Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended September 30, 2014

OR

 

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

For the transition period from                      to                     

Commission file number 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

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

 

Large Accelerated Filer		¨		Accelerated Filer		x
Non-Accelerated Filer		¨		Smaller Reporting Company		¨

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

At November 3, 2014, the registrant had 54,708,492 shares of common stock, par value $0.01 per share, outstanding.

 

 

 

---

Table of Contents

MERIDIAN BANCORP, INC.

FORM 10-Q

INDEX

 

				Page
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheets at September 30, 2014 and December 31, 2013 (Unaudited)			3
		Consolidated Statements of Net Income for the three and nine months ended September 30, 2014 and 2013 (Unaudited)			4
		Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013 (Unaudited)			5
		Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2014 and 2013 (Unaudited)			6
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (Unaudited)			7
		Notes to Unaudited Consolidated Financial Statements			9
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			48
Item 4.		Controls and Procedures			50
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			51
Item 1A.		Risk Factors			51
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 3.		Defaults Upon Senior Securities			51
Item 4.		Mine Safety Disclosures			51
Item 5.		Other Information			51
Item 6.		Exhibits			52
Signatures					54
Exhibit 10.4
Exhibit 10.5
Exhibit 10.6
Exhibit 10.7
Exhibit 10.9
Exhibit 10.10
Exhibit 10.13
Exhibit 10.15
Exhibit 10.16
Exhibit 21
Exhibit 31.1
Exhibit 31.2
Exhibit 32.0

 

2

---

Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		September 30, 2014				December 31, 2013
		(Dollars in thousands)
ASSETS
Cash and due from banks		$	388,273			$	86,271
Securities available for sale, at fair value			168,159				201,137
Federal Home Loan Bank stock, at cost			12,725				11,907
Loans held for sale			1,996				2,363
Loans, net of fees and costs			2,508,138				2,290,735
Less allowance for loan losses			(26,739	)			(25,335	)
Loans, net			2,481,399				2,265,400
Bank-owned life insurance			38,314				37,446
Foreclosed real estate, net			1,806				1,390
Premises and equipment, net			38,602				39,426
Accrued interest receivable			7,003				7,127
Deferred tax asset, net			14,410				13,478
Goodwill			13,687				13,687
Other assets			2,393				2,469
Total assets		$	3,168,767			$	2,682,101
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non interest-bearing		$	288,832			$	255,639
Interest-bearing			2,114,586				1,992,961
Total deposits			2,403,418				2,248,600
Long-term debt			172,687				161,903
Accrued expenses and other liabilities			21,623				22,393
Total liabilities			2,597,728				2,432,896
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 and 54,702,764 shares issued at September 30, 2014; no par value, 100,000,000 shares authorized and 56,313,200 shares issued at December 31, 2013 (1)			547				—
Additional paid-in capital			411,134				99,553
Retained earnings			178,678				162,388
Accumulated other comprehensive income			3,052				4,104
Treasury stock, at cost; 1,906,865 (1) shares at December 31, 2013			—				(9,919	)
Unearned compensation - ESOP, 2,995,386 and 1,419,093 (1) shares at September 30, 2014 and December 31, 2013, respectively			(21,548	)			(5,796	)
Unearned compensation - restricted shares, 204,049 and 254,168 (1) at September 30, 2014 and December 31, 2013, respectively			(824	)			(1,125	)
Total stockholders’ equity			571,039				249,205
Total liabilities and stockholders’ equity		$	3,168,767			$	2,682,101

  

 

(1)	Share amounts related to periods prior to the date of completion of the Conversion (July 28, 2014) have been restated to give retroactive recognition to the exchange ratio applied in the Conversion (2.4484-to-one). (See Note 1)

See accompanying notes to unaudited consolidated financial statements.

 

3

---

Table of Contents

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME

(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013 (1)				2014				2013 (1)
		(Dollars in thousands, except per share amounts)
Interest and dividend income:
Interest and fees on loans		$	26,617			$	22,889			$	76,164			$	65,413
Interest on debt securities:
Taxable			588				944				1,963				3,107
Tax-exempt			45				53				134				159
Dividends on equity securities			357				348				1,047				1,061
Other interest and dividend income			258				86				486				251
Total interest and dividend income			27,865				24,320				79,794				69,991
Interest expense:
Interest on deposits			4,513				4,427				13,325				12,516
Interest on borrowings			632				796				1,908				2,433
Total interest expense			5,145				5,223				15,233				14,949
Net interest income			22,720				19,097				64,561				55,042
Provision for loan losses			655				151				1,484				4,630
Net interest income, after provision for loan losses			22,065				18,946				63,077				50,412
Non-interest income:
Customer service fees			1,880				1,857				5,539				5,219
Loan fees			148				185				467				349
Mortgage banking gain (loss), net			19				(102	)			406				456
Gain on sales of securities, net			1,346				2,995				4,411				7,396
Income from bank-owned life insurance			294				299				868				886
Other income			—				—				17				9
Total non-interest income			3,687				5,234				11,708				14,315
Non-interest expenses:
Salaries and employee benefits			10,249				10,033				31,067				29,584
Occupancy and equipment			2,252				2,103				7,029				6,523
Data processing			1,201				1,089				3,271				3,159
Marketing and advertising			769				539				2,264				2,042
Professional services			588				453				1,888				1,591
Foreclosed real estate			(47	)			(31	)			163				161
Deposit insurance			515				525				1,597				1,522
Other general and administrative			1,180				876				3,130				2,892
Total non-interest expenses			16,707				15,587				50,409				47,474
Income before income taxes			9,045				8,593				24,376				17,253
Provision for income taxes			3,030				3,272				8,086				5,839
Net income		$	6,015			$	5,321			$	16,290			$	11,414
Income per share:
Basic		$	0.12			$	0.10			$	0.31			$	0.22
Diluted		$	0.11			$	0.10			$	0.30			$	0.21
Weighted average shares:
Basic			52,043,346				52,965,816				52,718,470				52,984,441
Diluted			53,156,287				53,866,034				53,801,448				53,795,975

  

 

(1)	Share and per share amounts related to periods prior to the date of completion of the Conversion (July 28, 2014) have been restated to give retroactive recognition to the exchange ratio applied in the Conversion (2.4484-to-one). (See Note 1)

See accompanying notes to unaudited consolidated financial statements.

 

4

---

Table of Contents

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
		(In thousands)
Net income		$	6,015			$	5,321			$	16,290			$	11,414
Other comprehensive loss:
Securities available for sale:
Unrealized holding gain (loss) on securities available for sale			(2,690	)			2,123				2,595				4,749
Reclassification adjustment for gain realized in income (1)			(1,346	)			(2,995	)			(4,411	)			(7,396	)
Net unrealized loss			(4,036	)			(872	)			(1,816	)			(2,647	)
Tax effect			1,603				343				764				1,041
Total other comprehensive loss			(2,433	)			(529	)			(1,052	)			(1,606	)
Comprehensive income		$	3,582			$	4,792			$	15,238			$	9,808

 

(1)

Amounts are included in gain on sales of securities, net in the Consolidated Statements of Net Income. Provision for income tax associated with the reclassification adjustment for the three months ended September 30, 2014 and 2013 was $535,000 and $903,000 and for the nine months ended September 30, 2014 and 2013 was $1.9 million and $2.9 million, respectively.

See accompanying notes to unaudited consolidated financial statements.

 

5

---

Table of Contents

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2014 and 2013

(Unaudited)

 

		Shares of Common Stock Outstanding (1)				Common Stock				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income				Treasury Stock				Unearned Compensation - ESOP				Unearned Compensation - Restricted Shares				Total
		(Dollars in thousands)
Nine Months Ended September 30, 2013
Balance at December 31, 2012			54,488,922			$	—			$	98,338			$	146,959			$	4,915			$	(8,331	)		$	(6,210	)		$	(1,728	)		$	233,943
Comprehensive income			—				—				—				11,414				(1,606	)			—				—				—				9,808
Purchase of treasury stock			(223,015	)			—				—				—				—				(1,698	)			—				—				(1,698	)
ESOP shares earned (76,023 shares)			—				—				271				—				—				—				311				—				582
Restricted stock awards, net of awards surrendered			97,373				—				513				—				—				—				—				468				981
Stock options exercised			20,221				—				(72	)			—				—				106				—				—				34
Balance at September 30, 2013			54,383,501			$	—			$	99,050			$	158,373			$	3,309			$	(9,923	)		$	(5,899	)		$	(1,260	)		$	243,650
Nine Months Ended September 30, 2014
Balance at December 31, 2013			54,406,335			$	—			$	99,553			$	162,388			$	4,104			$	(9,919	)		$	(5,796	)		$	(1,125	)		$	249,205
Comprehensive income			—				—				—				16,290				(1,052	)			—				—				—				15,238
ESOP shares earned (91,323 shares)			—				—				388				—				—				—				498				—				886
Restricted stock awards, net of awards surrendered			(1,861	)			—				345				—				—				—				—				301				646
Excess tax benefits in connection with share-based compensation			—				—				86				—				—				—				—				—				86
Stock options exercised			29,919				—				(93	)			—				—				150				—				—				57
Corporate Reorganization:
Conversion of Meridian Interstate Bancorp, Inc.			(1,356,629	)			531				301,750				—				—				—				—				—				302,281
Purchase by ESOP			1,625,000				16				16,234				—				—				—				(16,250	)			—				—
Treasury stock retired			—				—				(9,769	)			—				—				9,769				—				—				—
Contribution of Meridian Financial Services, MHC			—				—				2,640				—				—				—				—				—				2,640
Balance at September 30, 2014			54,702,764			$	547			$	411,134			$	178,678			$	3,052			$	—			$	(21,548	)		$	(824	)		$	571,039

  

 

(1)	Share amounts related to periods prior to the date of completion of the Conversion (July 28, 2014) have been restated to give retroactive recognition to the exchange ratio applied in the Conversion (2.4484-to-one). (See Note 1)

See accompanying notes to unaudited consolidated financial statements.

 

6

---

Table of Contents

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine Months Ended September 30,
		2014				2013
		(In thousands)
Cash flows from operating activities:
Net income		$	16,290			$	11,414
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of acquisition fair value adjustments			(31	)			(240	)
ESOP shares earned			886				582
Provision for loan losses			1,484				4,630
Accretion of net deferred loan origination costs/fees			(401	)			(50	)
Net accretion of securities available for sale			(20	)			(6	)
Capitalization of mortgage servicing rights			(28	)			(97	)
Amortization of mortgage servicing rights			173				248
Depreciation and amortization expense			1,794				1,706
Gain on sales of securities, net			(4,411	)			(7,396	)
Net loss and provision for foreclosed real estate			78				42
Deferred income tax benefit			(168	)			(92	)
Income from bank-owned life insurance			(868	)			(886	)
Share-based compensation expense			646				981
Excess tax benefits in connection with share-based compensation			(86	)			—
Net changes in:
Loans held for sale			367				8,208
Accrued interest receivable			124				(140	)
Other assets			(69	)			(595	)
Accrued expenses and other liabilities			(684	)			(43	)
Net cash provided by operating activities			15,076				18,266
Cash flows from investing activities:
Activity in securities available for sale:
Proceeds from maturities, calls and principal payments			36,873				31,607
Redemption of mutual funds, net			1,015				11,792
Proceeds from sales			24,311				45,826
Purchases			(26,631	)			(27,088	)
Loans originated, net of principal payments received			(218,822	)			(331,139	)
Purchases of premises and equipment			(908	)			(2,293	)
(Purchase) redemption of Federal Home Loan Bank stock			(818	)			157
Cash received in MHC merger			2,640				—
Proceeds from sales of foreclosed real estate			1,223				1,133
Net cash used in investing activities			(181,117	)			(270,005	)

 

7

---

Table of Contents

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine Months Ended September 30,
		2014				2013
		(In thousands)
Cash flows from financing activities:
Net increase in deposits			154,835				339,693
Proceeds from Federal Home Loan Bank advances with maturities of three months or more			57,131				47,500
Repayment of Federal Home Loan Bank advances with maturities of three months or more			(46,347	)			(20,749	)
Stock options exercised			57				34
Excess tax benefits in connection with share-based compensation			86				—
Net proceeds from sale of common stock			302,281				—
Purchase of treasury stock			—				(1,698	)
Net cash provided by financing activities			468,043				364,780
Net change in cash and cash equivalents			302,002				113,041
Cash and cash equivalents at beginning of period			86,271				93,192
Cash and cash equivalents at end of period		$	388,273			$	206,233
Supplemental cash flow information:
Interest paid on deposits		$	13,331			$	12,503
Interest paid on borrowings			1,931				2,759
Income taxes paid, net of refunds			7,493				6,465
Non-cash investing and financing activities:
Transfers from loans to foreclosed real estate			1,717				353
Net change in amounts due to broker on security transactions			—				475

See accompanying notes to unaudited consolidated financial statements.

