Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-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 number001-36573
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 ofRegulation 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, anon-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 Rule12b-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 Rule12b-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
FORM10-Q
INDEX
Page | ||||||
PART I. | ||||||
Item 1. | ||||||
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 | |||||
6 | ||||||
Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 | 7 | |||||
9 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 | ||||
Item 3. | 37 | |||||
Item 4. | 38 | |||||
PART II. | ||||||
Item 1. | 39 | |||||
Item 1A. | 39 | |||||
Item 2. | 39 | |||||
Item 3. | 39 | |||||
Item 4. | 39 | |||||
Item 5. | 39 | |||||
Item 6. | 40 | |||||
42 | ||||||
Exhibit 31.1 | ||||||
Exhibit 31.2 | ||||||
Exhibit 32.0 |
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PART I – FINANCIAL INFORMATION
ITEM 1. | FINANCIALSTATEMENTS |
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 | ) | ||||
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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 | ||||||
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Total assets | $ | 4,638,712 | $ | 4,436,002 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Deposits: | ||||||||
Non interest-bearing | $ | 439,315 | $ | 431,222 | ||||
Interest-bearing | 3,217,318 | 3,044,615 | ||||||
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Total deposits | 3,656,633 | 3,475,837 | ||||||
Long-term debt | 334,827 | 322,512 | ||||||
Accrued expenses and other liabilities | 31,074 | 30,356 | ||||||
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Total liabilities | 4,022,534 | 3,828,705 | ||||||
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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 | ||||||
Additionalpaid-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 | ) | ||||
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Total stockholders’ equity | 616,178 | 607,297 | ||||||
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Total liabilities and stockholders’ equity | $ | 4,638,712 | $ | 4,436,002 | ||||
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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 | ||||||
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Total interest and dividend income | 41,752 | 34,184 | ||||||
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Interest expense: | ||||||||
Interest on deposits | 7,419 | 5,228 | ||||||
Interest on short-term borrowings | — | 6 | ||||||
Interest on long-term debt | 980 | 571 | ||||||
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Total interest expense | 8,399 | 5,805 | ||||||
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Net interest income | 33,353 | 28,379 | ||||||
Provision for loan losses | 1,619 | 1,066 | ||||||
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Net interest income, after provision for loan losses | 31,734 | 27,313 | ||||||
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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 | ||||||
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Totalnon-interest income | 4,072 | 2,692 | ||||||
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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 | ||||||
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Totalnon-interest expenses | 21,877 | 19,230 | ||||||
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Income before income taxes | 13,929 | 10,775 | ||||||
Provision for income taxes | 4,685 | 3,298 | ||||||
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Net income | $ | 9,244 | $ | 7,477 | ||||
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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 | ||||
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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 | ) | ||||
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Net unrealized gain | 384 | 1,316 | ||||||
Tax effect | (156 | ) | (574 | ) | ||||
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Total other comprehensive income | 228 | 742 | ||||||
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Comprehensive income | $ | 9,472 | $ | 8,219 | ||||
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(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 | ||||||||||||||||||||||
(Dollarsinthousands) | ||||||||||||||||||||||||||||
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 | |||||||||||||||||||||
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Balance at March 31, 2017 | 53,630,841 | $ | 536 | $ | 391,316 | $ | 241,472 | $ | 2,034 | $ | (19,180 | ) | $ | 616,178 | ||||||||||||||
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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 | |||||||||||||||||||||
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Balance at March 31, 2016 | 53,895,870 | $ | 539 | $ | 391,399 | $ | 212,158 | $ | (1,350 | ) | $ | (20,062 | ) | $ | 582,684 | |||||||||||||
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See accompanying notes to consolidated financial statements.
