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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended March 31, 2017

OR

 

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

For the transition period from                      to                     

Commission file number 001-36573

 

 

Meridian Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   46-5396964

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

67 Prospect Street,

Peabody, Massachusetts

  01960
(Address of Principal Executive Offices)   Zip Code

(617) 567-1500

(Registrant’s telephone number, including area code)

Not Applicable

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

 

 

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

Indicate by check mark whether the registrant has submitted electronically 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  ☒    No  ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a small reporting company)    Small reporting company  
     Emerging Growth Company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

As of May 1, 2017, there were 53,638,998 outstanding shares of the Registrant’s common stock.

 

 

 

 

 


Table of Contents

MERIDIAN BANCORP, INC.

FORM 10-Q

INDEX

 

         Page  

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements (Unaudited)

  
 

Consolidated Balance Sheets at March  31, 2017 and December 31, 2016

     3  
 

Consolidated Statements of Net Income for the three months ended March 31, 2017 and 2016

     4  
 

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016

     5  
 

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2017 and 2016

     6  
 

Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016

     7  
 

Notes to Consolidated Financial Statements

     9  

Item 2.

 

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

     24  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     37  

Item 4.

 

Controls and Procedures

     38  

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     39  

Item 1A.

 

Risk Factors

     39  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     39  

Item 3.

 

Defaults Upon Senior Securities

     39  

Item 4.

 

Mine Safety Disclosures

     39  

Item 5.

 

Other Information

     39  

Item 6.

 

Exhibits

     40  
 

Signatures

     42  
 

Exhibit 31.1

  
 

Exhibit 31.2

  
 

Exhibit 32.0

  

 

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Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     March 31,
2017
    December 31,
2016
 
     (Dollars in thousands)  
ASSETS     

Cash and due from banks

   $ 327,663     $ 236,423  

Certificates of deposit

     80,323       80,323  

Securities available for sale, at fair value

     59,058       67,663  

Federal Home Loan Bank stock, at cost

     18,629       18,175  

Loans held for sale

     1,022       3,944  

Loans, net of fees and costs

     4,062,507       3,938,817  

Less: allowance for loan losses

     (41,764     (40,149
  

 

 

   

 

 

 

Loans, net

     4,020,743       3,898,668  

Bank-owned life insurance

     41,033       40,745  

Premises and equipment, net

     41,099       41,427  

Accrued interest receivable

     10,070       10,381  

Deferred tax asset, net

     21,471       21,461  

Goodwill

     13,687       13,687  

Other assets

     3,914       3,105  
  

 

 

   

 

 

 

Total assets

   $ 4,638,712     $ 4,436,002  
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Deposits:

    

Non interest-bearing

   $ 439,315     $ 431,222  

Interest-bearing

     3,217,318       3,044,615  
  

 

 

   

 

 

 

Total deposits

     3,656,633       3,475,837  

Long-term debt

     334,827       322,512  

Accrued expenses and other liabilities

     31,074       30,356  
  

 

 

   

 

 

 

Total liabilities

     4,022,534       3,828,705  
  

 

 

   

 

 

 

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; 53,630,841 and 53,596,105 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively

     536       536  

Additional paid-in capital

     391,316       390,065  

Retained earnings

     241,472       234,290  

Accumulated other comprehensive income

     2,034       1,806  

Unearned compensation - ESOP, 2,648,359 and 2,678,800 shares at March 31, 2017 and December 31, 2016, respectively

     (19,180     (19,400
  

 

 

   

 

 

 

Total stockholders’ equity

     616,178       607,297  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,638,712     $ 4,436,002  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME

(Unaudited)

 

     Three Months Ended March 31,  
     2017      2016  
     (Dollars in thousands, except per share amounts)  

Interest and dividend income:

     

Interest and fees on loans

   $ 40,489      $ 33,097  

Interest on debt securities:

     

Taxable

     119        266  

Tax-exempt

     10        33  

Dividends on equity securities

     277        400  

Interest on certificates of deposit

     212        170  

Other interest and dividend income

     645        218  
  

 

 

    

 

 

 

Total interest and dividend income

     41,752        34,184  
  

 

 

    

 

 

 

Interest expense:

     

Interest on deposits

     7,419        5,228  

Interest on short-term borrowings

     —          6  

Interest on long-term debt

     980        571  
  

 

 

    

 

 

 

Total interest expense

     8,399        5,805  
  

 

 

    

 

 

 

Net interest income

     33,353        28,379  

Provision for loan losses

     1,619        1,066  
  

 

 

    

 

 

 

Net interest income, after provision for loan losses

     31,734        27,313  
  

 

 

    

 

 

 

Non-interest income:

     

Customer service fees

     2,052        1,947  

Loan fees

     68        312  

Mortgage banking gains, net

     90        70  

Gain on sales of securities, net

     1,574        59  

Income from bank-owned life insurance

     288        302  

Other income

     —          2  
  

 

 

    

 

 

 

Total non-interest income

     4,072        2,692  
  

 

 

    

 

 

 

Non-interest expenses:

     

Salaries and employee benefits

     13,675        12,513  

Occupancy and equipment

     3,023        2,484  

Data processing

     1,379        1,257  

Marketing and advertising

     854        713  

Professional services

     1,135        613  

Deposit insurance

     691        452  

Other general and administrative

     1,120        1,198  
  

 

 

    

 

 

 

Total non-interest expenses

     21,877        19,230  
  

 

 

    

 

 

 

Income before income taxes

     13,929        10,775  

Provision for income taxes

     4,685        3,298  
  

 

 

    

 

 

 

Net income

   $ 9,244      $ 7,477  
  

 

 

    

 

 

 

Earnings per share:

     

Basic

   $ 0.18      $ 0.14  

Diluted

   $ 0.18      $ 0.14  

Weighted average shares:

     

Basic

     50,949,634        51,569,683  

Diluted

     52,526,737        52,663,921  

See accompanying notes to consolidated financial statements.

 

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MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended March 31,  
     2017     2016  
     (In thousands)  

Net income

   $ 9,244     $ 7,477  
  

 

 

   

 

 

 

Other comprehensive income:

    

Securities available for sale:

    

Unrealized holding gain

     1,958       1,375  

Reclassification adjustment for gains realized in income (1)

     (1,574     (59
  

 

 

   

 

 

 

Net unrealized gain

     384       1,316  

Tax effect

     (156     (574
  

 

 

   

 

 

 

Total other comprehensive income

     228       742  
  

 

 

   

 

 

 

Comprehensive income

   $ 9,472     $ 8,219  
  

 

 

   

 

 

 

 

(1) Amounts are included in gain on sales of securities, net in the Consolidated Statements of Net Income. Provision for income tax associated with the reclassification adjustments for the three months ended March 31, 2017 and 2016 were $639,000 and $26,000, respectively.

See accompanying notes to consolidated financial statements.

 

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MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2017 and 2016

(Unaudited)

 

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

Three Months Ended March 31, 2017

             

Balance at December 31, 2016

    53,596,105     $ 536     $ 390,065     $ 234,290     $ 1,806     $ (19,400   $ 607,297  

Comprehensive income

    —         —         —         9,244       228       —         9,472  

Dividends declared ($0.04 per share)

    —         —         —         (2,062     —         —         (2,062

ESOP shares earned (30,441 shares)

    —         —         351       —         —         220       571  

Share-based compensation expense - restricted stock, net of awards forfeited

    (8,080     —         489       —         —         —         489  

Share-based compensation expense - stock options, net of awards forfeited

    —         —         275       —         —         —         275  

Stock options exercised

    42,816       —         136       —         —         —         136  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2017

    53,630,841     $ 536     $ 391,316     $ 241,472     $ 2,034     $ (19,180   $ 616,178  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2016

             

Balance at December 31, 2015

    54,875,237     $ 549     $ 403,737     $ 206,214     $ (2,092   $ (20,282   $ 588,126  

Comprehensive income

    —         —         —         7,477       742       —         8,219  

Dividends declared ($0.03 per share)

    —         —         —         (1,533     —         —         (1,533

Repurchased stock related to buyback program

    (976,417     (10     (13,372     —         —         —         (13,382

ESOP shares earned (30,441 shares)

    —         —         194       —         —         220       414  

Share-based compensation expense - restricted stock, net of awards forfeited

    (4,950     —         530       —         —         —         530  

Share-based compensation expense - stock options, net of awards forfeited

    —         —         297       —         —         —         297  

Excess tax benefits in connection with share-based compensation

    —         —         6       —         —         —         6  

Stock options exercised

    2,000       —         7       —         —         —         7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2016

    53,895,870     $ 539     $ 391,399     $ 212,158     $ (1,350   $ (20,062   $ 582,684  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended March 31,  
     2017     2016  
     (In thousands)  

Cash flows from operating activities:

    

Net income

   $ 9,244     $ 7,477  

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

    