 

8

---

Table of Contents

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.	BASIS OF PRESENTATION

Meridian Bancorp, Inc. (the “Company”) is a Maryland corporation incorporated on March 6, 2014 to be the successor to Meridian Interstate Bancorp, Inc. (“Old Meridian”) upon completion of the second step mutual-to-stock conversion (the “Conversion”) of Meridian Financial Services, Incorporated, (the “MHC”), the top tier mutual holding company of Old Meridian. Old Meridian was the former mid-tier holding company for East Boston Savings Bank (the “Bank”). Prior to completion of the Conversion, approximately 59% of the shares of common stock of Old Meridian were owned by the MHC. In conjunction with the Conversion, the MHC and Meridian Interstate Funding Corporation were merged into Old Meridian (and ceased to exist), and Old Meridian merged into the Company and the Company became its successor under the name Meridian Bancorp, Inc. The Conversion was completed July 28, 2014. The Company raised gross proceeds of $325.0 million by selling a total of 32,500,000 shares of common stock at $10.00 per share in the second step stock offering. Concurrent with the completion of the stock offering, each share of Old Meridian common stock owned by public stockholders (stockholders other than the MHC) was exchanged for 2.4484 shares of Company common stock. A total of 22,200,316 shares of Company common stock were issued in the exchange. The Conversion was accounted for as a capital raising transaction by entities under common control. The historical financial results of the MHC are immaterial to the results of the Company and therefore the net assets of the MHC have been reflected as an increase to stockholders’ equity.

As a result of the Conversion, all share and per share information has been revised to reflect the 2.4484-to-one exchange ratio. Such revised financial information presented in this Form 10-Q is derived from the consolidated financial statements of Old Meridian and its subsidiaries.

The consolidated financial statements include the accounts of the Company and all other entities in which it has a controlling financial interest. The Company owns the Bank. The Bank’s subsidiaries include Prospect, Inc., which engages in securities transactions on its own behalf, EBOSCO, LLC and Berkeley Riverbend Estates LLC, both of which hold foreclosed real estate, and 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 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 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, 2014 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 consolidated financial statements and footnotes thereto of Old Meridian included in Old Meridian’s Form 10-K for the year ended December 31, 2013 which was filed with the Securities and Exchange Commission (“SEC”) on March 17, 2014, and is available through the SEC’s website at www.sec.gov.

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, 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 reporting 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, the evaluation of goodwill for impairment, other-than-temporary impairment of securities and the valuation of deferred tax assets.

 

9

---

Table of Contents

2.	RECENT ACCOUNTING PRONOUNCEMENT

In January 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (the “ASU”) No. 2014-04, Troubled Debt Restructurings by Creditors (Subtopic 310-40), Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. This update is intended to reduce diversity in the application of guidance by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. Amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The objective of this ASU was 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 principal 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. For public entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

 

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. If rights to dividends on unvested stock awards are non-forfeitable, 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,
		2014				2013				2014				2013
		(Dollars in thousands, except per share amounts)
Net income available to common stockholders		$	6,015			$	5,321			$	16,290			$	11,414
Basic weighted average shares outstanding			52,043,346				52,965,816				52,718,470				52,984,441
Effect of dilutive stock options			1,112,941				900,218				1,082,978				811,534
Diluted weighted average shares outstanding			53,156,287				53,866,034				53,801,448				53,795,975
Earnings per share:
Basic		$	0.12			$	0.10			$	0.31			$	0.22
Diluted		$	0.11			$	0.10			$	0.30			$	0.21

Share and per share amounts related to periods prior to the date of completion of the Conversion (July 28, 2014) have been restated to give retroactive recognition to the exchange ratio applied in the Conversion (2.4484-to-one). There were no anti-dilutive options for the three and nine months ended September 30, 2014. For the three and nine months ended September 30, 2013, options for the exercise of 17,056 and 43,824, respectively, were not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive.

 

10

---

Table of Contents

4.	SECURITIES AVAILABLE FOR SALE

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

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In thousands)
September 30, 2014
Debt securities:
Corporate bonds:
Financial services		$	42,829			$	715			$	(37	)		$	43,507
Industry and manufacturing			8,927				160				—				9,087
Healthcare			4,003				57				—				4,060
Other			1,006				26				—				1,032
Total corporate bonds			56,765				958				(37	)			57,686
Government-sponsored enterprises			34,552				1				(617	)			33,936
Municipal bonds			5,692				198				—				5,890
Residential mortgage-backed securities:
Government-sponsored enterprises			9,475				570				(6	)			10,039
Private label			1,455				89				—				1,544
Total debt securities			107,939				1,816				(660	)			109,095
Marketable equity securities:
Common stocks:
Financial services			10,534				662				(166	)			11,030
Industry and manufacturing			18,402				1,353				(850	)			18,905
Consumer products and services			12,996				1,423				(701	)			13,718
Technology			2,964				207				(12	)			3,159
Healthcare			5,234				1,445				—				6,679
Other			3,441				1,143				(23	)			4,561
Total common stocks			53,571				6,233				(1,752	)			58,052
Money market mutual funds			1,049				—				(37	)			1,012
Total marketable equity securities			54,620				6,233				(1,789	)			59,064
Total securities available for sale		$	162,559			$	8,049			$	(2,449	)		$	168,159
December 31, 2013
Debt securities:
Corporate bonds:
Financial services		$	58,166			$	1,148			$	(66	)		$	59,248
Industry and manufacturing			13,893				264				(16	)			14,141
Consumer products and services			7,234				32				—				7,266
Technology			2,503				18				—				2,521
Healthcare			9,009				149				—				9,158
Other			1,011				43				—				1,054
Total corporate bonds			91,816				1,654				(82	)			93,388
Government-sponsored enterprises			34,562				3				(1,417	)			33,148
Municipal bonds			5,721				137				—				5,858
Residential mortgage-backed securities:
Government-sponsored enterprises			11,138				592				—				11,730
Private label			1,578				86				—				1,664
Total debt securities			144,815				2,472				(1,499	)			145,788
Marketable equity securities:
Common stocks:
Financial services			6,909				614				—				7,523
Industry and manufacturing			18,092				2,413				(58	)			20,447
Consumer products and services			9,909				1,530				(3	)			11,436
Technology			3,442				132				(66	)			3,508
Healthcare			5,048				1,115				—				6,163
Other			3,441				807				—				4,248
Total common stocks			46,841				6,611				(127	)			53,325
Money market mutual funds			2,065				—				(41	)			2,024
Total marketable equity securities			48,906				6,611				(168	)			55,349
Total securities available for sale		$	193,721			$	9,083			$	(1,667	)		$	201,137

 

11

---

Table of Contents

At September 30, 2014, securities with an amortized cost of $23.3 million and $1.8 million, respectively, were pledged as collateral for Federal Home Loan Bank of Boston borrowings and Federal Reserve Bank discount window borrowings.

The amortized cost and fair value of debt securities by contractual maturity at September 30, 2014 are as follows. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties.

 

		One Year or Less								After One Year Through Five Years								After Five Years								Total
		Amortized Cost				Fair Value				Amortized Cost				Fair Value				Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(In thousands)
Corporate bonds:
Financial services		$	15,491			$	15,664			$	27,338			$	27,843			$	—			$	—			$	42,829			$	43,507
Industry and manufacturing			3,000				3,008				5,927				6,079				—				—				8,927				9,087
Healthcare			4,003				4,060				—				—				—				—				4,003				4,060
Other			1,006				1,032				—				—				—				—				1,006				1,032
Total corporate bonds			23,500				23,764				33,265				33,922				—				—				56,765				57,686
Government-sponsored enterprises			51				53				11,500				11,404				23,001				22,479				34,552				33,936
Municipal bonds			250				250				5,442				5,640				—				—				5,692				5,890
Residential mortgage-backed securities:
Government-sponsored enterprises			1				1				—				—				9,474				10,038				9,475				10,039
Private label			—				—				—				—				1,455				1,544				1,455				1,544
Total		$	23,802			$	24,068			$	50,207			$	50,966			$	33,930			$	34,061			$	107,939			$	109,095

For the three months ended September 30, 2014 and 2013, proceeds from sales of securities available for sale amounted to $9.5 million and $18.1 million, respectively. During the 2014 and 2013 periods, gross gains of $1.3 million and $3.0 million and gross losses of $11,000 and $0, respectively, were realized on those sales. For the nine months ended September 30, 2014 and 2013, proceeds from sales of securities available for sale amounted to $24.3 million and $45.8 million, respectively. During the 2014 and 2013 periods, gross gains of $4.4 million and $7.4 million and gross losses of $11,000 and $10,000, respectively, were realized on those sales.

Information pertaining to securities available for sale as of September 30, 2014 and December 31, 2013, 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 Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value
		(In thousands)
September 30, 2014
Debt securities:
Corporate bonds - financial services		$	—			$	—			$	37			$	1,463
Government-sponsored enterprises			—				—				617				33,884
Residential mortgage-backed securities:
Government-sponsored enterprises			6				224				—				—
Total debt securities			6				224				654				35,347
Marketable equity securities:
Common stocks:
Financial services			166				4,036				—				—
Industry and manufacturing			850				5,989				—				—
Consumer products and services			701				4,273				—				—
Technology			12				949				—				—
Other			23				444
Total common stocks			1,752				15,691				—				—
Money market mutual funds			—				—				37				1,012
Total marketable equity securities			1,752				15,691				37				1,012
Total temporarily impaired securities		$	1,758			$	15,915			$	691			$	36,359

 

12

---

Table of Contents

		Less Than Twelve Months								Twelve Months or Longer
		Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value
		(In thousands)
December 31, 2013
Debt securities:
Corporate bonds:
Financial services		$	19			$	6,981			$	47			$	1,453
Industry and manufacturing			16				984				—				—
Total corporate bonds			35				7,965				47				1,453
Government-sponsored enterprises			1,296				31,205				121				1,879
Total debt securities			1,331				39,170				168				3,332
Marketable equity securities:
Common stocks:
Industry and manufacturing			58				3,089				—				—
Consumer products and services			3				606				—				—
Technology			66				1,872				—				—
Total common stocks			127				5,567				—				—
Money market mutual funds			—				—				41				998
Total marketable equity securities			127				5,567				41				998
Total temporarily impaired securities		$	1,458			$	44,737			$	209			$	4,330

Management evaluates 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.

As of September 30, 2014, the net unrealized gain on the total debt securities portfolio was $1.2 million. At September 30, 2014, 29 debt securities had unrealized losses with aggregate depreciation of 1.8% from the Company’s amortized cost basis. In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, industry analysts’ reports and, to a lesser extent given the relatively insignificant levels of depreciation in the Company’s debt portfolio, spread differentials between the effective rates on instruments in the portfolio compared to risk-free rates. The unrealized losses are primarily caused by (a) recent declines in profitability and near-term profit forecasts by industry analysts resulting from a decline in the level of business activity (b) recent downgrades by several industry analysts and (c) recent increases in interest rates. The contractual terms of these investments do not permit the issuers to settle the security at a price less than the par value of the investment. The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments. Therefore, it is expected that the bonds would not be settled at a price less than the par value of the investment. Because (1) the Company does not intend to sell the securities; (2) the Company does not believe it is more likely than not that the Company will be required to sell the securities before recovery of its amortized cost basis; and (3) the present value of expected cash flows is sufficient to recover the entire amortized cost basis of the securities, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2014.