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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 | ) | |||||
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Net cash provided by operating activities | 13,300 | 10,026 | ||||||
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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 | ) | ||||
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Net cash used in investing activities | (113,784 | ) | (149,852 | ) | ||||
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(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 | ) | |||||
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Net cash provided by financing activities | 191,724 | 197,585 | ||||||
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Net change in cash and cash equivalents | 91,240 | 57,759 | ||||||
Cash and cash equivalents at beginning of period | 236,423 | 96,363 | ||||||
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Cash and cash equivalents at end of period | $ | 327,663 | $ | 154,122 | ||||
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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 Form10-Q and Rule10-01 of RegulationS-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 Form10-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 atwww.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,RevenuefromContractswithCustomers(Topic606). 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 ASUNo. 2016-01,FinancialInstruments—Overall,(Subtopic825-10). 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 ASUNo. 2016-02,Leases(Topic842). 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 aright-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 ASUNo. 2016-13,FinancialInstruments–CreditLosses(Topic326). 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 onavailable-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 ASUNo. 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 arenon-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 | ||||
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Basic weighted average shares outstanding | 50,949,634 | 51,569,683 | ||||||
Effect of dilutive stock options | 1,577,103 | 1,094,238 | ||||||
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Diluted weighted average shares outstanding | 52,526,737 | 52,663,921 | ||||||
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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.
10
Table of Contents
4. SECURITIES AVAILABLE FOR SALE
The amortized cost and fair values of securities available for sale, with gross unrealized gains and losses, follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
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 | |||||||
|
|
|
|
|
|
|
|
11
Table of Contents
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 | |||||||||||||||||||||||||
(Inthousands) | ||||||||||||||||||||||||||||||||
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 | |||||||||||||
(Inthousands) | ||||||||||||||||
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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|
|
|
|
|
|
12
Table of Contents
Less Than Twelve Months | Twelve Months or Longer | |||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Fair | Unrealized | Fair | |||||||||||||
Losses | Value | Losses | Value | |||||||||||||
(Inthousands) | ||||||||||||||||
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 aone-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.
13
Table of Contents
5. | LOANS |
A summary of loans follows:
March 31, 2017 | December 31, 2016 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
(Dollarsinthousands) | ||||||||||||||||
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 | |||||||||||||||||||||||||
(Inthousands) | ||||||||||||||||||||||||||||||||
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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|
|
|
|
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14
Table of Contents
One- to four- family | Multi- family | Home equity lines of credit | Commercial real estate | Construction | Commercial and industrial | Consumer | Total | |||||||||||||||||||||||||
(Inthousands) | ||||||||||||||||||||||||||||||||
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 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Table of Contents
The following table provides information about the Company’s past due andnon-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 | ||||||||||||||||
(Inthousands) | ||||||||||||||||||||
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 | |||||||||||||||||||
(Inthousands) | ||||||||||||||||||||||||
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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|
|
|
|
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|
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|
|
|
16
Table of Contents
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 | |||||||||||||||||||
(Inthousands) | ||||||||||||||||||||||||
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 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Total impaired loans | $ | 8,499 | $ | 60 | $ | 24 | $ | 23,264 | $ | 94 | $ | 80 | ||||||||||||
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|
|
|
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|
|
The following table summarizes the troubled debt restructurings (“TDRs”) at the dates indicated:
March 31, | December 31, | |||||||
2017 | 2016 | |||||||
(Inthousands) | ||||||||
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 | ||||||
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|
|
| |||||
Total TDRs on accrual status | 13,142 | 13,257 | ||||||
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|
| |||||
TDRs onnon-accrual status: | ||||||||
One- to four-family | 1,108 | 1,123 | ||||||
|
|
|
| |||||
Total TDRs onnon-accrual status | 1,108 | 1,123 | ||||||
|
|
|
| |||||
Total TDRs | $ | 14,250 | $ | 14,380 | ||||
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|
|
The Company generally places loans modified as TDRs onnon-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 aten-grade internal loan rating system for multi-family, commercial real estate, construction, and commercial and industrial loans as follows:
• | Loansrated1,2,3,4,5and6: Loans in these categories are considered “pass” rated loans with low to average risk. |
• | Loansrated7: 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. |
• | Loansrated8: 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. |
• | Loansrated9: 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. |
• | Loansrated10: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted. |
17
Table of Contents
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 | |||||||||||||||||||||||||
(Inthousands) | ||||||||||||||||||||||||||||||||
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 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 587,180 | $ | 1,791,468 | $ | 567,352 | $ | 524,723 | $ | 562,948 | $ | 1,776,601 | $ | 502,753 | $ | 515,430 | ||||||||||||||||
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|
|
|
|
|
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|
|
|
|
|
|
|
|
Forone- 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 | |||||||
(Inthousands) | ||||||||
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 | ||||||
|
|
|
| |||||
Totalnon-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 | ||||||||||||
(Dollarsinthousands) | ||||||||||||||||
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.
