FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

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 001-33898

 

 

Meridian Interstate Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Massachusetts   20-4652200

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

10 Meridian Street,

East Boston, Massachusetts

  02128
(Address of Principal Executive Offices)   Zip Code

(617) 567-1500

(Registrant’s telephone number, including area code)

Not Applicable

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

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   þ
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

At August 2, 2013, the registrant had 22,093,062 shares of no par value common stock outstanding.

 

 

 


Table of Contents

MERIDIAN INTERSTATE BANCORP, INC.

FORM 10-Q

INDEX

 

          Page  
PART I.  

FINANCIAL INFORMATION

  
Item 1.  

Financial Statements

  
 

Consolidated Balance Sheets at June 30, 2013 and December 31, 2012 (Unaudited)

     3   
 

Consolidated Statements of Net Income for the three and six months ended June 30, 2013 and 2012 (Unaudited)

     4   
 

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012 (Unaudited)

     5   
 

Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2013 and 2012 (Unaudited)

     6   
 

Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012 (Unaudited)

     7   
 

Notes to Unaudited Consolidated Financial Statements

     9   
Item 2.  

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

     29   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     43   
Item 4.  

Controls and Procedures

     44   
PART II.  

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     45   
Item 1A.  

Risk Factors

     45   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     45   
Item 3.  

Defaults Upon Senior Securities

     45   
Item 4.  

Mine Safety Disclosures

     45   
Item 5.  

Other Information

     45   
Item 6.  

Exhibits

     46   
Signatures        47   
Exhibit 31.1        48   
Exhibit 31.2        49   
Exhibit 32.0        50   

 

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Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     June 30,
2013
    December 31,
2012
 
     (Dollars in thousands)  

ASSETS

  

Cash and due from banks

   $ 143,441      $ 93,129   

Federal funds sold

     63        63   
  

 

 

   

 

 

 

Total cash and cash equivalents

     143,504        93,192   

Securities available for sale, at fair value

     221,996        262,785   

Federal Home Loan Bank stock, at cost

     11,907        12,064   

Loans held for sale

     10,188        14,502   

Loans

     2,029,032        1,806,843   

Less allowance for loan losses

     (23,450     (20,504
  

 

 

   

 

 

 

Loans, net

     2,005,582        1,786,339   

Bank-owned life insurance

     36,838        36,251   

Foreclosed real estate, net

     1,790        2,604   

Premises and equipment, net

     39,688        38,719   

Accrued interest receivable

     6,839        6,745   

Deferred tax asset, net

     10,463        9,710   

Goodwill

     13,687        13,687   

Other assets

     5,952        2,173   
  

 

 

   

 

 

 

Total assets

   $ 2,508,434      $ 2,278,771   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

  

Deposits:

    

Non interest-bearing

   $ 228,705      $ 204,079   

Interest-bearing

     1,833,364        1,661,354   
  

 

 

   

 

 

 

Total deposits

     2,062,069        1,865,433   

Long-term debt

     188,576        161,254   

Accrued expenses and other liabilities

     18,892        18,141   
  

 

 

   

 

 

 

Total liabilities

     2,269,537        2,044,828   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock, no par value, 50,000,000 shares authorized; 23,000,000 shares issued

     —          —     

Additional paid-in capital

     98,770        98,338   

Retained earnings

     153,052        146,959   

Accumulated other comprehensive income

     3,838        4,915   

Treasury stock, at cost, 714,114 and 660,800 shares at June 30, 2013 and December 31, 2012, respectively

     (9,336     (8,331

Unearned compensation—ESOP, 600,300 and 621,000 shares at June 30, 2013 and December 31, 2012, respectively

     (6,003     (6,210

Unearned compensation—restricted shares, 195,190 and 203,345 at June 30, 2013 and December 31, 2012, respectively

     (1,424     (1,728
  

 

 

   

 

 

 

Total stockholders’ equity

     238,897        233,943   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,508,434      $ 2,278,771   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME

(Unaudited)

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2013      2012      2013      2012  
     (Dollars in thousands, except per share amounts)  

Interest and dividend income:

           

Interest and fees on loans

   $ 21,730       $ 18,565       $ 42,524       $ 36,553   

Interest on debt securities

     1,060         2,006         2,269         4,204   

Dividends on equity securities

     364         292         713         653   

Interest on certificates of deposit

     —           9         —           18   

Other interest and dividend income

     101         96         165         177   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest and dividend income

     23,255         20,968         45,671         41,605   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Interest on deposits