As of September 30, 2014, the net unrealized gain on the total marketable equity portfolio was $4.4 million. At September 30, 2014, 35 marketable equity securities had unrealized losses with aggregate depreciation of 9.7% from the Company’s cost basis. Although the issuers have shown declines in earnings as a result of the weakened economy, no credit issues have been identified that cause management to believe the decline in market value is other than temporary, and the Company has the ability and intent to hold these investments until a recovery of fair value. In analyzing an equity issuer’s financial condition, management considers industry analysts’ reports, financial performance and projected target prices of investment analysts within a one-year time frame. A decline of 10% or more in the value of an acquired equity security is generally the triggering event for management to review individual securities for liquidation and/or classification as other-than-temporarily impaired. Impairment losses are recognized when management concludes that declines in the value of equity securities are other than temporary, or when they can no longer assert that they have the intent and ability to hold depreciated equity securities for a period of time sufficient to allow for any anticipated recovery in fair value. Unrealized losses on marketable equity securities that are in excess of 25% of cost and that have been sustained for more than twelve months are generally considered other-than-temporary and charged to earnings as impairment losses, or realized through sale of the security.

 

13

---

Table of Contents

5.

LOANS

The Company’s loan portfolio consists primarily of residential real estate, commercial real estate, construction, commercial business and consumer segments. The residential real estate loans include classes for one-to four-family, multi-family and home equity lines of credit. There are no foreign loans outstanding. Interest rates charged on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and the rates offered by our competitors. A summary of loans follows:

 

		September 30, 2014								December 31, 2013
		Amount				Percent				Amount				Percent
		(Dollars in thousands)
Real estate loans:
Residential real estate:
One- to four-family		$	467,426				18.6	%		$	454,148				19.8	%
Multi-family			365,033				14.6				288,172				12.6
Home equity lines of credit			49,738				2.0				54,499				2.4
Commercial real estate			1,079,707				43.0				1,032,408				45.0
Construction			226,566				9.0				208,799				9.1
Total real estate loans			2,188,470				87.2				2,038,026				88.9
Commercial business loans			312,917				12.5				247,005				10.8
Consumer			8,559				0.3				7,225				0.3
Total loans			2,509,946				100.0	%			2,292,256				100.0	%
Allowance for loan losses			(26,739	)							(25,335	)
Net deferred loan origination fees			(1,808	)							(1,521	)
Loans, net		$	2,481,399							$	2,265,400

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, 2014 and December 31, 2013, the Company was servicing loans for participants aggregating $79.7 million and $62.8 million, respectively.

As a result of the Mt. Washington Co-operative Bank acquisition in January 2010, the Company acquired loans at fair value of $345.3 million. Included in this amount was $27.7 million of loans with evidence of deterioration of credit quality since origination for which it was probable, at the time of the acquisition, that the Company would be unable to collect all contractually required payments receivable. The Company’s evaluation of loans with evidence of credit deterioration as of the acquisition date resulted in a nonaccretable discount of $7.6 million, which is defined as the loan’s contractually required payments receivable in excess of the amount of its cash flows expected to be collected. The Company considered factors such as payment history, collateral values, and accrual status when determining whether there was evidence of deterioration of the loan’s credit quality at the acquisition date.

 

14

---

Table of Contents

The following is a summary of the outstanding balance of the acquired loans with evidence of credit deterioration:

 

		September 30, 2014				December 31, 2013
		(In thousands)
Real estate loans:
Residential real estate:
One- to four-family		$	5,821			$	6,494
Multi-family			828				846
Home equity lines of credit			506				509
Commercial real estate			688				720
Total real estate loans			7,843				8,569
Commercial business loans			—				78
Consumer			—				4
Outstanding principal balance			7,843				8,651
Discount			(2,004	)			(2,215	)
Carrying amount		$	5,839			$	6,436

A rollforward of accretable yield follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
		(In thousands)
Beginning balance		$	1,154			$	903			$	1,181			$	1,047
Accretion			(17	)			(6	)			(44	)			(20	)
Disposals			—				(31	)			—				(161	)
Ending balance		$	1,137			$	866			$	1,137			$	866

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

 

		For the Three Months Ended September 30, 2014
		One- to four- family				Multi- family				Home equity lines of credit				Commercial real estate				Construction				Commercial business				Consumer				Unallocated				Total
		(In thousands)
Beginning balance		$	1,913			$	3,346			$	105			$	11,981			$	4,512			$	4,185			$	89			$	—			$	26,131
Provision (credit) for loan losses			(63	)			(87	)			(6	)			557				(61	)			293				22				—				655
Charge-offs			—				—				—				(36	)			(71	)			—				(40	)			—				(147	)
Recoveries			23				—				—				—				57				1				19				—				100
Ending balance		$	1,873			$	3,259			$	99			$	12,502			$	4,437			$	4,479			$	90			$	—			$	26,739

 

		For the Three Months Ended September 30, 2013
		One- to four- family				Multi- family				Home equity lines of credit				Commercial real estate				Construction				Commercial business				Consumer				Unallocated				Total
		(In thousands)
Beginning balance		$	1,885			$	1,308			$	160			$	12,181			$	5,247			$	2,586			$	83			$	—			$	23,450
Provision (credit) for loan losses			129				772				(7	)			174				(1,358	)			396				45				—				151
Charge-offs			(135	)			—				—				—				(369	)			—				(71	)			—				(575	)
Recoveries			88				—				—				—				537				4				24				—				653
Ending balance		$	1,967			$	2,080			$	153			$	12,355			$	4,057			$	2,986			$	81			$	—			$	23,679

 

15

---

Table of Contents

		For the Nine Months Ended September 30, 2014
		One- to four- family				Multi- family				Home equity lines of credit				Commercial real estate				Construction				Commercial business				Consumer				Unallocated				Total
		(In thousands)
Beginning balance		$	1,991			$	2,419			$	155			$	12,831			$	4,374			$	3,433			$	132			$	—			$	25,335
Provision (credit) for loan losses			(131	)			840				(51	)			(281	)			56				1,039				12				—				1,484
Charge-offs			(54	)			—				(5	)			(48	)			(71	)			—				(126	)			—				(304	)
Recoveries			67				—				—				—				78				7				72				—				224
Ending balance		$	1,873			$	3,259			$	99			$	12,502			$	4,437			$	4,479			$	90			$	—			$	26,739

 

		For the Nine Months Ended September 30, 2013
		One- to four- family				Multi- family				Home equity lines of credit				Commercial real estate				Construction				Commercial business				Consumer				Unallocated				Total
		(In thousands)
Beginning balance		$	2,507			$	1,431			$	226			$	10,405			$	3,656			$	2,174			$	105			$	—			$	20,504
Provision (credit) for loan losses			(130	)			745				(73	)			1,950				1,215				791				132				—				4,630
Charge-offs			(531	)			(96	)			—				—				(1,362	)			—				(224	)			—				(2,213	)
Recoveries			121				—				—				—				548				21				68				—				758
Ending balance		$	1,967			$	2,080			$	153			$	12,355			$	4,057			$	2,986			$	81			$	—			$	23,679

 

		At September 30, 2014
		One- to four-family				Multi- family				Home equity lines of credit				Commercial real estate				Construction				Commercial business				Consumer				Unallocated				Total
		(In thousands)
Amount of allowance for loan losses for impaired loans		$	67			$	171			$	—			$	68			$	31			$	84			$	—			$	—			$	421
Amount of allowance for loan losses for non-impaired loans			1,806				3,088				99				12,434				4,406				4,395				90				—				26,318
		$	1,873			$	3,259			$	99			$	12,502			$	4,437			$	4,479			$	90			$	—			$	26,739
Amount of allowance for loan losses for loans acquired with deteriorated credit quality included above		$	29			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	29
Impaired loans		$	3,957			$	1,453			$	20			$	13,532			$	8,477			$	1,073			$	—							$	28,512
Non-impaired loans			463,469				363,580				49,718				1,066,175				218,089				311,844				8,559								2,481,434
		$	467,426			$	365,033			$	49,738			$	1,079,707			$	226,566			$	312,917			$	8,559							$	2,509,946

 

16

---

Table of Contents

		At December 31, 2013
		One- to four-family				Multi- family				Home equity lines of credit				Commercial real estate				Construction				Commercial business				Consumer				Unallocated				Total
		(In thousands)
Amount of allowance for loan losses for impaired loans		$	132			$	—			$	—			$	190			$	54			$	—			$	—			$	—			$	376
Amount of allowance for loan losses for non-impaired loans			1,859				2,419				155				12,641				4,320				3,433				132				—				24,959
		$	1,991			$	2,419			$	155			$	12,831			$	4,374			$	3,433			$	132			$	—			$	25,335
Amount of allowance for loan losses for loans acquired with deteriorated credit quality included above		$	44			$	—			$	—			$	12			$	—			$	—			$	—			$	—			$	56
Impaired loans		$	4,089			$	4,002			$	21			$	10,820			$	13,308			$	1,232			$	—							$	33,472
Non-impaired loans			450,059				284,170				54,478				1,021,588				195,491				245,773				7,225								2,258,784
		$	454,148			$	288,172			$	54,499			$	1,032,408			$	208,799			$	247,005			$	7,225							$	2,292,256

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

 

		30-59 Days Past Due				60-89 Days Past Due				90 Days or Greater Past Due				Total Past Due				Loans on Non-accrual
		(In thousands)
September 30, 2014
Real estate loans:
Residential real estate:
One- to four-family		$	4,576			$	818			$	4,457			$	9,851			$	14,327
Home equity lines of credit			1,608				117				370				2,095				2,397
Commercial real estate			53				465				2,378				2,896				3,382
Construction			—				—				6,063				6,063				7,132
Total real estate loans			6,237				1,400				13,268				20,905				27,238
Commercial business loans			15				60				846				921				883
Consumer			566				334				—				900				—
Total		$	6,818			$	1,794			$	14,114			$	22,726			$	28,121
December 31, 2013
Real estate loans:
Residential real estate:
One- to four-family		$	6,203			$	1,185			$	6,714			$	14,102			$	17,622
Multi-family			75				—				85				160				—
Home equity lines of credit			2,504				178				744				3,426				2,689
Commercial real estate			314				—				2,742				3,056				8,972
Construction			497				—				11,297				11,794				11,298
Total real estate loans			9,593				1,363				21,582				32,538				40,581
Commercial business loans			284				50				852				1,186				949
Consumer			461				282				—				743				—
Total		$	10,338			$	1,695			$	22,434			$	34,467			$	41,530

 

17

---

Table of Contents

At September 30, 2014 and December 31, 2013, the Company did not have any accruing loans past due 90 days or more. Delinquent loans at September 30, 2014 and December 31, 2013 included $1.2 million and $1.3 million, respectively, of loans acquired with evidence of credit deterioration. At September 30, 2014 and December 31, 2013, non-accrual loans included $724,000 and $1.2 million, respectively, of loans acquired with evidence of credit deterioration.

