Attached files

file filename
EX-31.2 - EX-31.2 - Meridian Bancorp, Inc.d76846dex312.htm
EX-32.0 - EX-32.0 - Meridian Bancorp, Inc.d76846dex320.htm
EX-31.1 - EX-31.1 - Meridian Bancorp, Inc.d76846dex311.htm
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, 2015

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 (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark 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 2, 2015 the registrant had 55,060,687 shares of $0.01 par value common stock outstanding.

 

 

 


Table of Contents

MERIDIAN BANCORP, INC.

FORM 10-Q

INDEX

 

         Page  
PART I.  

FINANCIAL INFORMATION

  
Item 1.  

Financial Statements (Unaudited)

  
 

Consolidated Balance Sheets at September 30, 2015 and December 31, 2014

     3   
 

Consolidated Statements of Net Income for the three and nine months ended September 30, 2015 and 2014

     4   
 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014

     5   
 

Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2015 and 2014

     6   
 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014

     7   
 

Notes to Consolidated Financial Statements

     9   
Item 2.  

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

     27   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     43   
Item 4.  

Controls and Procedures

     44   
PART II.  

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     45   
Item 1A.  

Risk Factors

     45   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     45   
Item 3.  

Defaults Upon Senior Securities

     45   
Item 4.  

Mine Safety Disclosures

     45   
Item 5.  

Other Information

     45   
Item 6.  

Exhibits

     46   
 

Signatures

     47   
 

Exhibit 31.1

     48   
 

Exhibit 31.2

     49   
 

Exhibit 32.0

     50   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     September 30,
2015
    December 31,
2014
 
     (Dollars in thousands)  
ASSETS     

Cash and due from banks

   $ 98,038      $ 205,732   

Certificates of deposit

     95,008        85,000   

Securities available for sale, at fair value

     151,025        203,521   

Federal Home Loan Bank stock, at cost

     12,725        12,725   

Loans held for sale

     2,302        971   

Loans, net of fees and costs

     2,924,233        2,677,376   

Less: allowance for loan losses

     (32,585     (28,469
  

 

 

   

 

 

 

Loans, net

     2,891,648        2,648,907   

Bank-owned life insurance

     39,262        38,611   

Foreclosed real estate, net

     600        1,046   

Premises and equipment, net

     39,539        38,512   

Accrued interest receivable

     8,239        7,748   

Deferred tax asset, net

     19,933        15,610   

Goodwill

     13,687        13,687   

Other assets

     3,842        6,456   
  

 

 

   

 

 

 

Total assets

   $ 3,375,848      $ 3,278,526   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Deposits:

    

Non interest-bearing

   $ 352,360      $ 285,990   

Interest-bearing

     2,278,321        2,217,945   
  

 

 

   

 

 

 

Total deposits

     2,630,681        2,503,935   

Long-term debt

     140,023        171,899   

Accrued expenses and other liabilities

     22,045        24,982   
  

 

 

   

 

 

 

Total liabilities

     2,792,749        2,700,816   
  

 

 

   

 

 

 

Stockholders’ equity:

    

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

     —          —     

Common stock, $0.01 par value, 100,000,000 shares authorized; 54,458,315 and 54,708,066 shares issued at September 30, 2015 and December 31, 2014, respectively

     545        547   

Additional paid-in capital

     406,214        411,476   

Retained earnings

     200,813        184,715   

Accumulated other comprehensive income (loss)

     (3,358     2,898   

Unearned compensation - ESOP, 2,831,005 and 2,922,328 shares at September 30, 2015 and December 31, 2014, respectively

     (20,503     (21,164

Unearned compensation - restricted shares, 189,559 and 138,838 shares at September 30, 2015 and December 31, 2014, respectively

     (612     (762
  

 

 

   

 

 

 

Total stockholders’ equity

     583,099        577,710   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,375,848      $ 3,278,526   
  

 

 

   

 

 

 

See accompanying notes to 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,  
     2015      2014     2015      2014  
     (Dollars in thousands, except per share amounts)  

Interest and dividend income:

          

Interest and fees on loans

   $ 30,153       $ 26,617      $ 87,031       $ 76,164   

Interest on debt securities:

          

Taxable

     366         588        1,311         1,963   

Tax-exempt

     41         45        124         134   

Dividends on equity securities

     408         357        1,216         1,047   

Interest on certificates of deposit

     163         —          456         —     

Other interest and dividend income

     207         258        565         486   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest and dividend income

     31,338         27,865        90,703         79,794   
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest expense:

          

Interest on deposits

     4,643         4,513        13,679         13,325   

Interest on borrowings

     482         632        1,472         1,908   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     5,125         5,145        15,151         15,233   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income

     26,213         22,720        75,552         64,561   

Provision for loan losses

     2,412         655        6,123         1,484   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income, after provision for loan losses

     23,801         22,065        69,429         63,077   
  

 

 

    

 

 

   

 

 

    

 

 

 

Non-interest income:

          

Customer service fees

     2,049         1,880        5,809         5,539   

Loan fees

     318         148        714         467   

Mortgage banking gains, net

     38         19        416         406   

Gain on sales of securities, net

     45         1,346        2,489         4,411   

Income from bank-owned life insurance

     340         294        930         868   

Other income

     7         —          8         17   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest income

     2,797         3,687        10,366         11,708   
  

 

 

    

 

 

   

 

 

    

 

 

 

Non-interest expenses:

          

Salaries and employee benefits

     11,235         10,249        33,119         31,067   

Occupancy and equipment

     2,406         2,252        7,394         7,029   

Data processing

     1,375         1,201        3,887         3,271   

Marketing and advertising

     766         769        2,555         2,264   

Professional services

     644         588        1,981         1,888   

Foreclosed real estate

     96         (47     125         163   

Deposit insurance

     522         515        1,462         1,597   

Other general and administrative

     1,045         1,180        2,981         3,130   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest expenses

     18,089         16,707        53,504         50,409   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before income taxes

     8,509         9,045        26,291         24,376   

Provision for income taxes

     2,767         3,030        8,559         8,086   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 5,742       $ 6,015      $ 17,732       $ 16,290   
  

 

 

    

 

 

   

 

 

    

 

 

 

Earnings per share:

          

Basic

   $ 0.11       $ 0.12      $ 0.34       $ 0.31   

Diluted

   $ 0.11       $ 0.11      $ 0.33       $ 0.30   

Weighted average shares:

          

Basic

     51,940,055         52,043,346        51,959,315         52,718,470   

Diluted

     53,023,850         53,156,287        53,064,962         53,801,448   

See accompanying notes to 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,  
     2015     2014     2015     2014  
     (In thousands)  

Net income

   $ 5,742      $ 6,015      $ 17,732      $ 16,290   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss:

        

Securities available for sale:

        

Unrealized holding gain (loss) on securities available for sale

     (6,207     (2,690     (7,958     2,595   

Reclassification adjustment for gains realized in income (1)

     (45     (1,346     (2,489     (4,411
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized loss

     (6,252     (4,036     (10,447     (1,816

Tax effect

     2,530        1,603        4,191        764   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss

     (3,722     (2,433     (6,256     (1,052
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 2,020      $ 3,582      $ 11,476      $ 15,238   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amounts are included in gain on sales of securities, net, in the Consolidated Statements of Net Income. The provision for income taxes associated with the reclassification adjustments for the three months ended September 30, 2015 and 2014 was $18,000 and $535,000 and for the nine months ended September 30, 2015 and 2014 was $999,000 and $1.9 million, respectively.

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2015 and 2014

(Unaudited)

 

    Shares of
Common Stock
Outstanding (1)
    Common
Stock
    Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Unearned
Compensation -
ESOP
    Unearned
Compensation -
Restricted
Shares
    Total  
    (Dollars in thousands)  

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   

Share-based compensation expense, 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

    —          —          2,640        —          —          —          —          —          2,640   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

    54,702,764      $ 547      $ 411,134      $ 178,678      $ 3,052      $ —        $ (21,548   $ (824   $ 571,039   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2015

                 

Balance at December 31, 2014

    54,708,066      $ 547      $ 411,476      $ 184,715      $ 2,898      $ —        $ (21,164   $ (762   $ 577,710   

Comprehensive income

    —          —          —          17,732        (6,256     —          —          —          11,476   

Dividend declared ($0.03 per share)

    —          —          —          (1,634     —          —          —          —          (1,634

Repurchased stock related to buyback program

    (522,604     (5     (6,564     —          —          —          —          —          (6,569

ESOP shares earned (91,323 shares)

    —          —          501        —          —          —          661        —          1,162   

Share-based compensation expense, net of awards surrendered

    87,730        1        318        —          —          —          —          150        469   

Excess tax benefits in connection with share-based compensation

    —          —          323        —          —          —          —          —          323   

Stock options exercised

    185,123        2        160        —          —          —          —          —          162   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

    54,458,315      $ 545      $ 406,214      $ 200,813      $ (3,358   $ —        $ (20,503   $ (612   $ 583,099   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 consolidated financial statements.

 

6


Table of Contents

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended September 30,  
     2015     2014  
     (In thousands)  

Cash flows from operating activities:

    

Net income

   $ 17,732      $ 16,290   

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

    

Accretion of acquisition fair value adjustments

     (91     (31

ESOP shares earned

     1,162        886   

Provision for loan losses

     6,123        1,484   

Accretion of net deferred loan origination fees

     (740     (401

Net accretion of securities available for sale

     (55     (20

Capitalization of mortgage servicing rights

     (14     (28

Amortization of mortgage servicing rights

     155        173   

Depreciation and amortization expense

     1,846        1,794   

Gain on sales of securities, net

     (2,489     (4,411

Net loss and provision for foreclosed real estate

     92        78   

Deferred income tax benefit

     (132     (168

Income from bank-owned life insurance

     (930     (868

Share-based compensation expense

     469        646   

Excess tax benefits in connection with share-based compensation

     (323     (86

Net changes in:

    

Loans held for sale

     (1,331     367   

Accrued interest receivable

     (491     124   

Other assets

     2,473        (69

Accrued expenses and other liabilities

     (2,614     (684
  

 

 

   

 

 

 

Net cash provided by operating activities

     20,842        15,076   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of certificates of deposit

     (12,508     —     

Maturities of certificates of deposit

     2,500        —     

Activity in securities available for sale:

    

Proceeds from maturities, calls and principal payments

     32,927        36,873   

Redemption of mutual funds, net

     19,934        1,015   

Proceeds from sales

     20,434        24,311   

Purchases

     (28,708     (26,631

Loans originated, net of principal payments received

     (248,103     (218,822

Proceeds from bank-owned life insurance

     279        —     

Purchases of premises and equipment

     (2,811     (908

Purchase of Federal Home Loan Bank stock

     —          (818

Cash received in MHC merger

     —          2,640   

Proceeds from sales of foreclosed real estate

     354        1,223   
  

 

 

   

 

 

 

Net cash used in investing activities

     (215,702     (181,117
  

 

 

   

 

 

 

 

7


Table of Contents

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended September 30,  
     2015     2014  
     (In thousands)  

Cash flows from financing activities:

    

Net increase in deposits

     126,760        154,835   

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

     —          57,131   

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

     (31,876     (46,347

Cash dividends declared on common stock

     (1,634     —     

Repurchase of common stock

     (6,569     —     

Stock options exercised

     162        57   

Excess tax benefits in connection with share-based compensation

     323        86   

Net proceeds in sale of common stock

     —          302,281   
  

 

 

   

 

 

 

Net cash provided by financing activities

     87,166        468,043   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (107,694     302,002   

Cash and cash equivalents at beginning of period

     205,732        86,271   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 98,038      $ 388,273   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid on deposits

   $ 13,744      $ 13,331   

Interest paid on borrowings

     1,505        1,931   

Income taxes paid, net of refunds

     10,235        7,493   

Non-cash investing and financing activities:

    

Transfers from loans to foreclosed real estate

     —          1,717   

See accompanying notes to 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 outstanding 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 Old Meridian’s 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. The Company utilized $16.3 million of the proceeds to fund an addition to its Employee Stock Ownership Plan (“ESOP”) loan for the acquisition by the ESOP of an additional 1,625,000 shares at $10.00 per share representing 5% of the shares issued in the second-step offering 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. The Company invested $159.3 million of the net proceeds it received from the sale into the Bank’s operations and retained the remaining amount for general corporate purposes. 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 at the time of the offering.

