Meridian Bancorp (EBSB) 10-Q 2019 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2019

OR

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

For the transition period from              to             

Commission file number 001-36573

Meridian Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Maryland	46-5396964
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
67 Prospect Street, Peabody, Massachusetts	01960
(Address of Principal Executive Offices)	Zip Code

(617) 567-1500

(Registrant’s telephone number, including area code)

Not Applicable

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

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock	EBSB	The NASDAQ Stock Market, LLC

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

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

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

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Small reporting company	☐
		Emerging Growth Company	☐

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

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

As of August 1, 2019, there were 53,322,477 outstanding shares of the Registrant’s common stock.

MERIDIAN BANCORP, INC.

FORM 10-Q

INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets at June 30, 2019 and December 31, 2018	3
	Consolidated Statements of Net Income for the three and six months ended June 30, 2019 and 2018	4
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018	5
	Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018	6
	Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	39
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	41
	Signatures	43

2

PART I – FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30,			December 31,
	2019			2018
	(Dollars in thousands)
ASSETS
Cash and due from banks	$	361,050		$	371,995
Certificates of deposit		5,247			5,247
Securities available for sale, at fair value		16,500			17,159
Marketable equity securities, at fair value		14,776			13,437
Federal Home Loan Bank stock, at cost		27,469			29,187
Loans held for sale		2,105			409
Loans, net of deferred fees and costs		5,819,237			5,646,634
Less: allowance for loan losses		(53,865	)		(53,231	)
Loans, net		5,765,372			5,593,403
Bank-owned life insurance		41,295			40,734
Premises and equipment, net		66,280			45,140
Accrued interest receivable		15,436			14,267
Deferred tax asset, net		18,301			18,196
Goodwill		20,378			20,378
Core deposit intangible		2,385			2,653
Other assets		11,978			6,478
Total assets	$	6,368,572		$	6,178,683
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non interest-bearing	$	505,679		$	483,777
Interest-bearing		4,512,625			4,400,407
Total deposits		5,018,304			4,884,184
Short-term borrowings		—			50,000
Long-term debt		600,088			536,880
Accrued expenses and other liabilities		54,479			32,965
Total liabilities		5,672,871			5,504,029
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; 53,321,805 and    53,541,429 shares issued and outstanding at June 30, 2019 and December 31,    2018, respectively		533			535
Additional paid-in capital		375,760			378,583
Retained earnings		336,628			313,521
Accumulated other comprehensive loss		(24	)		(348	)
Unearned compensation - ESOP, 2,374,390 and 2,435,272 shares at June 30, 2019    and December 31, 2018, respectively		(17,196	)		(17,637	)
Total stockholders' equity		695,701			674,654
Total liabilities and stockholders' equity	$	6,368,572		$	6,178,683

See accompanying notes to consolidated financial statements.

3

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
	(Dollars in thousands, except per share amounts)
Interest and dividend income:
Interest and fees on loans	$	64,040	$	53,904		$	125,681	$	103,889
Interest on debt securities:
Taxable		108		126			218		252
Tax-exempt		13		15			26		30
Dividends on equity securities		142		134			247		282
Interest on certificates of deposit		28		141			55		344
Other interest and dividend income		1,943		1,527			4,520		3,049
Total interest and dividend income		66,274		55,847			130,747		107,846
Interest expense:
Interest on deposits		20,653		12,751			39,804		23,260
Interest on short-term borrowings		—		—			295		—
Interest on borrowings		3,151		2,049			5,581		3,691
Total interest expense		23,804		14,800			45,680		26,951
Net interest income		42,470		41,047			85,067		80,895
Provision for loan losses		78		1,870			921		4,059
Net interest income, after provision for loan losses		42,392		39,177			84,146		76,836
Non-interest income:
Customer service fees		2,288		2,282			4,385		4,452
Loan fees		53		(158	)		130		137
Mortgage banking gains, net		101		63			141		196
Gain (loss) on marketable equity securities, net		223		388			1,549		(149	)
Income from bank-owned life insurance		280		277			561		549
Other income		9		6			16		6
Total non-interest income		2,954		2,858			6,782		5,191
Non-interest expenses:
Salaries and employee benefits		14,916		14,438			30,548		29,832
Occupancy and equipment		3,650		3,025			7,246		6,564
Data processing		2,009		1,653			3,979		3,336
Marketing and advertising		1,299		1,006			2,461		1,973
Professional services		784		1,000			1,644		1,965
Deposit insurance		929		782			1,941		1,579
Merger and acquisition		—		14			—		88
Other general and administrative		1,530		1,547			3,094		2,817
Total non-interest expenses		25,117		23,465			50,913		48,154
Income before income taxes		20,229		18,570			40,015		33,873
Provision for income taxes		5,061		4,508			9,776		7,817
Net income	$	15,168	$	14,062		$	30,239	$	26,056
Earnings per share:
Basic	$	0.30	$	0.27		$	0.59	$	0.51
Diluted	$	0.29	$	0.27		$	0.59	$	0.49
Weighted average shares outstanding:
Basic		51,051,880		51,437,726			51,086,050		51,484,521
Diluted		51,511,678		52,867,787			51,489,608		52,975,541

See accompanying notes to consolidated financial statements.

4

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(In thousands)
Net income	$	15,168		$	14,062		$	30,239		$	26,056
Other comprehensive income (loss):
Net unrealized gain (loss) on securities available for sale		194			(117	)		450			(498	)
Tax effect		(54	)		38			(126	)		174
Total other comprehensive income (loss)		140			(79	)		324			(324	)
Comprehensive income	$	15,308		$	13,983		$	30,563		$	25,732

See accompanying notes to consolidated financial statements.

5

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Three and Six Months Ended June 30, 2019 and 2018

(Unaudited)

	Shares of Common Stock Outstanding			Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Unearned Compensation - ESOP			Total
	(Dollars in thousands)
Six Months Ended June 30, 2019
Balance at December 31, 2018		53,541,429		$	535		$	378,583		$	313,521		$	(348	)	$	(17,637	)	$	674,654
Comprehensive income (loss)		—			—			—			15,071			184			—			15,255
Dividends declared ($0.07 per share)		—			—			—			(3,569	)		—			—			(3,569	)
Repurchased stock related to buyback    program		(104,177	)		(1	)		(1,646	)		—			—			—			(1,647	)
ESOP shares committed to be allocated    (30,441 shares)		—			—			258			—			—			221			479
Share-based compensation expense -    restricted stock, net of awards forfeited		(455	)		—			681			—			—			—			681
Share-based compensation expense -    stock options, net of awards forfeited		—			—			407			—			—			—			407
Shares surrendered related to tax    withholdings on stock options exercised		(4,458	)		—			(71	)		—			—			—			(71	)
Stock options exercised		110,307			1			198			—			—			—			199
Balance at March 31, 2019		53,542,646		$	535		$	378,410		$	325,023		$	(164	)	$	(17,416	)	$	686,388
Comprehensive income (loss)		—			—			—			15,168			140			—			15,308
Dividends declared ($0.07 per share)		—			—			—			(3,563	)		—			—			(3,563	)
Repurchased stock related to buyback    program		(236,842	)		(2	)		(4,073	)		—			—			—			(4,075	)
ESOP shares committed to be allocated    (30,441 shares)		—			—			300			—			—			220			520
Share-based compensation expense -    restricted stock, net of awards forfeited		11,820			—			689			—			—			—			689
Share-based compensation expense -    stock options, net of awards forfeited		—			—			411			—			—			—			411
Shares surrendered related to tax    withholdings on stock options exercised		—			—			—			—			—			—			—
Stock options exercised		4,181			—			23			—			—			—			23
Balance at June 30, 2019		53,321,805		$	533		$	375,760		$	336,628		$	(24	)	$	(17,196	)	$	695,701

6

	Shares of Common Stock Outstanding			Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Unearned Compensation - ESOP			Total
Six Months Ended June 30, 2018
Balance at December 31, 2017		54,039,316		$	540		$	395,716		$	268,533		$	128		$	(18,518	)	$	646,399
Cumulative effect of adopting Accounting    Standards Update 2016-01		—			—			—			499			(499	)		—			—
Comprehensive income		—			—			—			11,994			(245	)		—			11,749
Dividends declared ($0.05 per share)		—			—			—			(2,576	)		—			—			(2,576	)
Repurchased stock related to buyback    program		(100,000	)		(1	)		(1,995	)		—			—			—			(1,996	)
ESOP shares committed to be allocated    (30,441 shares)		—			—			405			—			—			220			625
Share-based compensation expense -    restricted stock, net of awards forfeited		(3,190	)		—			716			—			—			—			716
Share-based compensation expense -    stock options, net of awards forfeited		—			—			415			—			—			—			415
Stock options exercised		132,748			1			274			—			—			—			275
Balance at March 31, 2018		54,068,874		$	540		$	395,531		$	278,450		$	(616	)	$	(18,298	)	$	655,607
Cumulative effect of adopting Accounting    Standards Update 2016-01		—			—			—			4			(4	)		—			—
Comprehensive income		—			—			—			14,062			(79	)		—			13,983
Dividends declared ($0.05 per share)		—			—			—			(2,567	)		—			—			(2,567	)
Repurchased stock related to buyback    program		(214,010	)		(2	)		(4,063	)		—			—			—			(4,065	)
ESOP shares committed to be allocated    (30,441 shares)		—			—			374			—			—			220			594
Share-based compensation expense -    restricted stock, net of awards forfeited		(2,360	)		—			696			—			—			—			696
Share-based compensation expense -    stock options, net of awards forfeited		—			—			407			—			—			—			407
Stock options exercised		52,775			1			10			—			—			—			11
Balance at June 30, 2018		53,905,279		$	539		$	392,955		$	289,949		$	(699	)	$	(18,078	)	$	664,666

See accompanying notes to consolidated financial statements.  