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

 

		September 30, 2014												December 31, 2013
		Recorded Investment				Unpaid Principal Balance				Related Allowance				Recorded Investment				Unpaid Principal Balance				Related Allowance
		(In thousands)
Impaired loans without a valuation allowance:
One- to four-family		$	3,233			$	3,656							$	2,399			$	2,699
Multi-family			—				—								4,002				4,002
Home equity lines of credit			20				20								21				21
Commercial real estate			11,259				11,271								9,327				10,014
Construction			7,986				8,666								12,930				15,926
Commercial business loans			524				855								1,232				1,635
Total			23,022				24,468								29,911				34,297
Impaired loans with a valuation allowance:
One- to four-family			724				724			$	67				1,690				1,806			$	132
Multi-family			1,453				1,453				171				—				—				—
Commercial real estate			2,273				2,500				68				1,493				1,493				190
Construction			491				491				31				378				389				54
Commercial business loans			549				549				84				—				—				—
Total			5,490				5,717				421				3,561				3,688				376
Total impaired loans		$	28,512			$	30,185			$	421			$	33,472			$	37,985			$	376

 

		Three Months Ended September 30,
		2014												2013
		Average Recorded Investment				Interest Income Recognized				Interest Income Recognized on Cash Basis				Average Recorded Investment				Interest Income Recognized				Interest Income Recognized on Cash Basis
		(In thousands)
One- to four-family		$	4,169			$	54			$	49			$	4,484			$	54			$	42
Multi-family			1,456				14				14				4,331				81				80
Home equity lines of credit			20				—				—				21				—				—
Commercial real estate			13,525				129				84				10,373				141				95
Construction			8,142				119				103				16,160				274				41
Commercial business loans			1,097				23				7				887				49				19
Total impaired loans		$	28,409			$	339			$	257			$	36,256			$	599			$	277

 

18

---

Table of Contents

		Nine Months Ended September 30,
		2014												2013
		Average Recorded Investment				Interest Income Recognized				Interest Income Recognized on Cash Basis				Average Recorded Investment				Interest Income Recognized				Interest Income Recognized on Cash Basis
		(In thousands)
One- to four-family		$	4,193			$	147			$	144			$	4,547			$	163			$	134
Multi-family			1,465				43				43				5,023				247				237
Home equity lines of credit			20				1				1				22				1				1
Commercial real estate			6,691				230				107				10,920				307				184
Construction			8,164				376				202				17,002				823				317
Commercial business loans			1,127				62				14				650				66				39
Total impaired loans		$	21,660			$	859			$	511			$	38,164			$	1,607			$	912

At September 30, 2014, additional funds of $3.6 million are committed to be advanced in connection with impaired construction loans.

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

 

		September 30, 2014				December 31, 2013
		(In thousands)
TDRs on accrual status:
One- to four-family		$	2,753			$	2,588
Multi-family			1,453				109
Home equity lines of credit			20				21
Commercial real estate			10,019				1,368
Commercial business loans			125				—
Total TDRs on accrual status			14,370				4,086
TDRs on non-accrual status:
One- to four-family			1,204				1,500
Commercial real estate			286				4,309
Construction			5,036				9,489
Commercial business loans			186				192
Total TDRs on non-accrual status			6,712				15,490
Total TDRs		$	21,082			$	19,576

The following is a summary of TDRs during the periods indicated:

 

		Three Months Ended September 30,
		2014												2013
		Number of Loans				Pre-Modification Balance				Post-Modification Balance				Number of Loans				Pre-Modification Balance				Post-Modification Balance
		(Dollars In thousands)
Real estate loans:
One- to four-family			—			$	—			$	—				1			$	126			$	126
Commercial real estate			1				10,037				10,037				—				—				—
Total			1			$	10,037			$	10,037				1			$	126			$	126

 

19

---

Table of Contents

		Nine Months Ended September 30,
		2014												2013
		Number of Loans				Pre-Modification Balance				Post-Modification Balance				Number of Loans				Pre-Modification Balance				Post-Modification Balance
		(Dollars In thousands)
Real estate loans:
One- to four-family			1			$	228			$	228				2			$	391			$	391
Commercial real estate			3				10,322				10,322				—				—				—
Construction			1				568				568				—				—				—
Commercial business loans			2				143				143				1				207				207
Total			7			$	11,261			$	11,261				3			$	598			$	598

The following provides information on how loans were modified as TDRs for the periods indicated.

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
		(In thousands)
Adjusted interest rates		$	—			$	126			$	228			$	391
Extended maturity dates			10,037				—				10,419				—
Combination of rate and maturity			—				—				614				207
Total		$	10,037			$	126			$	11,261			$	598

For loans modified as TDRs during the three months ended September 30, 2014, the Company extended the maturity date for one loan to 20 years. The loans modified as TDRs during the nine months ended September 30, 2014 consisted of two loans with rate reductions ranging from 1.50% to 2.00% and five loans with extended periods ranging from twelve months to 20 years.

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 months and future payments are reasonably assured. TDRs are 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 following table is a summary of TDRs that defaulted (became 90 days past due) in the first twelve months after restructure during the periods presented.

 

		Three Months Ended September 30,																Nine Months Ended September 30,
		2014								2013								2014								2013
		Number of Loans				Recorded Investment				Number of Loans				Recorded Investment				Number of Loans				Recorded Investment				Number of Loans				Recorded Investment
		(Dollars In thousands)
Real estate loans:
One- to four-family			1			$	231				1			$	288				1			$	231				3			$	757
Commercial business loans			—				—				1				207				—				—				1				207
Total			1			$	231				2			$	495				1			$	231				4			$	964

 

20

---

Table of Contents

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

 

•

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

 

•

Loans rated 4 and 4A: 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 5: 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 6: 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 7: 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 all multi-family, commercial real estate, construction and commercial business 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.

The following tables provide information with respect to the Company’s risk rating:

 

		September 30, 2014																December 31, 2013
		Multi-family residential real estate				Commercial real estate				Construction				Commercial business				Multi-family residential real estate				Commercial real estate				Construction				Commercial business
		(In thousands)
Loans rated 1 - 3A		$	354,207			$	1,068,747			$	201,014			$	302,430			$	275,711			$	1,015,172			$	178,980			$	245,646
Loans rated 4 - 4A			2,172				5,684				—				9,414				1,665				4,315				—				4
Loans rated 5			8,654				5,276				25,552				1,073				10,796				12,921				29,819				1,355
Loans rated 6			—				—				—				—				—				—				—				—
Loans rated 7			—				—				—				—				—				—				—				—
Total		$	365,033			$	1,079,707			$	226,566			$	312,917			$	288,172			$	1,032,408			$	208,799			$	247,005

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

 

21

---

Table of Contents

6.

DEPOSITS

A summary of deposit balances, by type follows:

 

		September 30,				December 31,
		2014				2013
		(In thousands)
Demand deposits		$	288,832			$	255,639
NOW deposits			289,744				210,277
Money market deposits			893,907				847,360
Regular savings and other deposits			270,311				259,608
Total non-certificate accounts			1,742,794				1,572,884
Term certificates less than $100,000			275,748				296,525
Term certificates $100,000 and greater			384,876				379,191
Total term certificates			660,624				675,716
Total deposits		$	2,403,418			$	2,248,600

A summary of term certificates, by maturity, follows:

 

		September 30, 2014								December 31, 2013
Maturing		Amount				Weighted Average Rate				Amount				Weighted Average Rate
		(Dollars in thousands)
Within 1 year		$	436,761				0.98	%		$	440,178				1.08	%
Over 1 year to 2 years			139,868				1.55				140,466				1.48
Over 2 years to 3 years			45,196				1.39				55,628				1.75
Over 3 years to 4 years			16,831				1.50				18,703				1.82
Over 4 years to 5 years			18,806				1.52				17,685				1.47
Greater than 5 years			3,162				5.50				3,056				5.13
		$	660,624				1.18	%		$	675,716				1.27	%

 

7.	BORROWINGS

Long-term debt consists of FHLB advances as follows:

 

		September 30, 2014								December 31, 2013
Maturing		Amount				Weighted Average Rate				Amount				Weighted Average Rate
		(Dollars in thousands)
2014		$	—				—	%		$	4,000				2.37	%
2015			39,500				1.20				19,500				2.05
2016			41,500				1.20				16,500				1.97
2017			74,632				1.38				77,500				1.35
2018			—				—				25,000				1.19
2019			8,893				1.23				10,203				1.23
2020			8,162				1.22				9,200				1.22
		$	172,687				1.28	%		$	161,903				1.48	%

During the quarter ended September 30, 2014, the Company prepaid $40.0 million of FHLB advances with a weighted average interest rate of 1.12%. The advances had fixed interest rates with maturities ranging from July 2017 through April 2018 and did not result in an FHLB prepayment penalty.

At September 30, 2014, advances amounting to $6.5 million are callable by the FHLB prior to maturity.

 

22

---

Table of Contents

As of September 30, 2014, the Company also has an available line of credit of $9.4 million with the FHLB at an interest rate that adjusts daily. No amounts were drawn on the line of credit as of September 30, 2014 and December 31, 2013. All borrowings from the FHLB are secured by investment securities (see Note 4) 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 Bank’s portfolio. At September 30, 2014, the Company pledged multi-family and commercial real estate loans with carrying values totaling $61.5 million and $217.2 million, respectively.

 

8.	COMMITMENTS AND DERIVATIVES

In the normal course of business, there are outstanding commitments 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 financial instruments whose contract amounts represent credit risk is as follows:

 

		September 30,				December 31,
		2014				2013
		(In thousands)
Unadvanced portion of existing loans:
Construction		$	299,269			$	239,977
Home equity line of credit			34,118				37,422
Other lines and letters of credit			122,421				104,956
Commitments to originate:
One- to four-family			12,291				11,592
Commercial real estate			61,492				92,526
Construction			119,038				83,439
Commercial business loans			18,294				39,928
Other loans			968				3,749
Total loan commitments outstanding		$	667,891			$	613,589

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 of 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.

 

23

---

Table of Contents

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, probability of default and loss of given default for all counterparties. At September 30, 2014 and December 31, 2013, the Company had $700,000 and $300,000, respectively, in cash pledged as collateral on its interest rate swap with the third party financial institution.

Summary information regarding these derivatives is presented below:

 

												Fair Value
		Notional Amount				Maturity		Interest Rate Paid		Interest Rate Received		September 30, 2014				December 31, 2013
		(In thousands)
Customer interest rate swap		$	11,268			10/17/33		1 Mo. Libor + 175bp		Fixed (4.1052%)		$	567			$	57
Third party interest rate swap			11,268			10/17/33		Fixed (4.1052%)		1 Mo. Libor + 175bp			(567	)			(57	)

Derivative Loan Commitments

Residential real estate loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential real estate loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market. A residential loan commitment requires the Company to originate a loan at a specific interest rate upon the completion of various underwriting requirements. Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from the exercise of the loan commitment might decline from the inception of the rate lock to funding of the loan due to increases in loan interest rates. If interest rates increase, the value of these commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases. Derivative loan commitments with a notional amount of $8.7 million and $4.8 million were outstanding at September 30, 2014 and December 31, 2013, respectively. The fair value of such commitments was a net asset of $58,000 and $13,000 at September 30, 2014 and December 31, 2013, respectively.

Forward Loan Sale Commitments

To protect against the price risk inherent in derivative loan commitments, the Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Under a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay the investor a “pair-off” fee, based on then-current market prices, to compensate the investor for the shortfall. Under a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor and the investor commits to a price that it will purchase the loan from the Company if the loan to the underlying borrower closes. The Company generally enters into forward sale contracts on the same day it commits to lend funds to a potential borrower. The Company expects that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments. Forward loan sale commitments with a notional amount of $9.4 million and $7.0 million were outstanding at September 30, 2014 and December 31, 2013, respectively. The fair value of such commitments was a net asset of $35,000 and $75,000 at September 30, 2014 and December 31, 2013, respectively.

 

24

---

Table of Contents

The following table presents the fair values of derivative instruments in the balance sheet.

 

		Assets						Liabilities
		Balance Sheet Location		Fair Value				Balance Sheet Location		Fair Value
		(In thousands)
September 30, 2014
Derivative loan commitments		Other assets		$	80			Other liabilities		$	22
Forward loan sale commitments		Other assets			42			Other liabilities			7
Loan level interest rate swaps		Other assets			567			Other liabilities			567
Total				$	689					$	596
December 31, 2013
Derivative loan commitments		Other assets		$	38			Other liabilities		$	25
Forward loan sale commitments		Other assets			82			Other liabilities			7
Loan level interest rate swaps		Other assets			57			Other liabilities			57
Total				$	177					$	89

The following table presents information pertaining to gains (losses) on the Company’s derivative instruments included in the consolidated statement of income.

 

				Three Months Ended September 30,								Nine Months Ended September 30,
Derivative Instrument		Location of Gain/(Loss)		2014				2013				2014				2013
				(In thousands)
Derivative loan commitments		Mortgage banking gains, net		$	(96	)		$	685			$	45			$	(83	)
Forward loan sale commitments		Mortgage banking gains, net			69				(1,154	)			(40	)			(212	)
Total				$	(27	)		$	(469	)		$	5			$	(295	)

For the three months ended September 30, 2014, the Company recognized net mortgage banking gains of $19,000, consisting of $46,000 in net gains on sale of loans and $27,000 in net derivative mortgage banking losses. The Company recognized net mortgage banking losses of $102,000, consisting of $367,000 in net gains on sale of loans and $469,000 in net derivative mortgage banking losses for the three months ended September 30, 2013. For the nine months ended September 30, 2014, the Company recognized net mortgage banking gains of $406,000, consisting of $401,000 in net gains on sale of loans and $5,000 in net derivative mortgage banking gains. The Company recognized net mortgage banking gains of $456,000, consisting of $751,000 in net gains on sale of loans and $295,000 in net derivative mortgage banking losses for the nine months ended September 30, 2013.