18
Table of Contents
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 | |||||||||||||
(Dollarsinthousands) | ||||||||||||||||
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 the3-Month London Interbank Offered Rate (LIBOR), less 60 basis points, during the first year and $10.0 million with variable rates based on the3-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 onone- 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 withoff-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 foron-balance sheet instruments.
19
Table of Contents
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.
20
Table of Contents
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 fornon-accrual loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Deposits — The fair values disclosed fornon-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 foroff-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.
21
Table of Contents
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 | |||||||||||||
(Inthousands) | ||||||||||||||||
March 31, 2017 | ||||||||||||||||
Assets: | ||||||||||||||||
Debt securities | $ | — | $ | 16,380 | $ | — | $ | 16,380 | ||||||||
Marketable equity securities | 42,678 | — | — | 42,678 | ||||||||||||
Loan level interest rate swaps | — | — | 702 | 702 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total assets | $ | 42,678 | $ | 16,380 | $ | 702 | $ | 59,760 | ||||||||
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|
|
|
|
|
| |||||||||
Liabilities: | ||||||||||||||||
Loan level interest rate swaps | — | — | 702 | 702 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total liabilities | $ | — | $ | — | $ | 702 | $ | 702 | ||||||||
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|
|
|
|
Total Fair | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Value | |||||||||||||
(Inthousands) | ||||||||||||||||
December 31, 2016 | ||||||||||||||||
Assets: | ||||||||||||||||
Debt securities | $ | — | $ | 21,631 | $ | — | $ | 21,631 | ||||||||
Marketable equity securities | 46,032 | — | — | 46,032 | ||||||||||||
Loan level interest rate swaps | — | — | 779 | 779 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
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 aNon-recurring Basis
The Company may also be required, from time to time, to measure certain other assets on anon-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from the application oflower-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 anon-recurring basis.
Three Months Ended | ||||||||||||||||
March 31, 2017 | March 31, 2017 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total Losses | |||||||||||||
(Inthousands) | ||||||||||||||||
Impaired loans | $ | — | $ | — | $ | 5,067 | $ | 1 | ||||||||
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|
|
|
|
|
|
| |||||||||
$ | — | $ | — | $ | 5,067 | $ | 1 | |||||||||
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|
|
|
|
|
Three Months Ended | ||||||||||||||||
December 31, 2016 | March 31, 2016 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total Losses | |||||||||||||
(Inthousands) | ||||||||||||||||
Impaired loans | $ | — | $ | — | $ | 4,916 | $ | 97 | ||||||||
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|
|
|
|
|
|
| |||||||||
$ | — | $ | — | $ | 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 | ||||||||||||||||
(Inthousands) | ||||||||||||||||||||
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 | ||||||||||||||||
(Inthousands) | ||||||||||||||||||||
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.MANAGEMENT’SDISCUSSIONANDANALYSISOFFINANCIALCONDITIONANDRESULTSOFOPERATIONS
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 Form10-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 Form10-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 atwww.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 onForm 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.
LoanPortfolioAnalysis. 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 inone- 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.
CreditRiskManagement. 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 onpre-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 totalre-evaluation of the loan and associated risks are documented by completing a loan risk assessment and action plan. Some loans may bere-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 onnon-accrual status based on a determination that the ultimate collection of all principal and interest due was not expected and certain loans remain onnon-accrual status until they attain a sustained payment history of six consecutive months.
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Non-performingAssets.Non-performing assets include loans that are 90 or more days past due or onnon-accrual status, including TDRs onnon-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. Fornon-accrual loans, interest previously accrued but not collected is reversed and charged against income at the time a loan is placed onnon-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 bydeed-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 ournon-performing assets at the dates indicated.