Accretion of acquisition fair value adjustments

     (54     (39

ESOP shares earned expense

     571       414  

Provision for loan losses

     1,619       1,066  

Accretion of net deferred loan origination fees

     (217     (289

Net accretion of securities available for sale

     (1     (17

Depreciation and amortization expense

     794       712  

Gain on sales of securities, net

     (1,574     (59

Deferred income tax benefit

     (166     (196

Income from bank-owned life insurance

     (288     (302

Share-based compensation expense

     764       827  

Net changes in:

    

Loans held for sale

     2,922       3,475  

Accrued interest receivable

     311       (257

Other assets

     (809     (692

Accrued expenses and other liabilities

     184       (2,094
  

 

 

   

 

 

 

Net cash provided by operating activities

     13,300       10,026  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of certificates of deposit

     —         (10,117

Maturities of certificates of deposit

     —         16,504  

Activity in securities available for sale:

    

Proceeds from maturities, calls and principal payments

     5,241       8,388  

Purchase of mutual funds, net

     (35     (39

Proceeds from sales

     8,393       3,914  

Purchases

     (3,022     (1,344

Loans originated, net of principal payments received

     (123,462     (163,892

Purchases of premises and equipment

     (445     (1,176

Purchase of Federal Home Loan Bank stock

     (454     (2,090
  

 

 

   

 

 

 

Net cash used in investing activities

     (113,784     (149,852
  

 

 

   

 

 

 

 

(Continued on next page)

 

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MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

(Unaudited)

 

Cash flows from financing activities:

    

Net increase in deposits

     180,801       168,406  

Net change in borrowings with maturities less than three months

     —         (20,000

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

     60,625       90,000  

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

     (48,310     (25,800

Cash dividends paid on common stock

     (1,528     (1,646

Stock options exercised

     136       7  

Repurchase of common stock

     —         (13,382
  

 

 

   

 

 

 

Net cash provided by financing activities

     191,724       197,585  
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     91,240       57,759  

Cash and cash equivalents at beginning of period

     236,423       96,363  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 327,663     $ 154,122  
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid on deposits

   $ 7,192     $ 5,143  

Interest paid on borrowings

     908       541  

Income taxes paid, net of refunds

     2,035       3,026  

Non-cash investing and financing activities:

    

Transfers from loans to foreclosed real estate

     —         638  

See accompanying notes to consolidated financial statements.

 

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MERIDIAN BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Meridian Bancorp, Inc. (the “Company”) and all other entities in which it has a controlling financial interest. The Company owns the Bank. The Bank’s subsidiaries include Prospect, Inc., which engages in securities transactions on its own behalf, EBOSCO, LLC, which can 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 (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by such generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Such adjustments were of a normal recurring nature. The results of operations for the three months ended March 31, 2017 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, 2016, which was filed with the Securities and Exchange Commission (“SEC”) on March 1, 2017, and is available through the SEC’s website at www.sec.gov.

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

Change in accounting principle - Share-based compensation

In March 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”), 2016-09 Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This Update amends its guidance on certain aspects of accounting for share-based payments to employees. The provisions of this Update became effective on January 1, 2017. The various changes applicable to adopting this Update include the following:

Accounting for Income Taxes

The Update states that entities will no longer record the excess tax benefits or deficiencies related to share-based compensation in additional paid in capital. Instead, they will record excess tax benefits or deficiencies in income tax expense or benefit in the income statement as part of the provision for income taxes on a prospective basis. For interim reporting purposes the excess tax benefits or deficiencies will be recorded as discrete items in the period in which they occur. The presentation of the excess tax benefits will be presented as an operating activity in the statement of cash flows. In addition, under the new guidance, when calculating incremental shares for earnings per share, entities exclude from assumed proceeds excess tax benefits that previously would have been recorded in additional paid in capital. The total income tax benefit recorded in the provision for income taxes for the quarter ended March 31, 2017 was $168,000.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The objective of this ASU was to clarify the principles for recognizing revenue and to develop a common revenue standard for generally accepted accounting principles (“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. The Company is currently reviewing this ASU to determine if it will have an impact on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments Overall, (Subtopic 825-10). The amendments in this update address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Targeted changes to GAAP include the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income and the elimination of the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost. The amendments in this update are effective for fiscal years

 

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beginning after December 15, 2017, including interim periods within those fiscal years. The Company has a portfolio of equity investments and if such guidance were effective for the year ending December 31, 2017, a net unrealized gain of approximately $407,000 and related deferred tax provision of $142,000 would have been recognized in net income for the three months ended March 31, 2017, instead of in other comprehensive income. The impact of this guidance on future periods is dependent on future market conditions and investment activity.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update is intended to improve financial reporting about leasing transactions and the key provision impacting the Company is the requirement for a lessee to record a right-to-use asset and liability representing the obligation to make lease payments for long-term operating leases. The update will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently reviewing this ASU to determine the impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments Credit Losses (Topic 326). The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments, including loans, held-to-maturity debt securities and commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology, referred to as Current Expected Credit Loss, or CECL, that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Credit losses on available-for-sale debt securities will be measured in a manner similar to current GAAP, but will be recognized through an allowance rather than as a direct write-down. This update will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently reviewing this ASU to determine the impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350). The update intends to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the impairment charge should not exceed the total amount of goodwill allocated to that reporting unit. This update will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The impact to the consolidated financial statements upon adopting this update is not expected to be material.

 

3. EARNINGS PER SHARE

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

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

 

    Three Months Ended March 31,  
    2017     2016  
    (Dollars in thousands, except per share amounts)  

Net income available to common stockholders

  $ 9,244     $ 7,477  
 

 

 

   

 

 

 

Basic weighted average shares outstanding

    50,949,634       51,569,683  

Effect of dilutive stock options

    1,577,103       1,094,238  
 

 

 

   

 

 

 

Diluted weighted average shares outstanding

    52,526,737       52,663,921  
 

 

 

   

 

 

 

Earnings per share:

   

Basic

  $ 0.18     $ 0.14  

Diluted

  $ 0.18     $ 0.14  

For the three months ended March 31, 2017 there were no anti-dilutive options. For the three months ended March 31, 2016, options for the exercise of 392,753 shares were not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive.

 

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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)  

March 31, 2017

           

Debt securities:

           

Corporate bonds:

           

Financial services

   $ 8,995      $ 8      $ (3    $ 9,000  

Industrials

     1,000        1        —          1,001  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate bonds

     9,995        9        (3      10,001  

Municipal bonds

     1,112        21        —          1,133  

Residential mortgage-backed securities:

           

Government-sponsored enterprises

     4,836        323        (2      5,157  

Private label

     83        6        —          89  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     16,026        359        (5      16,380  
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities:

           

Common stocks:

           

Basic materials

     5,051        574        (330      5,295  

Consumer products and services

     12,037        1,012        (426      12,623  

Financial services

     6,020        898        (15      6,903  

Healthcare

     8,650        1,081        (147      9,584  

Industrials

     4,421        672        —          5,093  

Technology

     2,795        400        (52      3,143  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total common stocks

     38,974        4,637        (970      42,641  

Money market mutual funds

     37        —          —          37  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable equity securities

     39,011        4,637        (970      42,678  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 55,037      $ 4,996      $ (975    $ 59,058  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

           

Debt securities:

           

Corporate bonds:

           

Financial services

   $ 12,989      $ 16      $ (3    $ 13,002  

Industrials

     1,000        3        —          1,003  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate bonds

     13,989        19        (3      14,005  

Municipal bonds

     1,202        17        —          1,219  

Residential mortgage-backed securities:

           

Government-sponsored enterprises

     5,284        325        (3      5,606  

Private label

     779        22        —          801  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     21,254        383        (6      21,631  
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities:

           

Common stocks:

           

Basic materials

     6,763        901        (232      7,432  

Consumer products and services

     13,567        1,093        (382      14,278  

Financial services

     5,953        970        —          6,923  

Healthcare

     8,225        533        (456      8,302  

Industrials

     4,181        624        (11      4,794  

Technology

     4,081        440        (220      4,301  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total common stocks

     42,770        4,561        (1,301      46,030  

Money market mutual funds

     2        —          —          2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable equity securities

     42,772        4,561        (1,301      46,032  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 64,026      $ 4,944      $ (1,307    $ 67,663  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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At March 31, 2017, securities with an amortized cost of $3.9 million and $488,000 were pledged as collateral for Federal Home Loan Bank of Boston (“FHLB”) borrowings and for the Federal Reserve Bank discount window borrowings, respectively.

The amortized cost and fair value of debt securities by contractual maturity at March 31, 2017 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.

 

                   After One Year                              
     One Year or Less      Through Five Years      After Five Years      Total  
     Amortized      Fair      Amortized      Fair      Amortized      Fair      Amortized      Fair  
     Cost      Value      Cost      Value      Cost      Value      Cost      Value  
     (In thousands)  

Corporate bonds:

                       

Financial services

   $ 8,995      $ 9,000      $ —        $ —        $ —        $ —        $ 8,995      $ 9,000  

Industrials

     1,000        1,001        —          —          —          —          1,000        1,001  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate bonds

     9,995        10,001        —          —          —          —          9,995        10,001  

Municipal bonds

     445        447        667        686        —          —          1,112        1,133  

Residential mortgage-backed securities:

                       

Government-sponsored enterprises

     —          —          1        1        4,835        5,156        4,836        5,157  

Private label

     —          —          —          —          83        89        83        89  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,440      $ 10,448      $ 668      $ 687      $ 4,918      $ 5,245      $ 16,026      $ 16,380  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended March 31, 2017 and 2016, proceeds from sales of securities available for sale amounted to $8.4 million and $3.9 million, respectively. Gross gains of $1.6 million and $909,000 and gross losses of $21,000 and $850,000, respectively, were realized on those sales.