Other Commitments

The Company has a contract with its core data processing provider through December 2017 with an outstanding commitment of $7.3 million as of September 30, 2014 and total annual payments of $2.2 million.

 

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.

 

25

---

Table of Contents

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

Cash and cash equivalents — The carrying amounts of cash and short-term instruments approximate fair values, based on the short-term nature of the assets.

Securities available for sale — All fair value measurements are obtained from a third party pricing service and are not adjusted by management. Marketable equity securities are measured at fair value utilizing quoted market prices (Level 1). Corporate bonds, obligations of government-sponsored enterprises, 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).

Federal Home Loan Bank stock — The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Loans held for sale — The fair value is based on commitments in effect from investors or prevailing market prices.

Loans — For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-accrual loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposits — The fair values disclosed for non-certificate accounts are, by definition, equal to the amount payable on demand at the reporting date which is their carrying amounts. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Borrowings — The fair value is estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

Accrued interest — The carrying amounts of accrued interest approximate fair value.

Forward loan sale commitments and derivative loan commitments — Forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Management judgment and estimation is required in determining these fair value measurements.

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.

Off-balance sheet credit-related instruments — Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these instruments is considered immaterial.

 

26

---

Table of Contents

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized as follows:

 

		Level 1				Level 2				Level 3				Total Fair Value
		(In thousands)
September 30, 2014
Assets:
Debt securities		$	—			$	109,095			$	—			$	109,095
Marketable equity securities			59,064				—				—				59,064
Derivative loan commitments			—				—				80				80
Forward loan sale commitments			—				—				42				42
Loan level interest rate swaps			—				—				567				567
Total assets		$	59,064			$	109,095			$	689			$	168,848
Liabilities:
Derivative loan commitments		$	—			$	—			$	22			$	22
Forward loan sale commitments			—				—				7				7
Loan level interest rate swaps			—				—				567				567
Total liabilities		$	—			$	—			$	596			$	596
December 31, 2013
Assets:
Debt securities		$	—			$	145,788			$	—			$	145,788
Marketable equity securities			55,349				—				—				55,349
Derivative loan commitments			—				—				38				38
Forward loan sale commitments			—				—				82				82
Loan level interest rate swaps			—				—				57				57
Total assets		$	55,349			$	145,788			$	177			$	201,314
Liabilities:
Derivative loan commitments		$	—			$	—			$	25			$	25
Forward loan sale commitments			—				—				7				7
Loan level interest rate swaps			—				—				57				57
Total liabilities		$	—			$	—			$	89			$	89

For the nine months ended September 30, 2014 and 2013, there were no transfers in or out of Levels 1 and 2 and the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis are as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
		(In thousands)
Derivative loan commitments and forward sale commitments, net:
Beginning balance		$	120			$	450			$	88			$	276
Total realized and unrealized losses included in net income			(27	)			(469	)			5				(295	)
Ending balance		$	93			$	(19	)		$	93			$	(19	)
Total realized gain (loss) relating to instruments still held at period end		$	93			$	(19	)		$	93			$	(19	)

 

27

---

Table of Contents

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 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.

The following tables summarize the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets. The gain/loss represents the amount of write-down, charge-off or specific reserve recorded during the periods noted on the assets held at period end. There were no liabilities measured at fair value on a non-recurring basis.

 

		September 30, 2014												Three Months Ended September 30, 2014				Nine Months Ended September 30, 2014
		Level 1				Level 2				Level 3				Total Losses				Total Losses
		(In thousands)
Impaired loans		$	—			$	—			$	12,640			$	(82	)		$	(65	)
Foreclosed real estate			—				—				1,806				—				(78	)
		$	—			$	—			$	14,446			$	(82	)		$	(143	)

 

														Three Months Ended				Nine Months Ended
		December 31, 2013												September 30, 2013				September 30, 2013
		Level 1				Level 2				Level 3				Total Losses				Total Losses
		(In thousands)
Impaired loans		$	—			$	—			$	8,000			$	(226	)		$	(627	)
Foreclosed real estate			—				—				1,390				—				—
		$	—			$	—			$	9,390			$	(226	)		$	(627	)

Certain impaired loans were 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 losses. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties.

Certain properties in foreclosed real estate were adjusted to fair value using appraised values of collateral, less cost to sell, and adjusted as necessary by management based on unobservable inputs for specific properties. The loss on foreclosed assets represents adjustments in valuation recorded during the time period indicated and not for losses incurred on sales.

 

28

---

Table of Contents

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 Amount				Fair Value
						Level 1				Level 2				Level 3				Total
		(In thousands)
September 30, 2014
Financial assets:
Cash and due from banks		$	388,273			$	388,273			$	—			$	—			$	388,273
Securities available for sale			168,159				59,064				109,095				—				168,159
Federal Home Loan Bank stock			12,725				—				—				12,725				12,725
Loans and loans held for sale, net			2,483,395				—				—				2,507,804				2,507,804
Accrued interest receivable			7,003				—				—				7,003				7,003
Financial liabilities:
Deposits			2,403,418				—				—				2,407,302				2,407,302
Borrowings			172,687				—				172,506				—				172,506
Accrued interest payable			806				—				—				806				806
On-balance sheet derivative financial instruments:
Assets:
Derivative loan commitments			80				—				—				80				80
Forward loan sale commitments			42				—				—				42				42
Loan level interest rate swaps			567				—				—				567				567
Liabilities:
Derivative loan commitments			22				—				—				22				22
Forward loan sale commitments			7				—				—				7				7
Loan level interest rate swaps			567				—				—				567				567
December 31, 2013
Financial assets:
Cash and due from banks		$	86,271			$	86,271			$	—			$	—			$	86,271
Securities available for sale			201,137				55,349				145,788				—				201,137
Federal Home Loan Bank stock			11,907				—				—				11,907				11,907
Loans and loans held for sale, net			2,267,763				—				—				2,298,488				2,298,488
Accrued interest receivable			7,127				—				—				7,127				7,127
Financial liabilities:
Deposits			2,248,600				—				—				2,253,543				2,253,543
Borrowings			161,903				—				160,581				—				160,581
Accrued interest payable			818				—				—				818				818
On-balance sheet derivative financial instruments:
Assets:
Derivative loan commitments			38				—				—				38				38
Forward loan sale commitments			82				—				—				82				82
Loan level interest rate swaps			57				—				—				57				57
Liabilities:
Derivative loan commitments			25				—				—				25				25
Forward loan sale commitments			7				—				—				7				7
Loan level interest rate swaps			57				—				—				57				57

 

29

---

Table of Contents

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s 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 included in Old Meridian’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the Securities and Exchange Commission.

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 are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to:

 

•

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

 

•

inflation and changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

 

•

increased competitive pressures among financial services companies;

 

•

changes in consumer spending, borrowing and savings habits;

 

•

our ability to enter new markets successfully and take advantage of growth opportunities, and the possible dilutive effect of potential acquisitions or de novo branches, if any;

 

•

legislative or regulatory changes that adversely affect our business;

 

•

adverse changes in the securities markets;

 

•

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

 

•

inability of third-party providers to perform their obligations to us; and

 

•

changes in our organization, compensation and benefit plans.

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. These factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Company’s loan or investment portfolios. Additional factors that may affect our results are discussed in the Company’s Prospectus dated May 9, 2014, filed with the Securities and Exchange Commission on May 20, 2014, 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 uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, we do not undertake, and specifically disclaim any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

 

30

---

Table of Contents

Critical Accounting Policies

A summary of significant accounting policies is described in Note 1 to the Consolidated Financial Statements included in the 2013 Annual Report on Form 10-K for the year ended December 31, 2013. 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 allowance for loan losses, the evaluation of goodwill for impairment, other-than-temporary impairment of securities and the valuation of deferred tax assets.

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

Assets. Our total assets increased $486.7 million, or 18.1%, to $3.169 billion at September 30, 2014 from $2.682 billion at December 31, 2013, reflecting net cash proceeds of $302.3 million raised in the Company’s second step common stock offering. Net loans increased $216.0 million, or 9.5%, to $2.481 billion at September 30, 2014 from $2.265 billion at December 31, 2013. Cash and due from banks increased $302.0 million, or 350.1%, to $388.3 million at September 30, 2014 from $86.3 million at December 31, 2013. Securities available for sale decreased $33.0 million, or 16.4%, to $168.2 million at September 30, 2014 from $201.1 million at December 31, 2013.

Loan Portfolio. At September 30, 2014, net loans were $2.481 billion, or 78.3% of total assets. During the nine months ended September 30, 2014, net loans increased $216.0 million, or 9.5%. The increase was primarily due to increases of $108.2 million in commercial real estate loans, $65.9 million in commercial business loans and $16.0 million in multi-family loans, excluding a reclassification during the first quarter of $60.9 million of commercial real estate loans to multi-family loans in accordance with regulatory guidance. Refer to Note 5 Loans in the 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 business 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 nature 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.

 

31

---

Table of Contents

Delinquencies. Total past due loans decreased $11.7 million, or 34.1%, to $22.7 million at September 30, 2014 from $34.5 million at December 31, 2013, reflecting decreases of $8.3 million in loans 90 days or greater past due and $3.4 million in loans 30 to 89 days past due. Delinquent loans at September 30, 2014 included $9.5 million of loans acquired in the Mt. Washington Co-operative Bank merger completed in January 2010, including $3.9 million that were 30 to 59 days past due, $345,000 that were 60 to 89 days past due and $5.3 million that were 90 days or greater past due. At September 30, 2014, non-accrual loans exceeded loans 90 days or greater past due primarily 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 that remain on non-accrual status until they attain a sustained payment history of six months.

Non-performing Assets. Non-performing assets include loans that are 90 or more days past due or on non-accrual status, including troubled debt restructurings 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, 2014, 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 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 following table provides information with respect to our non-performing assets at the dates indicated.

 

		September 30,				December 31,
		2014				2013
		(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Real estate loans:
Residential real estate:
One- to four-family		$	14,327			$	17,622
Home equity lines of credit			2,397				2,689
Commercial real estate			3,382				8,972
Construction			7,132				11,298
Total real estate loans			27,238				40,581
Commercial business loans			883				949
Total non-accrual loans (1)			28,121				41,530
Foreclosed assets			1,806				1,390
Total non-performing assets		$	29,927			$	42,920
Non-accrual loans to total loans			1.12	%			1.81	%
Non-accrual loans to total assets			0.89	%			1.55	%
Non-performing assets to total assets			0.94	%			1.60	%

 

(1)	TDRs on accrual status not included above totaled $14.4 million at September 30, 2014 and $4.1 million and December 31, 2013.

 

32

---

Table of Contents

Non-performing assets decreased to $29.9 million or 0.94% of total assets, at September 30, 2014, from $42.9 million, or 1.60% of total assets, at December 31, 2013. Non-performing assets at September 30, 2014 included $11.9 million of assets acquired in the Mt. Washington merger, all of which were non-accrual loans. Interest income that would have been recorded for the nine months ended September 30, 2014 had non-accruing loans been current according to their original terms amounted to $398,000. We recognized $722,000 of interest income, on a cash basis, on such loans for the nine months ended September 30, 2014.