7

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2019			2018
	(In thousands)
Cash flows from operating activities:
Net income	$	30,239		$	26,056
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of acquisition fair value adjustments		34			77
Amortization of core deposit intangible		268			295
ESOP shares expense		999			1,219
Provision for loan losses		921			4,059
Accretion of net deferred loan origination fees		(1,000	)		(779	)
Net amortization of securities available for sale		21			24
Depreciation and amortization expense		1,560			1,485
(Gain) loss on marketable equity securities, net		(1,549	)		149
Deferred income tax benefit		(231	)		(478	)
Income from bank-owned life insurance		(561	)		(549	)
Share-based compensation expense		2,188			2,234
Net changes in:
Loans held for sale		(1,696	)		2,720
Accrued interest receivable		(1,169	)		203
Other assets		(5,500	)		(5,911	)
Accrued expenses and other liabilities		2,747			(53	)
Net cash provided by operating activities		27,271			30,751
Cash flows from investing activities:
Purchases of certificates of deposit		—			(5,000	)
Maturities of certificates of deposit		—			50,441
Activity in securities, at fair value:
Proceeds from maturities, calls and principal payments		1,075			1,630
Proceeds from sales		223			2,961
Purchases		—			(763	)
Loans originated, net of principal payments received		(171,933	)		(495,426	)
Purchases of premises and equipment		(3,934	)		(2,061	)
Purchase of Federal Home Loan Bank stock		(1,092	)		(4,599	)
Redemption of Federal Home Loan Bank stock		2,810			—
Net cash used in investing activities		(172,851	)		(452,817	)
Cash flows from financing activities:
Net increase in deposits		134,129			281,661
Net change in borrowings with maturities less than three months		(50,000	)		—
Proceeds from Federal Home Loan Bank advances with maturities of three months or more		120,000			305,000
Repayment of Federal Home Loan Bank advances with maturities of three months or more		(56,792	)		(226,769	)
Cash dividends paid on common stock		(7,131	)		(5,150	)
Stock options exercised, net of cash paid in connection with income taxes		151			286
Repurchase of common stock		(5,722	)		(6,061	)
Net cash provided by financing activities		134,635			348,967
Net change in cash and cash equivalents		(10,945	)		(73,099	)
Cash and cash equivalents at beginning of period		371,995			402,687
Cash and cash equivalents at end of period	$	361,050		$	329,588
Supplemental cash flow information:
Interest paid on deposits	$	38,934		$	22,746
Interest paid on borrowings		5,562			3,508
Income taxes paid, net of refunds		11,485			14,379

See accompanying notes to consolidated financial statements.

8

MERIDIAN BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

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

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by such generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Such adjustments were of a normal recurring nature. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the entire year or any other interim period. For additional information, refer to the financial statements and footnotes thereto of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission (“SEC”) on March 1, 2019, and is available through the SEC’s website at www.sec.gov.

In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Adopted During the Period

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-02, Leases (Topic 842). This update is intended to improve financial reporting about leasing transactions and the key provision impacting the Company is the requirement for a lessee to record a right-to-use asset and liability representing the obligation to make lease payments for long-term operating leases. ASU 2016-02 became effective for the Company on January 1, 2019. The Company recorded an $18.8 million right-to-use lease asset and an obligation to make payment liability, representing the present value of future minimum lease payments, in premises and equipment, net and accrued expenses and other liabilities, respectively.

To be Adopted in Future Periods

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

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

9

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820). The update modifies the disclosure requirements primarily related to level 3 fair value measurements of the fair value hierarchy. This update will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. As the update primarily relates to disclosure requirements, the Company does not expect the adoption of this ASU to have a material impact on the Company’s results of operation or financial position.

3. EARNINGS PER SHARE

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

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(Dollars in thousands, except per share amounts)
Net income available to common stockholders	$	15,168	$	14,062	$	30,239	$	26,056
Basic weighted average shares outstanding		51,051,880		51,437,726		51,086,050		51,484,521
Effect of dilutive stock options		459,798		1,430,061		403,558		1,491,020
Diluted weighted average shares outstanding		51,511,678		52,867,787		51,489,608		52,975,541
Earnings per share:
Basic	$	0.30	$	0.27	$	0.59	$	0.51
Diluted	$	0.29	$	0.27	$	0.59	$	0.49

For the three months ended June 30, 2019 and 2018, options for the exercise of 121,608 shares and 63,629 shares, respectively, were not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive. For the six months ended June 30, 2019 and 2018, options for the exercise of 131,068 shares and 48,493 shares, respectively, were not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive An anti-dilutive option exists when the average stock price for the period is less than the exercise price of the option.

10

4. SECURITIES

Securities Available for Sale

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In thousands)
June 30, 2019
Debt securities:
Government-sponsored enterprises	$	1,810	$	41	$	—		$	1,851
Municipal bonds		2,089		44		—			2,133
Residential mortgage-backed securities:
Government-sponsored enterprises		11,715		154		(78	)		11,791
Private label		628		97		—			725
Total securities available for sale	$	16,242	$	336	$	(78	)	$	16,500
December 31, 2018
Debt securities:
Government-sponsored enterprises	$	1,869	$	5	$	(42	)	$	1,832
Municipal bonds		2,094		—		(63	)		2,031
Residential mortgage-backed securities:
Government-sponsored enterprises		12,749		85		(249	)		12,585
Private label		639		76		(4	)		711
Total debt securities	$	17,351	$	166	$	(358	)	$	17,159

At June 30, 2019, debt securities with a fair value of $2.4 million and $296,000 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 June 30, 2019 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
	Through Five Years				After Five Years				Total
	Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value
	(In thousands)
Government-sponsored enterprises	$	—	$	—	$	1,810	$	1,851	$	1,810	$	1,851
Municipal bonds		277		285		1,812		1,848		2,089		2,133
Residential mortgage-backed securities:
Government-sponsored enterprises		677		675		11,038		11,116		11,715		11,791
Private label		—		—		628		725		628		725
Total	$	954	$	960	$	15,288	$	15,540	$	16,242	$	16,500

11

Information pertaining to securities available for sale as of June 30, 2019 and December 31, 2018, with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	Less Than Twelve Months				Twelve Months or Longer
	Gross				Gross
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value
	(In thousands)
June 30, 2019
Debt securities:
Government-sponsored enterprises	$	—	$	—	$	—	$	—
Municipal bonds		—		—		—		—
Residential mortgage-backed securities:
Government-sponsored enterprises		—		—		78		4,778
Private label		—		—		—		—
Total temporarily impaired securities	$	—	$	—	$	78	$	4,778

	Less Than Twelve Months				Twelve Months or Longer
	Gross				Gross
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value
	(In thousands)
December 31, 2018
Debt securities:
Government-sponsored enterprises	$	42	$	1,832	$	—	$	—
Municipal bonds		28		1,267		35		764
Residential mortgage-backed securities:
Government-sponsored enterprises		247		8,479	$	2	$	159
Private label		4		163		—		—
Total temporarily impaired securities	$	321	$	11,741	$	37	$	923

The Company determined no debt securities were other-than-temporarily impaired for the six months ended June 30, 2019 and 2018. Management evaluates debt securities for other-than-temporary impairment on a quarterly basis, with more frequent evaluation for selected issuers or when economic or market concerns warrant such evaluations.

Marketable Equity Securities

Marketable equity securities consist of common stocks and money market mutual funds. The Company held equity securities with an aggregate fair value of $14.8 million and $13.4 million at June 30, 2019 and December 31, 2018, respectively.

The following is a summary of unrealized and realized gains and losses recognized in net income on marketable equity securities during the three and six months ended June 30, 2019:

	Three Months Ended					Six Months Ended
	June 30, 2019			June 30, 2018		June 30, 2019			June 30, 2018
	(In thousands)
Net realized (losses) gains on marketable equity securities    sold during the period	$	(155	)	$	—	$	(155	)	$	154
Net unrealized gains (losses) recognized during the reporting    period on marketable equity securities still held at the    reporting date		378			388		1,704			(303	)
Net gains (losses) recognized during the period    on marketable equity securities	$	223		$	388	$	1,549		$	(149	)

12

5. LOANS

A summary of loans follows:

	June 30, 2019						December 31, 2018
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
Residential real estate:
One- to four-family	$	668,997			11.5	%	$	647,367			11.4	%
Home equity lines of credit		60,040			1.0			50,087			0.9
Multi-family		1,061,839			18.2			1,010,521			17.9
Commercial real estate		2,647,033			45.4			2,621,979			46.4
Construction		748,457			12.9			686,948			12.1
Total real estate loans		5,186,366			89.0			5,016,902			88.7
Commercial and industrial		627,718			10.8			625,018			11.1
Consumer		11,445			0.2			10,953			0.2
Total loans		5,825,529			100.0	%		5,652,873			100.0	%
Allowance for loan losses		(53,865	)					(53,231	)
Net deferred loan origination fees		(6,292	)					(6,239	)
Loans, net	$	5,765,372					$	5,593,403

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 June 30, 2019 and December 31, 2018, the Company was servicing loans for participants aggregating $202.8 million and $197.9 million, respectively.

At June 30, 2019, multi-family and commercial real estate loans with carrying values totaling $306.4 million and $857.8 million, respectively, were pledged as collateral for FHLB borrowings.