     4,141         3,817         8,089         7,820   

Interest on borrowings

     795         756         1,637         1,539   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     4,936         4,573         9,726         9,359   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     18,319         16,395         35,945         32,246   

Provision for loan losses

     3,219         2,170         4,479         3,434   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income, after provision for loan losses

     15,100         14,225         31,466         28,812   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest income:

           

Customer service fees

     1,776         1,505         3,362         3,084   

Loan fees

     108         177         164         239   

Mortgage banking gains, net

     403         537         558         1,162   

Gain on sales of securities, net

     2,128         1,259         4,401         2,342   

Income from bank-owned life insurance

     296         295         587         596   

Equity income on investment in affiliate bank

     —           67         —           310   

Gain on sale of investment in affiliate bank

     —           4,819         —           4,819   

Other income

     9         1         9         1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

     4,720         8,660         9,081         12,553   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest expenses:

           

Salaries and employee benefits

     9,476         8,642         19,551         17,943   

Occupancy and equipment

     2,086         2,058         4,420         4,095   

Data processing

     1,079         857         2,070         1,689   

Marketing and advertising

     812         650         1,503         1,209   

Professional services

     537         870         1,138         1,703   

Foreclosed real estate

     86         103         192         286   

Deposit insurance

     522         440         997         871   

Other general and administrative

     997         1,179         2,016         2,269   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expenses

     15,595         14,799         31,887         30,065   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     4,225         8,086         8,660         11,300   

Provision for income taxes

     1,200         2,639         2,567         3,697   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 3,025       $ 5,447       $ 6,093       $ 7,603   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income per share:

           

Basic

   $ 0.14       $ 0.25       $ 0.28       $ 0.35   

Diluted

   $ 0.14       $ 0.25       $ 0.28       $ 0.35   

Weighted average shares:

           

Basic

     21,649,423         21,630,660         21,644,052         21,647,237   

Diluted

     21,962,628         21,808,507         21,957,397         21,818,079   

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  
     (In thousands)  

Net income

   $ 3,025      $ 5,447      $ 6,093      $ 7,603   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of taxes:

        

Unrealized holding (losses) gains on securities available for sale

     (2,403     58        2,626        4,781   

Reclassification adjustments for gains realized in income

     (2,128     (1,259     (4,401     (2,342
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized (losses) gains

     (4,531     (1,201     (1,775     2,439   

Tax effect

     1,800        487        698        (939
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

     (2,731     (714     (1,077     1,500   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 294      $ 4,733      $ 5,016      $ 9,103   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2013 and 2012

(Unaudited)

 

    Shares of
Common
Stock
Outstanding
    Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Treasury
Stock
    Unearned
Compensation  -

ESOP
    Unearned
Compensation  -

Restricted Shares
    Total  
    (Dollars in thousands)  

Six Months Ended June 30, 2012

               

Balance at December 31, 2011

    22,149,409      $ 97,669      $ 134,533      $ 3,985      $ (7,317   $ (6,624   $ (2,302   $ 219,944   

Comprehensive income

    —          —          7,603        1,500        —          —          —          9,103   

Stock option exercise

    3,101        (30     —          —          39        —          —          9   

Purchase of treasury stock

    (86,304     —          —          —          (1,141     —          —          (1,141

ESOP shares earned (20,700 shares)

    —          66        —          —          —          207        —          273   

Share-based compensation expense

    7,120        295        —          —          —          —          284        579   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

    22,073,326      $ 98,000      $ 142,136      $ 5,485      $ (8,419   $ (6,417   $ (2,018   $ 228,767   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2013

               

Balance at December 31, 2012

    22,135,855      $ 98,338      $ 146,959      $ 4,915      $ (8,331   $ (6,210   $ (1,728   $ 233,943   

Comprehensive income

    —          —          6,093        (1,077     —          —          —          5,016   

Stock option exercise

    7,472        (62     —          —          96        —          —          34   

Purchase of treasury stock

    (60,786     —          —          —          (1,101     —          —          (1,101

ESOP shares earned (20,700 shares)

    —          166        —          —          —          207        —          373   

Share-based compensation expense

    8,155        328        —          —          —          —          304        632   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

    22,090,696      $ 98,770      $ 153,052      $ 3,838      $ (9,336   $ (6,003   $ (1,424   $ 238,897   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended June 30,  
     2013     2012  
     (In thousands)  

Cash flows from operating activities:

    