Information pertaining to securities available for sale as of March 31, 2017 and 2016, with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

     Less Than Twelve Months      Twelve Months or Longer  
     Gross             Gross         
     Unrealized      Fair      Unrealized      Fair  
     Losses      Value      Losses      Value  
     (In thousands)  

March 31, 2017

           

Debt securities:

           

Corporate bonds-financial services

   $ 3      $ 4,999      $ —        $ —    

Residential mortgage-backed securities:

           

Government-sponsored enterprises

     —          —          2        202  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     3        4,999        2        202  
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities:

           

Common stocks:

           

Basic materials

     —          —          330        1,470  

Consumer products and services

     300        3,260        126        1,081  

Financial services

     15        853        —          —    

Healthcare

     55        1,066        92        1,481  

Technology

     4        709        48        297  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total common stocks and marketable equity securities

     374        5,888        596        4,329  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 377      $ 10,887      $ 598      $ 4,531  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Less Than Twelve Months      Twelve Months or Longer  
     Gross             Gross         
     Unrealized      Fair      Unrealized      Fair  
     Losses      Value      Losses      Value  
     (In thousands)  

December 31, 2016

           

Debt securities:

           

Corporate bonds-financial services

   $ 3      $ 5,000      $ —        $ —    

Residential mortgage-backed securities:

           

Government-sponsored enterprises

     —          —          3        205  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     3        5,000        3        205  
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities:

           

Common stocks:

           

Basic materials

     —          —          232        1,568  

Consumer products and services

     237        3,496        145        1,618  

Healthcare

     259        2,039        197        1,377  

Industrials

     11        450        —          —    

Technology

     —          —          220        1,681  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total common stocks and marketable equity securities

     507        5,985        794        6,244  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 510      $ 10,985      $ 797      $ 6,449  
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company determined no securities were other-than-temporarily impaired for the three months ended March 31, 2017, and 2016. 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.

At March 31, 2017, 18 marketable equity securities with a fair value of $10.2 million had gross unrealized losses totaling $970,000, or an aggregate depreciation of 8.7% from the Company’s cost basis. These marketable equity securities consisted of 10 securities with a fair value of $5.9 million and a gross unrealized loss of $374,000 for less than 12 months and eight securities with a fair value of $4.3 million and a gross unrealized loss of $596,000 for 12 months or longer. The marketable equity securities in a gross unrealized loss position for 12 months or longer were comprised of three securities in the basic materials sector with a fair value of $1.5 million and a gross unrealized loss of $330,000, two securities in the consumer products and services sector with a fair value of $1.1 million and a gross unrealized loss of $126,000, two securities in the healthcare sector with a fair value of $1.5 million and a gross unrealized loss of $92,000 and one security in the technology sector with a fair value of $297,000 and a gross unrealized loss of $48,000.

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 write-down. 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 issuers within the marketable equity securities portfolio had price declines resulting in unrealized losses, management does not believe these declines in market value are other than temporary and the Company currently has the ability and intent to hold these investments until a recovery of fair value.

 

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5. LOANS

A summary of loans follows:

 

     March 31, 2017     December 31, 2016  
     Amount      Percent     Amount      Percent  
     (Dollars in thousands)  

Real estate loans:

          

Residential real estate:

          

One- to four-family

   $ 544,025        13.4   $ 532,450        13.5

Home equity lines of credit

     42,642        1.0       42,913        1.1  

Multi-family

     587,180        14.4       562,948        14.3  

Commercial real estate

     1,791,468        44.0       1,776,601        45.1  

Construction

     567,352        13.9       502,753        12.8  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total real estate loans

     3,532,667        86.9       3,417,665        86.7  

Commercial and industrial

     524,723        12.9       515,430        13.1  

Consumer

     9,710        0.2       9,712        0.2  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

     4,067,100        100.0     3,942,807        100.0
     

 

 

      

 

 

 

Allowance for loan losses

     (41,764        (40,149   

Net deferred loan origination fees

     (4,593        (3,990   
  

 

 

      

 

 

    

Loans, net

   $ 4,020,743        $ 3,898,668     
  

 

 

      

 

 

    

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 March 31, 2017 and 2016, the Company was servicing loans for participants aggregating $241.9 million and $138.4 million, respectively.

At March 31, 2017, multi-family and commercial real estate loans with carrying values totaling $66.7 million and $456.0 million, respectively, were pledged as collateral for FHLB borrowings.

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

 

    One- to
four-
family
    Multi-
family
    Home
equity
lines

of credit
    Commercial
real estate
    Construction     Commercial
and

industrial
    Consumer     Total  
    (In thousands)  

Balance at December 31, 2016

  $ 1,367     $ 4,514     $ 73     $ 18,725     $ 8,931     $ 6,452     $ 87     $ 40,149  

Provision (credit) for loan losses

    (45     190       11       416       935       28       84       1,619  

Charge-offs

    —         —         —         —         —         —         (91     (91

Recoveries

    30       —         —         —         45       —         12       87  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2017

  $ 1,352     $ 4,704     $ 84     $ 19,141     $ 9,911     $ 6,480     $ 92     $ 41,764  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

    1,354       3,385       144       14,497       8,313       5,620       92       33,405  

Provision (credit) for loan losses

    31       102       (48     586       (531     883       43       1,066  

Charge-offs

    —         —         —         —         —         (44     (64     (108

Recoveries

    —         —         —         —         7       —         20       27  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2016

  $     1,385     $     3,487     $        96     $      15,083     $     7,789     $     6,459     $      91     $      34,390  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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)  

March 31, 2017

               

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

  $ 50     $ 135     $ —       $ 2     $ —       $ —       $ —       $ 187  

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

    1,302       4,569       84       19,139       9,911       6,480       92       41,577  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,352     $ 4,704     $ 84     $ 19,141     $ 9,911     $ 6,480     $ 92     $ 41,764  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 1,403     $ 1,352     $ —       $ 2,792     $ 988     $ 1,778     $ —       $ 8,313  

Loans not deemed to be impaired

    542,622       585,828       42,642       1,788,676       566,364       522,945       9,710       4,058,787  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 544,025     $ 587,180     $ 42,642     $ 1,791,468     $ 567,352     $ 524,723     $ 9,710     $ 4,067,100  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2016

               

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

  $ 49     $ 137     $ —       $ —       $ —       $ —       $ —       $ 186  

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

    1,318       4,377       73       18,725       8,931       6,452       87       39,963  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,367     $ 4,514     $ 73     $ 18,725     $ 8,931     $ 6,452     $ 87     $ 40,149  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 1,422     $ 1,359     $ —       $ 2,807     $ 988     $ 1,808     $ —       $ 8,384  

Loans not deemed to be impaired

    531,028       561,589       42,913       1,773,794       501,765       513,622       9,712       3,934,423  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 532,450     $ 562,948     $ 42,913     $ 1,776,601     $ 502,753     $ 515,430     $ 9,712     $ 3,942,807  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     30-59      60-89      90 Days                
     Days      Days      or Greater      Total      Loans on  
     Past Due      Past Due      Past Due      Past Due      Non-accrual  
     (In thousands)  

March 31, 2017

              

Real estate loans:

              

Residential real estate:

              

One- to four-family

   $ 428      $ 485      $ 2,900      $ 3,813      $ 8,761  

Home equity lines of credit

     563        —          521        1,084        672  

Commercial real estate

     234        —          1,904        2,138        2,792  

Construction

     —          —          815        815        815  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1,225        485        6,140        7,850        13,040  

Commercial and industrial

     —          —          533        533        646  

Consumer

     533        452        —          985        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,758      $ 937      $ 6,673      $ 9,368      $ 13,686  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

              

Real estate loans:

              

Residential real estate:

              

One- to four-family

   $ 641      $ 834      $ 2,902      $ 4,377      $ 8,487  

Home equity lines of credit

     707        131        672        1,510        674  

Commercial real estate

     105        —          1,904        2,009        2,807  

Construction

     —          —          815        815        815  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1,453        965        6,293        8,711        12,783  

Commercial and industrial

     —          —          653        653        653  

Consumer

     679        392        —          1,071        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,132      $ 1,357      $ 6,946      $ 10,435      $ 13,436  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2017 and December 31, 2016, the Company did not have any accruing loans past due 90 days or more.