March 31, | December 31, | |||||||
2017 | 2016 | |||||||
(Dollarsinthousands) | ||||||||
Loans accounted for on anon-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 | ||||||
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Total real estate loans | 13,040 | 12,783 | ||||||
Commercial and industrial | 646 | 653 | ||||||
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Totalnon-accrual loans (1) | 13,686 | 13,436 | ||||||
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Totalnon-performing assets | $ | 13,686 | $ | 13,436 | ||||
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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 onnon-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 hadnon-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 innon-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% ofnon-accrual loans, compared to $40.1 million, or 1.02% of total loans and 298.82% ofnon-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 ofnon-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 ournon-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.
TroubledDebtRestructurings. 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.
PotentialProblemLoans. 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 anon-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” or8-rated loans in accordance with ourten-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.
AllowanceforLoanLosses. 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 andnon-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 | |||||||
(Dollarsinthousands) | ||||||||
Beginning balance | $ | 40,149 | $ | 33,405 | ||||
Provision for loan losses | 1,619 | 1,066 | ||||||
Charge-offs: | ||||||||
Commercial and industrial | — | (44 | ) | |||||
Consumer | (91 | ) | (64 | ) | ||||
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Total charge-offs | (91 | ) | (108 | ) | ||||
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Recoveries: | ||||||||
One- to four-family | 30 | — | ||||||
Construction | 45 | 7 | ||||||
Consumer | 12 | 20 | ||||||
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Total recoveries | 87 | 27 | ||||||
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Net charge-offs | (4 | ) | (81 | ) | ||||
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Ending balance | $ | 41,764 | $ | 34,390 | ||||
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Allowance tonon-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 historicalcharge-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 thanone- 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 | |||||||||||||||||||
(Dollarsinthousands) | ||||||||||||||||||||||||
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 | ||||||||||||||||||
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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 | ||||||||||||||||||
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Total loans | $ | 41,764 | 100.0 | % | 100.0 | % | $ | 40,149 | 100.0 | % | 100.0 | % | ||||||||||||
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The allowance consists of general and allocated components. The general component relates to pools ofnon-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 individualone- 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 andnon-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 onnon-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.
SecuritiesPortfolio. 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,SecuritiesAvailableforSale, 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 | ||||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 3,530,991 | 0.85 | % | 100.0 | % | $ | 2,807,466 | 0.75 | % | 100.0 | % | ||||||||||||
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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 ofavailable-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 “CapitalManagement” 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
NetIncome. 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 isnon-interest income, which includes revenue that we receive from providing products and services. The majority of ournon-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 | |||||||||||||
(Dollarsinthousands) | ||||||||||||||||
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.
AverageBalanceSheetsandRelatedYieldsandRates. 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 includenon-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 | ||||||||||||||||||
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|
|
|
|
|
| |||||||||||||||||
Total interest-earning assets | 4,390,176 | 43,060 | 3.98 | 3,501,529 | 35,356 | 4.06 | ||||||||||||||||||
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| |||||||||||||||||||||
Noninterest-earning assets | 111,757 | 114,476 | ||||||||||||||||||||||
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| |||||||||||||||||||||
Total assets | $ | 4,501,933 | $ | 3,616,005 | ||||||||||||||||||||
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| |||||||||||||||||||||
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 | ||||||||||||||||||
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| |||||||||||||||||
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 | ||||||||||||||||||
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|
|
|
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| |||||||||||||||||
Total interest-bearing liabilities | 3,436,242 | 8,399 | 0.99 | 2,639,207 | 5,805 | 0.88 | ||||||||||||||||||
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Noninterest-bearing demand deposits | 425,353 | 368,038 | ||||||||||||||||||||||
Other noninterest-bearing liabilities | 27,312 | 23,312 | ||||||||||||||||||||||
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| |||||||||||||||||||||
Total liabilities | 3,888,907 | 3,030,557 | ||||||||||||||||||||||
Total stockholders’ equity | 613,026 | 585,448 | ||||||||||||||||||||||