Net income

   $ 6,093      $ 7,603   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Accretion of acquisition fair value adjustments

     (162     (306

Earned ESOP shares

     373        273   

Provision for loan losses

     4,479        3,434   

Accretion of net deferred loan origination costs

     (38     (30

Net (accretion) amortization of securities available for sale

     (5     175   

Capitalization of mortgage servicing rights

     (86     (576

Amortization of mortgage servicing rights

     173        143   

Depreciation and amortization expense

     1,117        1,081   

Gain on sales of securities, net

     (4,401     (2,342

Loss and provision for foreclosed real estate, net

     88        134   

Deferred income tax benefit

     (55     (24

Income from bank-owned life insurance

     (587     (596

Equity income on investment in affiliate bank

     —          (310

Gain on sale of investment in affiliate bank

     —          (4,819

Share-based compensation expense

     632        579   

Net changes in:

    

Loans held for sale

     4,314        (7,310

Accrued interest receivable

     (94     454   

Prepaid deposit insurance

     —          812   

Other assets

     (2,570     491   

Accrued expenses and other liabilities

     283        (2,522
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     9,554        (3,656
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Maturities of certificate of deposit

     —          2,500   

Activity in securities available for sale:

    

Proceeds from maturities, calls and principal payments

     20,704        91,952   

Redemption (purchases) of mutual funds, net

     9,911        (5,587

Proceeds from sales

     27,775        16,379   

Purchases

     (15,816     (57,427

Proceeds from sale of investment in affiliate bank

     —          6,600   

Redemption of Federal Home Loan Bank stock

     157        474   

Loans originated, net of principal payments received

     (223,966     (200,482

Purchases of premises and equipment

     (2,045     (2,496

Proceeds from sales of foreclosed real estate

     926        1,061   
  

 

 

   

 

 

 

Net cash used in investing activities

     (182,354     (147,026
  

 

 

   

 

 

 

 

(continued)

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended June 30,  
     2013     2012  
     (In thousands)  

Cash flows from financing activities:

    

Net increase in deposits

     196,653        96,167   

Net change in borrowings with maturities less than three months

     —          (6,463

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

     47,500        62,500   

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

     (19,974     (32,500

Stock option exercise

     34        9   

Purchase of treasury stock

     (1,101     (1,141
  

 

 

   

 

 

 

Net cash provided by financing activities

     223,112        118,572   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     50,312        (32,110

Cash and cash equivalents at beginning of period

     93,192        156,685   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 143,504      $ 124,575   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid on deposits

   $ 8,097      $ 7,949   

Interest paid on borrowings

     1,862        1,965   

Income taxes paid, net of refunds

     4,440        3,610   

Non-cash investing and financing activities:

    

Transfers from loans to foreclosed real estate

     200        354   

Receipt of common stock from sale of investment in affiliate bank

     —          11,136   

Net amounts due from broker on security transactions

     828        7,038   

See accompanying notes to unaudited consolidated financial statements.

 

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MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Meridian Interstate Bancorp, Inc., a 59.6%-owned subsidiary of Meridian Financial Services, Incorporated (“Meridian”), a mutual holding company, and all other entities in which it has a controlling financial interest (collectively referred to as the “Company”). The Company was formed in a corporate reorganization in 2006 and owns East Boston Savings Bank and its subsidiaries (the “Bank”) and Meridian Interstate Funding Corporation, which was established in 2008 to fund a loan to the Company’s Employee Stock Ownership Plan (“ESOP”). The Bank’s subsidiaries include Prospect, Inc., which engages in securities transactions on its own behalf, EBOSCO, LLC and Berkeley Riverbend Estates LLC, both of which hold foreclosed real estate; and East Boston Investment Services, Inc., which is authorized for third-party investment sales and is currently inactive. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company held a 43% share in Hampshire First Bank, a New Hampshire chartered bank, organized and headquartered in Manchester, New Hampshire, which was accounted for using the equity method, under which the Company’s share of the net income or loss of the affiliate was recognized as income or loss in the Company’s consolidated statement of income. On November 16, 2011, Hampshire First Bank entered into an Agreement and Plan of Merger with NBT Bancorp, Inc. (“NBTB”) and NBT Bank, N.A. which merger was completed on June 8, 2012, with the Company recognizing a pre-tax gain of $4.8 million and receiving $6.6 million of cash and 547,481 NBTB shares with a fair value of $11.1 million as proceeds from the sale.