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

 

     March 31, 2017      December 31, 2016  
            Unpaid                    Unpaid         
     Recorded      Principal      Related      Recorded      Principal      Related  
     Investment      Balance      Allowance      Investment      Balance      Allowance  
     (In thousands)  

Impaired loans without a valuation allowance:

                 

One- to four-family

   $ 827      $ 1,270         $ 841      $ 1,281     

Multi-family

     71        71           74        74     

Commercial real estate

     2,373        2,668           2,807        3,102     

Construction

     988        988           988        1,083     

Commercial and industrial

     1,778        2,097           1,808        2,138     
  

 

 

    

 

 

       

 

 

    

 

 

    

Total

     6,037        7,094           6,518        7,678     
  

 

 

    

 

 

       

 

 

    

 

 

    

Impaired loans with a valuation allowance:

                 

One- to four-family

     576        576      $ 50        581        581      $ 49  

Multi-family

     1,281        1,281        135        1,285        1,285        137  

Commercial real estate

     419        419        2        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,276        2,276        187        1,866      $ 1,866        186  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 8,313      $ 9,370      $ 187      $ 8,384      $ 9,544      $ 186  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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At March 31, 2017, additional funds committed to be advanced in connection with impaired construction loans were immaterial.

 

     Three Months Ended March 31,  
     2017      2016  
                   Interest                    Interest  
     Average      Interest      Income      Average      Interest      Income  
     Recorded      Income      Recognized      Recorded      Income      Recognized  
     Investment      Recognized      on Cash Basis      Investment      Recognized      on Cash Basis  
     (In thousands)  

One- to four-family

   $ 1,569      $ 19      $ 14      $ 1,875      $ 21      $ 21  

Multi-family

     1,353        13        —          1,395        14        —    

Home equity lines of credit

     —          —          —          —          —          —    

Commercial real estate

     2,800        10        10        3,673        38        38  

Construction

     988        2        —          15,564        8        8  

Commercial and industrial

     1,789        16        —          757        13        13  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 8,499      $ 60      $ 24      $ 23,264      $ 94      $ 80  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     March 31,      December 31,  
     2017      2016  
     (In thousands)  

TDRs on accrual status:

     

One- to four-family

   $ 2,200      $ 2,219  

Multi-family

     1,352        1,359  

Home equity lines of credit

     17        18  

Commercial real estate

     9,374        9,460  

Construction

     173        174  

Commercial and industrial

     26        27  
  

 

 

    

 

 

 

Total TDRs on accrual status

     13,142        13,257  
  

 

 

    

 

 

 

TDRs on non-accrual status:

     

One- to four-family

     1,108        1,123  
  

 

 

    

 

 

 

Total TDRs on non-accrual status

     1,108        1,123  
  

 

 

    

 

 

 

Total TDRs

   $ 14,250      $ 14,380  
  

 

 

    

 

 

 

The Company generally places loans modified as TDRs on non-accrual status for a minimum period of six months. Loans modified as TDRs qualify for return to accrual status once they have demonstrated performance with the modified terms of the loan agreement for a minimum of six months and future payments are reasonably assured. TDRs are initially reported as impaired loans with an allowance established as part of the allocated component of the allowance for loan losses when the discounted cash flows of the impaired loan is lower than the carrying value of that loan. TDRs may be removed from impairment disclosures in the year following the restructure if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring. At March 31, 2017 and December 31, 2016, the allowance for loan losses included an allocated component related to TDRs of $185,000 and $186,000, respectively. There were no charge-offs related to the TDRs modified during the three months ended March 31, 2017 and 2016, respectively. TDRs that defaulted and became 90 days past due in the first twelve months after being restructured were immaterial for the three months ended March 31, 2017, and 2016.

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

     March 31, 2017      December 31, 2016  
     Multi-family                    Commercial      Multi-family                    Commercial  
     residential      Commercial             and      residential      Commercial             and  
     real estate      real estate      Construction      industrial      real estate      real estate      Construction      industrial  
     (In thousands)  

Loans rated 1 - 6

   $ 581,184      $ 1,786,492      $ 566,314      $ 475,583      $ 556,892      $ 1,771,671      $ 500,565      $ 465,979  

Loans rated 7

     826        2,053        —          22,698        841        2,123        —          22,820  

Loans rated 8

     5,170        2,923        1,038        26,442        5,215        2,807        2,188        26,631  

Loans rated 9

     —          —          —          —          —          —          —          —    

Loans rated 10

     —          —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 587,180      $ 1,791,468      $ 567,352      $ 524,723      $ 562,948      $ 1,776,601      $ 502,753      $ 515,430  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

6. DEPOSITS

A summary of deposit balances, by type, follows:

 

     March 31,      December 31,  
     2017      2016  
     (In thousands)  

Demand deposits

   $ 439,315      $ 431,222  

NOW deposits

     748,465        630,413  

Money market deposits

     1,005,534        980,344  

Regular savings and other deposits

     323,136        305,632  
  

 

 

    

 

 

 

Total non-certificate accounts

     2,516,450        2,347,611  
  

 

 

    

 

 

 

Term certificates less than $250,000

     856,381        850,565  

Term certificates $250,000 and greater

     283,802        277,661  
  

 

 

    

 

 

 

Total certificate accounts

     1,140,183        1,128,226  
  

 

 

    

 

 

 

Total deposits

   $ 3,656,633      $ 3,475,837  
  

 

 

    

 

 

 

A summary of term certificates, by maturity, follows:

 

     March 31, 2017     December 31, 2016  
            Weighted            Weighted  

Maturing

   Amount      Average Rate     Amount      Average Rate  
     (Dollars in thousands)  

Within 1 year

   $ 651,353        1.19   $ 539,903        1.16

Over 1 year to 2 years

     198,679        1.25       306,120        1.29  

Over 2 years to 3 years

     152,779        1.81       122,952        1.69  

Over 3 years to 4 years

     103,384        2.00       133,256        2.02  

Over 4 years to 5 years

     30,436        1.74       22,483        1.61  

Greater than 5 years

     3,552        5.50       3,512        5.50  
  

 

 

      

 

 

    
   $ 1,140,183        1.39   $ 1,128,226        1.38
  

 

 

      

 

 

    

The Company had brokered certificates of deposit, which are included in term certificates in the tables above, totaling $160.4 million with a weighted average rate of 1.36% and $140.8 million with a weighted average rate of 1.21% at March 31, 2017 and 2016, respectively. At March 31, 2017 and December 31, 2016, the Company also had brokered NOW deposits totaling $435.2 million and $296.3 representing reciprocal deposits received from other financial institutions through Authorized Bank Deposit Placement Network Sponsor to facilitate full federal deposit insurance coverage for certain Bank customers.

 

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7. BORROWINGS

The Company had no short-term borrowings at March 31, 2017 or December 31, 2016. The Company has an available line of credit of $9.4 million with the FHLB at an interest rate that adjusts daily and $488,000 of borrowing capacity at the Federal Reserve Bank discount window. No amounts were drawn on the line of credit and no borrowings were outstanding with the Federal Reserve Bank discount window as of March 31, 2017 or December 31, 2016.

Long-term debt consists of FHLB advances as follows:

 

     March 31, 2017     December 31, 2016  
            Weighted            Weighted  
     Amount      Average Rate     Amount      Average Rate  
     (Dollars in thousands)  

Fixed rate advances maturing:

          

2017

   $ 52,132        1.27   $ 89,632        1.32

2018

     43,000        1.25       43,000        1.25  

2019

     29,439        1.72       4,891        1.23  

2020

     29,631        1.77       4,989        1.22  

2021

     45,000        1.46       45,000        1.46  

2022

     15,625        2.21       —          —    

2023

     10,000        2.10       10,000        2.10  

2026

     20,000        0.59       20,000        0.59  

2027

     10,000        1.50       —          —    

2031

     20,000        0.88       20,000        0.88  
  

 

 

      

 

 

    
     274,827        1.41       237,512        1.26  
  

 

 

      

 

 

    

Variable rate advances maturing:

          

2020

     —          —         25,000        0.27  

2021

     50,000        0.44       60,000        0.31  

2022

     10,000        0.04       —          —    
  

 

 

      

 

 

    
     60,000        0.37       85,000        0.29  
  

 

 

      

 

 

    

Total advances

   $ 334,827        1.23   $ 322,512        1.01
  

 

 

      

 

 

    

At March 31, 2017, advances amounting to $155.0 million are callable by the FHLB prior to maturity, including advances totaling $50.0 million with variable rates based on the 3-Month London Interbank Offered Rate (LIBOR), less 60 basis points, during the first year and $10.0 million with variable rates based on the 3-Month LIBOR, less 100 basis points, during the first year.

All borrowings from the FHLB are secured by investment securities and qualified collateral, consisting of a blanket lien on one- to four-family loans and certain multi-family and commercial real estate loans held in the Company’s portfolio. At March 31, 2017, the Company pledged multi-family and commercial real estate loans with carrying values totaling $66.6 million and $456.0 million, respectively.