As a result of the Conversion, all share and per share information for periods prior to the Conversion 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 in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by such generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Such adjustments were of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the entire year or any other interim period. For additional information, refer to the financial statements and footnotes thereto of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 which was filed with the Securities and Exchange Commission (“SEC”) on March 13, 2015, 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 reported period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, 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 PRONOUNCEMENTS

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 did not 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, 2017, including interim periods within that reporting period. Early adoption is permitted, but not before annual periods beginning after December 15, 2016. 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. Dividends on unvested stock awards are non-forfeitable, therefore these unvested stock awards are considered outstanding in the computation of basic earnings per share. Diluted earnings per share is computed in a manner similar to that of basic earnings per share except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury method) that would have been outstanding if all potentially dilutive common stock equivalents (such as options) were issued during the period. Unallocated common shares held by the ESOP are shown as a reduction in stockholders’ equity and are not included in the weighted-average number of common shares outstanding for either basic or diluted earnings per share calculations.

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  
     (Dollars in thousands, except per share amounts)  

Net income available to common stockholders

   $ 5,742       $ 6,015       $ 17,732       $ 16,290   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average shares outstanding

     51,940,055         52,043,346         51,959,315         52,718,470   

Effect of dilutive stock options

     1,083,795         1,112,941         1,105,647         1,082,978   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     53,023,850         53,156,287         53,064,962         53,801,448   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.11       $ 0.12       $ 0.34       $ 0.31   

Diluted

   $ 0.11       $ 0.11       $ 0.33       $ 0.30   

For the three and nine months ended September 30, 2015, options for the exercise of 36,673 and 38,589 shares, respectively, were not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive. There were no anti-dilutive options for the three and nine months ended September 30, 2014.

On September 17, 2015, the stockholders of the Company approved the Meridian Bancorp, Inc. 2015 Equity Incentive Plan (the “Plan”). The Plan provides for the issuance of up to 4,550,000 shares of common stock for the grant of stock-based and other incentive awards to officers, employees and directors of the Company; provided, however, that no more than 3,250,000 shares may be issued or delivered in the aggregate pursuant to the exercise of stock options, and no more than 1,300,000 shares may be issued or delivered pursuant to restricted stock awards. On November 2, 2015, the Company granted 1,395,314 stock options and 600,700 restricted stock awards under the Plan to its directors, officers and employees, including the Company’s named executive officers. Awards vest 20% per year over a period of five years beginning one year from the date of grant.

 

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, 2015

           

Debt securities:

           

Corporate bonds:

           

Financial services

   $ 27,414       $ 172       $ (26    $ 27,560   

Industry and manufacturing

     3,998         27         —           4,025   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate bonds

     31,412         199         (26      31,585   

Government-sponsored enterprises

     19,000         14         (18      18,996   

U.S. treasury securities

     24,995         24         —           25,019   

Municipal bonds

     5,142         110         —           5,252   

Residential mortgage-backed securities:

           

Government-sponsored enterprises

     7,534         500         (2      8,032   

Private label

     1,029         30         —           1,059   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     89,112         877         (46      89,943   
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities:

           

Common stocks:

           

Financial services

     11,133         464         (644      10,953   

Industry and manufacturing

     20,774         274         (5,795      15,253   

Consumer products and services

     18,150         780         (1,810      17,120   

Technology

     4,508         —           (592      3,916   

Healthcare

     7,638         465         (342      7,761   

Other

     3,423         1,576         (6      4,993   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total common stocks

     65,626         3,559         (9,189      59,996   

Money market mutual funds

     1,127         —           (41      1,086   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable equity securities

     66,753         3,559         (9,230      61,082   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 155,865       $ 4,436       $ (9,276    $ 151,025   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           

Debt securities:

           

Corporate bonds:

           

Financial services

   $ 37,852       $ 533       $ (38    $ 38,347   

Industry and manufacturing

     5,935         121         —           6,056   

Healthcare

     4,001         27         —           4,028   

Other

     1,005         19         —           1,024   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate bonds

     48,793         700         (38      49,455   

Government-sponsored enterprises

     34,548         9         (357      34,200   

U.S. treasury securities

     24,991         —           (54      24,937   

Municipal bonds

     5,441         182         —           5,623   

Residential mortgage-backed securities:

           

Government-sponsored enterprises

     8,754         589         (3      9,340   

Private label

     1,410         86         —           1,496   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     123,937         1,566         (452      125,051   
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities:

           

Common stocks:

           

Financial services

     10,849         1,225         (51      12,023   

Industry and manufacturing

     16,894         822         (1,658      16,058   

Consumer products and services

     13,992         1,467         (549      14,910   

Technology

     2,521         79         (184      2,416   

Healthcare

     5,220         1,551         —           6,771   

Other

     3,441         1,826         —           5,267   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total common stocks

     52,917         6,970         (2,442      57,445   

Money market mutual funds

     21,060         —           (35      21,025   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable equity securities

     73,977         6,970         (2,477      78,470   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 197,914       $ 8,536       $ (2,929    $ 203,521   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Table of Contents

At September 30, 2015, securities with an amortized cost of $16.0 million and $1.1 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, 2015 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

   $ 11,978       $ 12,062       $ 15,436       $ 15,498       $ —         $ —         $ 27,414       $ 27,560   

Industry and manufacturing

     2,998         3,013         1,000         1,012         —           —           3,998         4,025   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate bonds

     14,976         15,075         16,436         16,510         —           —           31,412         31,585   

Government-sponsored enterprises

     —           —           15,000         15,011         4,000         3,985         19,000         18,996   

U.S. treasury securities

     —           —           24,995         25,019         —           —           24,995         25,019   

Municipal bonds

     800         803         4,342         4,449         —           —           5,142         5,252   

Residential mortgage-backed securities:

                       

Government-sponsored enterprises

     —           —           12         12         7,522         8,020         7,534         8,032   

Private label

     —           —           —           —           1,029         1,059         1,029         1,059   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,776       $ 15,878       $ 60,785       $ 61,001       $ 12,551       $ 13,064       $ 89,112       $ 89,943   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended September 30, 2015 and 2014, proceeds from sales of securities available for sale amounted to $1.3 million and $9.5 million, respectively. Gross gains of $47,000 and $1.3 million and gross losses of $2,000 and $11,000, respectively, were realized on those sales. For the nine months ended September 30, 2015 and 2014, proceeds from sales of securities available for sale amounted to $20.4 million and $24.3 million, respectively. Gross gains of $2.8 million and $4.4 million and gross losses of $325,000 and $11,000, respectively, were realized on those sales.

Information pertaining to securities available for sale as of September 30, 2015 and December 31, 2014, 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, 2015

           

Debt securities:

           

Corporate bonds - financial services

   $ —         $ —         $ 26       $ 3,474   

Government-sponsored enterprises

     —           —           18         6,982   

Residential mortgage-backed securities:

           

Government-sponsored enterprises

     —           —           2         218   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     —           —           46         10,674   
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities:

           

Common stocks:

           

Financial services

     516         5,353         128         209   

Industry and manufacturing

     2,415         8,344         3,380         4,016   

Consumer products and services

     1,118         9,409         692         1,444   

Technology

     340         3,047         252         870   

Healthcare

     342         3,764         —           —     

Other

     6         13         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total common stocks

     4,737         29,930         4,452         6,539   

Money market mutual funds

     —           —           41         1,023   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable equity securities

     4,737         29,930         4,493         7,562   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 4,737       $ 29,930       $ 4,539       $ 18,236   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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, 2014

           

Debt securities:

           

Corporate bonds-financial services

   $ 5       $ 1,994       $ 33       $ 1,467   

Government-sponsored enterprises

     10         4,491         347         24,653   

U.S. treasury securities

     54         24,937         —           —     

Residential mortgage-backed securities:

           

Government-sponsored enterprises

     3         225         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     72         31,647         380         26,120   
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities:

           

Common stocks:

           

Financial services

     51         1,855         —           —     

Industry and manufacturing

     1,658         8,046         —           —     

Consumer products and services

     549         3,864         —           —     

Technology

     184         1,855         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total common stocks

     2,442         15,620         —           —     

Money market mutual funds

     —           —           35         1,018   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable equity securities

     2,442         15,620         35         1,018   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 2,514       $ 47,267       $ 415       $ 27,138   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company determined no securities were other-than-temporarily impaired for the nine months ended September 30, 2015 or 2014. 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, 2015, the net unrealized gain on the total debt securities portfolio was $831,000. At September 30, 2015, 12 debt securities had unrealized losses with aggregate depreciation of 0.4% 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 increase in interest rates. The contractual terms of these investments do not permit the companies 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, 2015.

As of September 30, 2015, the net unrealized loss on the total marketable equity securities portfolio was $5.7 million. At September 30, 2015, 78 marketable equity securities with a fair value of $37.5 million had unrealized losses totaling $9.2 million, or an aggregate depreciation of 19.8% from the Company’s cost basis. These marketable equity securities consisted of 60 securities with a fair value of $29.9 million and an unrealized loss of $4.7 million for less than 12 months and 18 securities with a fair value of $7.6 million and an unrealized loss of $4.5 million for 12 months or longer. The marketable equity securities in an unrealized loss position for 12 months or longer were comprised of one security in the financial services sector with a fair value of $209,000 and an unrealized loss of $128,000, 12 securities in the industry and manufacturing sector with a fair value of $4.0 million and an unrealized loss of $3.4 million, three marketable equity securities in the consumer products and services sector with a fair value of $1.4 million and an unrealized of $692,000, one security in the technology sector with a fair value of $870,000 and an unrealized loss of $252,000 and one money market mutual fund with a fair value of $1.0 million and an unrealized loss of $41,000.

                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.

Although some issuers have shown declines in earnings, no 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. The unrealized losses in the industry and manufacturing sector consisted primarily of commodity based companies that experienced significant declines in commodity prices, particularly during the three months ended September 30, 2015. Commodity prices have subsequently improved and somewhat stabilized. In addition, volatility in the equities markets since August 2015 resulted in significant short-term declines in market prices as of September 30, 2015. Subsequently, the net unrealized loss on our marketable equity securities portfolio has improved by approximately 20%. One marketable equity security in the industry and manufacturing sector with a fair value of $164,000 and an unrealized loss of $336,000 had an unrealized loss in excess of 25% of cost for a period greater than twelve months. Based on management’s evaluation for other-than-temporary impairment at September 30, 2015, the issuer’s profitability appears to be improving with earnings per share projected by investment analysts to increase over the next 12 months along with a strengthening of its balance sheet. In addition, the issuer’s market price per share subsequently increased 31% in early October and is projected by investment analysts to increase 52% within the next 12 months.

 

13


Table of Contents
5. LOANS

The Company’s loan portfolio consists primarily of residential real estate, commercial real estate, construction, commercial and industrial, 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, 2015     December 31, 2014  
     Amount      Percent     Amount      Percent  
     (Dollars in thousands)  

Real estate loans:

          

Residential real estate:

          

One- to four-family

   $ 458,635         15.7   $ 468,560         17.5

Multi-family

     386,060         13.2        409,675         15.3   

Home equity lines of credit

     48,838         1.7        50,091         1.9   

Commercial real estate

     1,274,371         43.5        1,145,820         42.8   

Construction

     384,468         13.1        265,980         9.9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total real estate loans

     2,552,372         87.2        2,340,126         87.4   

Commercial and industrial

     365,594         12.5        330,813         12.3   

Consumer

     9,793         0.3        8,772         0.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

     2,927,759         100.0     2,679,711         100.0
     

 

 

      

 

 

 

Allowance for loan losses

     (32,585        (28,469   

Net deferred loan origination fees

     (3,526        (2,335   
  

 

 

      

 

 

    

Loans, net

   $ 2,891,648         $ 2,648,907      
  

 

 

      

 

 

    

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, 2015 and December 31, 2014, the Company was servicing loans for participants aggregating $137.1 million and $88.1 million, respectively.