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| |||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 4,501,933 | $ | 3,616,005 | ||||||||||||||||||||
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| |||||||||||||||||||||
Net interest-earning assets | $ | 953,934 | $ | 862,322 | ||||||||||||||||||||
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| |||||||||||||||||||||
Fullytax-equivalent net interest income | 34,661 | 29,551 | ||||||||||||||||||||||
Less:tax-equivalent adjustments | (1,308 | ) | (1,172 | ) | ||||||||||||||||||||
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Net interest income | $ | 33,353 | $ | 28,379 | ||||||||||||||||||||
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| |||||||||||||||||||||
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 atax-equivalent basis. Thetax-equivalent adjustments are deducted fromtax-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 beforetax-equivalent adjustments were 4.10% and 4.23%, respectively, yields on securities and certificates of deposit beforetax-equivalent adjustments were 1.71% and 1.51%, respectively, and yield on total interest-earning assets beforetax-equivalent adjustments were 3.86% and 3.93%, respectively. Interest rate spread beforetax-equivalent adjustments for the three months ended March 31, 2017 and 2016 was 2.87% and 3.05%, respectively, while net interest margin beforetax-equivalent adjustments for the three months ended March 31, 2017 and 2016 was 3.08% and 3.26%, respectively. |
(2) | Loans onnon-accrual status are included in average balances. |
(3) | Includes FHLB stock and associated dividends. |
(4) | Interest rate spread represents the difference between thetax-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/VolumeAnalysis. The following table sets forth the effects of changing rates and volumes on our fullytax-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 | |||||||||
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Total | 8,535 | (831 | ) | 7,704 | ||||||||
Interest expense: | ||||||||||||
Deposits | 1,470 | 721 | 2,191 | |||||||||
Borrowings | 383 | 20 | 403 | |||||||||
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| |||||||
Total | 1,853 | 741 | 2,594 | |||||||||
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Change in fullytax-equivalent net interest income | $ | 6,682 | $ | (1,572 | ) | $ | 5,110 | |||||
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The interest rate spread and net interest margin on atax-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 atax-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 atax-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.
ProvisionforLoanLosses. 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 “AllowanceforLoanLosses.”
Non-InterestIncome.Non-interest income information is as follows:
Three Months Ended March 31, | Change | |||||||||||||||
2017 | 2016 | Amount | Percent | |||||||||||||
(Dollarsinthousands) | ||||||||||||||||
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 | ) | ||||||||||
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Totalnon-interest income | $ | 4,072 | $ | 2,692 | $ | 1,380 | 51.3 | % | ||||||||
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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-InterestExpense.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 | ) | ||||||||||
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Totalnon-interest expenses | $ | 21,877 | $ | 19,238 | $ | 2,639 | 13.7 | % | ||||||||
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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.
IncomeTaxProvision. 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 ofpre-tax income.
LiquidityManagement. 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,CommitmentsandDerivatives, 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.
CapitalManagement. 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 andoff-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 thephase-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 anon-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 | |||||||||||||||||||
(Dollarsinthousands) | ||||||||||||||||||||||||
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 | |||||||||||||
(Inthousands) | ||||||||||||||||
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 | ) | ||||||||
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Total Tier 1 and Common Equity Tier 1 capital | 600,457 | 462,715 | 591,804 | 452,328 | ||||||||||||
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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 | ||||||||||||
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Total regulatory capital | $ | 643,871 | $ | 506,129 | $ | 633,420 | $ | 493,944 | ||||||||
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Off-BalanceSheetArrangements. 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 nooff-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
ITEM 3. | QUANTITATIVEANDQUALITATIVEDISCLOSUREABOUTMARKETRISK |
InterestRateRiskManagement. 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.
NetInterestIncomeSimulationAnalysis. We analyze our interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income simulation. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest sensitive.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period.
Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income. Interest income simulations are completed quarterly and presented to the Asset/Liability Committee and the Board of Directors. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. The numerous assumptions used in the simulation process are reviewed by the Asset/Liability Committee and the Executive Committee on a quarterly basis. Changes to these assumptions can significantly affect the results of the simulation. The simulation incorporates assumptions regarding the potential timing of the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.