 

8. OTHER COMMITMENTS AND CONTINGENCIES AND DERIVATIVES

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

Loan Commitments

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

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

 

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

 

     March 31,      December 31,  
     2017      2016  
     (In thousands)  

Unadvanced portion of existing loans:

     

Construction

   $ 617,343      $ 503,586  

Home equity lines of credit

     38,657        36,722  

Other lines and letters of credit

     372,837        314,225  

Commitments to originate:

     

One- to four-family

     21,353        18,272  

Commercial real estate

     73,383        42,141  

Construction

     132,199        231,274  

Commercial and industrial

     36,280        31,463  

Other loans

     350        350  
  

 

 

    

 

 

 

Total loan commitments outstanding

   $ 1,292,402      $ 1,178,033  
  

 

 

    

 

 

 

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 March 31, 2017 and December 31, 2016, the Company had $1.8 million in cash pledged for collateral on its interest rate swaps with the third-party financial institution.

Summary information regarding these derivatives is presented below:

 

                    March 31, 2017     December 31, 2016  
     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%)    $ 10,870      $ 774     $ 10,922      $ 839  

Third-party interest rate swap

   10/17/33    Fixed (4.1052%)    1 Mo. Libor + 175bp      10,870        (774     10,922        (839

Customer interest rate swap

   12/13/26    1 Mo. Libor + 205bp    Fixed (3.82%)    $ 2,999      $ (72   $ 3,036      $ (60

Third-party interest rate swap

   12/13/26    Fixed (3.82%)    1 Mo. Libor + 205bp      2,999        72       3,036        60  

Other Commitments

As of March 31, 2017, the Company has an outstanding commitment of $20.6 million with its core data processing provider through December 2021.

 

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Employment and Change in Control Agreements

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

Legal Claims

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

 

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).

FHLB stock — The carrying value of FHLB stock approximates fair value based on the redemption provisions of the FHLB.

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

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

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

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

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

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.

 

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

 

                          Total Fair  
     Level 1      Level 2      Level 3      Value  
     (In thousands)  

March 31, 2017

           

Assets:

           

Debt securities

   $ —        $ 16,380      $ —        $ 16,380  

Marketable equity securities

     42,678        —          —          42,678  

Loan level interest rate swaps

     —          —          702        702  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 42,678      $ 16,380      $ 702      $ 59,760  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Loan level interest rate swaps

     —          —          702        702  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —        $ —        $ 702      $ 702  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                          Total Fair  
     Level 1      Level 2      Level 3      Value  
     (In thousands)  

December 31, 2016

           

Assets:

           

Debt securities

   $ —        $ 21,631      $ —        $ 21,631  

Marketable equity securities

     46,032        —          —          46,032  

Loan level interest rate swaps

     —          —          779        779  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 46,032      $ 21,631      $ 779      $ 68,442  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Loan level interest rate swaps

     —          —          779        779  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —        $ —        $ 779      $ 779  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

                          Three Months Ended  
     March 31, 2017      March 31, 2017  
     Level 1      Level 2      Level 3      Total Losses  
     (In thousands)  

Impaired loans

   $ —        $ —        $ 5,067      $ 1  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ —        $ 5,067      $ 1  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                          Three Months Ended  
     December 31, 2016      March 31, 2016  
     Level 1      Level 2      Level 3      Total Losses  
     (In thousands)  

Impaired loans

   $ —        $ —        $ 4,916      $ 97  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ —        $ 4,916      $ 97  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 are periodically adjusted to fair value using appraised values of collateral, less estimated 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.

 

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

March 31, 2017

              

Financial assets:

              

Cash and due from banks

   $ 327,663      $ 327,663      $ —        $ —        $ 327,663  

Certificates of deposit

     80,323        —          80,559        —          80,559  

Securities available for sale

     59,058        42,678        16,380        —          59,058  

Federal Home Loan Bank stock

     18,629        —          —          18,629        18,629  

Loans and loans held for sale, net

     4,021,765        —          —          4,098,592        4,098,592  

Accrued interest receivable

     10,070        —          —          10,070        10,070  

Financial liabilities:

              

Deposits

     3,656,633        —          —          3,583,910        3,583,910  

Borrowings

     334,827        —          335,492        —          335,492  

Accrued interest payable

     1,688        —          —          1,688        1,688  

On-balance sheet derivative financial instruments:

              

Assets:

              

Loan level interest rate swaps

     702        —          —          702        702  

Liabilities:

              

Loan level interest rate swaps

     702        —          —          702        702  

 

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

December 31, 2016

              

Financial assets:

              

Cash and due from banks

   $ 236,423      $ 236,423      $ —        $ —        $ 236,423  

Certificates of deposit

     80,323        —          80,710        —          80,710  

Securities available for sale

     67,663        46,032        21,631        —          67,663  

Federal Home Loan Bank stock

     18,175        —          —          18,175        18,175  

Loans and loans held for sale, net

     3,902,612        —          —          3,970,896        3,970,896  

Accrued interest receivable

     10,381        —          —          10,381        10,381  

Financial liabilities:

              

Deposits

     3,475,837        —          —          3,485,618        3,485,618  

Borrowings

     322,512        —          322,928        —          322,928  

Accrued interest payable

     1,384        —          —          1,384        1,384  

On-balance sheet derivative financial instruments:

              

Assets:

              

Loan level interest rate swaps

     779        —          —          779        779  

Liabilities:

              

Loan level interest rate swaps

     779        —          —          779        779  

 

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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. You should read the information in this section in conjunction with our business and financial information and the Consolidated Financial Statements and related notes that are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC.

Forward Looking Statements

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

 

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

 

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

 

    competition among depository and other financial institutions;

 

    changes in consumer spending, borrowing and savings habits;

 

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

 

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

 

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

 

    our ability to access cost-effective funding;

 

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

 

    demand for loans and deposits in our market area;

 

    our ability to implement and changes in our business strategies;

 

    adverse changes in the securities or secondary mortgage markets;

 

    the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations;

 

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

 

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

 

    our ability to retain key employees; and

 

    significant increases in our loan losses.

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the SEC on March 1, 2017, 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 Annual Report on Form 10-K for the year ended December 31, 2016. Critical accounting estimates are necessary in the application of

 

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certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Management believes that the most critical accounting policies are the determination of the allowance for loan losses and the evaluation of securities for other-than-temporary impairment.

Comparison of Financial Condition at March 31, 2017 and December 31, 2016

Assets. Our total assets increased $202.7 million, or 4.6%, to $4.639 billion at March 31, 2017 from $4.436 billion at December 31, 2016. Net loans increased $122.1 million, or 3.1%, to $4.021 billion at March 31, 2017 from $3.899 billion at December 31, 2016. Cash and due from banks increased $91.2 million, or 38.6%, to $327.7 million at March 31, 2017 from $236.4 million at December 31, 2016. Securities available for sale decreased $8.6 million, or 12.7%, to $59.1 million at March 31, 2017 from $67.7 million at December 31, 2016.

Loan Portfolio Analysis. At March 31, 2017, net loans were $4.021 billion, or 86.7% of total assets. During the three months ended March 31, 2017, net loans increased $122.1 million, or 3.1%. Loan originations totaled $426.0 million during the three months ended March 31, 2017. The increase in net loans resulted primarily from increases of $64.6 million in construction loans, $24.2 million in multi-family loans, $14.9 million in commercial real estate loans, $11.6 million in one- to four-family loans and $9.3 million in commercial and industrial loans. Refer to Note 5, Loans, in Notes to the Unaudited Consolidated Financial Statements within this report for more detail regarding the loans held in the Company’s loan portfolio.

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

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

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

Delinquencies. Total past due loans decreased $1.1 million, or 10.2%, to $9.4 million at March 31, 2017 from $10.4 million at December 31, 2016, reflecting decreases of $273,000 in loans 90 days or greater past due and $794,000 in loans 30 to 89 days past due. At March 31, 2017, 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 remain on non-accrual status until they attain a sustained payment history of six consecutive months.

 

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Non-performing Assets. Non-performing assets include loans that are 90 or more days past due or on non-accrual status, including TDRs on non-accrual status, and real estate and other loan collateral acquired through foreclosure and repossession. Loans 90 days or greater past due may remain on an accrual basis if adequately collateralized and in the process of collection. At March 31, 2017, we did not have any accruing loans past due 90 days or greater. For non-accrual loans, interest previously accrued but not collected is reversed and charged against income at the time a loan is placed on non-accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until it is sold. When property is acquired, it is initially recorded at the fair value less estimated costs to sell at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value after acquisition of the property result in charges against income. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction totaled $1.2 million at March 31, 2017. The following table provides information with respect to our non-performing assets at the dates indicated.

 

     March 31,     December 31,  
     2017     2016  
     (Dollars in thousands)  

Loans accounted for on a non-accrual basis:

    

Real estate loans:

    

Residential real estate:

    

One- to four-family

   $ 8,761     $ 8,487  

Home equity lines of credit

     672       674  

Commercial real estate

     2,792       2,807  

Construction

     815       815  
  

 

 

   

 

 

 

Total real estate loans

     13,040       12,783  

Commercial and industrial

     646       653  
  

 

 

   

 

 

 

Total non-accrual loans (1)

     13,686       13,436  
  

 

 

   

 

 

 

Total non-performing assets

   $ 13,686     $ 13,436  
  

 

 

   

 

 

 

Non-accrual loans to total loans

     0.34     0.34

Non-accrual loans to total assets

     0.30     0.30

Non-performing assets to total assets

     0.30     0.30

 

(1) TDRs on accrual status not included above totaled $13.1 million at March 31, 2017 and $13.3 million at December 31, 2016.