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Such adjustments were of a normal recurring nature. The results of operations for the three and six months ended June 30, 2013 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 Form 10-K for the year ended December 31, 2012 which was filed with the Securities and Exchange Commission (“SEC”) on March 15, 2013, and is available through the SEC’s website at www.sec.gov.

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

2. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220), Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. The update generally requires the Company to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income, effective prospectively for reporting periods beginning after December 15, 2012. The update had no material impact on the Company’s consolidated financial statements.

 

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3. EARNINGS PER SHARE

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

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

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2013     2012     2013     2012  
    (Dollars in thousands, except per share amounts)  

Net income available to common stockholders

  $ 3,025      $ 5,447      $ 6,093      $ 7,603   
 

 

 

   

 

 

   

 

 

   

 

 

 

Average number of common shares outstanding

    21,507,247        21,460,224        21,514,555        21,475,457   

Effect of unvested stock awards

    142,176        170,436        129,497        171,780   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average shares outstanding

    21,649,423        21,630,660        21,644,052        21,647,237   

Effect of dilutive stock options

    313,205        177,847        313,345        170,842   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding

    21,962,628        21,808,507        21,957,397        21,818,079   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

       

Basic

  $ 0.14      $ 0.25      $ 0.28      $ 0.35   

Diluted

  $ 0.14      $ 0.25      $ 0.28      $ 0.35   

Options for the exercise of 46,700 and 71,100 shares for the three months ended June 30, 2013 and 2012, respectively, and options for the exercise of 23,350 and 64,850 shares for the six months ended June 30, 2013 and 2012, respectively, were not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive.

 

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4. SECURITIES

The following table sets forth the amortized cost and fair value of securities available for sale.

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
     (In thousands)  

June 30, 2013

          

Debt securities:

          

Corporate bonds:

          

Financial services

   $ 66,432       $ 1,388       $ (95   $ 67,725   

Industry and manufacturing

     13,869         368         (2     14,235   

Consumer products and services

     11,250         192         —          11,442   

Technology

     2,504         20         —          2,524   

Healthcare

     11,027         316         —          11,343   

Other

     1,014         54         —          1,068   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total corporate bonds

     106,096         2,338         (97     108,337   

Government-sponsored enterprises

     36,573         6         (1,156     35,423   

Municipal bonds

     7,234         150         —          7,384   

Residential mortgage-backed securities:

          

Government-sponsored enterprises

     13,247         723         —          13,970   

Private label

     1,862         79         —          1,941   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     165,012         3,296         (1,253     167,055   
  

 

 

    

 

 

    

 

 

   

 

 

 

Marketable equity securities:

          

Common stocks:

          

Financial services

     11,220         881         (104     11,997   

Industry and manufacturing

     14,793         1,077         (460     15,410   

Consumer products and services

     10,137         1,998         (35     12,100   

Technology

     2,954         291         (68     3,177   

Healthcare

     3,993         1,011         (32     4,972   

Other

     2,677         724         —          3,401   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total common stocks

     45,774         5,982         (699     51,057   

Money market mutual funds

     3,921         —           (37     3,884   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total marketable equity securities

     49,695         5,982         (736     54,941   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 214,707       $ 9,278       $ (1,989   $ 221,996   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2012

          

Debt securities:

          

Corporate bonds:

          

Financial services

   $ 76,044       $ 2,480       $ (71   $ 78,453   

Industry and manufacturing

     14,846         449         —          15,295   

Consumer products and services

     12,259         355         —          12,614   

Technology

     2,506         —           (29     2,477   

Healthcare

     11,041         461         —          11,502   

Other

     1,018         61         —          1,079   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total corporate bonds

     117,714         3,806         (100     121,420   

Government-sponsored enterprises

     53,084         94         (29     53,149   

Municipal bonds

     7,236         225         —          7,461   

Residential mortgage-backed securities:

          

Government-sponsored enterprises

     16,280         1,019         (1     17,298   

Private label

     3,169         140         —          3,309   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     197,483         5,284         (130     202,637   
  

 

 

    

 

 

    

 

 

   

 

 

 

Marketable equity securities:

          

Common stocks:

          

Financial services

     11,354         622         (67     11,909   

Industry and manufacturing

     10,922         1,329         (157     12,094   

Consumer products and services

     11,849         1,284         (59     13,074   

Technology

     1,847         11         (8     1,850   

Healthcare

     3,757         560         (9     4,308   

Other

     2,677         422         —          3,099   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total common stocks

     42,406         4,228         (300     46,334   

Money market mutual funds

     13,833         —           (19     13,814   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total marketable equity securities

     56,239         4,228         (319     60,148   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 253,722       $ 9,512       $ (449   $ 262,785   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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At June 30, 2013, securities with an amortized cost of $27.1 million and $2.8 million, respectively, were pledged as collateral for Federal Home Loan Bank of Boston borrowings and Federal Reserve Bank discount window borrowings.