13

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

	Three Months Ended June 30, 2019
	One- to four- family			Multi- family		Home equity lines of credit			Commercial real estate			Construction			Commercial and industrial			Consumer			Total
	(In thousands)
Balance at March 31, 2019	$	897		$	8,382	$	61		$	28,194		$	10,020		$	6,353		$	90		$	53,997
Provision (credit) for loan    losses		(62	)		211		4			(413	)		234			71			33			78
Charge-offs		—			—		—			—			—			(186	)		(60	)		(246	)
Recoveries		—			—		1			5			—			—			30			36
Balance at June 30, 2019	$	835		$	8,593	$	66		$	27,786		$	10,254		$	6,238		$	93		$	53,865
	Three Months Ended June 30, 2018
	One- to four- family			Multi- family		Home equity lines of credit			Commercial real estate			Construction			Commercial and industrial			Consumer			Total
	(In thousands)
Balance at March 31, 2018	$	925		$	6,989	$	62		$	23,873		$	9,581		$	5,978		$	80		$	47,488
Provision (credit) for loan    losses		23			419		—			1,415			(417	)		389			41			1,870
Charge-offs		—			—		—			—			—			—			(79	)		(79	)
Recoveries		68			—		1			5			—			—			48			122
Balance at June 30, 2018	$	1,016		$	7,408	$	63		$	25,293		$	9,164		$	6,367		$	90		$	49,401
	Six Months Ended June 30, 2019
	One- to four- family			Multi- family		Home equity lines of credit			Commercial real estate			Construction			Commercial and industrial			Consumer			Total
	(In thousands)
Balance at December 31, 2018	$	1,033		$	8,240	$	70		$	27,785		$	9,755		$	6,236		$	112		$	53,231
Provision (credit) for loan    losses		(198	)		353		(6	)		(4	)		499			198			79			921
Charge-offs		—			—		—			—			—			(196	)		(137	)		(333	)
Recoveries		—			—		2			5			—			—			39			46
Balance at June 30, 2019	$	835		$	8,593	$	66		$	27,786		$	10,254		$	6,238		$	93		$	53,865
	Six Months Ended June 30, 2018
	One- to four- family			Multi- family		Home equity lines of credit			Commercial real estate			Construction			Commercial and industrial			Consumer			Total
	(In thousands)
Balance at December 31, 2017	$	1,001		$	6,263	$	62		$	21,513		$	10,166		$	6,084		$	96		$	45,185
Provision (credit) for loan    losses		(53	)		1,145		(1	)		3,770			(1,177	)		283			92			4,059
Charge-offs		—			—		—			—			—			—			(159	)		(159	)
Recoveries		68			—		2			10			175			—			61			316
Balance at June 30, 2018	$	1,016		$	7,408	$	63		$	25,293		$	9,164		$	6,367		$	90		$	49,401

14

	One- to four- family		Multi- family		Home equity lines of credit		Commercial real estate		Construction		Commercial and industrial		Consumer		Total
	(In thousands)
June 30, 2019
Amount of allowance for loan    losses for loans deemed to be    impaired	$	35	$	—	$	—	$	—	$	—	$	—	$	—	$	35
Amount of allowance for loan    losses for loans not deemed to    be impaired		800		8,593		66		27,786		10,254		6,238		93		53,830
	$	835	$	8,593	$	66	$	27,786	$	10,254	$	6,238	$	93	$	53,865
Loans deemed to be impaired	$	1,136	$	930	$	—	$	751	$	—	$	1,150	$	—	$	3,967
Loans not deemed to be impaired		667,861		1,060,909		60,040		2,646,282		748,457		626,568		11,445		5,821,562
	$	668,997	$	1,061,839	$	60,040	$	2,647,033	$	748,457	$	627,718	$	11,445	$	5,825,529
December 31, 2018
Amount of allowance for loan    losses for loans deemed to    be impaired	$	45	$	65	$	—	$	—	$	—	$	—	$	—	$	110
Amount of allowance for loan    losses for loans not deemed to    be impaired		988		8,175		70		27,785		9,755		6,236		112		53,121
	$	1,033	$	8,240	$	70	$	27,785	$	9,755	$	6,236	$	112	$	53,231
Loans deemed to be impaired	$	1,190	$	1,271	$	—	$	784	$	—	$	1,548	$	—	$	4,793
Loans not deemed to be impaired		646,177		1,009,250		50,087		2,621,195		686,948		623,470		10,953		5,648,080
	$	647,367	$	1,010,521	$	50,087	$	2,621,979	$	686,948	$	625,018	$	10,953	$	5,652,873

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

	30-59		60-89		90 Days
	Days		Days		or Greater		Total		Loans on
	Past Due		Past Due		Past Due		Past Due		Non-accrual
	(In thousands)
June 30, 2019
Real estate loans:
Residential real estate:
One- to four-family	$	285	$	119	$	2,040	$	2,444	$	5,378
Commercial real estate		—		—		—		—		318
Total real estate loans		285		119		2,040		2,444		5,696
Commercial and industrial		—		—		350		350		350
Consumer		845		656		—		1,501		—
Total	$	1,130	$	775	$	2,390	$	4,295	$	6,046
December 31, 2018
Real estate loans:
Residential real estate:
One- to four-family	$	877	$	462	$	2,458	$	3,797	$	5,888
Home equity lines of credit		524		—		—		524		—
Multi-family		176		—		—		176		—
Commercial real estate		—		90		161		251		342
Total real estate loans		1,577		552		2,619		4,748		6,230
Commercial and industrial		214		—		515		729		676
Consumer		887		588		—		1,475		—
Total	$	2,678	$	1,140	$	3,134	$	6,952	$	6,906

15

At June 30, 2019 and December 31, 2018, 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:

	June 30, 2019						December 31, 2018
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
	(In thousands)
Impaired loans without a valuation allowance:
One- to four-family	$	774	$	1,110			$	653	$	982
Multi-family		930		930				44		44
Commercial real estate		751		751				784		784
Commercial and industrial		1,150		1,666				1,548		1,878
Total		3,605		4,457				3,029		3,688
Impaired loans with a valuation allowance:
One- to four-family		362		362	$	35		537		537	$	45
Multi-family		—		—		—		1,227		1,227		65
Total		362		362		35		1,764	$	1,764		110
Total impaired loans	$	3,967	$	4,819	$	35	$	4,793	$	5,452	$	110

	Three Months Ended June 30,
	2019						2018
					Interest						Interest
	Average		Interest		Income		Average		Interest		Income
	Recorded		Income		Recognized		Recorded		Income		Recognized
	Investment		Recognized		on Cash Basis		Investment		Recognized		on Cash Basis
	(In thousands)
One- to four-family	$	1,297	$	13	$	8	$	1,374	$	13	$	10
Multi-family		1,112		16		—		1,298		13		—
Commercial real estate		758		9		4		824		9		4
Commercial and industrial		1,351		16		—		1,486		14		—
Total impaired loans	$	4,518	$	54	$	12	$	4,982	$	49	$	14
	Six Months Ended June 30,
	2019						2018
					Interest						Interest
	Average		Interest		Income		Average		Interest		Income
	Recorded		Income		Recognized		Recorded		Income		Recognized
	Investment		Recognized		on Cash Basis		Investment		Recognized		on Cash Basis
	(In thousands)
One- to four-family	$	1,304	$	21	$	12	$	1,379	$	27	$	22
Multi-family		1,168		34		—		1,304		26		—
Commercial real estate		766		17		7		831		19		10
Commercial and industrial		1,416		32		—		1,505		29		—
Total impaired loans	$	4,654	$	104	$	19	$	5,019	$	101	$	32

16

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

	June 30,		December 31,
	2019		2018
	(In thousands)
TDRs on accrual status:
One- to four-family	$	2,118	$	2,152
Multi-family		930		1,271
Commercial real estate		—		8,906
Commercial and industrial		—		12
Total TDRs on accrual status		3,048		12,341
TDRs on non-accrual status:
One- to four-family		722		770
Total TDRs on non-accrual status		722		770
Total TDRs	$	3,770	$	13,111

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

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

• Loans rated 1 - 6:    Loans in these categories are considered “pass” rated loans with low to average risk.

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

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

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

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

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

17

The following table provides the Company’s risk-rated loans by class:

	June 30, 2019								December 31, 2018
	Multi-family						Commercial		Multi-family						Commercial
	residential		Commercial				and		residential		Commercial				and
	real estate		real estate		Construction		industrial		real estate		real estate		Construction		industrial
	(In thousands)
Loans rated 1 - 6	$	1,058,471	$	2,627,998	$	748,457	$	589,908	$	1,006,295	$	2,604,771	$	686,948	$	587,658
Loans rated 7		—		18,283		—		10,825		—		16,424		—		10,100
Loans rated 8		3,368		752		—		26,985		4,226		784		—		27,260
Loans rated 9		—		—		—		—		—		—		—		—
Loans rated 10		—		—		—		—		—		—		—		—
Total	$	1,061,839	$	2,647,033	$	748,457	$	627,718	$	1,010,521	$	2,621,979	$	686,948	$	625,018

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

6. DEPOSITS

A summary of deposit balances, by type, follows:

	June 30,		December 31,
	2019		2018
	(In thousands)
Noninterest-bearing demand deposits	$	505,679	$	483,777
Interest-bearing demand deposits		1,161,835		1,190,346
Money market deposits		675,452		729,174
Regular savings and other deposits		986,112		794,813
Total non-certificate accounts		3,329,078		3,198,110
Term certificates less than $250,000		1,302,415		1,267,935
Term certificates $250,000 and greater		386,811		418,139
Total certificate accounts		1,689,226		1,686,074
Total deposits	$	5,018,304	$	4,884,184

A summary of term certificates, by maturity, follows:

	June 30, 2019					December 31, 2018
			Weighted					Weighted
Maturing	Amount		Average Rate			Amount		Average Rate
	(Dollars in thousands)
Within 1 year	$	1,232,000		2.18	%	$	1,043,283		1.98	%
Over 1 year to 2 years		395,466		2.09			485,028		2.18
Over 2 years to 3 years		23,263		1.74			96,591		2.01
Over 3 years to 4 years		30,778		2.61			47,926		2.37
Over 4 years to 5 years		7,719		1.77			13,246		2.21
	$	1,689,226		2.16	%	$	1,686,074		2.05	%

The Company had certificate of deposit accounts obtained through a listing service, included in term certificates in the table above, totaling $35.4 million with a weighted average rate of 2.58% and $54.8 million with a weighted average rate of 2.37% at June 30, 2019 and December 31, 2018, respectively. The Company had brokered certificates of deposit, which are included in term certificates in the table above, totaling $479.5 million with a weighted average rate of 2.26% and $413.8 million with a weighted average rate of 2.20% at June 30, 2019 and December 31, 2018, respectively. In addition, the Company had $150.4 million and $150.2 million in brokered interest-bearing demand deposits at June 30, 2019 and December 31, 2018, respectively, and $60.0 million in brokered savings accounts at June 30, 2019.

18

7. BORROWINGS

The Company had no short-term borrowings at June 30, 2019. At December 31, 2018, short-term borrowings consisted of an FHLB advance totaling $50.0 million with a rate of 2.66% and an original maturity of less than one year. The Company has an available line of credit of $9.4 million with the FHLB at an interest rate that adjusts daily and $296,000 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 June 30, 2019 or December 31, 2018.