Non-performing assets were $13.7 million or 0.30% of total assets, at March 31, 2017, compared to $13.4 million, or 0.30% of total assets, at December 31, 2016. We recognized $136,000 of interest income on non-accrual loans for the three months ended March 31, 2017. Additional interest income that would have been recorded for the three months ended March 31, 2017 had non-accruing loans been current according to their original terms amounted to $20,000.

Non-accrual loans increased $250,000, or 1.9%, to $13.7 million, or 0.34% of total loans outstanding at March 31, 2017, from $13.4 million, or 0.34% of total loans outstanding at December 31, 2016, primarily due to an increase of $274,000 in non-accrual, one- to four-family loans.

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 March 31, 2017, our allowance for loan losses was $41.8 million, or 1.03% of total loans and 305.16% of non-accrual loans, compared to $40.1 million, or 1.02% of total loans and 298.82% of non-accrual loans at December 31, 2016. We increased our allowance primarily as a result of growth in the loan portfolio, in particular, commercial loans. Included in our allowance at March 31, 2017 was a general component of $41.6 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.

At March 31, 2017 and December 31, 2016, the Company did not hold any foreclosed real estate. We continue to be actively engaged with our borrowers in resolving remaining problem assets and with the effective management of real estate owned as a result of foreclosures.

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

 

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Total TDRs decreased $130,000 to $14.3 million at March 31, 2017 from $14.4 million at December 31, 2016, reflecting principal paydowns. Modifications of TDRs consist of rate reductions, loan term extensions or provisions for interest-only payments for specified periods up to 12 months. We have generally been successful with the concessions we have offered to borrowers to date. We generally return TDRs to accrual status when they have sustained payments for six consecutive months based on the restructured terms and future payments are reasonably assured. We recognized $153,000 of interest income on TDRs for the three months ended March 31, 2017.

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

Other potential problem loans are those loans that are currently performing, but where known information about possible credit problems of the borrowers causes us to have concerns as to the ability of such borrowers to comply with contractual loan repayment terms. These other potential problem loans are generally loans classified as “substandard” or 8-rated loans in accordance with our ten-grade internal loan rating system that is consistent with guidelines established by banking regulators. At March 31, 2017, other potential problem loans totaled $28.7 million, including $24.8 million of commercial and industrial loans, $3.8 million of multi-family loans and $50,000 of construction 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:

 

     Three Months Ended March 31,  
     2017     2016  
     (Dollars in thousands)  

Beginning balance

   $ 40,149     $ 33,405  

Provision for loan losses

     1,619       1,066  

Charge-offs:

    

Commercial and industrial

     —         (44

Consumer

     (91     (64
  

 

 

   

 

 

 

Total charge-offs

     (91     (108
  

 

 

   

 

 

 

Recoveries:

    

One- to four-family

     30       —    

Construction

     45       7  

Consumer

     12       20  
  

 

 

   

 

 

 

Total recoveries

     87       27  
  

 

 

   

 

 

 

Net charge-offs

     (4     (81
  

 

 

   

 

 

 

Ending balance

   $ 41,764     $ 34,390  
  

 

 

   

 

 

 

Allowance to non-accrual loans

     305.16     112.06

Allowance to total loans outstanding

     1.03     1.06

Net charge-offs to average loans outstanding

     0.00     0.01

Our provision for loan losses was $1.6 million for the three months ended March 31, 2017 compared to $1.1 million for the three months ended March 31, 2016. For the three months ended March 31, 2017, the increase in the provision for loan losses was primarily due to growth in the commercial loan categories. The changes in the provision and the allowance for loan losses were based on management’s assessment of loan portfolio growth and composition changes, declines in historical charge-off trends, reduced levels of problem loans and other improving asset quality trends. The increase in the allowance for loan losses at March 31, 2017 compared to March 31, 2016 was primarily due to increases in the multi-family, commercial real estate, construction, and commercial and industrial loan categories; as such loans have higher inherent credit risk than one- to four- family loans and home equity lines of credit. We continue to assess the adequacy of our allowance for loan losses in accordance with established policies.

 

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

 

     March 31, 2017     December 31, 2016  
                 

Percent

of

                

Percent

of

 
            Percent of     Loans in            Percent of     Loans in  
            Allowance     Category            Allowance     Category  
            to Total     of Total            to Total     of Total  
     Amount      Allowance     Loans     Amount      Allowance     Loans  
     (Dollars in thousands)  

Real estate loans:

              

Residential real estate:

              

One- to four-family

   $ 1,352        3.2     13.4   $ 1,367        3.4     13.5

Multi-family

     4,704        11.3       1.0       4,514        11.2       1.1  

Home equity lines of credit

     84        0.2       14.4       73        0.2       14.3  

Commercial real estate

     19,141        45.9       44.0       18,725        46.7       45.1  

Construction

     9,911        23.7       13.9       8,931        22.2       12.8  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total real estate loans

     35,192        84.3       86.9       33,610        83.7       86.7  

Commercial and industrial

     6,480        15.5       12.9       6,452        16.1       13.1  

Consumer

     92        0.2       0.2       87        0.2       0.2  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total loans

   $ 41,764        100.0     100.0   $ 40,149        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 $8.3 million and $8.4 million as of March 31, 2017 and December 31, 2016, respectively. At March 31, 2017, impaired loans totaling $2.3 million had a valuation allowance of $187,000. Impaired loans totaling $1.9 million had a valuation allowance of $186,000 at December 31, 2016. Our average investment in impaired loans was $8.5 million and $23.3 million for the three months ended March 31, 2017 and 2016, respectively.

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

Management has reviewed the collateral value for all impaired and non-accrual loans that were collateral-dependent as of March 31, 2017 and considered any probable loss in determining the allowance for loan losses.

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

 

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

 

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

 

    Appraisals we receive are based on comparable property sales.

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

 

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

 

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    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 March 31, 2017, our securities portfolio was $59.1 million, or 1.3% of total assets. During the three months ended March 31, 2017, the securities portfolio decreased $8.6 million, or 12.7%, primarily due to $5.2 million in maturities, calls and principal payments and $8.4 million in sales, partially offset by $3.0 million in purchases. At March 31, 2017, the securities portfolio consisted of $16.4 million, or 27.7%, in debt securities and $42.7 million, or 72.3%, in marketable equity securities. The debt securities within the portfolio are corporate bonds, municipal bonds, and mortgage-backed securities issued by government-sponsored enterprises and private companies. Included in marketable equity securities are common stocks and money market mutual funds. We purchase marketable equity securities with the intent to generate long-term capital gains through purchasing investment grade dividend paying securities in companies with relatively low long-term debt and a history of sustained earnings and above-average growth. We typically initiate a securities position based on market opportunities. At March 31, 2017, we had no investments in a single company or entity that had an aggregate book value in excess of 10% of our equity. Refer to Note 4, Securities Available for Sale, in Notes to the Unaudited Consolidated Financial Statements within this report for more detail regarding our securities portfolio.

Deposits. Deposits are a major source of our funds for lending and other investment purposes. Deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Our deposit base is comprised of demand, 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 $180.8 million, or 5.2%, to $3.657 billion at March 31, 2017 from $3.476 billion at December 31, 2016. Our continuing focus on the acquisition and expansion of core deposit relationships resulted in net growth in core deposits of $168.8 million, or 7.2%, to $2.516 billion, or 68.8% of total deposits. Refer to Note 6, Deposits, in Notes to the Unaudited Consolidated Financial Statements within this report for more detail regarding our deposits.

 

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

 

     Three Months Ended March 31,  
     2017     2016  
                  Percent                  Percent  
     Average      Average     of Total     Average      Average     of Total  
     Balance      Rate     Deposits     Balance      Rate     Deposits  
     (Dollars in thousands)  

Demand deposits

   $ 425,353        —       11.9   $ 368,038        —       13.4

NOW deposits

     654,977        0.75       20.5       338,517        0.59       12.4  

Money market deposits

     1,008,392        0.90       27.5       873,774        0.80       30.2  

Regular savings and other deposits

     307,940        0.14       8.8       290,463        0.14       10.2  

Certificates of deposit

     1,134,329        1.38       31.3       936,674        1.24       33.8  
  

 

 

      

 

 

   

 

 

      

 

 

 

Total

   $ 3,530,991        0.85     100.0   $ 2,807,466        0.75     100.0
  

 

 

      

 

 

   

 

 

      

 

 

 

Borrowings. We use borrowings from the FHLB to supplement our supply of funds for loans and investments. At March 31, 2017 and December 31, 2016, FHLB advances totaled $334.8 million and $322.5 million, respectively, with a weighted average rate of 1.23% and 1.01%, respectively. Total borrowings increased $12.3 million, or 3.8%, during the three months ended March 31, 2017. The Bank entered into long-term advances with the FHLB totaling $60.6 million with original terms ranging from three to ten years and initial interest rates ranging from 0.04% to 2.21% during the three months ended March 31, 2017. The maturing advances with the FHLB during the three months ended March 31, 2017 totaled $47.5 million and consisted of long term advances with original terms ranging from three to five years and fixed interest rates ranging from of 0.31% to 1.57%. At March 31, 2017, we also had an available line of credit of $9.4 million with the FHLB at an interest rate that adjusts daily, none of which was outstanding at that date. Refer to Note 7, Borrowings, in Notes to the Unaudited Consolidated Financial Statements within this report for more detail regarding our borrowings.