Non-accrual loans decreased $13.4 million, or 32.3%, to $28.1 million, or 1.12% of total loans outstanding at September 30, 2014, from $41.5 million, or 1.81% of total loans outstanding at December 31, 2013, primarily due to decreases of $5.6 million in non-accrual commercial real estate loans, $4.2 million in non-accrual construction loans and $3.3 million in non-accrual one- to four-family loans. The decrease in non-accrual commercial real estate loans resulted from one commercial TDR that was moved from non-accrual to accrual status during the quarter ended September 30, 2014. This TDR was structurally modified with additional collateral that improved the debt service coverage ratio and loan to value. The decrease in non-accrual construction loans for the quarter ended September 30, 2014 resulted from activity related to two construction loan relationships classified as TDRs. The note and loan documents for one loan relationship were sold to a third party and resulted in a charge off of $71,000 recorded against the allowance for loan losses during the quarter ended September 30, 2014. The second of these loan relationships remains; however due to liquidation of the portion of the collateral and additional payments made by the borrower, a recovery of $35,000 was realized in the allowance for loan losses. The decrease in non-accrual one- to-four family loans resulted from continued account monitoring, collection and workout efforts.

At September 30, 2014, our allowance for loan losses was $26.7 million, or 1.07% of total loans and 95.1% of non-accrual loans, compared to $25.3 million, or 1.11% of total loans and 61.0% of non-accrual loans at December 31, 2013. Included in our allowance at September 30, 2014 was a general component of $26.3 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-accrual 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.

Foreclosed real estate increased $416,000, or 29.9%, to $1.8 million at September 30, 2014 from $1.4 million at December 31, 2013. At September 30, 2014, foreclosed real estate consisted of a townhouse construction development project, a single family residential construction development project and a one- to four-family loan. 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 of 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 increased $1.5 million, or 7.7%, to $21.1 million at September 30, 2014 from $19.6 million at December 31, 2013, primarily due to increases of $1.3 million in multi-family and $8.7 million in commercial real estate TDRs on accrual status, partially offset by decreases of $4.0 million in commercial real estate and $5.5 million in construction TDRs on non-accrual status. 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 months based on the restructured terms and future payments are reasonably assured. Interest income that would have been recorded for the nine months ended September 30, 2014 had TDRs been current according to their original terms amounted to $121,000. We recognized $371,000 of interest income on TDRs for the nine months ended September 30, 2014.

 

33

---

Table of Contents

Potential Problem Loans. Certain loans are identified during our loan review process that are currently performing in accordance with their contractual terms and we 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 5-rated loans in accordance with our nine-grade internal loan rating system that is consistent with guidelines established by banking regulators. At September 30, 2014, other potential problem loans totaled $21.9 million, including $17.1 million of construction loans, $3.1 million of multi-family loans and $1.7 million of commercial real estate.

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.

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

 

		Nine Months Ended September 30,
		2014				2013
		(Dollars in thousands)
Beginning balance		$	25,335			$	20,504
Provision for loan losses			1,484				4,630
Charge offs:
Residential real estate:
One- to four-family			(54	)			(531	)
Multi-family			—				(96	)
Home equity lines of credit			(5	)			—
Commercial real estate			(48	)			—
Construction			(71	)			(1,362	)
Consumer			(126	)			(224	)
Total charge-offs			(304	)			(2,213	)
Recoveries:
Residential real estate:
One- to four-family			67				121
Construction			78				548
Commercial business			7				21
Consumer			72				68
Total recoveries			224				758
Net charge-offs			(80	)			(1,455	)
Ending balance		$	26,739			$	23,679
Allowance to non-accrual loans			95.09	%			54.33	%
Allowance to total loans outstanding			1.07	%			1.11	%
Net charge-offs to average loans outstanding			0.00	%			0.10	%

 

34

---

Table of Contents

Our provision for loan losses was $1.5 million for the nine months ended September 30, 2014 compared to $4.6 million for the nine months ended September 30, 2013. The changes in the provision for loan losses were based on management’s assessment of loan portfolio growth and composition changes, a decline in historical charge-off trends, an ongoing evaluation of credit quality and improving economic conditions. The allowance for loan losses was $26.7 million or 1.07% of total loans outstanding at September 30, 2014, compared to $23.7 million or 1.11% of total loans outstanding at September 30, 2013. The increase in the allowance for loan losses was primarily due to loan growth. We continue to assess the adequacy of our allowance for loan losses in accordance with established policies.

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

 

		September 30, 2014												December 31, 2013
		Amount				Percent of Allowance to Total Allowance				Percent of Loans in Category of Total Loans				Amount				Percent of Allowance to Total Allowance				Percent of Loans in Category of Total Loans
		(Dollars in thousands)
Real estate loans:
Residential real estate:
One- to four-family		$	1,873				7.0	%			18.6	%		$	1,991				7.9	%			19.8	%
Multi-family			3,259				12.1				14.6				2,419				9.5				12.6
Home equity lines of credit			99				0.4				2.0				155				0.6				2.4
Commercial real estate			12,502				46.8				43.0				12,831				50.6				45.0
Construction			4,437				16.6				9.0				4,374				17.3				9.1
Total real estate loans			22,170				82.9				87.2				21,770				85.9				88.9
Commercial business loans			4,479				16.8				12.5				3,433				13.6				10.8
Consumer			90				0.3				0.3				132				0.5				0.3
Total loans		$	26,739				100.0	%			100.0	%		$	25,335				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, whereby an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan.

We had impaired loans totaling $28.5 million and $33.5 million as of September 30, 2014 and December 31, 2013, respectively. 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. At September 30, 2014, impaired loans totaling $5.5 million had a valuation allowance of $421,000. Impaired loans totaling $3.6 million had a valuation allowance of $376,000 at December 31, 2013. Our average investment in impaired loans was $21.7 million and $38.2 million for the nine months ended September 30, 2014 and 2013, 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 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.

 

35

---

Table of Contents

We review residential and commercial loans for impairment based on the fair value of collateral, if collateral-dependent, or the present value of expected cash flows. Management has reviewed the collateral value for all impaired and non-accrual loans as of September 30, 2014 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.

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 payment history of at least six 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

 

36

---

Table of Contents

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, 2014, our securities portfolio was $168.2 million, or 5.3% of total assets. At that date, 34.3% of the securities portfolio, or $57.7 million, was invested in corporate bonds. The amortized cost and fair value of corporate bonds in the financial services sector was $42.8 million, and $43.5 million, respectively. The remainder of the corporate bond portfolio includes companies from a variety of industries. Refer to Note 4 Securities Available for Sale in the Notes to the Unaudited Consolidated Financial Statements within this report for more detail regarding the investments held in the Company’s securities portfolio.

At September 30, 2014, we had no investments in a single company or entity, other than government-sponsored enterprises, that had an aggregate book value in excess of 10% of our equity.

Each reporting period, we evaluate all securities with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary (“OTTI”). OTTI is required to be recognized if (1) we intend to sell the security; (2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. Marketable equity securities are evaluated for OTTI based on the severity and duration of the impairment and, if deemed to be other than temporary, the declines in fair value are reflected in earnings as realized losses. For impaired debt securities that we intend to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income/loss, net of applicable taxes.

At September 30, 2014, unrealized losses in our debt portfolio ranged from 0% to 3.9% of amortized cost, and unrealized losses in our equity portfolio ranged from 0% to 28.4% of cost. As of September 30, 2014, the net unrealized gain on the total debt securities portfolio was $1.2 million. The most significant market valuation decrease related to any one debt security within the portfolio at September 30, 2014 is $78,000. We have no indication that the issuer will be unable to continue to service the obligations, and management does not intend to sell, and more likely than not will not be required to sell, such bond before the earlier of recovery or maturity. As a result, management considers the decline in market value to be temporary. No other debt securities had a market value decline greater than 3.9% of amortized cost.

As of September 30, 2014 the net unrealized gain on the total marketable equity securities portfolio was $4.4 million. The most significant market valuation decrease related to any one equity security within the portfolio at September 30, 2014 is $271,000. Although the issuers have shown declines in earnings as a result of the weakened economy, no credit issues have been identified that cause management to believe the decline in market value is other than temporary, and we have the ability and intent to hold these investments until a recovery of fair value. In analyzing an equity issuer’s financial condition, management considers industry analysts’ reports, financial performance and projected target prices of investment analysts within a one-year time frame.

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, NOW, money market, regular savings and other deposits, and certificates of deposit. We consider demand, NOW, money market, and regular savings and other deposits to be core deposits. Total deposits increased $154.8 million, or 6.9%, to $2.403 billion at September 30, 2014 from $2.249 billion at December 31, 2013. Our continuing focus on the acquisition and expansion of core deposit relationships resulted in net growth in those non-term deposits of $169.9 million, or 10.8%, to $1.743 billion at September 30, 2014, or 72.5% of total deposits at that date. For further information about our deposits, refer to Note 6 Deposits in Notes to the Unaudited Consolidated Financial Statements within this report.

 

37

---

Table of Contents

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

 

		Nine Months Ended September 30,
		2014												2013
		Average Balance				Average Rate				Percent of Total Deposits				Average Balance				Average Rate				Percent of Total Deposits
		(Dollars in thousands)
Demand deposits		$	305,732				—	%			12.0	%		$	218,061				—	%			11.1	%
NOW deposits			238,087				0.58				12.1				181,421				0.53				9.5
Money market deposits			864,656				0.89				37.2				677,728				0.91				36.6
Regular savings and other deposits			265,932				0.26				11.2				251,402				0.26				11.6
Certificates of deposit			675,388				1.20				27.5				674,883				1.33				31.2
Total		$	2,349,795				0.76	%			100.0	%		$	2,003,495				0.84	%			100.0	%

Borrowings. We use borrowings from the Federal Home Loan Bank of Boston to supplement our supply of funds for loans and investments. In addition, we may also purchase federal funds from local banking institutions as an additional short-term funding source for the Bank. Total borrowings increased $10.8 million, or 6.7%, to $172.7 million at September 30, 2014 from $161.9 million at December 31, 2013, reflecting new advances with the Federal Home Loan Bank of Boston totaling $57.1 million with terms of one to three years and fixed interest rates of 0.33% to 1.44% during the nine months ended September 30, 2014. At September 30, 2014 and December 31, 2013, Federal Home Loan Bank of Boston advances totaled $172.7 million and $161.9 million, respectively, with a weighted average rate of 1.28% and 1.48%, respectively. During the third quarter ended September 30, 2014, the Company prepaid $40.0 million of FHLB advances with a weighted average interest rate of 1.12%. The advances had fixed interest rates with maturities ranging from July 2017 through April 2018 and did not result in a FHLB prepayment penalty. At September 30, 2014, we also had an available line of credit of $9.4 million with the Federal Home Loan Bank of Boston at an interest rate that adjusts daily, none of which was outstanding at that date. For further information about our borrowings, refer to Note 7 Borrowings in Notes to the Unaudited Consolidated Financial Statements within this report.

Information relating to borrowings, including the federal funds purchased, is detailed in the following table.

 

		Nine Months Ended September 30,
		2014				2013
		(Dollars in thousands)
Balance outstanding at end of period		$	172,687			$	187,700
Average amount outstanding during the period		$	195,002			$	184,080
Weighted average interest rate during the period			1.31	%			1.77	%
Maximum outstanding at any month end		$	211,340			$	188,576
Weighted average interest rate at end of period			1.28	%			1.87	%

Stockholders’ Equity. Total stockholders’ equity increased $321.8 million, or 129.1%, to $571.0 million at September 30, 2014, from $249.2 million at December 31, 2013. The increase for the nine months ended September 30, 2014 was primarily the result of the Company’s second step stock offering and to $16.3 million in net income, partially offset by a decrease of $1.1 million in accumulated other comprehensive income reflecting a decrease in the fair value of available for sale securities. Stockholders’ equity to assets was 18.02% at September 30, 2014, compared to 9.29% at December 31, 2013. Book value per share increased to $10.44 at September 30, 2014 from $4.58 at December 31, 2013. Tangible book value per share increased to $10.19 at September 30, 2014 from $4.33 at December 31, 2013. At September 30, 2014, the Company and the Bank continued to exceed all regulatory capital requirements. For further information regarding regulatory capital requirements and the actual capital amounts and ratios for the Bank and the Company, refer to “Capital Management.”

 

38

---

Table of Contents

Average Balance Sheets and Related Yields and Rates. The following tables present 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 the tables, average balances have been calculated using daily average balances, and non-accrual loans are included in average balances but are not deemed material. Loan fees are included in interest income on loans but are not material.