As a result of the Mt. Washington 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.

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

 

     September 30,
2015
     December 31,
2014
 
     (In thousands)  

Real estate loans:

     

Residential real estate:

     

One- to four-family

   $ 5,056       $ 5,776   

Multi-family

     600         625   

Home equity lines of credit

     360         505   

Commercial real estate

     365         447   
  

 

 

    

 

 

 

Outstanding principal balance

     6,381         7,353   

Discount

     (1,396      (1,787
  

 

 

    

 

 

 

Carrying amount

   $ 4,985       $ 5,566   
  

 

 

    

 

 

 

 

14


Table of Contents

A rollforward of the accretable discount, included with the outstanding loan balances, follows:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  
     (In thousands)  

Beginning balance

   $ 684       $ 1,154       $ 919       $ 1,181   

Accretion

     (13      (17      (41      (44

Disposals

     (99      —           (306      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 572       $ 1,137       $ 572       $ 1,137   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

    For the Three Months Ended September 30, 2015  
    One- to
four-family
    Multi-
family
    Home
equity lines
of credit
    Commercial
real estate
    Construction     Commercial
and
industrial
    Consumer     Total  
    (In thousands)  

Beginning balance

  $ 1,517      $ 3,522      $ 152      $ 12,816      $ 6,811      $ 5,185      $ 106      $ 30,109   

Provision (credit) for loan losses

    (100     (247     (5     1,620        932        104        108        2,412   

Charge-offs

    (6     —          —          —          —          —          (70     (76

Recoveries

    —          —          —          —          107        —          33        140   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $     1,411      $     3,275      $      147      $     14,436      $     7,850      $     5,289      $      177      $      32,585   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    For the Three Months Ended September 30, 2014  
    One- to
four-family
    Multi-
family
    Home
equity lines
of credit
    Commercial
real estate
    Construction     Commercial
and
industrial
    Consumer     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 Nine Months Ended September 30, 2015  
    One- to
four-family
    Multi-
family
    Home
equity lines
of credit
    Commercial
real estate
    Construction     Commercial
and
industrial
    Consumer     Total  
    (In thousands)  

Beginning balance

  $ 1,849      $ 3,635      $ 100      $ 13,000      $ 5,155      $ 4,633      $ 97      $ 28,469   

Provision (credit) for loan losses

    (280     (360     47        1,418        4,417        688        193        6,123   

Charge-offs

    (166     —          —          —          (2,287     (33     (188     (2,674

Recoveries

    8        —          —          18        565        1        75        667   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $     1,411      $     3,275      $      147      $     14,436      $     7,850      $     5,289      $      177      $      32,585   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    For the Nine Months Ended September 30, 2014  
    One- to
four-family
    Multi-
family
    Home
equity lines
of credit
    Commercial
real estate
    Construction     Commercial
and
industrial
    Consumer     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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents
    One- to
four-family
    Multi-
family
    Home
equity lines
of credit
    Commercial
real estate
    Construction     Commercial
and
industrial
    Consumer     Total  
    (In thousands)  

September 30, 2015

               

Amount of allowance for loan losses for loans deemed to be impaired

  $ 8      $ 162      $ —        $ 16      $ —        $ 31      $ —        $ 217   

Amount of allowance for loan losses for loans not deemed to be impaired

    1,403        3,113        147        14,420        7,850        5,258        177        32,368   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,411      $ 3,275      $ 147      $ 14,436      $ 7,850      $ 5,289      $ 177      $ 32,585   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amount of allowance for loan losses for loans acquired with deteriorated credit quality included above

  $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 2,033      $ 1,411      $ —        $ 4,982      $ 17,681      $ 1,102      $ —        $ 27,209   

Loans not deemed to be impaired

    456,602        384,649        48,838        1,269,389        366,787        364,492        9,793        2,900,550   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 458,635      $ 386,060      $ 48,838      $ 1,274,371      $ 384,468      $ 365,594      $ 9,793      $ 2,927,759   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    One- to
four-family
    Multi-
family
    Home
equity lines
of credit
    Commercial
real estate
    Construction     Commercial
and
industrial
    Consumer     Total  
    (In thousands)  

December 31, 2014

               

Amount of allowance for loan losses for loans deemed to be impaired

  $ 76      $ 168      $ —        $ —        $ 32      $ 14      $ —        $ 290   

Amount of allowance for loan losses for loans not deemed to be impaired

    1,773        3,467        100        13,000        5,123        4,619        97        28,179   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,849      $ 3,635      $ 100      $ 13,000      $ 5,155      $ 4,633      $ 97      $ 28,469   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amount of allowance for loan losses for loans acquired with deteriorated credit quality included above

  $ 41      $ —        $ —        $ —        $ —        $ —        $ —        $ 41   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 4,415      $ 1,443      $ 20      $ 15,398      $ 9,818      $ 984      $ —        $ 32,078   

Loans not deemed to be impaired

    464,145        408,232        50,071        1,130,422        256,162        329,829        8,772        2,647,633   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 468,560      $ 409,675      $ 50,091      $ 1,145,820      $ 265,980      $ 330,813      $ 8,772      $ 2,679,711   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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, 2015

              

Real estate loans:

              

Residential real estate:

              

One- to four-family

   $ 1,148       $ 843       $ 2,369       $ 4,360       $ 9,717   

Home equity lines of credit

     753         580         338         1,671         1,837   

Commercial real estate

     —           —           3,812         3,812         4,983   

Construction

     —           —           17,502         17,502         17,502   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1,901         1,423         24,021         27,345         34,039   

Commercial and industrial

     5         121         980         1,106         1,101   

Consumer

     600         445         —           1,045         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,506       $ 1,989       $ 25,001       $ 29,496       $ 35,140   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents
     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)  

December 31, 2014

              

Real estate loans:

              

Residential real estate:

              

One- to four-family

   $ 4,386       $ 1,129       $ 3,056       $ 8,571       $ 14,649   

Home equity lines of credit

     1,040         75         753         1,868         2,277   

Commercial real estate

     —           1,739         3,038         4,777         5,311   

Construction

     —           —           7,350         7,350         8,417   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     5,426         2,943         14,197         22,566         30,654   

Commercial and industrial

     5         99         833         937         855   

Consumer

     521         527         —           1,048         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,952       $ 3,569       $ 15,030       $ 24,551       $ 31,509   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2015 and December 31, 2014, the Company did not have any accruing loans past due 90 days or more. Delinquent loans at September 30, 2015 and December 31, 2014 included $694,000 and $485,000, respectively, of loans acquired with evidence of credit deterioration. At September 30, 2015 and December 31, 2014, non-accrual loans included $896,000 and $994,000, respectively, of loans acquired with evidence of credit deterioration.

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

 

     September 30, 2015      December 31, 2014  
     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

   $ 1,374       $ 1,861          $ 2,986       $ 3,515      

Multi-family

     91         91            102         102      

Home equity lines of credit

     —           —              20         20      

Commercial real estate

     4,498         4,800            15,398         15,705      

Construction

     17,681         20,788            9,328         10,007      

Commercial and industrial

     972         1,302            936         1,320      
  

 

 

    

 

 

       

 

 

    

 

 

    

Total

     24,616         28,842            28,770         30,669      
  

 

 

    

 

 

       

 

 

    

 

 

    

Impaired loans with a valuation allowance:

                 

One- to four-family

     659         659       $ 8         1,429         1,429       $ 76   

Multi-family

     1,320         1,320         162         1,341         1,341         168   

Commercial real estate

     484         484         16         —           —           —     

Construction

     —           —           —           490         490         32   

Commercial and industrial

     130         130         31         48         48         14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,593         2,593         217         3,308         3,308         290   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 27,209       $ 31,435       $ 217       $ 32,078       $ 33,977       $ 290   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents
     Three Months Ended September 30,  
     2015      2014  
     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

   $ 2,179       $   21       $   21       $ 4,169       $ 54       $ 49   

Multi-family

     1,416         14         14         1,456         14         14   

Home equity lines of credit

     —           —           —           20         —           —     

Commercial real estate

     4,991         19         19         13,525         129         84   

Construction

     17,744         33         33         8,142         119         103   

Commercial and industrial

     1,110         3         3         1,097         23         7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 27,440       $ 90       $ 90       $ 28,409       $ 339       $ 257   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

      Nine Months Ended September 30,   
     2015      2014  
     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

   $ 2,927       $ 106       $ 105       $ 4,193       $ 147       $ 144   

Multi-family

     1,426         41         41         1,465         43         43   

Home equity lines of credit

     —           —           —           20         1         1   

Commercial real estate

     8,724         165         165         6,691         230         107   

Construction

     16,367         289         288         8,164         376         202   

Commercial and industrial

     1,019         8         8         1,127         62         14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 30,463       $ 609       $ 607       $ 21,660       $ 859       $ 511   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     September 30,
2015
     December 31,
2014
 
     (In thousands)  

TDRs on accrual status:

     

One- to four-family

   $ 2,241       $ 2,946   

Multi-family

     1,412         1,443   

Home equity lines of credit

     19         20   

Commercial real estate

     10,050         9,950   

Construction

     174         121   

Commercial and industrial

     35         —     
  

 

 

    

 

 

 

Total TDRs on accrual status

     13,931         14,480   
  

 

 

    

 

 

 

TDRs on non-accrual status:

     

One- to four-family

     1,666         1,469   

Commercial real estate

     444         283   

Construction

     2,282         6,496   

Commercial and industrial

     372         186   
  

 

 

    

 

 

 

Total TDRs on non-accrual status

     4,764         8,434   
  

 

 

    

 

 

 

Total TDRs

   $ 18,695       $ 22,914   
  

 

 

    

 

 

 

 

18


Table of Contents

For the nine months ended September 30, 2015 and 2014, new TDRs were immaterial and there were no TDRs that defaulted within the 12 months of restructure. The Company generally places loans modified as TDRs on non-accrual status for a minimum period of six months. Loans modified as TDRs qualify for return to accrual status once they have demonstrated performance with the modified terms of the loan agreement for a minimum of six consecutive months and future payments are reasonably assured. TDRs are 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 are lower than the carrying value of that loan. TDRs may be removed from impairment disclosures in the year following the restructure if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring.

The Company utilizes a nine-grade internal loan rating system for multi-family, commercial real estate, construction, and commercial and industrial 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 assets 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 and industrial loans. The Company also engages an independent third-party to review a significant portion of loans within these segments on at least an annual basis. Management uses the results of these reviews as part of its annual review process.