Long-term debt consists of FHLB advances as follows:

	June 30, 2019					December 31, 2018
			Weighted					Weighted
	Amount		Average Rate			Amount		Average Rate
	(Dollars in thousands)
Fixed rate advances maturing:
2019	$	3,104		2.06	%	$	4,160		1.86	%
2020		136,359		2.29			67,095		2.38
2021		25,000		1.70			25,000		1.70
2022		110,625		1.97			105,625		1.79
2023		275,000		3.10			75,000		2.50
2024		20,000		2.61			—		—
Thereafter		10,000		1.21			20,000		1.36
		580,088		2.58			296,880		2.07
Variable rate advances maturing:
2023		20,000		1.60			220,000		1.17
2024		—		—			—		—
Thereafter		—		—			20,000		1.75
		20,000		1.60			240,000		1.22
Total advances	$	600,088		2.55	%	$	536,880		1.69	%

At June 30, 2019, advances totaling $360.0 million, with a weighted average rate of 2.80%, are callable by the FHLB prior to maturity, including variable rate advances totaling $20.0 million, with a weighted average rate of 1.60%.

Variable rate advances adjust based on the following:

	June 30, 2019		December 31, 2018
	(Dollars in thousands)
Variable rate advances adjusting during the first year:
3 Month Libor less 100bp	$	20,000	$	45,000
3 Month Libor less 125bp		—		25,000
3 Month Libor less 130bp		—		85,000
3 Month Libor less 200bp		—		50,000
3 Month Libor less 230bp		—		15,000
		20,000		220,000
Variable rate advances adjusting during the first two years:
3 Month Libor less 100bp		—		20,000
		—		20,000
Total variable rate advances	$	20,000	$	240,000

All borrowings from the FHLB are secured by investment securities and qualified collateral, consisting of a blanket lien on one- to four-family loans and certain multi-family and commercial real estate loans held in the Company’s portfolio. At June 30, 2019, the Company pledged multi-family and commercial real estate loans with carrying values totaling $306.4 million and $857.8 million, respectively.

19

8. COMMITMENTS AND CONTINGENCIES AND DERIVATIVES

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

Loan Commitments

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

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

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

	June 30,		December 31,
	2019		2018
	(In thousands)
Unadvanced portion of existing loans:
Construction	$	496,507	$	559,139
Home equity lines of credit		72,108		56,323
Other lines and letters of credit		359,857		311,842
Commitments to originate:
One- to four-family		30,769		20,226
Commercial real estate		51,239		82,810
Construction		153,051		182,207
Commercial and industrial		12,355		7,460
Total loan commitments outstanding	$	1,175,886	$	1,220,007

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 June 30, 2019, the Company had $4.2 million in cash pledged for collateral on its interest rate swaps with the third-party financial institution. At December 31, 2018, the Company had no cash pledged for collateral on its interest rate swaps with the third-party financial institution.

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Summary information regarding these derivatives is presented below:

				June 30, 2019					December 31, 2018
	Maturity	Interest Rate Paid	Interest Rate Received	Notional Amount		Fair Value Asset (Liability)			Notional Amount		Fair Value Asset (Liability)
				(Dollars in thousands)
Customer interest rate swap	06/07/32	1 Mo. Libor + 200bp	Fixed (4.40%)	$	63,219	$	3,117		$	64,004	$	(1,310	)
Third-party interest rate swap	06/07/32	Fixed (4.40%)	1 Mo. Libor + 200bp		63,219		(3,117	)		64,004		1,310
Customer interest rate swap	10/17/33	1 Mo. Libor + 175bp	Fixed (4.1052%)	$	10,316	$	908		$	10,458	$	471
Third-party interest rate swap	10/17/33	Fixed (4.1052%)	1 Mo. Libor + 175bp		10,316		(908	)		10,458		(471	)
Customer interest rate swap	12/13/26	1 Mo. Libor + 205bp	Fixed (3.82%)	$	2,644	$	9		$	2,725	$	(109	)
Third-party interest rate swap	12/13/26	Fixed (3.82%)	1 Mo. Libor + 205bp		2,644		(9	)		2,725		109

Other Commitments

As of June 30, 2019, the Company has an outstanding commitment of $10.8 million with its core data processing provider through December 2021.

Employment and Change in Control Agreements

The Company has entered into employment agreements with certain senior executives which provide for a minimum annual salary, subject to increase at the discretion of the Board of Directors, and other benefits, including a severance payment in the event employment is terminated in conjunction with a defined change in control. 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:

Securities, at fair value — 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).

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.

21

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

							Total Fair
	Level 1		Level 2		Level 3		Value
	(In thousands)
June 30, 2019
Assets:
Debt securities	$	—	$	16,500	$	—	$	16,500
Marketable equity securities		14,776		—		—		14,776
Loan level interest rate swaps		—		—		4,034		4,034
Total assets	$	14,776	$	16,500	$	4,034	$	35,310
Liabilities:
Loan level interest rate swaps	$	—	$	—	$	4,034	$	4,034
Total liabilities	$	—	$	—	$	4,034	$	4,034
							Total Fair
	Level 1		Level 2		Level 3		Value
	(In thousands)
December 31, 2018
Assets:
Debt securities	$	—	$	17,159	$	—	$	17,159
Marketable equity securities		13,437		—		—		13,437
Loan level interest rate swaps		—		—		1,890		1,890
Total assets	$	13,437	$	17,159	$	1,890	$	32,486
Liabilities:
Loan level interest rate swaps	$	—	$	—	$	1,890	$	1,890
Total liabilities	$	—	$	—	$	1,890	$	1,890

Assets Measured at Fair Value on a Non-recurring Basis

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

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. Impaired loans measured at fair value at June 30, 2019 and December 31, 2018 were $1.7 million and $2.1 million, respectively. The related gains and losses were immaterial for the three and six months ended June 30, 2019 and 2018.

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Summary of Fair Values of Financial Instruments

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

	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
June 30, 2019
Financial assets:
Cash and due from banks	$	361,050	$	361,050	$	—	$	—	$	361,050
Certificates of deposit		5,247		—		5,249		—		5,249
Securities available for sale, at fair value		16,500		—		16,500		—		16,500
Marketable equity securities, at fair value		14,776		14,776		—		—		14,776
Federal Home Loan Bank stock		27,469		—		—		27,469		27,469
Loans and loans held for sale, net		5,767,477		—		—		5,730,926		5,730,926
Accrued interest receivable		15,436		—		—		15,436		15,436
Loan level interest rate swaps		4,034		—		—		4,034		4,034
Financial liabilities:
Deposits		5,018,304		—		—		5,061,528		5,061,528
Borrowings		600,088		—		610,462		—		610,462
Accrued interest payable		4,581		—		—		4,581		4,581
Loan level interest rate swaps		4,034		—		—		4,034		4,034
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
December 31, 2018
Financial assets:
Cash and due from banks	$	371,995	$	371,995	$	—	$	—	$	371,995
Certificates of deposit		5,247		—		5,303		—		5,303
Securities available for sale, at fair value		17,159		—		17,159		—		17,159
Marketable equity securities, at fair value		13,437		13,437		—		—		13,437
Federal Home Loan Bank stock		29,187		—		—		29,187		29,187
Loans and loans held for sale, net		5,593,812		—		—		5,489,521		5,489,521
Accrued interest receivable		14,267	��	—		—		14,267		14,267
Loan level interest rate swaps		1,890		—		—		1,890		1,890
Financial liabilities:
Deposits		4,884,184		—		—		4,714,313		4,714,313
Borrowings		586,880		—		582,861		—		582,861
Accrued interest payable		3,388		—		—		3,388		3,388
Loan level interest rate swaps		1,890		—		—		1,890		1,890

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

This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. You should read the information in this section in conjunction with our business and financial information and the Consolidated Financial Statements and related notes that are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC.

Forward Looking Statements

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

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

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

• competition among depository and other financial institutions;

• changes in consumer spending, borrowing and savings habits;

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

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

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

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

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

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

• our ability to access cost-effective funding;

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

• demand for loans and deposits in our market area;

• our ability to implement and changes in our business strategies;

• adverse changes in the securities or secondary mortgage markets;

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

• failure or breaches of our IT security systems;

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

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

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

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

• the effects of federal government shutdowns;

• our ability to successfully introduce new products and services; and

• our ability to retain key employees.

24

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on March 1, 2019, under “Risk Factors,” which is available through the SEC’s website at www.sec.gov, as updated by subsequent filings with the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Critical Accounting Policies

A summary of significant accounting policies is described in Note 1 to the Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2018. Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Management believes that the most critical accounting policies are related to the determination of the allowance for loan losses.

Comparison of Financial Condition at June 30, 2019 and December 31, 2018

Assets. Total assets increased $189.9 million, or 3.1%, to $6.369 billion at June 30, 2019 from $6.179 billion at December 31, 2018. Net loans increased $172.0 million, or 3.1%, to $5.765 billion at June 30, 2019 from $5.593 billion at December 31, 2018. Cash and due from banks decreased $10.9 million, or 2.9%, to $361.1 million at June 30, 2019 from $372.0 million at December 31, 2018. Securities at fair value increased $680,000, or 2.2%, to $31.3 million at June 30, 2019 from $30.6 million at December 31, 2018.

Loan Portfolio Analysis. At June 30, 2019, net loans were $5.765 billion, or 90.5% of total assets. During the six months ended June 30, 2019, net loans increased $172.0 million, or 3.1% from December 31, 2018. Loan originations totaled $553.5 million during the six months ended June 30, 2019. The increase in net loans resulted primarily from increases of $61.5 million in construction loans, $51.3 million in multi-family loans, $25.1 million in commercial real estate loans, $21.6 million in one- to four-family loans and $10.0 million in home equity lines of credit. The increase in commercial real estate loans reflects a $70.0 million loan pay-off that occurred in the second quarter. Refer to Note 5, Loans, in Notes to the Unaudited Consolidated Financial Statements within this report for more detail regarding the loans held in the Company’s loan portfolio.

