any applicable tax withholding requirements shall be made by a net settlement of the Stock Option whereby the number of shares of Stock to be issued upon exercise are reduced by a number of shares having a Fair Market Value on the date of exercise equal to the exercise price and any applicable tax withholding.

IN WITNESS WHEREOF , the Board has adopted this Amendment Number One on the date set forth below.

MERIDIAN BANCORP, INC.

 

Date:

 

August 15,2018

 

By:

 

/s/ Richard J. Gavegnano

 

 

 

 

 

 

Richard J. Gavegnano

 

 

 

 

 

 

Chairman of the Board, President and

 

 

 

 

 

 

Chief Executive Officer

 

 

 

EXHIBIT 31.1

RULE 13a-14(a)/15d-14(a)

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Richard J. Gavegnano, certify that:

1) I have reviewed this Quarterly Report on Form 10-Q of Meridian Bancorp, Inc.;

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an Annual Report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2018

 

/s/    Richard J. Gavegnano

 

 

Richard J. Gavegnano

Chairman, President and Chief Executive Officer

 

 

 

 

EXHIBIT 31.2

RULE 13a-14(a)/15d-14(a)

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Mark L. Abbate, certify that:

1) I have reviewed this Quarterly Report on Form 10-Q of Meridian Bancorp, Inc.;

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an Annual Report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

 

 

Date: November 9, 2018

 

/s/    Mark L. Abbate

 

 

Mark L. Abbate

 

 

Executive Vice President, Treasurer and Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

 

 

EXHIBIT 32.0

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Meridian Bancorp, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2018 as filed with the Securities and Exchange Commission (the “Report”), the undersigned hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Meridian Bancorp, Inc. as of and for the period covered by the Report.

 

 

Dated: November 9, 2018

 

/s/    Richard J. Gavegnano

 

 

Richard J. Gavegnano

Chairman, President and Chief Executive Officer

 

 

 

Dated: November 9, 2018

 

/s/    Mark L. Abbate

 

 

Mark L. Abbate

Executive Vice President, Treasurer and Chief Financial Officer

(Principal Financial and Accounting Officer)