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

 

     September 30, 2015      December 31, 2014  
     Multi-family
residential
real estate
     Commercial
real estate
     Construction      Commercial
and
industrial
     Multi-family
residential
real estate
     Commercial
real estate
     Construction      Commercial
and
industrial
 
     (In thousands)  

Loans rated 1 - 3A

   $ 376,725       $ 1,264,674       $ 364,693       $ 340,124       $ 399,113       $ 1,135,540       $ 238,505       $ 322,013   

Loans rated 4 - 4A

     898         4,435         —           24,334         1,960         4,832         —           7,816   

Loans rated 5

     8,437         5,262         19,775         1,136         8,602         5,448         27,475         984   

Loans rated 6

     —           —           —           —           —           —           —           —     

Loans rated 7

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 386,060       $ 1,274,371       $ 384,468       $ 365,594       $ 409,675       $ 1,145,820       $ 265,980       $ 330,813   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

19


Table of Contents
6. DEPOSITS

A summary of deposit balances, by type, follows:

 

     September 30,
2015
     December 31,
2014
 
     (In thousands)  

Demand deposits

   $ 352,360       $ 285,990   

NOW deposits

     308,612         294,840   

Money market deposits

     880,841         942,542   

Regular savings and other deposits

     283,595         272,611   
  

 

 

    

 

 

 

Total non-certificate accounts

     1,825,408         1,795,983   
  

 

 

    

 

 

 

Term certificates less than $100,000

     361,856         280,393   

Term certificates $100,000 and greater

     443,417         427,559   
  

 

 

    

 

 

 

Total term certificates

     805,273         707,952   
  

 

 

    

 

 

 

Total deposits

   $ 2,630,681       $ 2,503,935   
  

 

 

    

 

 

 

A summary of term certificates, by maturity, follows:

 

     September 30, 2015     December 31, 2014  

Maturing

   Amount      Weighted
Average Rate
    Amount      Weighted
Average Rate
 
     (Dollars in thousands)  

Within 1 year

   $ 453,212         1.03   $ 493,676         1.05

Over 1 year to 2 years

     237,612         1.26        131,099         1.31   

Over 2 years to 3 years

     54,983         1.32        42,237         1.39   

Over 3 years to 4 years

     32,682         1.62        18,202         1.47   

Over 4 years to 5 years

     23,473         1.63        19,539         1.50   

Greater than 5 years

     3,311         5.50        3,199         5.50   
  

 

 

      

 

 

    
   $ 805,273         1.18   $ 707,952         1.16
  

 

 

      

 

 

    

At September 30, 2015, the Company had brokered certificates of deposit, which are included in term certificates in the tables above, totaling $88.0 million with a weighted average rate of 1.19%. The Company had no brokered certificates of deposits at December 31, 2014.

 

7. BORROWINGS

Long-term debt consists of FHLB advances as follows:

 

     September 30, 2015     December 31, 2014  

Maturing

   Amount      Weighted
Average Rate
    Amount      Weighted
Average Rate
 
     (Dollars in thousands)  

2015

   $ 10,000         1.83   $ 39,500         1.20

2016

     41,500         1.20        41,500         1.20   

2017

     74,632         1.38        74,632         1.38   

2018

     —           —          —           —     

2019

     7,128         1.23        8,454         1.23   

2020

     6,763         1.22        7,813         1.22   
  

 

 

      

 

 

    
   $ 140,023         1.34   $ 171,899         1.28
  

 

 

      

 

 

    

At September 30, 2015, advances amounting to $6.5 million are callable by the FHLB prior to maturity.

As of September 30, 2015, 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, 2015 or December 31, 2014. 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, 2015, the Company pledged multi-family and commercial real estate loans with carrying values totaling $60.0 million and $183.2 million, respectively.

 

20


Table of Contents
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,
2015
     December 31,
2014
 
     (In thousands)  

Unadvanced portion of existing loans:

     

Construction

   $ 461,661       $ 315,206   

Home equity line of credit

     34,948         32,861   

Other lines and letters of credit

     166,957         119,352   

Commitments to originate:

     

One- to four-family

     20,438         20,641   

Commercial real estate

     67,127         46,260   

Construction

     171,964         116,215   

Commercial and industrial

     76,237         19,013   

Other loans

     1,235         785   
  

 

 

    

 

 

 

Total loan commitments outstanding

   $ 1,000,567       $ 670,333   
  

 

 

    

 

 

 

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.

Interest Rate Swaps

The Company is a party to interest rate derivatives that are not designated as hedging instruments. These derivatives relate to interest rate swaps that the Company enters into with commercial business customers to synthetically convert their loans from a variable rate to a fixed rate. The Company pays interest to the customer at a floating rate on the notional amount and receives interest from the customer at a fixed rate for the same notional amount. Concurrently, the Company enters into an offsetting interest rate swap with a third-party financial institution. In the offsetting swap, the Company pays the other financial institution interest at the same fixed rate on the same notional amount as the swap entered into with the customer, and receives interest from the financial institution for the same floating rate on the same notional amount. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating and probability of default. At September 30, 2015 and December 31, 2014, the Company had $1.4 million and $950,000, respectively, in cash pledged for collateral on its interest rate swap with the third-party financial institution.

 

21


Table of Contents

Summary information regarding these derivatives is presented below:

 

                    September 30, 2015     December 31, 2014  
     Maturity    Interest Rate Paid    Interest Rate Received    Notional
Amount
     Fair
Value
    Notional
Amount
     Fair
Value
 
(Dollars in thousands)  

Customer interest rate swap

   10/17/33    1 Mo. Libor + 175bp    Fixed (4.1052%)    $ 11,140       $ 1,119      $ 11,245       $ 932   

Third-party interest rate swap

   10/17/33    Fixed (4.1052%)    1 Mo. Libor + 175bp      11,140         (1,119     11,245         (932

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 $12.8 million and $12.2 million were outstanding at September 30, 2015 and December 31, 2014, respectively. The fair value of such commitments was a net asset of $106,000 and $123,000 at September 30, 2015 and December 31, 2014, 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 $14.9 million and $12.2 million were outstanding at September 30, 2015 and December 31, 2014, respectively. The fair value of such commitments was a net liability of $50,000 and $22,000 at September 30, 2015 and December 31, 2014, respectively.

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

 

     Assets      Liabilities  
     Balance Sheet
Location
   Fair
Value
     Balance Sheet
Location
   Fair
Value
 
     (In thousands)  

September 30, 2015

           

Derivative loan commitments

   Other assets    $ 107       Other liabilities    $ 1   

Forward loan sale commitments

   Other assets      1       Other liabilities      51   

Loan level interest rate swaps

   Other assets      1,119       Other liabilities      1,119   
     

 

 

       

 

 

 

Total

      $ 1,227          $ 1,171   
     

 

 

       

 

 

 

December 31, 2014

           

Derivative loan commitments

   Other assets    $ 159       Other liabilities    $ 36   

Forward loan sale commitments

   Other assets      11       Other liabilities      33   

Loan level interest rate swaps

   Other assets      932       Other liabilities      932   
     

 

 

       

 

 

 

Total

      $ 1,102          $ 1,001   
     

 

 

       

 

 

 

 

22


Table of Contents

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

 

          Three Months Ended September 30,     Nine Months Ended September 30,  

Derivative Instrument

  

Location of Gain (Loss)

   2015     2014     2015     2014  
          (In thousands)  

Derivative loan commitments

   Mortgage banking gains, net    $ 69      $ (96   $ (17   $ 45   

Forward loan sale commitments

   Mortgage banking gains, net      (278     69        (28     (40
     

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ (209   $ (27   $ (45   $ 5   
     

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended September 30, 2015, the Company recognized net mortgage banking gains of $38,000, consisting of $247,000 in net gains on sale of loans and $209,000 in net derivative mortgage banking losses. 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 for the three months ended September 30, 2014. For the nine months ended September 30, 2015, the Company recognized net mortgage banking gains of $416,000, consisting of $461,000 in net gains on sale of loans and $45,000 in net derivative mortgage banking losses. 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 for the nine months ended September 30, 2014.

Other Commitments

The Company has a contract with its core data processing provider through December 2017 with an outstanding commitment of $5.0 million as of September 30, 2015, with total annual payments of $2.2 million. As of September 30, 2015, the Company had outstanding commitments totaling $453,000 for the construction of two new branches located in Brookline and Dorchester, Massachusetts.

 

9. FAIR VALUES OF ASSETS AND LIABILITIES

Determination of Fair Value

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

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

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.

Certificates of deposit — Fair values of certificates of deposit are estimated using discounted cash flow analyses based on current market rates for similar types of deposits.

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, U.S. treasury securities, municipal bonds and mortgage-backed securities are determined by pricing models that consider standard input factors such as observable market data, benchmark yields, reported trades, broker/dealer quotes, credit spreads, benchmark securities, as well as new issue data, monthly payment information, and collateral performance, among others (Level 2).

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.

 

23


Table of Contents

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. Derivative loan commitments also include the fair values of respective servicing rights. 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.

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, 2015

           

Assets:

           

Debt securities

   $ —         $ 89,943       $ —         $ 89,943   

Marketable equity securities

     61,082         —           —           61,082   

Derivative loan commitments

     —           —           107         107   

Forward loan sale commitments

     —           —           1         1   

Loan level interest rate swaps

     —           —           1,119         1,119   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 61,082       $ 89,943       $ 1,227       $ 152,252   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative loan commitments

   $ —         $ —         $ 1       $ 1   

Forward loan sale commitments

     —           —           51         51   

Loan level interest rate swaps

     —           —           1,119         1,119   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —         $ —         $ 1,171       $ 1,171   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           

Assets:

           

Debt securities

   $ —         $ 125,051       $ —         $ 125,051   

Marketable equity securities

     78,470         —           —           78,470   

Derivative loan commitments

     —           —           159         159   

Forward loan sale commitments

     —           —           11         11   

Loan level interest rate swaps

     —           —           932         932   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 78,470       $ 125,051       $ 1,102       $ 204,623   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative loan commitments

   $ —         $ —         $ 36       $ 36   

Forward loan sale commitments

     —           —           33         33   

Loan level interest rate swaps

     —           —           932         932   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —         $ —         $ 1,001       $ 1,001   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

For the nine months ended September 30, 2015 and 2014, 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,  
     2015      2014      2015      2014  
     (In thousands)  

Derivative loan commitments and forward sale commitments, net:

           

Beginning balance

   $ 265       $ 120       $ 101       $ 88   

Total realized and unrealized losses included in net income

     (209      (27      (45      5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 56       $ 93       $ 56       $ 93   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total unrealized gain relating to instruments still held at period end

   $ 56       $ 93       $ 56       $ 93   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2015      Three Months Ended
September 30, 2015
    Nine Months Ended
September 30, 2015
 
     Level 1      Level 2      Level 3      Gains (Losses)     Gains (Losses)  
     (In thousands)  

Impaired loans

   $ —         $ —         $ 23,284       $ (28   $ (2,315

Foreclosed real estate

     —           —           600         —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ —         $ —         $ 23,884       $ (28   $ (2,315
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     December 31, 2014      Three Months Ended
September 30, 2014
    Nine Months Ended
September 30, 2014
 
     Level 1      Level 2      Level 3      Gains (Losses)     Gains (Losses)  
     (In thousands)  

Impaired loans

   $ —         $ —         $ 13,664       $ (82   $ (65

Foreclosed real estate

     —           —           1,046         —          (78
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ —         $ —         $ 14,710       $ (82   $ (143
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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.

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.