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

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

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

Delinquencies. Total past due loans decreased $2.7 million, or 38.2%, to $4.3 million at June 30, 2019 from $7.0 million at December 31, 2018, reflecting net decreases of $1.5 million in loans 30 to 59 days past due, $365,000 in loans 60 to 89 days past due, and $744,000 in loans 90 days or greater past due. At June 30, 2019, non-accrual loans exceeded loans 90 days or greater past due primarily due to loans which were placed on non-accrual status based on a determination that the ultimate collection of all principal and interest due was not expected and certain loans remain on non-accrual status until they attain a sustained contractual payment history of six consecutive months.

25

Non-performing Assets. Non-performing assets include loans that are 90 or more days past due or on non-accrual status, including TDRs on non-accrual status, and real estate and other loan collateral acquired through foreclosure and repossession. Loans 90 days or greater past due may remain on an accrual basis if adequately collateralized and in the process of collection. At June 30, 2019 we did not have any accruing loans past due 90 days or greater. For non-accrual loans, interest previously accrued but not collected is reversed and charged against income at the time a loan is placed on non-accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until it is sold. When property is acquired, it is initially recorded at the fair value, less estimated costs to sell, at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value after acquisition of the property result in charges against income. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction totaled $981,000 at June 30, 2019.

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

	June 30,			December 31,
	2019			2018
	(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Real estate loans:
Residential real estate:
One- to four-family	$	5,378		$	5,888
Commercial real estate		318			342
Total real estate loans		5,696			6,230
Commercial and industrial		350			676
Total non-accrual loans (1)		6,046			6,906
Total non-performing assets	$	6,046		$	6,906
Non-accrual loans to total loans		0.10	%		0.12	%
Non-accrual loans to total assets		0.09	%		0.11	%
Non-performing assets to total assets		0.09	%		0.11	%

(1) TDRs on accrual status not included above totaled $3.0 million and $12.3 million at June 30, 2019 and December 31, 2018, respectively.

Non-accrual loans decreased $860,000, or 12.5%, to $6.0 million, or 0.10% of total loans outstanding at June 30, 2019, from $6.9 million, or 0.12% of total loans outstanding at December 31, 2018, due to decreases of $510,000 in one- to four-family loans, $326,000 in commercial and industrial loans, and $24,000 in commercial real estate 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 June 30, 2019, our allowance for loan losses was $53.9 million, or 0.92% of total loans and 890.92% of non-accrual loans, compared to $53.2 million, or 0.94% of total loans and 770.79% of non-accrual loans at December 31, 2018. We increased our allowance primarily as a result of growth in the loan portfolio, and in particular, construction and multi-family loans. Included in our allowance at June 30, 2019 was a general component of $53.8 million, which is based upon our evaluation of various factors relating to loans not deemed to be impaired. We continue to believe our level of non-performing loans and assets, which declined significantly during the past two years, is manageable and we believe that we have sufficient capital and human resources to manage the collection of our non-performing assets in an orderly fashion.

At June 30, 2019 and December 31, 2018, the Company did not hold any foreclosed real estate. We continue to be actively engaged with our borrowers in resolving remaining problem assets and with the effective management of real estate owned as a result of foreclosures.

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

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Total TDRs decreased $9.3 million to $3.8 million at June 30, 2019 from $13.1 million at December 31, 2018, primarily due to the reclassification of an $8.9 million commercial real estate loan from TDR status based on the loan’s market rate terms, financial strength of the borrower and value of the underlying property. Modifications of TDRs consist of rate reductions, loan term extensions or provisions for interest-only payments for specified periods up to 12 months. We have generally been successful with the concessions we have offered to borrowers to date. We generally return TDRs to accrual status when they have sustained payments for six consecutive months based on the restructured terms and future payments are reasonably assured.

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

Other potential problem loans are those loans that are currently performing, but where known information about possible credit problems of the borrowers causes us to have concerns as to the ability of such borrowers to comply with contractual loan repayment terms. These other potential problem loans are generally loans classified as “substandard” or 8-rated loans in accordance with our ten-grade internal loan rating system that is consistent with guidelines established by banking regulators. At June 30, 2019 other potential problem loans totaled $28.3 million, including $25.9 million in commercial and industrial loans and $2.4 million in multi-family loans. The $25.9 million in commercial and industrial loans classified as substandard consists of loans to non-profit educational organizations in eastern Massachusetts that were identified during our loan review process as having possible financial issues that, if not corrected, could result in some loss to the Company. It was determined that this loan relationship is performing in accordance with the terms of the loans with the current expectation that we will be repaid in full in accordance with those terms, but with continual credit monitoring of the relationship.

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

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

	Six Months Ended June 30,
	2019			2018
	(Dollars in thousands)
Beginning balance	$	53,231		$	45,185
Provision for loan losses		921			4,059
Charge-offs:
Commercial and industrial		196			—
Consumer		137			159
Total charge-offs		333			159
Recoveries:
One- to four-family		—			68
Commercial real estate		5			10
Construction		—			175
Home equity lines of credit		2			2
Consumer		39			61
Total recoveries		46			316
Net charge-offs (recoveries)		287			(157	)
Ending balance	$	53,865		$	49,401
Allowance to non-accrual loans		890.92	%		624.93		%
Allowance to total loans outstanding		0.92	%		0.96		%
Net charge-offs (recoveries) to average loans outstanding		0.01	%		(0.01	)	%

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Our provision for loan losses was $921,000 for the six months ended June 30, 2019 compared to $4.1 million for the six months ended June 30, 2018, reflecting a reduction in loan growth. The changes in the provision and the allowance for loan losses coverage ratio were based on management’s assessment of loan portfolio growth and composition changes, declines in historical charge-off trends, reduced levels of problem loans and other improving asset quality trends. The increase in the allowance for loan losses at June 30, 2019 compared to December 31, 2018 was primarily due to increased allocations in the construction and multi-family loan categories, partially offset by a decreased allocation in the one- to four-family category. Generally, multi-family, commercial real estate, construction and commercial and industrial loan categories have higher inherent credit risks than one- to four- family loans and home equity lines of credit. We continue to assess the adequacy of our allowance for loan losses in accordance with established policies.

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

	June 30, 2019								December 31, 2018
						Percent of								Percent of
			Percent of			Loans in					Percent of			Loans in
			Allowance			Category					Allowance			Category
			to Total			of Total					to Total			of Total
	Amount		Allowance			Loans			Amount		Allowance			Loans
	(Dollars in thousands)
Real estate loans:
Residential real estate:
One- to four-family	$	835		1.6	%		11.5	%	$	1,033		1.9	%		11.4	%
Multi-family		8,593		16.0			18.2			8,240		15.5			17.9
Home equity lines of credit		66		0.1			1.0			70		0.1			0.9
Commercial real estate		27,786		51.5			45.4			27,785		52.3			46.4
Construction		10,254		19.0			12.9			9,755		18.3			12.1
Total real estate loans		47,534		88.2			89.0			46,883		88.1			88.7
Commercial and industrial		6,238		11.6			10.8			6,236		11.7			11.1
Consumer		93		0.2			0.2			112		0.2			0.2
Total loans	$	53,865		100.0	%		100.0	%	$	53,231		100.0	%		100.0	%

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

We had impaired loans totaling $4.0 million and $4.8 million as of June 30, 2019 and December 31, 2018, respectively. At June 30, 2019, impaired loans totaling $362,000 had a valuation allowance of $35,000. Impaired loans totaling $1.8 million had a valuation allowance of $110,000 at December 31, 2018. Our average investment in impaired loans was $4.7 million and $5.0 million for the six months ended June 30, 2019 and 2018, respectively.

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

Management has reviewed the collateral value for all impaired and non-accrual loans that were collateral-dependent as of June 30, 2019 and considered any probable loss in determining the allowance for loan losses.

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

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

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

• Appraisals we receive are based on comparable property sales.

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

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

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

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

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

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

Securities Portfolio. At June 30, 2019 our securities portfolio was $31.3 million, or 0.5% of total assets, compared to $30.6 million, or 0.5% of total assets, at December 31, 2018. During the six months ended June 30, 2019, the securities portfolio increased $680,000, or 2.2% primarily due to a net unrealized gain recognized on marketable equity securities of $1.7 million. At June 30, 2019, the securities portfolio consisted of $16.5 million, or 52.8%, in debt securities and $14.8 million, or 47.2%, in marketable equity securities. The debt securities within the portfolio are government-sponsored enterprises, municipal bonds, and mortgage-backed securities issued by government-sponsored enterprises and private companies. Included in marketable equity securities are common stocks and money market mutual funds. We purchase 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 June 30, 2019 we had no investments in a single company or entity that had an aggregate book value in excess of 10% of our stockholders’ equity. Refer to Note 4, Securities, in Notes to the Unaudited Consolidated Financial Statements within this report for more detail regarding our securities portfolio.

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Deposits. Deposits are a major source of our funds for lending and other investment purposes. Deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Our deposit base is comprised of demand, interest-bearing checking, money market, regular savings and other deposits, and certificates of deposit, which include brokered certificates of deposit. We consider demand, interest-bearing checking, money market, and regular savings and other deposits to be core deposits. Total deposits increased $134.1 million, or 2.7%, to $5.018 billion at June 30, 2019 from $4.884 billion at December 31, 2018. Our continuing focus on the acquisition and expansion of core deposit relationships resulted in net growth in core deposits of $131.0 million, or 4.1%, to $3.329 billion, or 66.3% 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.

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

	Six Months Ended June 30,
	2019								2018
						Percent								Percent
	Average		Average			of Total			Average		Average			of Total
	Balance		Rate			Deposits			Balance		Rate			Deposits
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	488,897		—	%		10.1	%	$	485,665		—	%		11.1	%
Interest-bearing demand deposits		1,202,572		1.76			23.2			1,068,456		1.18			25.7
Money market deposits		687,260		1.26			13.5			866,268		1.02			19.7
Regular savings and other deposits		937,789		1.67			19.8			337,156		0.14			7.7
Certificates of deposit		1,641,012		2.11			33.4			1,440,854		1.73			35.8
Total	$	4,957,530		1.62	%		100.0	%	$	4,198,399		1.12	%		100.0	%

Borrowings. We use borrowings from the FHLB to supplement our supply of funds for loans and investments. At June 30, 2019 and December 31, 2018, FHLB advances totaled $600.1 million and $586.9 million, respectively, with a weighted average rate of 2.55% and 1.77%, respectively. Total borrowings increased $13.2 million, or 2.3%, during the six months ended June 30, 2019. During the six months ended June 30, 2019, the Bank entered into long-term advances totaling $120.0 million with terms ranging from one to three years and fixed interest rates ranging from 2.02% to 2.28%. During the six months ended June 30, 2019, advances maturing with the FHLB totaled $50.0 million and consisted of a short-term advance with a term of three months and a fixed interest rate of 2.66%. Advances called by the FHLB during the six months ended June 30, 2019 totaled $55.0 million and consisted of three long-term advances with original terms of 5 to 10 years and interest rates ranging from 1.50% to 1.60% at the time of call. At June 30, 2019, 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.