 

		Three Months Ended September 30,
		2014												2013
		Average Balance				Interest (1)				Yield/ Cost (1)(2)				Average Balance				Interest (1)				Yield/ Cost (1)(2)
		(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (3)		$	2,463,012			$	27,343				4.40	%		$	2,070,990			$	23,224				4.45	%
Securities and certificates of deposits			179,407				1,144				2.53				219,907				1,499				2.70
Other interest-earning assets (4)			383,152				258				0.27				160,150				86				0.21
Total interest-earning assets			3,025,571				28,745				3.77				2,451,047				24,809				4.02
Noninterest-earning assets			119,532												118,162
Total assets		$	3,145,103											$	2,569,209
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
NOW deposits		$	260,461				394				0.60			$	191,192				254				0.53
Money market deposits			886,068				1,986				0.89				754,841				1,770				0.93
Regular savings and other deposits			268,078				174				0.26				254,401				168				0.26
Certificates of deposit			669,629				1,959				1.16				688,478				2,235				1.29
Total interest-bearing deposits			2,084,236				4,513				0.86				1,888,912				4,427				0.93
Borrowings			196,537				632				1.28				188,032				796				1.68
Total interest-bearing liabilities			2,280,773				5,145				0.89				2,076,944				5,223				1.00
Noninterest-bearing demand deposits			365,112												233,893
Other noninterest-bearing liabilities			19,943												16,165
Total liabilities			2,665,828												2,327,002
Total stockholders’ equity			479,275												242,207
Total liabilities and stockholders’ equity		$	3,145,103											$	2,569,209
Net interest-earning assets		$	744,798											$	374,103
Fully tax-equivalent net interest income							23,600												19,586
Less: tax-equivalent adjustments							(880	)											(489	)
Net interest income						$	22,720											$	19,097
Interest rate spread (1)(5)											2.88	%											3.02	%
Net interest margin (1)(6)											3.09	%											3.17	%
Average interest-earning assets to average interest-bearing liabilities			132.66	%											118.01	%
Supplemental Information:
Total deposits, including noninterest-bearing demand deposits		$	2,449,348			$	4,513				0.73	%		$	2,122,805			$	4,427				0.83	%
Total deposits and borrowings, including noninterest-bearing demand deposits		$	2,645,885			$	5,145				0.77	%		$	2,310,837			$	5,223				0.90	%

 

(footnotes begin on following page)

 

39

---

Table of Contents

(footnotes from previous page)

 

(1)

Income on debt securities, equity securities and revenue bonds included in commercial real estate loans, resulting yields, and 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, 2014 and 2013, yields on loans before tax-equivalent adjustments were 4.29% and 4.38%, respectively, yields on securities and certificates of deposit before tax-equivalent adjustments were 2.19% and 2.43%, respectively, and yield on total interest-earning assets before tax-equivalent adjustments were 3.65% and 3.94%, respectively. Interest rate spread before tax-equivalent adjustments for the three months ended September 30, 2014 and 2013 was 2.76% and 2.94%, respectively, while net interest margin before tax-equivalent adjustments for the three months ended September 30, 2014 and 2013 was 2.98% and 3.09%, respectively.

(2)	Annualized.

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

(4)	Includes Federal Home Loan Bank stock and associated dividends.

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

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

 

40

---

Table of Contents

		Nine Months Ended September 30,
		2014												2013
		Average Balance				Interest (1)				Yield/ Cost (1)(2)				Average Balance				Interest (1)				Yield/ Cost (1)(2)
		(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (3)		$	2,380,840			$	78,106				4.39	%		$	1,946,945			$	66,310				4.55	%
Securities and certificates of deposits			185,867				3,597				2.59				234,989				4,796				2.73
Other interest-earning assets (4)			211,801				486				0.31				143,639				251				0.23
Total interest-earning assets			2,778,508				82,189				3.95				2,325,573				71,357				4.10
Noninterest-earning assets			115,846												118,802
Total assets		$	2,894,354											$	2,444,375
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
NOW deposits		$	238,087				1,027				0.58			$	181,421				713				0.53
Money market deposits			864,656				5,730				0.89				677,728				4,615				0.91
Regular savings and other deposits			265,932				515				0.26				251,402				495				0.26
Certificates of deposit			675,388				6,053				1.20				674,883				6,693				1.33
Total interest-bearing deposits			2,044,063				13,325				0.87				1,785,434				12,516				0.94
Borrowings			195,002				1,908				1.31				184,080				2,433				1.77
Total interest-bearing liabilities			2,239,065				15,233				0.91				1,969,514				14,949				1.01
Noninterest-bearing demand deposits			305,732												218,061
Other noninterest-bearing liabilities			19,058												17,263
Total liabilities			2,563,855												2,204,838
Total stockholders’ equity			330,499												239,537
Total liabilities and stockholders’ equity		$	2,894,354											$	2,444,375
Net interest-earning assets		$	539,443											$	356,059
Fully tax-equivalent net interest income							66,956												56,408
Less: tax-equivalent adjustments							(2,395	)											(1,366	)
Net interest income						$	64,561											$	55,042
Interest rate spread (1)(5)											3.04	%											3.09	%
Net interest margin (1)(6)											3.22	%											3.24	%
Average interest-earning assets to average interest-bearing liabilities			124.09	%											118.08	%
Supplemental Information:
Total deposits, including noninterest-bearing demand deposits		$	2,349,795			$	13,325				0.76	%		$	2,003,495			$	12,516				0.84	%
Total deposits and borrowings, including noninterest-bearing demand deposits		$	2,544,797			$	15,233				0.80	%		$	2,187,575			$	14,949				0.91	%

 

(1)

Income on debt securities, equity securities and revenue bonds included in commercial real estate loans, resulting yields, and 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, 2014 and 2013, yields on loans before tax-equivalent adjustments were 4.28% and 4.49%, respectively, yields on securities and certificates of deposit before tax-equivalent adjustments were 2.26% and 2.46%, respectively, and yield on total interest-earning assets before tax-equivalent adjustments were 3.84% and 4.02%, respectively. Interest rate spread before tax-equivalent adjustments for the nine months ended September 30, 2014 and 2013 was 2.93% and 3.01%, respectively, while net interest margin before tax-equivalent adjustments for the nine months ended September 30, 2014 and 2013 was 3.11% and 3.16%, respectively.

(2)	Annualized.

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

(4)	Includes Federal Home Loan Bank stock and associated dividends.

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

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

 

41

---

Table of Contents

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, 2014 Compared to 2013 Increase (Decrease) Due to												Nine Months Ended September 30, 2014 Compared to 2013 Increase (Decrease) Due to
		Volume				Rate				Net				Volume				Rate				Net
		(In thousands)
Interest Income:
Loans		$	4,354			$	(235	)		$	4,119			$	14,311			$	(2,515	)		$	11,796
Securities and certificates of deposits			(263	)			(92	)			(355	)			(961	)			(238	)			(1,199	)
Other interest-earning assets			145				27				172				142				93				235
Total			4,236				(300	)			3,936				13,492				(2,660	)			10,832
Interest Expense:
Deposits			347				(261	)			86				1,514				(705	)			809
Borrowings			35				(199	)			(164	)			137				(662	)			(525	)
Total			382				(460	)			(78	)			1,651				(1,367	)			284
Change in fully tax-equivalent net interest income		$	3,854			$	160			$	4,014			$	11,841			$	(1,293	)		$	10,548

Results of Operations for the Three and Nine Months Ended September 30, 2014 and 2013

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 (annualized where appropriate):

 

		Three Months Ended September 30,								Change								Nine Months Ended September 30,								Change
		2014				2013				Amount				Percent				2014				2013				Amount				Percent
		(Dollars in thousands)
Net interest income		$	22,720			$	19,097			$	3,623				19.0	%		$	64,561			$	55,042			$	9,519				17.3	%
Provision for loan losses			655				151				504				333.8				1,484				4,630				(3,146	)			(67.9	)
Non-interest income			3,687				5,234				(1,547	)			(29.6	)			11,708				14,315				(2,607	)			(18.2	)
Non-interest expenses			16,707				15,587				1,120				7.2				50,409				47,474				2,935				6.2
Net income			6,015				5,321				694				13.0				16,290				11,414				4,876				42.7
Return on average assets			0.76	%			0.83	%			(0.07	)			(8.4	)			0.75	%			0.62	%			0.13				21.0
Return on average equity			5.02	%			8.79	%			(3.77	)			(42.9	)			6.57	%			6.35	%			0.22				3.5

 

42

---

Table of Contents

Net Interest Income. Net interest income increased $3.6 million, or 19.0%, to $22.7 million for the quarter ended September 30, 2014 from $19.1 million for the quarter ended September 30, 2013. The net interest rate spread and net interest margin were 2.76% and 2.98%, respectively, for the quarter ended September 30, 2014 compared to 2.94% and 3.09%, respectively, for the quarter ended September 30, 2013. For the nine months ended September 30, 2014, net interest income increased $9.5 million, or 17.3%, to $64.6 million from $55.0 million for the nine months ended September 30, 2013. The net interest rate spread and net interest margin were 2.93% and 3.11%, respectively, for the nine months ended September 30, 2014 compared to 3.01% and 3.16%, respectively, for the nine months ended September 30, 2013. The increases in net interest income were due primarily to loan growth along with declines in the cost of funds, partially offset by declines in yields on interest-earning assets and deposit growth for the quarter and nine months ended September 30, 2014 compared to the same periods in 2013.

The Company’s yield on interest-earning assets declined 29 basis points to 3.65% for the quarter ended September 30, 2014 compared to 3.94% for the quarter ended September 30, 2013, while the cost of funds declined 13 basis points to 0.77% for the quarter ended September 30, 2014 compared to 0.90% for the quarter ended September 30, 2013. For the nine months ended September 30, 2014, the yield on interest-earning assets declined by 18 basis points to 3.84% compared to 4.02% for the nine months ended September 30, 2013, while the cost of funds declined by 11 basis points to 0.80% for the nine months ended September 30, 2014 compared to 0.91% for the nine months ended September 30, 2013.

The average balance of the Company’s loan portfolio increased $392.0 million, or 18.9%, to $2.463 billion, which was partially offset by the decline in the yield on loans of nine basis points to 4.29% for the quarter ended September 30, 2014 compared to the quarter ended September 30, 2013. For the nine months ended September 30, 2014, the average balance of the loan portfolio increased $433.9 million, or 22.3%, to $2.381 billion, which was partially offset by the decrease in the yield on loans of 21 basis points to 4.28% compared to the nine months ended September 30, 2013.

The Company’s average balance of total deposits increased $326.5 million, or 15.4%, to $2.449 billion, which was partially offset by the decline in the cost of total deposits of 10 basis points to 0.73% for the quarter ended September 30, 2014 compared to the quarter ended September 30, 2013. For the nine months ended September 30, 2014, the average balance of total deposits increased $346.3 million, or 17.3%, to $2.350 billion, which as partially offset by the decline in cost of total deposits of eight basis points to 0.76% compared to the nine months ended September 30, 2013.

Provision for Loan Losses. Our provision for loan losses was $655,000 for the three months ended September 30, 2014 compared to $151,000 for the three months ended September 30, 2013. For the nine months ended September 30, 2014, the provision for loan losses was $1.5 million compared to $4.6 million for the nine months ended September 30, 2013. For further discussion of the changes in the provision and allowance for loan losses, refer to “Asset Quality—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
		2014				2013				Amount				Percent				2014				2013				Amount				Percent
		(Dollars in thousands)
Customer service fees		$	1,880			$	1,857			$	23				1.2	%		$	5,539			$	5,219			$	320				6.1	%
Loan fees			148				185				(37	)			(20.0	)			467				349				118				33.8
Mortgage banking gain (loss), net			19				(102	)			121				118.6				406				456				(50	)			(11.0	)
Gain on sales of securities, net			1,346				2,995				(1,649	)			(55.1	)			4,411				7,396				(2,985	)			(40.4	)
Income from bank-owned life insurance			294				299				(5	)			(1.7	)			868				886				(18	)			(2.0	)
Other income			—				—				—				—				17				9				8				88.9
Total non-interest income		$	3,687			$	5,234			$	(1,547	)			(29.6	)%		$	11,708			$	14,315			$	(2,607	)			(18.2	)%

 

43

---

Table of Contents

Non-interest income decreased $1.5 million, or 29.6%, to $3.7 million for the quarter ended September 30, 2014 from $5.2 million for the quarter ended September 30, 2013, primarily due to a decrease of $1.6 million in gain on sales of securities, net. For the nine months ended September 30, 2014, non-interest income decreased $2.6 million, or 18.2%, to $11.7 million from $14.3 million for the nine months ended September 30, 2013, primarily due to a decrease of $3.0 million in gain on sales of securities, net partially offset by an increase of $320,000 in customer service fees.