 

25


Table of Contents
     Carrying
Amount
     Fair Value  
        Level 1      Level 2      Level 3      Total  
     (In thousands)  

September 30, 2015

              

Financial assets:

              

Cash and due from banks

   $ 98,038       $ 98,038       $ —         $ —         $ 98,038   

Certificates of deposit

     95,008         —           95,159         —           95,159   

Securities available for sale

     151,025         61,082         89,943         —           151,025   

Federal Home Loan Bank stock

     12,725         —           —           12,725         12,725   

Loans and loans held for sale, net

     2,893,950         —           —           2,909,609         2,909,609   

Accrued interest receivable

     8,239         —           —           8,239         8,239   

Financial liabilities:

              

Deposits

     2,630,681         —           —           2,634,935         2,634,935   

Borrowings

     140,023         —           141,060         —           141,060   

Accrued interest payable

     806         —           —           806         806   

On-balance sheet derivative financial instruments:

              

Assets:

              

Derivative loan commitments

     107         —           —           107         107   

Forward loan sale commitments

     1         —           —           1         1   

Loan level interest rate swaps

     1,119         —           —           1,119         1,119   

Liabilities:

              

Derivative loan commitments

     1         —           —           1         1   

Forward loan sale commitments

     51         —           —           51         51   

Loan level interest rate swaps

     1,119         —           —           1,119         1,119   

December 31, 2014

              

Financial assets:

              

Cash and due from banks

   $ 205,732       $ 205,732       $ —         $ —         $ 205,732   

Certificates of deposit

     85,000         —           85,096         —           85,096   

Securities available for sale

     203,521         78,470         125,051         —           203,521   

Federal Home Loan Bank stock

     12,725         —           —           12,725         12,725   

Loans and loans held for sale, net

     2,649,878         —           —           2,666,049         2,666,049   

Accrued interest receivable

     7,748         —           —           7,748         7,748   

Financial liabilities:

              

Deposits

     2,503,935         —           —           2,507,982         2,507,982   

Borrowings

     171,899         —           172,074         —           172,074   

Accrued interest payable

     891         —           —           891         891   

On-balance sheet derivative financial instruments:

              

Assets:

              

Derivative loan commitments

     159         —           —           159         159   

Forward loan sale commitments

     11         —           —           11         11   

Loan level interest rate swaps

     932         —           —           932         932   

Liabilities:

              

Derivative loan commitments

     36         —           —           36         36   

Forward loan sale commitments

     33         —           —           33         33   

Loan level interest rate swaps

     932         —           —           932         932   

 

26


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 the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, 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 the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. The Company’s ability to predict results or actual effect of future plans 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 areas, that are worse than expected;

 

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

 

    competition among depository and other financial institutions;

 

    changes in consumer spending, borrowing and savings habits;

 

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

 

    changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, including as a result of Basel III;

 

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

 

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

 

    inability of third-party providers to perform their obligation 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the Securities and Exchange Commission on March 13, 2015, 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 required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Critical Accounting Policies

A summary of significant accounting policies is described in Note 1 to the Consolidated Financial Statements included in the 2014 Annual Report on Form 10-K for the year ended December 31, 2014. 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.

 

27


Table of Contents

Comparison of Financial Condition at September 30, 2015 and December 31, 2014

Assets. Total assets increased $97.3 million, or 3.0%, to $3.376 billion at September 30, 2015 from $3.279 billion at December 31, 2014. Net loans increased $242.7 million, or 9.2%, to $2.892 billion at September 30, 2015 from $2.649 billion at December 31, 2014. Cash and due from banks decreased $107.7 million, or 52.3%, to $98.0 million at September 30, 2015 from $205.7 million at December 31, 2014. Securities available for sale decreased $52.5 million, or 25.8%, to $151.0 million at September 30, 2015 from $203.5 million at December 31, 2014.

Loan Portfolio Analysis. At September 30, 2015, net loans were $2.892 billion, or 85.7% of total assets. During the nine months ended September 30, 2015, net loans increased $242.7 million, or 9.2%. The increase was primarily due to increases of $128.6 million in commercial real estate loans, $118.5 million in construction loans and $34.8 million in commercial and industrial loans, partially offset by decreases of $23.6 million in multi-family loans and $9.9 million in one- to four-family loans. 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 and industrial loans are assigned a risk rating based on pre-determined criteria and levels of risk. The risk rating is monitored annually for most loans; however, it may change during the life of the loan as appropriate.

Internal and independent third-party loan reviews vary by loan type, as well as the 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.

Delinquencies. Total past due loans increased $4.9 million, or 20.1%, to $29.5 million at September 30, 2015 from $24.6 million at December 31, 2014, reflecting an increase of $10.0 million in loans 90 days or greater past due, partially offset by a decrease of $5.0 million in loans 30 to 89 days past due. The increase in loans 90 days or more past due was primarily due to a $14.0 million construction loan placed on non-accrual status as reduced by a $2.3 million charge-off during the second quarter of 2015. At September 30, 2015, 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 consecutive 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 (“TDRs”) on non-accrual status, and real estate and other loan collateral acquired through foreclosure and repossession. Loans 90 days or greater past due may remain on an accrual basis if adequately collateralized and in the process of collection. At September 30, 2015, 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 recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction totaled $1.4 million at September 30, 2015.

 

28


Table of Contents

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

 

     September 30,
2015
    December 31,
2014
 
     (Dollars in thousands)  

Loans accounted for on a non-accrual basis:

    

Real estate loans:

    

Residential real estate:

    

One- to four-family

   $ 9,717      $ 14,649   

Home equity lines of credit

     1,837        2,277   

Commercial real estate

     4,983        5,311   

Construction

     17,502        8,417   
  

 

 

   

 

 

 

Total real estate loans

     34,039        30,654   

Commercial and industrial

     1,101        855   
  

 

 

   

 

 

 

Total non-accrual loans (1)

     35,140        31,509   

Foreclosed assets

     600        1,046   
  

 

 

   

 

 

 

Total non-performing assets

   $ 35,740      $ 32,555   
  

 

 

   

 

 

 

Non-accrual loans to total loans

     1.20     1.18

Non-accrual loans to total assets

     1.04     0.96

Non-performing assets to total assets

     1.06     0.99

 

(1) TDRs on accrual status not included above totaled $13.9 million at September 30, 2015 and $14.5 million and December 31, 2014.

Non-performing assets increased $3.2 million or 9.8%, to $35.7 million, or 1.06% of total assets, at September 30, 2015, from $32.6 million, or 0.99% of total assets, at December 31, 2014. Interest income that would have been recorded for the nine months ended September 30, 2015 had non-accruing loans been current according to their original terms amounted to $695,000. Construction loans, including related foreclosed real estate, represented approximately 50.6% of our non-performing assets at September 30, 2015.

Non-accrual loans increased $3.6 million, or 11.5%, to $35.1 million, or 1.20% of total loans outstanding at September 30, 2015, from $31.5 million, or 1.18% of total loans outstanding at December 31, 2014, primarily due to an increase of $9.1 million in non-accrual construction loans, partially offset by a decrease of $4.9 million in non-accrual one- to four-family loans. The increase in non-accrual construction loans during the nine months ended September 30, 2015 was primarily due to a $14.0 million construction loan placed on non-accrual status as reduced by a $2.3 million charge-off during the second quarter of 2015. Other non-accrual construction loans were reduced by $5.0 million during the nine months ended September 30, 2015 due to collection efforts. The decrease in non-accrual one- to four-family loans during the nine months ended September 30, 2015 resulted from continued account monitoring, collection and workout efforts.

The $14.0 million non-accrual construction loan relationship is collateralized by a multi-family development project located in the City of Boston comprised of a substantially completed 12 unit apartment building and a proposed 16 unit apartment building with a shared parking garage. The loan relationship, which matured on May 1, 2015, was originated in 2008 and modified with a new borrower in 2012 for a total exposure of $18.7 million if it had been fully advanced. The loan relationship is also collateralized by other properties in the City of Boston. All of the collateral properties were appraised in 2014 or 2015 based on “as is” values, with the $2.3 million charge-off based on these appraisals. We are moving toward resolution and have commenced foreclosure proceedings on the other properties with foreclosure sales scheduled for November 2015.

Achieving and maintaining a moderate risk profile by aggressively managing troubled assets has been and will continue to be a primary focus for us. At September 30, 2015, our allowance for loan losses was $32.6 million, or 1.11% of total loans and 92.7% of non-accrual loans, compared to $28.5 million, or 1.06% of total loans and 90.4% of non-performing loans at December 31, 2014. Included in our allowance at September 30, 2015 was a general component of $32.4 million, which is based upon our evaluation of various factors relating to loans not deemed to be impaired. We continue to believe our level of non-performing loans and assets, which declined significantly during the past two years, is manageable and we believe that we have sufficient capital and human resources to manage the collection of our non-performing assets in an orderly fashion.

Foreclosed real estate decreased $446,000, or 42.6%, to $600,000 at September 30, 2015 from $1.0 million at December 31, 2014. At September 30, 2015, foreclosed real estate consisted of a townhouse construction development project. 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.

 

29


Table of Contents

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 troubled debt restructure if, for reasons related to the debtor’s financial difficulties, a concession is granted to the debtor that would not otherwise be considered.

Total TDRs decreased $4.2 million, or 18.4%, to $18.7 million at September 30, 2015 from $22.9 million at December 31, 2014, consisting primarily of decreases of $549,000 in TDRs on accrual status and $3.7 million in TDRs on non-accrual status. The decrease of $4.2 million in non-accrual construction TDRs during the nine months ended September 30, 2015 was primarily due to a principal paydown resulting from the sale of a portion of a construction loan relationship. Modifications with TDRs consist of rate reductions, loan term extensions or provisions for interest-only payments for specified periods up to 12 months. We have generally been successful with the concessions we have offered to borrowers to date. We generally return TDRs to accrual status when they have sustained payments for six consecutive months based on the restructured terms and future payments are reasonably assured. Interest income that would have been recorded for the nine months ended September 30, 2015 had TDRs been current according to their original terms amounted to $39,000. We recognized $660,000 of interest income on TDRs for the nine months ended September 30, 2015.

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

Other potential problem loans are those loans that are currently performing, but where known information about possible credit problems of the borrowers causes us to have concerns as to the ability of such borrowers to comply with contractual loan repayment terms. These other potential problem loans are generally loans classified as “substandard” or 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, 2015, other potential problem loans totaled $9.1 million, including $2.1 million of construction loans and $7.0 million of multi-family loans.

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,  
     2015     2014  
     (Dollars in thousands)  

Beginning balance

   $ 28,469      $ 25,335   

Provision for loan losses

     6,123        1,484   

Charge offs:

    

One- to four-family

     (166     (54

Home equity lines of credit

     —          (5

Commercial real estate

     —          (48

Construction

     (2,287     (71

Commercial and industrial

     (33     —     

Consumer

     (188     (126
  

 

 

   

 

 

 

Total charge-offs

     (2,674     (304
  

 

 

   

 

 

 

Recoveries:

    

One- to four-family

     8        67   

Commercial real estate

     18        —     

Construction

     565        78   

Commercial and industrial

     1        7   

Consumer

     75        72   
  

 

 

   

 

 

 

Total recoveries

     667        224   
  

 

 

   

 

 

 

Net charge-offs

     (2,007     (80
  

 

 

   

 

 

 

Ending balance

   $ 32,585      $ 26,739   
  

 

 

   

 

 

 

Allowance to non-accrual loans

     92.73     95.09

Allowance to total loans outstanding

     1.11     1.07

Net charge-offs to average loans outstanding

     0.10     0.00

 

30


Table of Contents

Our provision for loan losses was $6.1 million for the nine months ended September 30, 2015 compared to $1.5 million for the nine months ended September 30, 2014. The increase was primarily due to commercial real estate and construction loan growth and a $2.3 million provision and charge-off for a construction loan relationship during the second quarter of 2015. The changes in the provision for loan losses were also based on management’s assessment of loan portfolio growth and composition changes, historical charge-off trends, an ongoing evaluation of credit quality and current economic conditions. The allowance for loan losses was $32.6 million or 1.11% of total loans outstanding at September 30, 2015, compared to $26.7 million or 1.07% of total loans outstanding at September 30, 2014. The increase in the allowance for loan losses was primarily due to increases in the commercial real estate, construction and commercial and industrial loan categories, as such loans have higher inherent credit risk than loans in our residential real estate loan categories. 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, 2015     December 31, 2014  
     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

   $ 1,411         4.3     15.7   $ 1,849         6.5     17.5

Multi-family

     3,275         10.1        13.2        3,635         12.8        15.3   

Home equity lines of credit

     147         0.5        1.7        100         0.4        1.9   

Commercial real estate

     14,436         44.3        43.5        13,000         45.6        42.8   

Construction

     7,850         24.1        13.1        5,155         18.1        9.9   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total real estate loans

     27,119         83.3        87.2        23,739         83.4        87.4   

Commercial and industrial

     5,289         16.2        12.5        4,633         16.3        12.3   

Consumer

     177         0.5        0.3        97         0.3        0.3   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total loans

   $ 32,585         100.0     100.0   $ 28,469         100.0     100.0
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

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

We had impaired loans totaling $27.2 million and $32.1 million as of September 30, 2015 and December 31, 2014, respectively. At September 30, 2015, impaired loans totaling $2.6 million had a valuation allowance of $217,000. Impaired loans totaling $3.3 million had a valuation allowance of $290,000 at December 31, 2014. Our average investment in impaired loans was $30.5 million and $21.7 million for nine months ended September 30, 2015 and 2014, 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.