Simulation analysis is only an estimate of our interest rate risk exposure at a particular point in time. We continually review the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.
The simulation uses projected repricing of assets and liabilities on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a significant impact on interest income simulation. Because of the large percentage of loans we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets
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that in turn affect the rate sensitivity position. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. Our asset sensitivity would be reduced if prepayments slow and vice versa. While we believe such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.
The following table reflects changes in estimated net interest income for the Bank due to immediatenon-parallel changes in interest rates for the subsequent one year period as of the dates indicated.
March 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
Increase (Decrease) in Market Interest Rates | Amount | Change | Percent | Amount | Change | Percent | ||||||||||||||||||
(Dollarsinthousands) | ||||||||||||||||||||||||
300 | $ | 117,977 | $ | (17,844 | ) | (13.14 | )% | $ | 115,819 | $ | (17,805 | ) | (13.32 | )% | ||||||||||
Flat | 135,821 | 133,624 | ||||||||||||||||||||||
-100 | 134,040 | (1,781 | ) | (1.31 | ) | 131,636 | (1,988 | ) | (1.49 | ) |
ITEM 4. | CONTROLSANDPROCEDURES |
(a) | ConclusionRegardingtheEffectivenessofDisclosureControlsandProcedures The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. |
(b) | ChangesinInternalControlsoverFinancialReporting There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules13a-15(f) and15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. |
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ITEM 1. | LEGALPROCEEDINGS |
Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
ITEM 1A. | RISKFACTORS |
For information regarding our risk factors, see “Risk Factors,” in the Company’s 2016 Annual Report on Form10-K, filed with the SEC on March 1, 2017, which is available through the SEC’s website atwww.sec.gov. As of March 31, 2017, our risk factors have not changed materially from those reported in the annual report. The risks described in the annual report are not the only risks that we face. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.
ITEM 2. | UNREGISTEREDSALESOFEQUITYSECURITIESANDUSEOFPROCEEDS |
(a.) | Not applicable |
(b.) | Not applicable |
(c.) | For the three months ended March 31, 2017 there were no repurchases of Meridian Bancorp, Inc. stock. In August 2015, the Company adopted a repurchase program for 2,737,334 shares of common stock. The program has no expiration date. As of March 31, 2017, the Company had repurchased 2,059,611 shares of common stock under the repurchase program. |
ITEM 3. | DEFAULTSUPONSENIORSECURITIES |
Not applicable.
ITEM 4. | MINESAFETYDISCLOSURES |
Not applicable.
ITEM 5. | OTHERINFORMATION |
Not applicable.
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ITEM 6. | EXHIBITS |
3.1 | Articles of Incorporation of Meridian Bancorp, Inc. (Incorporated by reference to the Registration Statement onForm S-1 of Meridian Bancorp, Inc. (FileNo. 333-194454), originally filed with the Securities and Exchange Commission on March 10, 2014) | |
3.2 | Bylaws of Meridian Bancorp, Inc. (Incorporated by reference to the Registration Statement onForm S-1 of Meridian Bancorp, Inc. (FileNo. 333-194454), originally filed with the Securities and Exchange Commission on March 10, 2014) | |
4 | Form of Common Stock Certificate of Meridian Bancorp, Inc. (Incorporated by reference to the Registration Statement onForm S-1 of Meridian Bancorp, Inc. (FileNo. 333-194454), originally filed with the Securities and Exchange Commission on March 10, 2014) | |
10.1 | Meridian Bancorp, Inc. 2015 Equity Incentive Plan (Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement for the Annual Meeting of Stockholders (FileNo. 001-36573), filed with the Securities and Exchange Commission on August 18, 2015) | |
10.2 | Form of Employee Stock Option Agreement under the Meridian Bancorp, Inc. 2015 Equity Incentive Plan filed as an exhibit toForm 8-K filed on November 5, 2015 | |