Information relating to borrowings is detailed in the following table.

 

     Three Months Ended March 31,  
     2017     2016  
     (Dollars in thousands)  

Balance outstanding at end of period

   $ 334,827     $ 211,426  

Average amount outstanding during the period

   $ 330,604     $ 199,799  

Weighted average interest rate during the period

     1.20     1.16

Maximum outstanding at any month end

   $ 334,827     $ 211,693  

Weighted average interest rate at end of period

     1.23     1.22

Stockholders’ Equity. Total stockholders’ equity increased $8.9 million, or 1.5%, to $616.2 million at March 31, 2017, from $607.3 million at December 31, 2016. The increase for the three months ended March 31, 2017 was due primarily to net income of $9.2 million, $1.5 million related to stock-based compensation plans and $228,000 in accumulated other comprehensive income, reflecting an increase in the fair value of available-for-sale securities, partially offset by a dividend of $0.04 per share totaling $2.1 million. Stockholders’ equity to assets was 13.28% at March 31, 2017, compared to 13.69% at December 31, 2016. Book value per share increased to $11.49 at March 31, 2017 from $11.33 at December 31, 2016. At March 31, 2017, the Company and the Bank continued to exceed all regulatory capital requirements. Refer to “Capital Management” within this report for more information regarding capital requirements and actual capital amounts and ratios for the Bank and the Company.

 

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Results of Operations for the Three Months Ended March 31, 2017 and 2016

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 March 31,     Change  
     2017     2016     Amount     Percent  
     (Dollars in thousands)  

Net interest income

   $ 33,353     $ 28,379     $ 4,974       17.5

Provision for loan losses

     1,619       1,066       553       51.9  

Non-interest income

     4,072       2,692       1,380       51.3  

Non-interest expenses

     21,877       19,230       2,647       13.8  

Net income

     9,244       7,477       1,767       23.6  

Basic earnings per share

     0.18       0.14       0.04       28.6  

Diluted earnings per share

     0.18       0.14       0.04       28.6  

Return on average assets

     0.82     0.83     (0.01 )%      (1.2

Return on average equity

     6.03     5.11     0.92     18.0  

Net Interest Income.

Average Balance Sheets and Related Yields and Rates. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using daily average balances, and include non-accrual loans and purchase accounting related premium and discounts. The loan yields include the effect of amortization or accretion of deferred loan fees/costs and purchase accounting premiums/discounts to interest and fees on loans.

 

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     Three Months Ended March 31,  
     2017     2016  
     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)

   $ 4,000,857      $ 41,689       4.23   $ 3,146,449      $ 34,104       4.36

Securities and certificates of deposits

     145,841        725       2.02       231,604        1,034       1.80  

Other interest-earning assets (3)

     243,478        646       1.08       123,476        218       0.71  
  

 

 

    

 

 

     

 

 

    

 

 

   

Total interest-earning assets

     4,390,176        43,060       3.98       3,501,529        35,356       4.06  
     

 

 

        

 

 

   

Noninterest-earning assets

     111,757            114,476       
  

 

 

        

 

 

      

Total assets

   $ 4,501,933          $ 3,616,005       
  

 

 

        

 

 

      

Liabilities and stockholders’ equity:

              

Interest-bearing liabilities:

              

NOW deposits

   $ 654,977        1,219       0.75     $ 338,517        500       0.59  

Money market deposits

     1,008,392        2,230       0.90       873,774        1,745       0.80  

Regular savings and other deposits

     307,940        108       0.14       290,463        103       0.14  

Certificates of deposit

     1,134,329        3,862       1.38       936,674        2,880       1.24  
  

 

 

    

 

 

     

 

 

    

 

 

   

Total interest-bearing deposits

     3,105,638        7,419       0.97       2,439,428        5,228       0.86  

Borrowings

     330,604        980       1.20       199,779        577       1.16  
  

 

 

    

 

 

     

 

 

    

 

 

   

Total interest-bearing liabilities

     3,436,242        8,399       0.99       2,639,207        5,805       0.88  
     

 

 

        

 

 

   

Noninterest-bearing demand deposits

     425,353            368,038       

Other noninterest-bearing liabilities

     27,312            23,312       
  

 

 

        

 

 

      

Total liabilities

     3,888,907            3,030,557       

Total stockholders’ equity

     613,026            585,448       
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 4,501,933          $ 3,616,005       
  

 

 

        

 

 

      

Net interest-earning assets

   $ 953,934          $ 862,322       
  

 

 

        

 

 

      

Fully tax-equivalent net interest income

        34,661            29,551    

Less: tax-equivalent adjustments

        (1,308          (1,172  
     

 

 

        

 

 

   

Net interest income

      $ 33,353          $ 28,379    
     

 

 

        

 

 

   

Interest rate spread (1)(4)

          2.99          3.18

Net interest margin (1)(5)

          3.20          3.39

Average interest-earning assets to average interest-bearing liabilities

        127.76          132.67  

Supplemental Information:

              

Total deposits, including noninterest-bearing demand deposits

   $ 3,530,991      $ 7,419       0.85   $ 2,807,466      $ 5,228       0.75

Total deposits and borrowings, including noninterest-bearing demand deposits

   $ 3,861,595      $ 8,399       0.88   $ 3,007,245      $ 5,805       0.78

 

(1) Income on debt securities, equity securities and revenue bonds included in commercial real estate loans, as well as resulting yields, interest rate spread and net interest margin, are presented on a tax-equivalent basis. The tax-equivalent adjustments are deducted from tax-equivalent net interest income to agree to amounts reported in the consolidated statements of net income. For the three months ended March 31, 2017 and 2016, yields on loans before tax-equivalent adjustments were 4.10% and 4.23%, respectively, yields on securities and certificates of deposit before tax-equivalent adjustments were 1.71% and 1.51%, respectively, and yield on total interest-earning assets before tax-equivalent adjustments were 3.86% and 3.93%, respectively. Interest rate spread before tax-equivalent adjustments for the three months ended March 31, 2017 and 2016 was 2.87% and 3.05%, respectively, while net interest margin before tax-equivalent adjustments for the three months ended March 31, 2017 and 2016 was 3.08% and 3.26%, respectively.
(2) Loans on non-accrual status are included in average balances.
(3) Includes FHLB stock and associated dividends.
(4) Interest rate spread represents the difference between the tax-equivalent yield on interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income (tax-equivalent basis) divided by average interest-earning assets.
(6) Annualized.

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

 

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     Three Months Ended March 31,  
     2017 Compared to 2016  
     Increase (Decrease) Due to  
     Volume      Rate      Net  
     (In thousands)  

Interest income:

        

Loans

   $ 8,678      $ (1,093    $ 7,585  

Securities and certificates of deposits

     (421      112        (309

Other interest-earning assets

     278        150        428  
  

 

 

    

 

 

    

 

 

 

Total

     8,535        (831      7,704  

Interest expense:

        

Deposits

     1,470        721        2,191  

Borrowings

     383        20        403  
  

 

 

    

 

 

    

 

 

 

Total

     1,853        741        2,594  
  

 

 

    

 

 

    

 

 

 

Change in fully tax-equivalent net interest income

   $ 6,682      $ (1,572    $ 5,110  
  

 

 

    

 

 

    

 

 

 

The interest rate spread and net interest margin on a tax-equivalent basis were 2.99% and 3.20%, respectively, for the three months ended March 31, 2017 compared to 3.18% and 3.39%, respectively, for the three months ended March 31, 2016. The 17.5% increase in net interest income for the three months ended March 31, 2017 was primarily due to loan growth, partially offset by growth in deposits and borrowings along with a decline in the yield on loans and an increase in the cost of funds.

The Company’s yield on interest-earning assets on a tax-equivalent basis decreased eight basis points to 3.98% for the three months ended March 31, 2017 compared to 4.06% for the three months ended March 31, 2016, while the cost of funds increased 10 basis points to 0.88% from 0.78% for the three months ended March 31, 2017 and 2016, respectively. The increase in interest income was primarily due to growth in the Company’s average loan balances of $854.4 million, or 27.2%, to $4.001 billion, partially offset by a decrease in the yield on loans on a tax-equivalent basis of 13 basis points to 4.23% for the three months ended March 31, 2017 compared to 4.36% for the three months ended March 31, 2016 reflecting reductions in prepayment, late payment and other fees of $661,000 compared to the first quarter of 2016. The increase in interest expense on deposits was primarily due to the growth in average total deposits of $723.5 million, or 25.8%, to $3.530 billion and an increase in the average total cost of deposits of 10 basis points to 0.85% for the three months ended March 31, 2017 compared the same period in March 31, 2016. The increase in interest expense on borrowings was primarily due to the increase in average borrowings of $130.8 million, or 65.5%, to $330.6 million, and an increase in the cost of average borrowings of four basis points to 1.20% for the three months ended March 31, 2017 compared to 1.16% for the three months ended March 31, 2016.