We measure impairment on residential and commercial loans 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 that were collateral-dependent as of September 30, 2015 and considered any probable loss in determining the allowance for loan losses.

For residential loans measured for impairment based on the collateral value, we generally 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.

 

31


Table of Contents
    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 generally 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 consecutive months. The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. Loan losses are charged against the allowance when we believe the uncollectability of a loan balance is confirmed; for collateral-dependent loans, generally when appraised values (as adjusted values, if applicable) less estimated costs to sell, are less than our carrying values.

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles in the United States of America, there can be no assurance that regulators, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

Securities Portfolio. At September 30, 2015, our securities portfolio was $151.0 million, or 4.5% of total assets. At that date, $31.6 million, or 20.9% of the securities portfolio, was invested in corporate bonds. The amortized cost and fair value of corporate bonds in the financial services sector was $27.4 million and $27.6 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 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, 2015, we had no investments in a single company or entity that had an aggregate book value in excess of 10% of our stockholders’ 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.

As of September 30, 2015, the net unrealized gain on the total debt securities portfolio was $831,000. The most significant market valuation decrease related to any one debt security within the portfolio at September 30, 2015 was $20,000. We have no indication that the issuer will be unable to continue to service the obligations, and management does intend not 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.

 

32


Table of Contents

As of September 30, 2015, the net unrealized loss on the total marketable equity securities portfolio was $5.7 million. At September 30, 2015, 78 marketable equity securities with a fair value of $37.5 million had unrealized losses totaling $9.2 million, or an aggregate depreciation of 19.8% from the Company’s cost basis. These marketable equity securities consisted of 60 securities with a fair value of $29.9 million and an unrealized loss of $4.7 million for less than 12 months and 18 securities with a fair value of $7.6 million and an unrealized loss of $4.5 million for 12 months or longer. The marketable equity securities in an unrealized loss position for 12 months or longer were comprised of one security in the financial services sector with a fair value of $209,000 and an unrealized loss of $128,000, 12 securities in the industry and manufacturing sector with a fair value of $4.0 million and an unrealized loss of $3.4 million, three marketable equity securities in the consumer products and services sector with a fair value of $1.4 million and an unrealized of $692,000, one security in the technology sector with a fair value of $870,000 and an unrealized loss of $252,000 and one money market mutual fund with a fair value of $1.0 million and an unrealized loss of $41,000.

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.

Although some issuers have shown declines in earnings, no 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. The unrealized losses in the industry and manufacturing sector consisted primarily of commodity based companies that experienced significant declines in commodity prices, particularly during the three months ended September 30, 2015. Commodity prices have subsequently improved and somewhat stabilized. In addition, volatility in the equities markets since August 2015 resulted in significant short-term declines in market prices as of September 30, 2015. Subsequently, the net unrealized loss on our marketable equity securities portfolio has improved by approximately 20%. One marketable equity security in the industry and manufacturing sector with a fair value of $164,000 and an unrealized loss of $336,000 had an unrealized loss in excess of 25% of cost for a period greater than twelve months. Based on management’s evaluation for other-than-temporary impairment at September 30, 2015, the issuer’s profitability appears to be improving with earnings per share projected by investment analysts to increase over the next 12 months along with a strengthening of its balance sheet. In addition, the issuer’s market price per share subsequently increased 31% in early October and is projected by investment analysts to increase 52% within the next 12 months.

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, which include brokered certificates of deposit. We consider demand, NOW, money market, and regular savings and other deposits to be core deposits. Total deposits increased $126.7 million, or 5.1%, to $2.631 billion at September 30, 2015 from $2.504 billion at December 31, 2014. Our continuing focus on the acquisition and expansion of core deposit relationships resulted in net growth in core deposits of $29.4 million, or 1.6%, to $1.825 billion, or 69.4% of total deposits. For further information about our deposits, refer to Note 6 Deposits in Notes to the Unaudited Consolidated Financial Statements within this report.

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

 

     Nine Months Ended September 30,  
     2015     2014  
     Average
Balance
     Average
Rate
    Percent
of Total
Deposits
    Average
Balance
     Average
Rate
    Percent
of Total
Deposits
 
     (Dollars in thousands)  

Demand deposits

   $ 323,264         —       13.4   $ 305,732         —       12.0

NOW deposits

     291,864         0.57        11.7        238,087         0.58        12.1   

Money market deposits

     947,368         0.83        33.5        864,656         0.89        37.2   

Regular savings and other deposits

     280,481         0.17        10.8        265,932         0.26        11.2   

Certificates of deposit

     717,126         1.15        30.6        675,388         1.20        27.5   
  

 

 

      

 

 

   

 

 

      

 

 

 

Total

   $ 2,560,103         0.71     100.0   $ 2,349,795         0.76     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. At September 30, 2015 and December 31, 2014, Federal Home Loan Bank of Boston advances totaled $140.0 million and $171.9 million, respectively, with a weighted average rate of 1.34% and 1.28%, respectively. Total borrowings decreased $31.9 million, or 18.5%, during the nine months ended September 30, 2015, reflecting maturing advances with the Federal Home Loan Bank of Boston totaling $29.5 million with original terms ranging from one to five years and fixed interest rates ranging from 0.33% to 2.86%. At September 30, 2015, 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,  
     2015     2014  
     (Dollars in thousands)  

Balance outstanding at end of period

   $ 140,023      $ 172,687   

Average amount outstanding during the period

   $ 144,662      $ 195,002   

Weighted average interest rate during the period

     1.36     1.31

Maximum outstanding at any month end

   $ 156,637      $ 211,340   

Weighted average interest rate at end of period

     1.34     1.28

Stockholders’ Equity. Total stockholders’ equity increased $5.4 million, or 0.9%, to $583.1 million at September 30, 2015, from $577.7 million at December 31, 2014. The increase for the nine months ended September 30, 2015 was due primarily to $17.7 million in net income and $2.1 million related to stock-based compensation plans, partially offset by decreases of $6.3 million in accumulated other comprehensive income reflecting a decrease in the fair value of available-for-sale securities, a $6.6 million reduction in additional paid-in capital resulting from the Company’s repurchase of 522,604 shares of common stock and an initial quarterly dividend declaration of $0.03 per share totaling $1.6 million. Stockholders’ equity to assets was 17.27% at September 30, 2015, compared to 17.62% at December 31, 2014. Book value per share increased to $10.71 at September 30, 2015 from $10.56 at December 31, 2014. Tangible book value per share increased to $10.46 at September 30, 2015 from $10.31 at December 31, 2014. At September 30, 2015, 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” below.

 

33


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,  
     2015     2014  
     Average
Balance
     Interest (1)     Yield/
Cost (1)(6)
    Average
Balance
     Interest (1)     Yield/
Cost (1)(6)
 
     (Dollars in thousands)  

Assets:

              

Interest-earning assets:

              

Loans (2)

   $ 2,813,703       $ 30,967        4.37   $ 2,463,012       $ 27,343        4.40

Securities and certificates of deposits

     262,874         1,150        1.74        179,407         1,144        2.53   

Other interest-earning assets (3)

     171,454         207        0.48        383,152         258        0.27   
  

 

 

    

 

 

     

 

 

    

 

 

   

Total interest-earning assets

     3,248,031         32,324        3.95        3,025,571         28,745        3.77   
     

 

 

        

 

 

   

Noninterest-earning assets

     117,024             119,532        
  

 

 

        

 

 

      

Total assets

   $ 3,365,055           $ 3,145,103        
  

 

 

        

 

 

      

Liabilities and stockholders’ equity:

              

Interest-bearing liabilities:

              

NOW deposits

   $ 296,829         416        0.56      $ 260,461         394        0.60   

Money market deposits

     921,425         1,909        0.82        886,068         1,986        0.89   

Regular savings and other deposits

     283,130         102        0.14        268,078         174        0.26   

Certificates of deposit

     759,682         2,216        1.16        669,629         1,959        1.16   
  

 

 

    

 

 

     

 

 

    

 

 

   

Total interest-bearing deposits

     2,261,066         4,643        0.81        2,084,236         4,513        0.86   

Borrowings

     140,297         482        1.36        196,537         632        1.28   
  

 

 

    

 

 

     

 

 

    

 

 

   

Total interest-bearing liabilities

     2,401,363         5,125        0.85        2,280,773         5,145        0.89   
     

 

 

        

 

 

   

Noninterest-bearing demand deposits

     350,963             365,112        

Other noninterest-bearing liabilities

     22,572             19,943        
  

 

 

        

 

 

      

Total liabilities

     2,774,898             2,665,828        

Total stockholders’ equity

     590,157             479,275        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 3,365,055           $ 3,145,103        
  

 

 

        

 

 

      

Net interest-earning assets

   $ 846,668           $ 744,798        
  

 

 

        

 

 

      

Fully tax-equivalent net interest income

        27,199             23,600     

Less: tax-equivalent adjustments

        (986          (880  
     

 

 

        

 

 

   

Net interest income

      $ 26,213           $ 22,720     
     

 

 

        

 

 

   

Interest rate spread (1)(4)

          3.10          2.88

Net interest margin (1)(5)

          3.32          3.09

Average interest-earning assets to average interest-bearing liabilities

        135.26          132.66  

Supplemental Information:

              

Total deposits, including noninterest-bearing demand deposits

   $ 2,612,029       $ 4,643        0.71   $ 2,449,348       $ 4,513        0.73

Total deposits and borrowings, including noninterest-bearing demand deposits

   $ 2,752,326       $ 5,125        0.74   $ 2,645,885       $ 5,145        0.77

(footnotes begin on following page)

 

34


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, 2015 and 2014, yields on loans before tax-equivalent adjustments were 4.25% and 4.29%, respectively, yields on securities and certificates of deposit before tax-equivalent adjustments were 1.48% and 2.19%, respectively, and yields on total interest-earning assets before tax-equivalent adjustments were 3.83% and 3.65%, respectively. Interest rate spread before tax-equivalent adjustments for the three months ended September 30, 2015 and 2014 was 2.98% and 2.76%, respectively, while net interest margin before tax-equivalent adjustments for the three months ended September 30, 2015 and 2014 was 3.20% and 2.98%, respectively.
(2) Loans on non-accrual status are included in average balances.
(3) Includes Federal Home Loan Bank stock and associated dividends.
(4) Interest rate spread represents the difference between the tax-equivalent yield on interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income (tax-equivalent basis) divided by average interest-earning assets.
(6) Annualized.