	Six Months Ended June 30,
	2019			2018
	(Dollars in thousands)
Balance outstanding at end of period	$	600,088		$	591,660
Average amount outstanding during the period	$	555,076		$	556,672
Weighted average interest rate during the period		2.13	%		1.34	%
Maximum outstanding at any month end	$	600,088		$	601,956
Weighted average interest rate at end of period		2.55	%		1.52	%

Stockholders’ Equity. Total stockholders’ equity increased $21.0 million, or 3.1%, to $695.7 million at June 30, 2019, from $674.7 million at December 31, 2018. The increase for the six months ended June 30, 2019 was due primarily to net income of $30.2 million and $3.4 million related to stock-based compensation plans, partially offset by the repurchase of 341,019 shares of the Company’s stock at a total cost of $5.7 million, and dividends of $0.14 per share totaling $7.1 million. Stockholders’ equity to assets was 10.92% at June 30, 2019, unchanged from December 31, 2018. Book value per share increased to $13.05 at June 30, 2019 from $12.60 at December 31, 2018. At June 30, 2019, the Company and the Bank continued to exceed all regulatory capital requirements. Refer to “- Capital Management” within this report for more information regarding capital requirements and actual capital amounts and ratios for the Bank and the Company.

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Results of Operations for the Three and Six Months Ended June 30, 2019 and 2018

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

Net income information is as follows:

	Three Months Ended June 30,						Change								Six Months Ended June 30,						Change
	2019			2018			Amount				Percent				2019			2018			Amount				Percent
	(Dollars in thousands)
Net interest income	$	42,470		$	41,047		$	1,423				3.5		%	$	85,067		$	80,895		$	4,172				5.2		%
Provision for loan losses		78			1,870			(1,792	)			(95.8	)			921			4,059			(3,138	)			(77.3	)
Non-interest income		2,954			2,858			96				3.4				6,782			5,191			1,591				30.6
Non-interest expenses		25,117			23,465			1,652				7.0				50,913			48,154			2,759				5.7
Net income		15,168			14,062			1,106				7.9				30,239			26,056			4,183				16.1
Basic earnings per share		0.30			0.27			0.03				11.1				0.59			0.51			0.09				17.0
Diluted earnings per share		0.29			0.27			0.02				7.4				0.59			0.49			0.10				19.4
Return on average assets		0.97	%		1.01	%		(0.04	)	%		(4.0	)			0.97	%		0.96	%		0.01		%		1.0
Return on average equity		8.75	%		8.50	%		0.25		%		2.9				8.79	%		7.93	%		0.86		%		10.8

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Net Interest Income.

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

	Three Months Ended June 30,
	2019									2018
	Average Balance		Interest (1)				Yield Cost (1)(6)			Average Balance		Interest (1)				Yield Cost (1)(6)
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (2)	$	5,809,827	$	64,740				4.47	%	$	5,043,367	$	54,491				4.33	%
Securities and certificates of deposits		36,447		312				3.43			70,155		443				2.53
Other interest-earning assets (3)		290,092		1,943				2.69			328,659		1,527				1.86
Total interest-earning assets		6,136,366		66,995				4.38			5,442,181		56,461				4.16
Noninterest-earning assets		136,159									118,324
Total assets	$	6,272,525								$	5,560,505
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	1,215,832		5,584				1.84		$	1,104,003		3,486				1.27
Money market deposits		674,851		2,158				1.28			849,177		2,326				1.10
Regular savings and other deposits		954,811		3,961				1.66			339,004		118				0.14
Certificates of deposit		1,660,373		8,950				2.16			1,504,883		6,821				1.82
Total interest-bearing deposits		4,505,867		20,653				1.84			3,797,067		12,751				1.35
Borrowings		532,449		3,151				2.37			591,862		2,049				1.39
Total interest-bearing liabilities		5,038,316		23,804				1.90			4,388,929		14,800				1.35
Noninterest-bearing demand deposits		495,090									482,903
Other noninterest-bearing liabilities		45,506									27,018
Total liabilities		5,578,912									4,898,850
Total stockholders' equity		693,613									661,655
Total liabilities and stockholders' equity	$	6,272,525								$	5,560,505
Net interest-earning assets	$	1,098,050								$	1,053,252
Fully tax-equivalent net interest income				43,191									41,661
Less: tax-equivalent adjustments				(721	)								(614	)
Net interest income			$	42,470								$	41,047
Interest rate spread (1)(4)								2.48	%								2.81	%
Net interest margin (1)(5)								2.82	%								3.07	%
Average interest-earning assets to average    interest-bearing liabilities				121.79		%							124.00		%
Supplemental Information:
Total deposits, including noninterest-bearing    demand deposits	$	5,000,957	$	20,653				1.66	%	$	4,279,970	$	12,751				1.19	%
Total deposits and borrowings, including    noninterest-bearing demand deposits	$	5,533,406	$	23,804				1.73	%	$	4,871,832	$	14,800				1.22	%

(1) Income on debt securities, equity securities and revenue bonds included in commercial real estate loans, as well as resulting yields, interest rate spread and net interest margin, are presented on a tax-equivalent basis. The tax-equivalent adjustments are deducted from tax-equivalent net interest income to agree to amounts reported in the consolidated statements of net income. For the three months ended June 30, 2019 and 2018, yields on loans before tax-equivalent adjustments were 4.42% and 4.29%, respectively, yields on securities and certificates of deposit before tax-equivalent adjustments were 3.20% and 2.38%, respectively, and yields on total interest-earning assets before tax-equivalent adjustments were 4.33% and 4.12%, respectively. Interest rate spread before tax-equivalent adjustments for the three months ended June 30, 2019 and 2018 was 2.43% and 2.77%, respectively, while net interest margin before tax-equivalent adjustments for the three months ended June 30, 2019 and 2018 was 2.78% and 3.03%, respectively.

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

(3) Includes FHLB stock and associated dividends.

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

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

(6) Annualized.

	Six Months Ended June 30,
	2019									2018
	Average Balance		Interest (1)				Yield Cost (1)(6)			Average Balance		Interest (1)				Yield Cost (1)(6)
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (2)	$	5,752,551	$	127,065				4.45	%	$	4,910,858	$	105,064				4.31	%
Securities and certificates of deposits		36,478		584				3.23			83,260		966				2.34
Other interest-earning assets (3)		321,472		4,520				2.84			323,301		3,049				1.90
Total interest-earning assets		6,110,501		132,169				4.36			5,317,419		109,079				4.14
Noninterest-earning assets		127,095									121,096
Total assets	$	6,237,596								$	5,438,515
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	1,202,572		10,524				1.76		$	1,068,456		6,277				1.18
Money market deposits		687,260		4,306				1.26			866,268		4,383				1.02
Regular savings and other deposits		937,789		7,763				1.67			337,156		232				0.14
Certificates of deposit		1,641,012		17,211				2.11			1,440,854		12,368				1.73
Total interest-bearing deposits		4,468,633		39,804				1.80			3,712,734		23,260				1.26
Borrowings		555,076		5,876				2.13			556,672		3,691				1.34
Total interest-bearing liabilities		5,023,709		45,680				1.83			4,269,406		26,951				1.27
Noninterest-bearing demand deposits		488,897									485,665
Other noninterest-bearing liabilities		37,324									26,136
Total liabilities		5,549,930									4,781,207
Total stockholders' equity		687,666									657,308
Total liabilities and stockholders' equity	$	6,237,596								$	5,438,515
Net interest-earning assets	$	1,086,792								$	1,048,013
Fully tax-equivalent net interest income				86,489									82,128
Less: tax-equivalent adjustments				(1,422	)								(1,233	)
Net interest income			$	85,067								$	80,895
Interest rate spread (1)(4)								2.53	%								2.87	%
Net interest margin (1)(5)								2.85	%								3.11	%
Average interest-earning assets to average    interest-bearing liabilities				121.63		%							124.55		%
Supplemental Information:
Total deposits, including noninterest-bearing    demand deposits	$	4,957,530	$	39,804				1.62	%	$	4,198,399	$	23,260				1.12	%
Total deposits and borrowings, including    noninterest-bearing demand deposits	$	5,512,606	$	45,680				1.67	%	$	4,755,071	$	26,951				1.14	%

(1) Income on debt securities, equity securities and revenue bonds included in commercial real estate loans, as well as resulting yields, interest rate spread and net interest margin, are presented on a tax-equivalent basis. The tax-equivalent adjustments are deducted from tax-equivalent net interest income to agree to amounts reported in the consolidated statements of net income. For the six months ended June 30, 2019 and 2018, yields on loans before tax-equivalent adjustments were 4.41% and 4.27%, respectively, yields on securities and certificates of deposit before tax-equivalent adjustments were 3.02% and 2.20%, respectively, and yields on total interest-earning assets before tax-equivalent adjustments were 4.31% and 4.09%, respectively. Interest rate spread before tax-equivalent adjustments for the six months ended June 30, 2019 and 2018 was 2.48% and 2.82%, respectively, while net interest margin before tax-equivalent adjustments for the three months ended June 30, 2019 and 2018 was 2.81% and 3.07%, respectively.

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

(3) Includes FHLB stock and associated dividends.

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

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

(6) Annualized.