The amortized cost and fair value of debt securities by contractual maturity at June 30, 2013 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.

 

     Within 1 year      Over 1 year to 5 years      Over 5 years      Total  
     Amortized      Fair      Amortized      Fair      Amortized      Fair      Amortized      Fair  
     Cost      Value      Cost      Value      Cost      Value      Cost      Value  
     (In thousands)  

Corporate bonds:

                       

Financial services

   $ 11,766       $ 11,866       $ 50,666       $ 51,895       $ 4,000       $ 3,964       $ 66,432       $ 67,725   

Industry and manufacturing

     3,996         4,083         9,873         10,152         —           —           13,869         14,235   

Consumer products and services

     11,250         11,442         —           —           —           —           11,250         11,442   

Technology

     —           —           2,504         2,524         —           —           2,504         2,524   

Healthcare

     5,015         5,119         6,012         6,224         —           —           11,027         11,343   

Other

     —           —           1,014         1,068         —           —           1,014         1,068   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate bonds

     32,027         32,510         70,069         71,863         4,000         3,964         106,096         108,337   

Government-sponsored enterprises

     —           —           75         78         36,498         35,345         36,573         35,423   

Municipal bonds

     1,460         1,462         5,774         5,922         —           —           7,234         7,384   

Residential mortgage-backed securities:

                       

Government-sponsored enterprises

     —           —           3         3         13,244         13,967         13,247         13,970   

Private label

     —           —           —           —           1,862         1,941         1,862         1,941   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 33,487       $ 33,972       $ 75,921       $ 77,866       $ 55,604       $ 55,217       $ 165,012       $ 167,055   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended June 30, 2013 and 2012, proceeds from sales of securities available for sale amounted to $8.0 million and $8.6 million, during the 2013 and 2012 periods. Gross gains of $2.1 million and $1.4 million and gross losses of $0 and $98,000, respectively, were realized on the sales. For the six months ended June 30, 2013 and 2012, proceeds from sales of securities available for sale amounted to $27.8 million and $16.4 million, during the 2013 and 2012 periods. Gross gains of $4.4 million and $2.4 million and gross losses of $10,000 and $98,000, respectively, were realized on the sales.

Information pertaining to securities available for sale as of June 30, 2013 and December 31, 2012, with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

     Within One Year      Over One Year  
     Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
 
     (In thousands)  

June 30, 2013

           

Debt securities:

           

Corporate bonds:

           

Financial services

   $ 42       $ 7,958       $ 53       $ 4,446   

Industry and manufacturing

     2         998         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate bonds

     44         8,956         53         4,446   

Government-sponsored enterprises

     1,156         33,343         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     1,200         42,299         53         4,446   
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities:

           

Common stocks:

           

Financial services

     87         2,009         17         217   

Industry and manufacturing

     445         4,833         15         413   

Consumer products and services

     35         749         —           —     

Technology

     68         1,586         —           —     

Healthcare

     32         1,139         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total common stocks

     667         10,316         32         630   

Money market mutual funds

     —           —           37         994   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable equity securities

     667         10,316         69         1,624   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 1,867       $ 52,615       $ 122       $ 6,070   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Within One Year      Over One Year  
     Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
 
     (In thousands)  

December 31, 2012

           

Debt securities:

           

Corporate bonds:

           

Financial services

   $ 14       $ 2,986       $ 57       $ 4,442   

Technology

     29         2,477         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate bonds

     43         5,463         57         4,442   

Government-sponsored enterprises

     29         8,962         —           —     

Residential mortgage-backed securities:

           

Government-sponsored enterprises

     1         8         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     73         14,433         57         4,442   
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities:

           

Common stocks:

           

Financial services

     46         7,193         21         217   

Industry and manufacturing

     157         2,654         —           —     

Consumer products and services

     59         1,077         —           —     

Technology

     8         936         —           —     

Healthcare

     9         612         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total common stocks

     279         12,472         21         217   

Money market mutual funds

     —           —           19         1,004   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable equity securities

     279         12,472         40         1,221   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 352       $ 26,905       $ 97       $ 5,663   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company determined no securities were other-than-temporarily impaired for the six months ended June 30, 2013. Management evaluates securities for other-than-temporary impairment on a quarterly basis, with more frequent evaluation for selected issuers or when economic or market concerns warrant such evaluations.