 

35


Table of Contents
     Nine Months Ended September 30,  
     2015     2014  
     Average
Balance
     Interest (1)     Yield/
Cost (1)(6)
    Average
Balance
     Interest (1)     Yield/
Cost (1)(6)
 
     (Dollars in thousands)  

Assets:

              

Interest-earning assets:

              

Loans (2)

   $ 2,736,720       $ 89,432        4.37   $ 2,380,840       $ 78,106        4.39

Securities and certificates of deposits

     276,976         3,618        1.75        185,867         3,597        2.59   

Other interest-earning assets (3)

     185,297         565        0.41        211,801         486        0.31   
  

 

 

    

 

 

     

 

 

    

 

 

   

Total interest-earning assets

     3,198,993         93,615        3.91        2,778,508         82,189        3.95   
     

 

 

        

 

 

   

Noninterest-earning assets

     114,196             115,846        
  

 

 

        

 

 

      

Total assets

   $ 3,313,189           $ 2,894,354        
  

 

 

        

 

 

      

Liabilities and stockholders’ equity:

              

Interest-bearing liabilities:

              

NOW deposits

   $ 291,864         1,254        0.57      $ 238,087         1,027        0.58   

Money market deposits

     947,368         5,901        0.83        864,656         5,730        0.89   

Regular savings and other deposits

     280,481         357        0.17        265,932         515        0.26   

Certificates of deposit

     717,126         6,167        1.15        675,388         6,053        1.20   
  

 

 

    

 

 

     

 

 

    

 

 

   

Total interest-bearing deposits

     2,236,839         13,679        0.82        2,044,063         13,325        0.87   

Borrowings

     144,662         1,472        1.36        195,002         1,908        1.31   
  

 

 

    

 

 

     

 

 

    

 

 

   

Total interest-bearing liabilities

     2,381,501         15,151        0.85        2,239,065         15,233        0.91   
     

 

 

        

 

 

   

Noninterest-bearing demand deposits

     323,264             305,732        

Other noninterest-bearing liabilities

     22,152             19,058        
  

 

 

        

 

 

      

Total liabilities

     2,726,917             2,563,855        

Total stockholders’ equity

     586,272             330,499        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 3,313,189           $ 2,894,354        
  

 

 

        

 

 

      

Net interest-earning assets

   $ 817,492           $ 539,443        
  

 

 

        

 

 

      

Fully tax-equivalent net interest income

        78,464             66,956     

Less: tax-equivalent adjustments

        (2,912          (2,395  
     

 

 

        

 

 

   

Net interest income

      $ 75,552           $ 64,561     
     

 

 

        

 

 

   

Interest rate spread (1)(4)

          3.06          3.04

Net interest margin (1)(5)

          3.28          3.22

Average interest-earning assets to average interest-bearing liabilities

        134.33          124.09  

Supplemental Information:

              

Total deposits, including noninterest-bearing demand deposits

   $ 2,560,103       $ 13,679        0.71   $ 2,349,795       $ 13,325        0.76

Total deposits and borrowings, including noninterest-bearing demand deposits

   $ 2,704,765       $ 15,151        0.75   $ 2,544,797       $ 15,233        0.80

(footnotes begin on following page)

 

36


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 nine months ended September 30, 2015 and 2014, yields on loans before tax-equivalent adjustments were 4.25% and 4.28%, respectively, yields on securities and certificates of deposit before tax-equivalent adjustments were 1.50% and 2.26%, respectively, and yields on total interest-earning assets before tax-equivalent adjustments were 3.79% and 3.84%, respectively. Interest rate spread before tax-equivalent adjustments for the nine months ended September 30, 2015 and 2014 was 2.94% and 2.93%, respectively, while net interest margin before tax-equivalent adjustments for the nine months ended September 30, 2015 and 2014 was 3.16% and 3.11%, respectively.
(2) Loans on non-accrual status are included in average balances.
(3) Includes Federal Home Loan Bank stock and associated dividends.
(4) Interest rate spread represents the difference between the tax-equivalent yield on interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income (tax-equivalent basis) divided by average interest-earning assets.
(6) Annualized.

Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our fully tax-equivalent net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.

 

     Three Months Ended September 30,
2015 Compared to 2014
Increase (Decrease) Due to
    Nine Months Ended September 30,
2015 Compared to 2014

Increase (Decrease) Due to
 
     Volume     Rate     Net     Volume     Rate     Net  
     (In thousands)  

Interest income:

            

Loans

   $ 3,862      $ (238   $ 3,624      $ 11,631      $ (305   $ 11,326   

Securities and certificates of deposits

     432        (426     6        1,418        (1,397     21   

Other interest-earning assets

     (190     139        (51     (66     145        79   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     4,104        (525     3,579        12,983        (1,557     11,426   

Interest expense:

            

Deposits

     402        (272     130        1,151        (797     354   

Borrowings

     (191     41        (150     (510     74        (436
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     211        (231     (20     641        (723     (82
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in fully tax-equivalent net interest income

   $ 3,893      $ (294   $ 3,599      $ 12,342      $ (834   $ 11,508   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

37


Table of Contents

Results of Operations for the Three and Nine Months Ended September 30, 2015 and 2014

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

Net income information is as follows:

 

     Three Months Ended September 30,     Change     Nine Months Ended September 30,     Change  
     2015     2014     Amount     Percent     2015     2014     Amount     Percent  
     (Dollars in thousands)  

Net interest income

   $ 26,213      $ 22,720      $ 3,493        15.4   $ 75,552      $ 64,561      $ 10,991        17.0

Provision for loan losses

     2,412        655        1,757        268.2        6,123        1,484        4,639        312.6   

Non-interest income

     2,797        3,687        (890     (24.1     10,366        11,708        (1,342     (11.5

Non-interest expenses

     18,089        16,707        1,382        8.3        53,504        50,409        3,095        6.1   

Net income

     5,742        6,015        (273     (4.5     17,732        16,290        1,442        8.9   

Return on average assets

     0.68     0.76     (0.08 )%      (10.5     0.71     0.75     (0.04 )%      (5.3

Return on average equity

     3.89     5.02     (1.13 )%      (22.5     4.03     6.57     (2.54 )%      (38.7

Net Interest Income. Net interest income increased $3.5 million, or 15.4%, to $26.2 million for the three months ended September 30, 2015 from $22.7 million for the three months ended September 30, 2014. The net interest rate spread and net interest margin were 2.98% and 3.20%, respectively, for the three months ended September 30, 2015 compared to 2.76% and 2.98%, respectively, for the three months ended September 30, 2014. For the nine months ended September 30, 2015, net interest income increased $11.0 million, or 17.0%, to $75.6 million from $64.6 million for the nine months ended September 30, 2014. The net interest rate spread and net interest margin were 2.94% and 3.16%, respectively, for the nine months ended September 30, 2015 compared to 2.93% and 3.11%, respectively, for the nine months ended September 30, 2014. The increases in net interest income were due primarily to loan growth along with declines in the cost of funds, partially offset by deposit growth for the three and nine months ended September 30, 2015 compared to the same periods in 2014.

The yield on interest-earning assets increased 18 basis points to 3.83% for the three months ended September 30, 2015 compared to 3.65% for the three months ended September 30, 2014, while the cost of funds declined three basis points to 0.74% for the three months ended September 30, 2015 compared to 0.77% for the three months ended September 30, 2014. The increase in interest income on loans was primarily due to growth in the Company’s average loan balances of $350.7 million, or 14.2%, to $2.814 billion, partially offset by a decrease in the yield on loans of four basis points to 4.25%. The increase in interest expense on deposits was primarily due to the growth in average total deposits of $162.7 million, or 6.6%, to $2.612 billion, partially offset by the decline in the cost of average total deposits of two basis points to 0.71% for the three months ended September 30, 2015 compared to 0.73% for the three months ended September 30, 2014. The decrease in interest expense on borrowings was primarily due to the reduction in average borrowings of $56.2 million, or 28.6%, to $140.3 million, partially offset by an increase in the cost of average borrowings of eight basis points to 1.36% for the three months ended September 30, 2015 compared to 1.28% for the three months ended September 3014.

The yield on interest-earning assets declined five basis points to 3.79% for the nine months ended September 30, 2015 compared to 3.84% for the nine months ended September 30, 2014, while the cost of funds declined five basis points to 0.75% for the nine months ended September 30, 2015 compared to 0.80% for the nine months ended September 30, 2014. The increase in interest income on loans was primarily due to growth in the Company’s average loan balances of $355.9 million, or 14.9%, to $2.737 billion, partially offset by a decrease in the yield on loans of three basis points to 4.25%. The increase in interest expense on deposits was primarily due to growth in average total deposits of $210.3 million, or 9.0%, to $2.560 billion, partially offset by the decline in the cost of average total deposits of five basis points to 0.71% for the nine months ended September 30, 2015 compared to 0.76% for the nine months ended September 30, 2014. The decrease in interest expense on borrowings was primarily due to the reduction in average borrowings of $50.3 million, or 25.8%, to $144.7 million, partially offset by an increase in the cost of average borrowings of five basis points to 1.36% for the nine months ended September 30, 2015 compared to 1.31% for the nine months ended September 3014.

Provision for Loan Losses. Our provision for loan losses was $2.4 million for the three months ended September 30, 2015 compared to $655,000 for the three months ended September 30, 2014. For the nine months ended September 30, 2015, the provision for loan losses was $6.1 million compared to $1.5 million for the nine months ended September 30, 2014. The increases were primarily due to commercial real estate and construction loan growth in the three months and nine months ended September 30, 2015 and a $2.3 million provision and charge-off for a construction loan relationship during the second quarter of 2015. For further discussion of the changes in the provision and allowance for loan losses, refer to “-Allowance for Loan Losses” above.

 

38


Table of Contents

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

 

     Three Months Ended September 30,      Change     Nine Months Ended September 30,      Change  
     2015      2014      Amount     Percent     2015      2014      Amount     Percent  
     (Dollars in thousands)  

Customer service fees

   $ 2,049       $ 1,880       $ 169        9.0   $ 5,809       $ 5,539       $ 270        4.9

Loan fees

     318         148         170        114.9        714         467         247        52.9   

Mortgage banking gains, net

     38         19         19        100.0        416         406         10        2.5   

Gain on sales of securities, net

     45         1,346         (1,301     (96.7     2,489         4,411         (1,922     (43.6

Income from bank-owned life insurance

     340         294         46        15.6        930         868         62        7.1   

Other income

     7         —           7        —          8         17         (9     (52.9
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total non-interest income

   $ 2,797       $ 3,687       $ (890     (24.1 )%    $ 10,366       $ 11,708       $ (1,342     (11.5 )% 
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

The increases in customer service fees were primarily due to interchange fees earned as a result of the increasing number and activity in demand deposit accounts. The increases in loan fees reflect loan growth during the current year. The decreases in gain on sales of securities, net, reflected a decrease in the number of securities sold during the three and nine months ended September 30, 2015 compared to the same periods in 2014.

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

 

     Three Months Ended September 30,     Change     Nine Months Ended September 30,      Change  
     2015      2014     Amount     Percent     2015      2014      Amount     Percent  
     (Dollars in thousands)  

Salaries and employee benefits

   $ 11,235       $ 10,249      $ 986        9.6   $ 33,119       $ 31,067       $ 2,052        6.6

Occupancy and equipment

     2,406         2,252        154        6.8        7,394         7,029         365        5.2   

Data processing

     1,375         1,201        174        14.5        3,887         3,271         616        18.8   

Marketing and advertising

     766         769        (3     (0.4     2,555         2,264         291        12.9   

Professional services

     644         588        56        9.5        1,981         1,888         93        4.9   

Foreclosed real estate

     96         (47     143        304.3        125         163         (38     (23.3

Deposit insurance

     522         515        7        1.4        1,462         1,597         (135     (8.5

Other general and administrative

     1,045         1,180        (135     (11.4     2,981         3,130         (149     (4.8
  

 

 

    

 

 

   

 

 

     

 

 

    

 

 

    

 

 

   

Total non-interest expenses

   $ 18,089       $ 16,707      $ 1,382        8.3   $ 53,504       $ 50,409       $ 3,095        6.1
  

 

 

    

 

 

   

 

 

     

 

 

    

 

 

    

 

 

   

The increases in salaries and employee benefits expense were primarily due to employee compensation increases and staffing growth during the current year. The increases in occupancy and equipment include costs associated with the opening of the new branch in Dorchester. The increase in data processing expense for the nine months ended September 30, 2015, reflected a one-time cost reduction during the second quarter of 2014 along with a scheduled contractual increase and business growth during the current year. The increase in marketing and advertising expense reflected the Bank’s new and expanded advertising campaign in our Boston area market. The Company’s efficiency ratio was 62.45% for the quarter ended September 30, 2015 compared to 66.67% for the quarter ended September 30, 2014. For the nine months ended September 30, 2015, the efficiency ratio was 64.13% compared to 70.15% for the nine months ended September 30, 2014.