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

 

		Three Months Ended September 30,								Change								Nine Months Ended September 30,								Change
		2014				2013				Amount				Percent				2014				2013				Amount				Percent
		(Dollars in thousands)
Salaries and employee benefits		$	10,249			$	10,033			$	216				2.2	%		$	31,067			$	29,584			$	1,483				5.0	%
Occupancy and equipment			2,252				2,103				149				7.1				7,029				6,523				506				7.8
Data processing			1,201				1,089				112				10.3				3,271				3,159				112				3.5
Marketing and advertising			769				539				230				42.7				2,264				2,042				222				10.9
Professional services			588				453				135				29.8				1,888				1,591				297				18.7
Foreclosed real estate			(47	)			(31	)			(16	)			(51.6	)			163				161				2				1.2
Deposit insurance			515				525				(10	)			(1.9	)			1,597				1,522				75				4.9
Other general and administrative			1,180				876				304				34.7				3,130				2,892				238				8.2
Total non-interest expenses		$	16,707			$	15,587			$	1,120				7.2	%		$	50,409			$	47,474			$	2,935				6.2	%

Non-interest expenses increased $1.1 million, or 7.2%, to $16.7 million for the quarter ended September 30, 2014 from $15.6 million for the quarter ended September 30, 2013, primarily due to increases of $216,000 in salaries and employee benefits, $149,000 in occupancy and equipment, $112,000 in data processing, $230,000 in marketing and advertising, $135,000 in professional services and $304,000 in other general and administrative expenses. For the nine months ended September 30, 2014, non-interest expenses increased $2.9 million, or 6.2%, to $50.4 million from $47.5 million for the nine months ended September 30, 2013, primarily due to increases of $1.5 million in salaries and employee benefits, $506,000 in occupancy and equipment, $112,000 in data processing, $222,000 in marketing and advertising, $297,000 in professional services and $238,000 in other general and administrative expenses. The increases in salaries and employee benefits and occupancy and equipment expenses were primarily associated with the opening of three new branches in 2013 and costs associated with the expansion of residential and commercial lending capacity. The Company’s efficiency ratio was 66.67% for the quarter ended September 30, 2014 compared to 73.05% for the quarter ended September 30, 2013. For the nine months ended September 30, 2014, the efficiency ratio was 70.15% compared to 76.62% for the nine months ended September 30, 2013.

Income Tax Provision. We recorded a provision for income taxes of $3.0 million for the quarter ended September 30, 2014, reflecting an effective tax rate of 33.5%, compared to $3.3 million, or 38.1%, for the quarter ended September 30, 2013. For the nine months ended September 30, 2014, the provision for income taxes was $8.1 million, reflecting an effective tax rate of 33.2%, compared to $5.8 million, or 33.8%, for the nine months ended September 30, 2013. The change in the effective tax rate was primarily due to changes in the components of pre-tax income.

Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities of and payments on investment securities and borrowings from the Federal Home Loan Bank of Boston. 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.

 

44

---

Table of Contents

We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.

Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At September 30, 2014, cash and due from banks totaled $388.3 million, including $302.3 million of net cash proceeds raised in the Company’s second step common stock offering. In addition, at September 30, 2014, we had $218.5 million of available borrowing capacity with the Federal Home Loan Bank of Boston, including a $9.4 million line of credit. On September 30, 2014, we had $172.7 million of advances outstanding.

A significant use of our liquidity is the funding of loan originations. At September 30, 2014, we had total loan commitments outstanding of $667.9 million. Historically, many of the commitments expire without being fully drawn; therefore the total amount of commitments does not necessarily represent future cash requirements.

Another significant use of our liquidity is the funding of deposit withdrawals. Certificates of deposit due within one year of September 30, 2014 totaled $436.8 million, or 66.1% 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.

Our primary investing activities are the origination of loans and the purchase of securities. Our primary financing activities consist of activity in deposit accounts and Federal Home Loan Bank 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.

We have a contract with our core data processing provider through December 2017, with a related outstanding commitment of $7.3 million as of September 30, 2014 and with total annual payments of $2.2 million.

The net proceeds from the stock offering significantly increased our liquidity and capital resources. Over time, our level of liquidity may be reduced as the net proceeds from the stock offering are used for general corporate purposes, including the funding of loans. Our financial condition and results of operations are expected to be enhanced and result in increases in net interest-earning assets and net interest income. However, due to the increase in equity from the stock offering proceeds, our return on equity will initially be lower but is expected to increase over time.

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, 2014, both the Company and the Bank exceeded all of their respective regulatory capital requirements. The Bank is considered “well capitalized” under regulatory guidelines.

 

45

---

Table of Contents

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, 2014
Total Capital (to Risk Weighted Assets):
Company		$	582,982				21.9	%		$	213,395				8.0	%			N/A				N/A
Bank			407,513				15.4				211,342				8.0			$	264,177				10.0	%
Tier 1 Capital (to Risk Weighted Assets):
Company			554,243				20.8				106,697				4.0				N/A				N/A
Bank			378,774				14.3				105,671				4.0				158,506				6.0
Tier 1 Capital (to Average Assets):
Company			554,243				17.6				125,690				4.0				N/A				N/A
Bank			378,774				12.1				124,787				4.0				155,983				5.0
December 31, 2013
Total Capital (to Risk Weighted Assets):
Company		$	259,577				10.8	%		$	192,797				8.0	%			N/A				N/A
Bank			246,100				10.2				192,511				8.0			$	240,639				10.0	%
Tier 1 Capital (to Risk Weighted Assets):
Company			231,342				9.6				96,398				4.0				N/A				N/A
Bank			217,865				9.1				96,256				4.0				144,383				6.0
Tier 1 Capital (to Average Assets):
Company			231,342				8.7				105,999				4.0				N/A				N/A
Bank			217,865				8.2				105,702				4.0				132,127				5.0

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

 

		September 30, 2014								December 31, 2013
		Consolidated				Bank				Consolidated				Bank
		(In thousands)
Total stockholders’ equity per financial statements		$	571,039			$	395,570			$	249,205			$	235,728
Adjustments to Tier 1 capital:
Accumulated other comprehensive income			(3,052	)			(3,052	)			(4,104	)			(4,104	)
Goodwill disallowed			(13,687	)			(13,687	)			(13,687	)			(13,687	)
Servicing assets disallowed			(57	)			(57	)			(72	)			(72	)
Total Tier 1 capital			554,243				378,774				231,342				217,865
Adjustments to total capital:
Allowance for loan losses			26,739				26,739				25,335				25,335
45% of net unrealized gains on marketable equity securities			2,000				2,000				2,900				2,900
Total regulatory capital		$	582,982			$	407,513			$	259,577			$	246,100

In July 2013, the FDIC and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them

 

46

---

Table of Contents

consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets), sets the leverage ratio at a uniform 4% of total assets and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised. The Bank has elected to exercise its one-time option to opt-out of the requirement under the final rule to include certain “available-for-sale” securities holdings for purposes of calculating its regulatory capital requirements. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule is effective January 1, 2015. The “capital conservation buffer” will be phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer will be effective.

Consolidated regulatory capital requirements identical to those applicable to the Bank will apply to bank holding companies such as the Company as of January 1, 2015. As is the case with institutions themselves, the capital conservation buffer will be phased in between 2016 and 2019.

The Company may use capital management tools such as cash dividends and common share repurchases. Pursuant to Federal Reserve Board regulations, we may not repurchase shares for at least one year following the second step conversion. In addition, Massachusetts regulations restrict repurchases for the first three years following the second step conversion. We are also subject to the Federal Reserve Board’s notice provisions for stock repurchases.

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 principles 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, 2014, 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.

 

47

---

Table of Contents

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 in 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.

 

48

---

Table of Contents

The following table reflects changes in estimated net interest income for the Bank due to immediate non-parallel changes in interest rates at October 1, 2014 through September 30, 2015.

 

Increase (Decrease) in Market Interest Rates		Net Interest Income
		Amount				Change				Percent
		(Dollars in Thousands)
300		$	86,758			$	(1,895	)			(2.14	)%
Flat			88,653
-100			89,477				824				0.93

 

49

---

Table of Contents

ITEM 4.

CONTROLS 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 Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, 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.

 

50

---

Table of Contents

PART II – OTHER 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 Prospectus dated May 9, 2014, filed with the SEC on May 20, 2014, which is available through the SEC’s website at www.sec.gov. As of September 30, 2014, our risk factors have not changed materially from those reported in the prospectus. 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.)

On July 28, 2014, the Company completed the sale of 32,500,000 shares of its common stock par value $0.01 per share, in connection with the second step mutual-to-stock Conversion of Meridian Financial Services, Incorporated.

The effective date of the Company’s registration statement (Commission No. 333-194454) was May 9, 2014. The Company registered for offer and sale shares of common stock, par value $0.01, at a sales price of $10.00 per share.

The selling agent who assisted the Company in the sale of its common stock was Sterne, Agee & Leach. For their services, Sterne, Agee & Leach received a fee of $4.6 million, including a sales fee equal to 0.75% of the dollar amount of the shares of common stock sold in the subscription and community offerings and a sales fee equal to 5.0% of the dollar amount of the shares of common stock sold in the syndicated offering, except that no fee was payable to Sterne, Agee & Leach with respect to shares purchased by officers, directors and employees or their immediate families, or shares purchased by the Company’s tax-qualified and non-qualified employee benefit plans. In addition, Sterne, Agee & Leach was reimbursed for expenses, including attorney fees.

From the effective date of the registration statement until September 30, 2014 the Company utilized $16.3 million to fund the new ESOP loan and incurred expenses in connection with the offer and sale of the common stock totaling $6.5 million, resulting in net cash proceeds to the Company of $302.3 million. As of September 30, 2014, the Company had invested $159.3 million of the net proceeds it received from the sale into the Bank’s operations and has retained the remaining amount for general corporate purposes.

 

(c.)

There were no repurchases of common stock during the quarter ended September 30, 2014.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

 

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5.

OTHER INFORMATION

Not applicable.

 

51

---

Table of Contents

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		[Reserved]
10.2		[Reserved]
10.3		[Reserved]
10.4		Amended and Restated Employment Agreement with Richard J. Gavegnano and East Boston Savings Bank dated July 28, 2014
10.5		East Boston Savings Bank Amended and Restated Employee Severance Compensation Plan
10.6		Form of Amended and Restated Supplemental Executive Retirement Agreements with Directors Vincent D. Basile, Domenic A. Gambardella, Edward L. Lynch, Gregory F. Natalucci, and James G. Sartori
10.7		Amended and Restated Supplemental Executive Retirement Agreement with Richard J. Gavegnano
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		Amended and Restated Employment Agreement between Edward J. Merritt and East Boston Savings Bank dated July 28, 2014
10.10		Amended and Restated Supplemental Executive Retirement Agreement between East Boston Savings Bank and Edward J. Merritt dated July 28, 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
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
10.16		East Boston Non-Qualified Supplemental Employee Stock Ownership Plan dated October 1, 2014

 

52

---

Table of Contents

21		Subsidiaries of Registrant
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
32.0		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 for the three and nine months ended September 30, 2014, 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 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

 

53

---

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

				MERIDIAN BANCORP, INC. (Registrant)
Date: November 10, 2014				By:		/s/ Richard J. Gavegnano
						Richard J. Gavegnano Chairman, President and Chief Executive Officer (Principal Executive Officer)
Date: November 10, 2014				By:		/s/ Mark L. Abbate
						Mark L. Abbate Senior Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)

 

54