As of June 30, 2013, the net unrealized gain on the total debt securities portfolio was $2.0 million. At June 30, 2013, 31 debt securities had unrealized losses with aggregate depreciation of 2.6% from the Company’s amortized cost basis. In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, industry analysts’ reports and, to a lesser extent given the relatively insignificant levels of depreciation in the Company’s debt portfolio, spread differentials between the effective rates on instruments in the portfolio compared to risk-free rates. The unrealized losses are primarily caused by (a) recent declines in profitability and near-term profit forecasts by industry analysts resulting from a decline in the level of business activity; (b) recent downgrades by several industry analysts; and (c) recent increases in interest rates. The contractual terms of these investments do not permit the companies to settle the security at a price less than the par value of the investment. The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments. Therefore, it is expected that the bonds would not be settled at a price less than the par value of the investment. Because (1) the Company does not intend to sell the securities; (2) the Company does not believe it is “more likely than not” that the Company will be required to sell the securities before recovery of its amortized cost basis; and (3) the present value of expected cash flows is sufficient to recover the entire amortized cost basis of the securities, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2013.

As of June 30, 2013, the net unrealized gain on the total marketable equity securities portfolio was $5.2 million. At June 30, 2013, 25 marketable equity securities have unrealized losses with aggregate depreciation of 5.8% from the Company’s cost basis. Two equity securities had a market value decline of 15.0% or more for less than twelve months, with a net unrealized loss of $281,000. Although the issuers have shown declines in earnings as a result of the weakened economy, no credit issues have been identified that cause management to believe the decline in market value is other than temporary, and the Company has the ability and intent to hold these investments until a recovery of fair value. In analyzing an equity issuer’s financial condition, management considers industry

 

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analysts’ reports, financial performance and projected target prices of investment analysts within a one-year time frame. A decline of 10% or more in the value of an acquired equity security is generally the triggering event for management to review individual securities for liquidation and/or classification as other-than-temporarily impaired. Impairment losses are recognized when management concludes that declines in the value of equity securities are other than temporary, or when they can no longer assert that they have the intent and ability to hold depreciated equity securities for a period of time sufficient to allow for any anticipated recovery in fair value. Unrealized losses on marketable equity securities that are in excess of 25% of cost and that have been sustained for more than twelve months are generally considered-other-than temporary and charged to earnings as impairment losses, or realized through sale of the security.

5. LOANS

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

 

     June 30, 2013     December 31, 2012  
     Amount     %     Amount     %  
     (Dollars in thousands)  

Real estate loans:

        

Residential real estate:

        

One- to four-family

   $ 430,673        21.1   $ 443,228        24.5

Multi-family

     177,748        8.8        178,948        9.9   

Home equity lines of credit

     56,484        2.8        60,907        3.4   

Commercial real estate

     946,989        46.7        795,642        44.0   

Construction

     232,508        11.5        173,255        9.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

     1,844,402        90.9        1,651,980        91.4   

Commercial business loans

     178,392        8.8        147,814        8.2   

Consumer

     7,005        0.3        7,143        0.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     2,029,799        100.0     1,806,937        100.0
    

 

 

     

 

 

 

Allowance for loan losses

     (23,450       (20,504  

Net deferred loan origination fees

     (767       (94  
  

 

 

     

 

 

   

Loans, net

   $ 2,005,582        $ 1,786,339     
  

 

 

     

 

 

   

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, 2013 and December 31, 2012, the Company was servicing loans for participants aggregating $47.0 million and $41.1 million, respectively.

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

 

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

 

     June 30,
2013
    December 31,
2012
 
     (In thousands)  

Real estate loans:

    

Residential real estate:

    

One- to four-family

   $ 6,981      $ 7,581   

Multi-family

     858        1,280   

Home equity lines of credit

     566        568   

Commercial real estate

     733        1,646   
  

 

 

   

 

 

 

Total real estate loans

     9,138        11,075   

Commercial business loans

     78        78   

Consumer

     4        4   
  

 

 

   

 

 

 

Outstanding principal balance

     9,220        11,157   

Discount

     (2,287     (2,595
  

 

 

   

 

 

 

Carrying amount

   $ 6,933      $ 8,562   
  

 