Income Tax Provision. We recorded a provision for income taxes of $2.8 million for the three months ended September 30, 2015, reflecting an effective tax rate of 32.5%, compared to $3.0 million, or a 33.5% effective tax rate, for the three months ended September 30, 2014. For the nine months ended September 30, 2015, the provision for income taxes amounted to $8.6 million, reflecting an effective tax rate of 32.6%, compared to $8.1 million, or a 33.2% effective tax rate, for the nine months ended September 30, 2014. The changes in the effective tax provision were 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.

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.

 

39


Table of Contents

Our most liquid assets are cash and due from banks, and certificates of deposit with other banks. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At September 30, 2015, cash and due from banks totaled $98.0 million and certificates of deposit totaled $95.0 million. In addition, at September 30, 2015, we had $275.0 million of available borrowing capacity with the Federal Home Loan Bank of Boston, including a $9.4 million line of credit. On September 30, 2015, we had $140.0 million of advances outstanding.

A significant use of our liquidity is the funding of loan originations. At September 30, 2015 and December 31, 2014, we had total loan commitments outstanding of $1.001 billion and $670.3 million, respectively. Historically, many of the commitments expire without being fully drawn; therefore the total amount of commitments does not necessarily represent future cash requirements. For further information, see Note 8 Commitments and Derivatives in the Notes to the Unaudited Consolidated Financial Statements, within this report.

Another significant use of our liquidity is the funding of deposit withdrawals. Certificates of deposit due within one year of September 30, 2015 totaled $453.2 million, or 56.3% 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. Meridian Bancorp, Inc. is a separate legal entity from East Boston Savings Bank and it must provide for its own liquidity to pay dividends and repurchase its common stock and for other corporate purposes. Meridian Bancorp, Inc.’s primary source of liquidity is proceeds from the second-step offering, and to a lesser extent dividend payments received from East Boston Savings Bank. The ability of East Boston Savings Bank to pay dividends is subject to regulatory requirements. At September 30, 2015, Meridian Bancorp, Inc. (on an unconsolidated basis) had cash and cash equivalents, certificates of deposit and securities available for sale totaling $144.2 million. We have the ability to attract and retain deposits by adjusting the interest rates offered and accept brokered certificates of deposit when it is deemed cost effective.

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, 2015, both the Company and the Bank exceeded all of their respective regulatory capital requirements. The Bank is considered “well capitalized” under regulatory guidelines.

In July 2013, the FDIC and the other federal bank regulatory agencies issued a final rule that revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them 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 was 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 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. Massachusetts regulations restrict repurchases for the first three years following the second-step conversion except where compelling and valid business reasons are established to the satisfaction of the Massachusetts Commissioner of Banks. We are also subject to the Federal Reserve Board’s notice provisions for stock repurchases. In August 2015, the Company received regulatory approval from the Massachusetts Commissioner of Banks and a non-objection from the Federal Reserve Bank to adopt a stock repurchase program for up to 5% of its common stock. As of September 30, 2015, the Company had repurchased 522,604 shares of its stock at an average price of $12.57 per share, or 19.1% of the 2,737,334 shares authorized for repurchase under the Company’s repurchase program. The Company’s Board of Directors declared a quarterly cash dividend of $0.03 per common share on August 27, 2015. The dividend was paid on October 1, 2015 to stockholders of record at the close of business on September 17, 2015.

 

40


Table of Contents

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

 

                  Minimum
Capital
Requirement
    Minimum
To Be Well
Capitalized Under
 
     Actual      
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (Dollars in thousands)  

September 30, 2015

               

Total Capital (to Risk Weighted Assets):

               

Company

   $ 602,024         18.4   $ 261,233         8.0   $ 326,542         10.0

Bank

     434,271         13.2        263,362         8.0        329,203         10.0   

Tier 1 Capital (to Risk Weighted Assets):

               

Company

     569,439         17.4        195,925         6.0        261,233         8.0   

Bank

     401,686         12.2        197,522         6.0        263,362         8.0   

Common Equity Tier 1 Capital (to Risk Weighted Assets):

               

Company

     569,439         17.4        146,944         4.5        212,252         6.5   

Bank

     401,686         12.2        148,141         4.5        213,982         6.5   

Tier 1 Capital (to Average Assets):

               

Company

     569,439         16.9        134,560         4.0        168,200         5.0   

Bank

     401,686         12.6        128,075         4.0        160,094         5.0   

December 31, 2014

               

Total Capital (to Risk Weighted Assets):

               

Company

   $ 591,563         20.3   $ 232,621         8.0     N/A         N/A   

Bank

     416,069         14.9        223,348         8.0      $ 279,178         10.0

Tier 1 Capital (to Risk Weighted Assets):

               

Company

     561,072         19.3        116,311         4.0        N/A         N/A   

Bank

     385,578         13.8        111,674         4.0        167,511         6.0   

Tier 1 Capital (to Average Assets):

               

Company

     561,072         17.4        128,662         4.0        N/A         N/A   

Bank

     385,578         12.3        125,176         4.0        156,470         5.0   

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

 

     Company      Bank  
     (In thousands)  

September 30, 2015

     

Total stockholders’ equity per financial statements

   $ 583,099       $ 415,329   

Adjustments to Common Equity Tier 1 capital:

     

Accumulated other comprehensive income

     27         44   

Goodwill disallowed

     (13,687      (13,687
  

 

 

    

 

 

 

Total Common Equity Tier 1 capital

     569,439         401,686   
  

 

 

    

 

 

 

Adjustments to Tier 1 capital:

     

Additional Tier 1 capital additions (deductions)

     —           —     
  

 

 

    

 

 

 

Total Tier 1 capital

     569,439         401,686   
  

 

 

    

 

 

 

Adjustments to total capital:

     

Allowance for loan losses

     32,585         32,585   

45% of net unrealized gains on marketable equity securities

     —           —     
  

 

 

    

 

 

 

Total regulatory capital

   $ 602,024       $ 434,271   
  

 

 

    

 

 

 

 

41


Table of Contents
     Company      Bank  
     (In thousands)  

December 31, 2014

     

Total stockholders’ equity per financial statements

   $ 577,710       $ 402,247   

Adjustments to Tier 1 capital:

     

Accumulated other comprehensive income

     (2,898      (2,929

Goodwill disallowed

     (13,687      (13,687

Servicing assets disallowed

     (53      (53
  

 

 

    

 

 

 

Total Tier 1 capital

     561,072         385,578   
  

 

 

    

 

 

 

Adjustments to total capital:

     

Allowance for loan losses

     28,469         28,469   

45% of net unrealized gains on marketable equity securities

     2,022         2,022   
  

 

 

    

 

 

 

Total regulatory capital

   $ 591,563       $ 416,069   
  

 

 

    

 

 

 

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, 2015, 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.

 

42


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.

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

 

Increase (Decrease) in Market Interest Rates

   September 30, 2015     December 31, 2014  
   Amount      Change     Percent     Amount      Change     Percent  
     (Dollars in thousands)  

300

   $ 91,804       $ (11,166     (10.84 )%    $ 87,006       $ (8,254     (8.66 )% 

Flat

     102,970             95,260        

-100

     103,850         880        0.85        96,386         1,126        1.18   

 

43


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.

 

44


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 2014 Annual Report on Form 10-K, filed with the SEC on March 13, 2015, which is available through the SEC’s website at www.sec.gov. As of September 30, 2015, our risk factors have not changed materially from those reported in the annual report. The risks described in the annual report are not the only risks that we face. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.

 

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

 

  (a.) Not applicable.

 

  (b.) Not applicable.

 

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

 

     (a)      (b)      (c)      (d)  

Period

   Total Number of
Shares (or Units)
Purchased
     Average Price
Paid Per Share (or
Unit)
     Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs (1)
     Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs
 

July 1 – 31, 2015

     —         $ —           —           2,737,334   

August 1 – 31, 2015

     334,031       $ 12.46         334,031         2,403,303   

September 1 – 30, 2015

     188,573       $ 12.77         188,573         2,214,730   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     522,604       $ 12.57         522,604         2,214,730   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) In August 2015, the Company’s Board of Directors voted to adopt a stock repurchase program of up to 5% of its outstanding common stock, or 2,737,334 shares of its common stock.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5. OTHER INFORMATION

Not applicable.

 

45


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    Meridian Bancorp, Inc. 2015 Equity Incentive Plan (Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement for the Annual Meeting of Stockholders (File No. 001-36573), filed with the Securities and Exchange Commission on August 18, 2015)
  10.2   

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

  10.3   

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

  10.4    Amended and Restated Employment Agreement with Richard J. Gavegnano and East Boston Savings Bank dated July 28, 2014 filed as an exhibit to Form 10-Q filed on November 10, 2014
  10.5    East Boston Savings Bank Amended and Restated Employee Severance Compensation Plan filed as an exhibit to Form 10-Q filed on November 10, 2014
  10.6    Form of Amended and Restated Supplemental Executive Retirement Agreements with Directors Vincent D. Basile, Domenic A. Gambardella, Edward L. Lynch, Gregory F. Natalucci, and James G. Sartori filed as an exhibit to Form 10-Q filed on November 10, 2014
  10.7    Amended and Restated Supplemental Executive Retirement Agreement with Richard J. Gavegnano filed as an exhibit to Form 10-Q filed on November 10, 2014
  10.8    2008 Equity Incentive Plan (Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement for its 2008 Annual Meeting, as filed with the Securities and Exchange Commission on July 11, 2008)
  10.9    Amended and Restated Employment Agreement between Edward J. Merritt and East Boston Savings Bank dated July 28, 2014 filed as an exhibit to Form 10-Q filed on November 10, 2014
  10.10    Amended and Restated Supplemental Executive Retirement Agreement between East Boston Savings Bank and Edward J. Merritt dated July 28, 2014 filed as an exhibit to Form 10-Q filed on November 10, 2014
  10.11    Joint Beneficiary Designation Agreement between Edward J. Merritt and Mt. Washington Co-operative Bank (Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 16, 2010)
  10.12    First Amendment to Joint Beneficiary Designation Agreement between Edward J. Merritt and Mt. Washington Co-operative Bank (Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 16, 2010)
  10.13    Amended and Restated Two-Year Change in Control Agreement between Mark Abbate and East Boston Savings Bank dated July 28, 2014 filed as an exhibit to Form 10-Q filed on November 10, 2014
  10.14    Incentive Compensation Plan filed as an exhibit to Form 10-K filed on March 17, 2014
  10.15    Amended and Restated Two-Year Change in Control Agreement between John Migliozzi and East Boston Savings Bank dated July 28, 2014 filed as an exhibit to Form 10-Q filed on November 10, 2014
  10.16    East Boston Non-Qualified Supplemental Employee Stock Ownership Plan dated October 1, 2014 filed as an exhibit to Form 10-Q filed on November 10, 2014
  10.17    Amended and Restated Two-Year Change in Control Agreement between Frank Romano and East Boston Savings Bank dated July 28, 2014 filed as an exhibit to Form 10-K filed on March 13, 2015
  10.18    Form of Restricted Stock Award Agreement under the Meridian Bancorp, Inc. 2015 Equity Incentive Plan filed as an exhibit to Form 8-K filed on November 5, 2015
  21    Subsidiaries of Registrant filed as an exhibit to Form 10-Q filed on November 10, 2014
  31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    The following financial statements formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Net Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Labels Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

46


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 9, 2015     By:  

/s/ Richard J. Gavegnano

     

Richard J. Gavegnano

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

Date: November 9, 2015     By:  

/s/ Mark L. Abbate

     

Mark L. Abbate

Executive Vice President, Treasurer and Chief Financial Officer

(Principal Financial and Accounting Officer)

 

47