10.3 | Form of Director Stock Option Agreement under the Meridian Bancorp, Inc. 2015 Equity Incentive Plan filed as an exhibit toForm 8-K filed on November 5, 2015 | |
10.4 | Amended and Restated Employment Agreement with Richard J. Gavegnano and East Boston Savings Bank dated July 28, 2014 filed as an exhibit toForm 10-Q filed on November 10, 2014 | |
10.5 | East Boston Savings Bank Amended and Restated Employee Severance Compensation Plan filed as an exhibit toForm 10-Q filed on November 10, 2014 | |
10.6 | Form of Amended and Restated Supplemental Executive Retirement Agreements with Directors Domenic A. Gambardella, Gregory F. Natalucci, and James G. Sartori filed as an exhibit toForm 10-Q filed on November 10, 2014 | |
10.7 | Amended and Restated Supplemental Executive Retirement Agreement with Richard J. Gavegnano filed as an exhibit toForm 10-Q filed on November 10, 2014 | |
10.8 | 2008 Equity Incentive Plan (Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement for its 2008 Annual Meeting, as filed with the Securities and Exchange Commission on July 11, 2008) | |
10.9 | Termination Amendment for the Amended and Restated Employment Agreement between Edward J. Merritt and East Boston Savings Bank dated December 10, 2015 filed as an exhibit toForm 8-K filed on December 10, 2015 | |
10.10 | Amended and Restated Supplemental Executive Retirement Agreement between East Boston Savings Bank and Edward J. Merritt dated July 28, 2014 filed as an exhibit toForm 10-Q filed on November 10, 2014 | |
10.11 | Joint Beneficiary Designation Agreement between Edward J. Merritt and Mt. WashingtonCo-operative Bank (Incorporated by reference to the Company’s Annual Report onForm 10-K as filed with the Securities and Exchange Commission on March 16, 2010) | |
10.12 | First Amendment to Joint Beneficiary Designation Agreement between Edward J. Merritt and Mt. WashingtonCo-operative Bank (Incorporated by reference to the Company’s Annual Report onForm 10-K as filed with the Securities and Exchange Commission on March 16, 2010) | |
10.13 | Amended and RestatedTwo-Year Change in Control Agreement between Mark Abbate and East Boston Savings Bank dated July 28, 2014 filed as an exhibit toForm 10-Q filed on November 10, 2014 | |
10.14 | Incentive Compensation Plan filed as an exhibit toForm 10-K filed on March 17, 2014 | |
10.15 | Amended and RestatedTwo-Year Change in Control Agreement between John Migliozzi and East Boston Savings Bank dated July 28, 2014 filed as an exhibit toForm 10-Q filed on November 10, 2014 | |
10.16 | East BostonNon-Qualified Supplemental Employee Stock Ownership Plan dated October 1, 2014 filed as an exhibit toForm 10-Q filed on November 10, 2014 | |
10.17 | Amended and RestatedTwo-Year Change in Control Agreement between Frank Romano and East Boston Savings Bank dated July 28, 2014 filed as an exhibit toForm 10-K filed on March 13, 2015 | |
10.18 | Form of Restricted Stock Award Agreement under the Meridian Bancorp, Inc. 2015 Equity Incentive Plan filed as an exhibit toForm 8-K filed on November 5, 2015 | |
10.19 | Two-Year Change in Control Agreement between Edward J. Merritt and East Boston Savings Bank dated December 10, 2015 filed as an exhibit toForm 8-K filed on December 10, 2015 | |
10.20 | Freeze Amendment to the Amended and Restated Supplemental Executive Retirement Agreement between East Boston Savings Bank and Edward J. Merritt dated December 10, 2015 filed as an exhibit toForm 8-K filed on December 10, 2015 | |
21 | Subsidiaries of Registrant filed as an exhibit toForm 10-Q filed on November 10, 2014 | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101 | The following financial statements formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Net Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MERIDIAN BANCORP, INC. (Registrant) | ||||||
Date: May 9, 2017 | By: | /s/ Richard J. Gavegnano | ||||
Richard J. Gavegnano Chairman, President and Chief Executive Officer (Principal Executive Officer) | ||||||
Date: May 9, 2017 | By: | /s/ Mark L. Abbate | ||||
Mark L. Abbate | ||||||
Executive Vice President, Treasurer and Chief Financial Officer | ||||||
(Principal Financial and Accounting Officer) |
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