 

   

 

 

 

A rollforward of accretable yield follows:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  
     (In thousands)  

Beginning balance

   $ 1,040      $ 1,162      $ 1,047      $ 1,181   

Accretion

     (7     (18     (14     (37

Disposals

     (130     —          (130     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 903      $ 1,144      $ 903      $ 1,144   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

    For the Three Months Ended June 30, 2013  
    One- to
four-family
    Multi-
family
    Home
equity lines
of credit
    Commercial
real estate
    Construction     Commercial
business
    Consumer     Unallocated     Total  
    (In thousands)  

Beginning balance

  $ 2,150      $ 1,315      $ 177      $ 10,620      $ 4,459      $ 2,078      $ 84      $ —        $ 20,883   

Provision (credit) for loan loss

    22        (1     (17     1,561        1,148        494        12        —          3,219   

Charge-offs

    (288     (6     —          —          (366     —          (21     —          (681

Recoveries

    1        —          —          —          6        14        8        —          29   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 1,885      $ 1,308      $ 160      $ 12,181      $ 5,247      $ 2,586      $ 83      $ —        $ 23,450   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Three Months Ended June 30, 2012  
    One- to
four-family
    Multi-
family
    Home
equity lines
of credit
    Commercial
real estate
    Construction     Commercial
business
    Consumer     Unallocated     Total  
    (In thousands)  

Beginning balance

  $ 2,090      $ 1,439      $ 158      $ 7,125      $ 2,082      $ 1,131      $ 72      $ —        $ 14,097   

Provision for loan loss

    230        13        6        12        1,501        380        28        —          2,170   

Charge-offs

    (168     —          —          —          (218     —          (16     —          (402

Recoveries

    170        —          —          —          229        —          7        —          406   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 2,322      $ 1,452      $ 164      $ 7,137      $ 3,594      $ 1,511      $ 91      $ —        $ 16,271   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents
    For the Six Months Ended June 30, 2013  
    One- to
four-family
    Multi-
family
    Home
equity lines
of credit
    Commercial
real estate
    Construction     Commercial
business
    Consumer     Unallocated     Total  
    (In thousands)  

Beginning balance

  $ 2,507      $ 1,431      $ 226      $ 10,405      $ 3,656      $ 2,174      $ 105      $ —        $ 20,504   

Provision (credit) for loan loss

    (259     (27     (66     1,776        2,573        395        87        —          4,479   

Charge-offs

    (396     (96     —          —          (993     —          (153     —          (1,638

Recoveries

    33        —          —          —          11        17        44        —          105   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 1,885      $ 1,308      $ 160      $ 12,181      $ 5,247      $ 2,586      $ 83      $ —        $ 23,450   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Six Months Ended June 30, 2012  
    One- to
four-family
    Multi-
family
    Home
equity lines
of credit
    Commercial
real estate
    Construction     Commercial
business
    Consumer     Unallocated     Total  
    (In thousands)  

Beginning balance

  $ 1,861      $ 1,361      $ 245      $ 6,980      $ 1,430      $ 1,061      $ 115      $ —        $ 13,053   

Provision (credit) for loan loss

    650        163        (29     (61     2,231        446        34        —          3,434   

Charge-offs

    (367     (72     (52     (9     (298     —          (75     —          (873

Recoveries

    178        —          —          227        231        4        17        —          657   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 2,322      $ 1,452      $ 164      $ 7,137      $ 3,594      $ 1,511      $ 91      $ —        $ 16,271   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    At June 30, 2013  
    One- to
four-family
    Multi-
family
    Home
equity lines
of credit
    Commercial
real estate
    Construction     Commercial
business
    Consumer     Unallocated     Total  
    (In thousands)  

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

  $ 128      $ —        $ —        $ 303      $ 256      $ 84      $ —        $ —        $ 771   

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

    1,757        1,308        160        11,878        4,991        2,502        83        —          22,679   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,885      $ 1,308      $ 160      $ 12,181      $ 5,247      $ 2,586      $ 83      $ —        $ 23,450   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 37      $ —        $ —        $ 9      $ —        $ —        $ —        $ —        $ 46   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 4,643      $ 4,638      $ 22      $ 9,877      $ 17,152      $ 511      $ —          $ 36,843   

Loans not deemed to be impaired

    426,030        173,110        56,462        937,112        215,356        177,881        7,005          1,992,956   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
  $ 430,673      $ 177,748      $ 56,484      $ 946,989      $ 232,508      $ 178,392      $ 7,005        $ 2,029,799   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