Provision for Loan Losses. Our provision for loan losses was $1.6 million for the three months ended March 31, 2017 compared to $1.1 million for the three months ended March 31, 2016. For further discussion of the changes in the provision and allowance for loan losses, refer to “Allowance for Loan Losses.”

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

 

     Three Months Ended March 31,      Change  
     2017      2016      Amount      Percent  
     (Dollars in thousands)  

Customer service fees

   $ 2,052      $ 1,947      $ 105        5.4

Loan fees

     68        312        (244      (78.2

Mortgage banking gains, net

     90        70        20        28.6  

Gain on sales of securities, net

     1,574        59        1,515        2,567.8  

Income from bank-owned life insurance

     288        302        (14      (4.6

Other income

     —          2        (2      (100.0
  

 

 

    

 

 

    

 

 

    

Total non-interest income

   $ 4,072      $ 2,692      $ 1,380        51.3
  

 

 

    

 

 

    

 

 

    

The increase in gain on sales of securities, net, reflected an increase in the number and prices of marketable equity securities sold during the three months ended March 31, 2017 compared to the same period in March 31, 2016.

 

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

 

     Three Months Ended March 31,      Change  
     2017      2016      Amount      Percent  
     (Dollars in thousands)  

Salaries and employee benefits

   $ 13,675      $ 12,513      $ 1,162        9.3

Occupancy and equipment

     3,023        2,484        539        21.7  

Data processing

     1,379        1,257        122        9.7  

Marketing and advertising

     854        713        141        19.8  

Professional services

     1,135        613        522        85.2  

Deposit insurance

     691        452        239        52.9  

Other general and administrative

     1,120        1,206        (86      (7.1
  

 

 

    

 

 

    

 

 

    

Total non-interest expenses

   $ 21,877      $ 19,238      $ 2,639        13.7
  

 

 

    

 

 

    

 

 

    

The increase in salaries and employee benefits expense reflects annual increases in employee compensation and health benefits during the three months ended March 31, 2017. In addition, the increase in salaries and employee benefits, occupancy and equipment expenses and other general and administrative expenses include costs associated with the opening of two new branches, the introduction of our new mobile branch in 2016 and an expansion of our regulatory compliance staff. Professional services increased primarily due to additional costs related to regulatory compliance projects undertaken in the fourth quarter of 2016 to enhance our regulatory compliance infrastructure. The Company’s efficiency ratio was 61.02% for the quarter ended March 31, 2017 compared to 54.33% for the quarter ended December 31, 2016 and 62.01% for the quarter ended March 31, 2016.

Income Tax Provision. We recorded a provision for income taxes of $4.7 million for the three months ended March 31, 2017, reflecting an effective tax rate of 33.6%, compared to $3.3 million, or a 30.6% effective tax rate, for the three months ended March 31, 2016. The changes in the income tax provision and effective tax rate 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, sales, maturities and payments on investment securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

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

Our most liquid assets are cash and due from banks, and certificates of deposit with other banks. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At March 31, 2017, cash and due from banks totaled $327.7 million and certificates of deposit totaled $80.3 million. In addition, at March 31, 2017, we had $205.7 million of available borrowing capacity with the FHLB, including a $9.4 million line of credit. On March 31, 2017, we had $334.8 million of advances outstanding.

Our primary investing activities are the origination of loans and the purchase and sale of securities. Our primary financing activities consist of activity in deposit accounts and FHLB advances. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. Occasionally, we offer promotional rates on certain deposit products to attract deposits.

A significant use of our liquidity is the funding of loan originations. At March 31, 2017 and December 31, 2016, we had total loan commitments outstanding of $1.292 billion and $1.178 billion, respectively. Historically, many of the commitments expire without being fully drawn; therefore the total amount of commitments does not necessarily represent future cash requirements. Refer to Note 8, Commitments and Derivatives, in Notes to the Unaudited Consolidated Financial Statements within this report for more detail regarding our outstanding commitments.

Another significant use of our liquidity is the funding of deposit withdrawals. Certificates of deposit due within one year of March 31, 2017 totaled $651.3 million, or 57.1% of total certificates of deposit. If these maturing deposits do not remain with us, we will be required to utilize other sources of funds. Historically, a significant portion of certificates of deposit that mature have remained with us. We have the ability to attract and retain deposits by adjusting the interest rates offered and accepting brokered certificates of deposit when it is deemed cost effective.

Meridian Bancorp, Inc. is a separate legal entity from East Boston Savings Bank and it must provide for its own liquidity to pay dividends and repurchase its common stock and for other corporate purposes. Meridian Bancorp, Inc.’s primary source of liquidity is proceeds from the 2014 second-step offering, and to a lesser extent dividend payments received from East Boston Savings Bank. The

 

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ability of East Boston Savings Bank to pay dividends is subject to regulatory requirements. At March 31, 2017, Meridian Bancorp, Inc. (on an unconsolidated basis) had cash and cash equivalents, certificates of deposit and securities available for sale totaling $118.4 million.

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

Capital Management. Both the Company and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board and the Federal Deposit Insurance Corporation, respectively, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2017, both the Company and the Bank exceeded all of their respective regulatory capital requirements. The Bank is considered “well capitalized” under regulatory guidelines.

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

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 March 31, 2017, the Company had repurchased 2,059,611 shares of its stock at an average price of $13.71 per share, or 75.2% of the 2,737,334 shares authorized for repurchase under the Company’s repurchase program. The Company did not repurchase any of its shares during the three months ended March 31, 2017. The Company’s Board of Directors declared a quarterly cash dividend of $0.04 per common share on March 1, 2017. The dividend was paid on April 4, 2017 to stockholders of record at the close of business on March 21, 2017.

 

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

 

     Actual     Minimum
Capital
Requirement
    Minimum to be Well
Capitalized Under Prompt
Corrective Action
Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (Dollars in thousands)  

March 31, 2017

               

Total Capital (to Risk Weighted Assets):

               

Company

   $ 643,871        14.6   $ 351,871        8.0   $ 439,837        10.0

Bank

     506,129        11.6       349,977        8.0       437,473        10.0  

Tier 1 Capital (to Risk Weighted Assets):

               

Company

     600,457        13.7       263,902        6.0       351,871        8.0  

Bank

     462,715        10.6       262,484        6.0       349,977        8.0  

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

               

Company

     600,457        13.7       197,927        4.5       285,894        6.5  

Bank

     462,715        10.6       196,862        4.5       284,357        6.5  

Tier 1 Capital (to Average Assets):

               

Company

     600,457        13.3       180,078        4.0       225,097        5.0  

Bank

     462,715        10.5       175,862        4.0       219,829        5.0  

December 31, 2016

               

Total Capital (to Risk Weighted Assets):

               

Company

   $ 633,420        15.0   $ 338,278        8.0   $ 423,597        10.0

Bank

     493,944        11.7       337,058        8.0       421,323        10.0  

Tier 1 Capital (to Risk Weighted Assets):

               

Company

     591,804        14.0       254,158        6.0       338,878        8.0  

Bank

     452,328        10.7       252,794        6.0       337,058        8.0  

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

               

Company

     591,804        14.0       190,619        4.5       275,338        6.5  

Bank

     452,328        10.7       189,595        4.5       273,860        6.5  

Tier 1 Capital (to Average Assets):

               

Company

     591,804        13.8       171,854        4.0       214,817        5.0  

Bank

     452,328        10.7       168,518        4.0       210,648        5.0  

 

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

 

     March 31,      December 31,  
     2017      2016  
     Consolidated      Bank      Consolidated      Bank  
     (In thousands)  

Total stockholders’ equity per financial statements

   $ 616,178      $ 478,438      $ 607,297      $ 467,821  

Adjustments to Tier 1 and Common Equity Tier 1 capital:

           

Accumulated other comprehensive gain

     (2,034      (2,036      (1,806      (1,806

Goodwill disallowed

     (13,687      (13,687      (13,687      (13,687
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Tier 1 and Common Equity Tier 1 capital

     600,457        462,715        591,804        452,328  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjustments to total capital:

           

Allowance for loan losses

     41,764        41,764        40,149        40,149  

45% of net unrealized gains on marketable equity securities

     1,650        1,650        1,467        1,467  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total regulatory capital

   $ 643,871      $ 506,129      $ 633,420      $ 493,944  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 three months ended March 31, 2017, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest Rate Risk Management. Our earnings and the market value of our assets and liabilities are subject to fluctuations caused by changes in the level of interest rates. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk emphasizes: originating loans with adjustable interest rates; selling the residential real estate fixed-rate loans with terms greater than 10 years that we originate; promoting core deposit products; and adjusting the interest rates and maturities of funding sources, as necessary.

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

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

Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income. Interest income simulations are compl