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

	Three Months Ended June 30,									Six Months Ended June 30,
	2019 Compared to 2018									2019 Compared to 2018
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume			Rate			Net			Volume			Rate			Net
	(In thousands)
Interest income:
Loans	$	8,496		$	1,753		$	10,249		$	18,499		$	3,502		$	22,001
Securities and certificates of deposit		(256	)		125			(131	)		(666	)		284			(382	)
Other interest-earning assets		(196	)		612			416			(17	)		1,488			1,471
Total		8,044			2,490			10,534			17,816			5,274			23,090
Interest expense:
Deposits		1,160			6,742			7,902			2,773			13,771			16,544
Borrowings		(224	)		1,326			1,102			(11	)		2,196			2,185
Total		936			8,068			9,004			2,762			15,967			18,729
Change in fully tax-equivalent net interest    income	$	7,108		$	(5,578	)	$	1,530		$	15,054		$	(10,693	)	$	4,361

The interest rate spread and net interest margin on a tax-equivalent basis were 2.48% and 2.82%, respectively, for the three months ended June 30, 2019 compared to 2.81% and 3.07%, respectively, for the three months ended June 30, 2018. For the six months ended June 30, 2019, the interest rate spread and net interest margin on a tax-equivalent basis were 2.53% and 2.85%, respectively, compared to 2.87% and 3.11%, respectively, for the six months ended June 30, 2018. Net interest income increased 3.5% and 5.2% for the three and six months ended June 30, 2019, respectively, compared to the respective prior periods and was primarily due to growth in average loan balances and yields on interest-earning assets, partially offset by growth in in the average balances of deposits and borrowings along with an increase in the cost of funds.

The yield on interest-earning assets on a tax-equivalent basis increased 22 basis points to 4.38% for the for the three months ended June 30, 2019, compared to 4.16% for the three months ended June 30, 2018, while the cost of funds increased 51 basis points to 1.73% from 1.22% for the three months ended June 30, 2019 and 2018, respectively. The increase in interest income was primarily due to growth in the Company’s average loan balances of $766.5 million, or 15.2%, to $5.810 billion and a 14 basis point increase in the yield on loans to 4.47% on a tax-equivalent basis, from 4.33% for the three months ended June 30, 2018. The increase in interest expense on deposits was primarily due to the growth in average total deposits of $721.0 million, or 16.8%, to $5.001 billion and an increase in the average total cost of deposits of 47 basis points to 1.66% for the three months ended June 30, 2019 compared to 1.19% for the same period in 2018. The increase in interest expense on borrowings was primarily due to an increase in the cost of average borrowings of 98 basis points to 2.37% for the three months ended June 30, 2019 compared to 1.39% for the three months ended June 30, 2018, partially offset by a decrease in average borrowings of $59.4 million, or 10.0%, to $532.4 million.

The yield on interest-earning assets on a tax-equivalent basis increased 22 basis points to 4.36% for the six months ended June 30, 2019 compared to 4.14% for the six months ended June 30, 2018, while the cost of funds increased 53 basis points to 1.67% from 1.14% for the six months ended June 30, 2019 and 2018, respectively. The increase in interest income was primarily due to growth in the Company’s average loan balances of $841.7 million, or 17.1%, to $5.753 billion and a 14 basis point increase in the yield on loans to 4.45% on a tax-equivalent basis, from 4.31% for the six months ended June 30, 2018. The increase in interest expense on deposits was primarily due to the growth in average total deposits of $759.1 million, or 18.1%, to $4,958 billion and an increase in the average total cost of deposits of 50 basis points to 1.62% for the six months ended June 30, 2019 compared to 1.12% for the same period in 2018. The increase in interest expense on borrowings was primarily due to an increase in the cost of average borrowings of 79 basis points to 2.13% for the six months ended June 30, 2019 compared to 1.34% for the six months ended June 30, 2018, partially offset by a decrease in average borrowings of $1.6 million, or 0.3%, to $555.1 million.

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Provision for Loan Losses. The provision for loan losses was $78,000 for the three months ended June 30, 2019 compared to $1.9 million for the three months ended June 30, 2018. For the six months ended June 30, 2019, the provision for loan losses was $921,000 compared to $4.1 million for June 30, 2018. For further discussion of the changes in the provision and allowance for loan losses, refer to “- Comparison of Financial Condition at June 30, 2019 and December 31, 2018 - Allowance for Loan Losses.”

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

	Three Months Ended June 30,					Change							Six Months Ended June 30,					Change
	2019		2018			Amount			Percent				2019		2018			Amount			Percent
	(Dollars in thousands)												(Dollars in thousands)
Customer service fees	$	2,288	$	2,282		$	6			0.3		%	$	4,385	$	4,452		$	(67	)		(1.5	)	%
Loan fees		53		(158	)		211			133.5				130		137			(7	)		(5.1	)
Mortgage banking gains, net		101		63			38			60.3				141		196			(55	)		(28.1	)
Gain (loss) on marketable equity    securities, net		223		388			(165	)		(42.5	)			1,549		(149	)		1,698			1,139.6
Income from bank-owned life    insurance		280		277			3			1.1				561		549			12			2.2
Other income		9		6			3			50.0				16		6			10			166.7
Total non-interest income	$	2,954	$	2,858		$	96			3.4		%	$	6,782	$	5,191		$	1,591			30.6		%

The increase in non-interest income for the three months ended June 30, 2019 was due primarily to an increase of $211,000 in loan fees, partially offset by a $165,000 decrease in gain on marketable equity securities, net. The increase in non-interest income for the six months ended June 30, 2019 was due primarily to a $1.7 million increase in gain on marketable equity securities, net, reflecting increases in market valuations. Refer to Note 4, Securities, in the Notes to the Unaudited Consolidated Financial Statements within this report for more detail regarding our securities portfolio.

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

	Three Months Ended June 30,				Change							Six Months Ended June 30,				Change
	2019		2018		Amount			Percent				2019		2018		Amount			Percent
	(Dollars in thousands)											(Dollars in thousands)
Salaries and employee benefits	$	14,916	$	14,438	$	478			3.3		%	$	30,548	$	29,832	$	716			2.4		%
Occupancy and equipment		3,650		3,025		625			20.7				7,246		6,564		682			10.4
Data processing		2,009		1,653		356			21.5				3,979		3,336		643			19.3
Marketing and advertising		1,299		1,006		293			29.1				2,461		1,973		488			24.7
Professional services		784		1,000		(216	)		(21.6	)			1,644		1,965		(321	)		(16.3	)
Deposit insurance		929		782		147			18.8				1,941		1,579		362			22.9
Merger and acquisition		—		14		(14	)		(100.0	)			—		88		(88	)		(100.0	)
Other general and administrative		1,530		1,547		(17	)		(1.1	)			3,094		2,817		277			9.8
Total non-interest expenses	$	25,117	$	23,465	$	1,652			7.0		%	$	50,913	$	48,154	$	2,759			5.7		%

The increases in salaries and employee benefits expense were primarily due to annual increases in employee compensation, payroll taxes and employee benefits, while the increases in occupancy and equipment expenses and data processing include costs associated with the expansion of our branch network, including one new branch opened late in the first quarter of 2018, three new branch openings in the fourth quarter of 2018, and one new branch opened in July 2019.

Income Tax Provision. The Company recorded a provision for income taxes of $5.1 million for the three months ended June 30, 2019, reflecting an effective tax rate of 25.0%, compared to $4.5 million, or a 24.3% effective tax rate, for the three months ended June 30, 2018. For the six months ended June 30, 2019, the provision for income taxes was $9.8 million, reflecting an effective rate of 24.4%, compared to $7.8 million, or an effective rate of 23.1% for the six months ended June 30, 2018.

Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, sales, maturities and payments on investment securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

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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 June 30, 2019, cash and due from banks totaled $361.1 million and certificates of deposit totaled $5.2 million. In addition, at June 30, 2019, we had $356.9 million of available borrowing capacity with the FHLB, including a $9.4 million line of credit. On June 30, 2019, we had $600.1 million of advances outstanding. We periodically pledge additional multi-family and commercial real estate loans held in the Bank’s portfolio as qualified collateral to increase our borrowing capacity with the FHLB.

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

A significant use of our liquidity is the funding of loan originations. At June 30, 2019 and December 31, 2018, we had total loan commitments outstanding of $1.176 billion and $1.220 billion, respectively. Historically, many of the commitments expire without being fully drawn; therefore the total amount of commitments does not necessarily represent future cash requirements. Refer to Note 8, Commitments and Contingencies and Derivatives, in Notes to the Unaudited Consolidated Financial Statements within this report for more detail regarding our outstanding commitments.

Another significant use of our liquidity is the funding of deposit withdrawals. Certificates of deposit due within one year of June 30, 2019 totaled $1.232 billion, or 72.9% of total certificates of deposit. If these maturing deposits do not remain with us, we will be required to utilize other sources of funds. Historically, a significant portion of certificates of deposit that mature have remained with us. We have the ability to attract and retain deposits by adjusting the interest rates offered and accepting brokered certificates of deposit when it is deemed cost effective.  

Meridian Bancorp, Inc. is a separate legal entity from East Boston Savings Bank and it must provide for its own liquidity to pay dividends and repurchase its common stock and for other corporate purposes. Meridian Bancorp, Inc.’s primary source of liquidity is the remaining proceeds from the 2014 second-step offering, which may be augmented by dividend payments received from East Boston Savings Bank. The ability of East Boston Savings Bank to pay dividends is subject to regulatory requirements. At June 30, 2019, Meridian Bancorp, Inc. (on an unconsolidated basis) had cash and cash equivalents, certificates of deposit and equity securities totaling $29.0 million.

Capital Management. Both the Company and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board and the Federal Deposit Insurance Corporation, respectively, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2019, 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 as set forth in the following table. Additionally, community banking institutions must maintain a capital conservation buffer of Total, Tier 1 and 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, including dividend payments and stock repurchases, and discretionary bonuses. At June 30, 2019, the capital conservation buffer was 4.11% for the Company and 3.25% for the Bank.

As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies are required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%, and have proposed 9% as the minimum capital for the Community Bank Leverage Ratio. A financial institution can elect to be subject to this new definition.

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The Company may use capital management tools such as cash dividends and common share repurchases. We are subject to the Federal Reserve Board’s notice provisions for stock repurchases. The Company repurchased 236,842 shares of its common stock at an average price of $17.21 during the three months ended June 30, 2019, or 47.35% of the 500,000 shares authorized for repurchase under the Company’s repurchase program adopted in April 2019. As of June 30, 2019, the Company had repurchased of 3,610,364 shares of its stock at an average price of $15.05 per share since August 2015. During the six months ended June 30, 2019 the Company’s Board of Directors declared two quarterly cash dividends of $0.07 per common share on February 28, 2019 and May 31, 2019. The dividend declared on May 31, 2019 was paid on July 2, 2019 to stockholders of record at the close of business on June 18, 2019.

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

	Actual					Minimum Capital Requirement					Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
June 30, 2019
Total Capital (to Risk Weighted Assets):
Company	$	726,827		12.1	%	$	480,198	8.0		%	N/A		N/A
Bank		674,543		11.2			479,839	8.0			$	599,799		10.0	%
Tier 1 Capital (to Risk Weighted Assets):
Company		672,962		11.2			360,149		6.0		N/A		N/A
Bank		620,678		10.3			359,879		6.0			479,839		8.0
Common Equity Tier 1 Capital (to Risk    Weighted Assets):
Company		672,962		11.2			270,111		4.5		N/A		N/A
Bank		620,678		10.3			269,910		4.5			389,869		6.5
Tier 1 Capital (to Average Assets):
Company		672,962		10.8			249,865		4.0		N/A		N/A
Bank		620,678		10.0			249,264		4.0			311,580		5.0
December 31, 2018
Total Capital (to Risk Weighted Assets):
Company	$	705,202		11.9	%	$	472,374	8.0		%	N/A		N/A
Bank		625,403		10.6			472,027	8.0			$	590,034		10.0	%
Tier 1 Capital (to Risk Weighted Assets):
Company		651,971		11.0			354,280		6.0		N/A		N/A
Bank		572,172		9.7			354,020		6.0			472,027		8.0
Common Equity Tier 1 Capital (to Risk    Weighted Assets):
Company		651,971		11.0			265,710		4.5		N/A		N/A
Bank		572,172		9.7			265,515		4.5			383,522		6.5
Tier 1 Capital (to Average Assets):
Company		651,971		11.0			236,979		4.0		N/A		N/A
Bank		572,172		9.7			235,627		4.0			294,534		5.0

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

	June 30,						December 31,
	2019						2018
	Consolidated			Bank			Consolidated			Bank
	(In thousands)
Total stockholders' equity per financial statements	$	695,701		$	643,417		$	674,654		$	594,855
Adjustments to Tier 1 and Common Equity Tier 1    capital:
Accumulated other comprehensive loss (income)		24			24			348			348
Goodwill disallowed		(20,378	)		(20,378	)		(20,378	)		(20,378	)
Core deposit intangible		(2,385	)		(2,385	)		(2,653	)		(2,653	)
Total Tier 1 and Common Equity Tier 1 capital		672,962			620,678			651,971			572,172
Adjustments to total capital:
Allowance for loan losses		53,865			53,865			53,231			53,231
Total regulatory capital	$	726,827		$	674,543		$	705,202		$	625,403

Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles in the United States of America, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

For the six months ended June 30, 2019, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

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

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

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

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

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The simulation uses projected repricing of assets and liabilities on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a significant impact on interest income simulation. Because of the large percentage of loans we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that in turn affect the rate sensitivity position. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. Our asset sensitivity would be reduced if prepayments slow and vice versa. While we believe such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.

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

Increase (Decrease)	June 30, 2019									December 31, 2018
in Market Interest Rates	Amount		Change			Percent				Amount		Change			Percent
	(Dollars in thousands)
300	$	151,756	$	(23,495	)		(13.41	)	%	$	147,983	$	(22,802	)		(13.35	)	%
Flat		175,251									170,785
-100		179,819		4,568			2.61				175,942		5,157			3.02

ITEM 4.     CONTROLS AND PROCEDURES

(a) Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

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

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PART II – OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

ITEM 1A.   RISK FACTORS

For information regarding our risk factors, see “Risk Factors,” in the Company’s 2018 Annual Report on Form 10-K, filed with the SEC on March 1, 2019, which is available through the SEC’s website at www.sec.gov. As of June 30, 2019, our risk factors had not changed materially from those reported in the annual report. The risks described in the Annual Report are not the only risks that we face. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.

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

(a.) Not applicable

(b.) Not applicable

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

Period	(a) Total Number of Shares (or Units) Purchased		(b) Average Price Paid Per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1)(2)		(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 1 – 30, 2019		—	$	—		—		500,099
May  1 – 31, 2019		236,842	$	17.21		236,842		263,257
June 1 – 30, 2019		—	$	—		—		263,257
		236,842	$	17.21		236,842		263,257

(1) In August 2015, the Company adopted a stock repurchase program of up to 5% of its outstanding common stock, or 2,737,334 shares of its common stock. In November 2018, the repurchase program was amended to increase the number of shares available for repurchase by up to 636,287, or approximately 1.2% of its outstanding common stock. The Company completed the repurchase of the 3,373,621 shares authorized under this plan in 2019.

(2) In April 2019, the Company announced that it had adopted a new stock repurchase program of up to 0.9% of its outstanding common stock, or 500,000 shares of its common stock.

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.     MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.     OTHER INFORMATION

Not applicable.  

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ITEM 6.     EXHIBITS

3.1	Articles of Incorporation of Meridian Bancorp, Inc. (Incorporated by reference to the Registration Statement on Form S-1 of Meridian Bancorp, Inc. (File No. 333-194454), originally filed with the Securities and Exchange Commission on March 10, 2014)
3.2	Bylaws of Meridian Bancorp, Inc. (Incorporated by reference to the Registration Statement on Form S-1 of Meridian Bancorp, Inc. (File No. 333-194454), originally filed with the Securities and Exchange Commission on March 10, 2014)
4	Form of Common Stock Certificate of Meridian Bancorp, Inc. (Incorporated by reference to the Registration Statement on Form S-1 of Meridian Bancorp, Inc. (File No. 333-194454), originally filed with the Securities and Exchange Commission on March 10, 2014)
10.1	Meridian Bancorp, Inc. 2015 Equity Incentive Plan (Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement for the Annual Meeting of Stockholders (File No. 001-36573), filed with the Securities and Exchange Commission on August 18, 2015)
10.2	Form of Employee Stock Option Agreement under the Meridian Bancorp, Inc. 2015 Equity Incentive Plan filed as an exhibit to Form 8-K filed on November 5, 2015
10.3	Form of Director Stock Option Agreement under the Meridian Bancorp, Inc. 2015 Equity Incentive Plan filed as an exhibit to Form 8-K filed on November 5, 2015
10.4	Amended and Restated Employment Agreement with Richard J. Gavegnano and East Boston Savings Bank dated July 28, 2014 filed as an exhibit to Form 10-Q filed on November 10, 2014
10.5	East Boston Savings Bank Amended and Restated Employee Severance Compensation Plan filed as an exhibit to Form 10-Q filed on November 10, 2014
10.6	Form of Amended and Restated Supplemental Executive Retirement Agreements with Directors Domenic A. Gambardella, Gregory F. Natalucci, and James G. Sartori filed as an exhibit to Form 10-Q filed on November 10, 2014
10.7	Amended and Restated Supplemental Executive Retirement Agreement with Richard J. Gavegnano filed as an exhibit to Form 10-Q filed on November 10, 2014
10.8	2008 Equity Incentive Plan (Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement for its 2008 Annual Meeting, as filed with the Securities and Exchange Commission on July 11, 2008)
10.9	Termination Amendment for the Amended and Restated Employment Agreement between Edward J. Merritt and East Boston Savings Bank dated December 10, 2015 filed as an exhibit to Form 8-K filed on December 10, 2015
10.10	Amended and Restated Supplemental Executive Retirement Agreement between East Boston Savings Bank and Edward J. Merritt dated July 28, 2014 filed as an exhibit to Form 10-Q filed on November 10, 2014
10.11	Joint Beneficiary Designation Agreement between Edward J. Merritt and Mt. Washington Co-operative Bank (Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 16, 2010)
10.12	First Amendment to Joint Beneficiary Designation Agreement between Edward J. Merritt and Mt. Washington Co-operative Bank (Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 16, 2010)
10.13	Amended and Restated Two-Year Change in Control Agreement between Mark Abbate and East Boston Savings Bank dated July 28, 2014 filed as an exhibit to Form 10-Q filed on November 10, 2014
10.14	Incentive Compensation Plan filed as an exhibit to Form 10-K filed on March 17, 2014
10.15	Amended and Restated Two-Year Change in Control Agreement between John Migliozzi and East Boston Savings Bank dated July 28, 2014 filed as an exhibit to Form 10-Q filed on November 10, 2014
10.16	East Boston Non-Qualified Supplemental Employee Stock Ownership Plan dated October 1, 2014 filed as an exhibit to Form 10-Q filed on November 10, 2014
10.17	Amended and Restated Two-Year Change in Control Agreement between Frank Romano and East Boston Savings Bank dated July 28, 2014 filed as an exhibit to Form 10-K filed on March 13, 2015

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10.18	Form of Restricted Stock Award Agreement under the Meridian Bancorp, Inc. 2015 Equity Incentive Plan filed as an exhibit to Form 8-K filed on November 5, 2015
10.19	Two-Year Change in Control Agreement between Edward J. Merritt and East Boston Savings Bank dated December 10, 2015 filed as an exhibit to Form 8-K filed on December 10, 2015
10.20	Freeze Amendment to the Amended and Restated Supplemental Executive Retirement Agreement between East Boston Savings Bank and Edward J. Merritt dated December 10, 2015 filed as an exhibit to Form 8-K filed on December 10, 2015
10.21	Amendment Number One to Meridian Bancorp, Inc. 2008 Equity Incentive Plan dated August 15, 2018 filed as an exhibit to Form 10-Q filed on November 9, 2018
21	Subsidiaries of Registrant filed as an exhibit to Form 10-Q filed on November 10, 2014
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following financial statements formatted in Inline 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 – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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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SIGNATURES

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

	MERIDIAN BANCORP, INC. (Registrant)
Date: August 9, 2019	By:	/s/    Richard J. Gavegnano
		Richard J. Gavegnano Chairman, President and Chief Executive Officer (Principal Executive Officer)
Date: August 9, 2019	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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