 

16


Table of Contents
    At December 31, 2012  
    One- to
four-family
    Multi-
family
    Home
equity lines
of credit
    Commercial
real estate
    Construction     Commercial
business
    Consumer     Unallocated     Total  
    (In thousands)  

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

  $ 128      $ 90      $ —        $ 204      $ 227      $ —        $ —        $ —        $ 649   

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

    2,379        1,341        226        10,201        3,429        2,174        105        —          19,855   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 2,507      $ 1,431      $ 226      $ 10,405      $ 3,656      $ 2,174      $ 105      $ —        $ 20,504   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 31      $ 90      $ —        $ 9      $ —        $ —        $ —        $ —        $ 130   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 4,486      $ 5,784      $ 22      $ 12,146      $ 18,319      $ 424      $ —          $ 41,181   

Loans not deemed to be impaired

    438,742        173,164        60,885        783,496        154,936        147,390        7,143          1,765,756   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
  $ 443,228      $ 178,948      $ 60,907      $ 795,642      $ 173,255      $ 147,814      $ 7,143        $ 1,806,937   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

The following table provides information about the Company’s past due and non-accrual loans at the dates indicated.

 

     June 30, 2013  
     30-59
Days
Past Due
     60-89
Days
Past Due
     90 Days
or Greater
Past Due
     Total
Past Due
     Loans on
Non-accrual
 
     (In thousands)  

Real estate loans:

              

Residential real estate:

              

One- to four-family

   $ 4,602       $ 1,130       $ 5,903       $ 11,635       $ 18,156   

Multi-family

     328         —           —           328         595   

Home equity lines of credit

     482         202         321         1,005         2,626   

Commercial real estate

     979         1,694         3,532         6,205         8,002   

Construction

     3,443         —           6,186         9,629         15,421   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     9,834         3,026         15,942         28,802         44,800   

Commercial business loans

     38         948         123         1,109         511   

Consumer

     383         309         —           692         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,255       $ 4,283       $ 16,065       $ 30,603       $ 45,311   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

17


Table of Contents
     December 31, 2012  
     30-59
Days
Past Due
     60-89
Days
Past Due
     90 Days
or Greater
Past Due
     Total
Past Due
     Loans on
Non-accrual
 
     (In thousands)  

Real estate loans:

              

Residential real estate:

              

One- to four-family

   $ 3,996       $ 2,476       $ 8,990       $ 15,462       $ 18,870   

Multi-family

     —           —           364         364         976   

Home equity lines of credit

     767         674         754         2,195         2,674   

Commercial real estate

     1,722         379         3,671         5,772         8,844   

Construction

     496         —           6,553         7,049         7,785   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     6,981         3,529         20,332         30,842         39,149   

Commercial business loans

     201         —           318         519         424   

Consumer

     479         132         —           611         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,661       $ 3,661       $ 20,650       $ 31,972       $ 39,573   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2013 and December 31, 2012, the Company did not have any accruing loans past due 90 days or more. Delinquent loans at June 30, 2013 and December 31, 2012 included $966,000 and $2.3 million of loans acquired with evidence of credit deterioration. At June 30, 2013 and December 31, 2012, non-accrual loans included $1.8 million and $3.9 million of loans acquired with evidence of credit deterioration.

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

 

     June 30, 2013      December 31, 2012  
            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

   $ 2,624       $ 2,903          $ 2,157       $ 2,465      

Multi-family

     4,638         4,638            5,419         5,893      

Home equity lines of credit

     22         22            22         22      

Commercial real estate

     3,119         3,346            9,752         10,054      

Construction

     14,929         16,387            16,726         17,818      

Commercial business loans

     254         332            424         502      
  

 

 

    

 

 

       

 

 

    

 

 

    

Total

     25,586         27,628            34,500         36,754      
  

 

 

    

 

 

       

 

 

    

 

 

    

Impaired loans with a valuation allowance:

                 

One- to four-family

     2,019         2,118       $ 128         2,329         2,330       $ 128   

Multi-family

     —           —           —           365         482         90   

Commercial real estate

     6,758         6,758         303         2,394         2,394         204   

Construction

     2,223         3,044         256         1,593         1,787         227   

Commercial business loans

     257         257         84         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     11,257         12,177         771         6,681         6,993         649   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 36,843       $ 39,805       $ 771       $ 41,181       $ 43,747       $ 649   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

18


Table of Contents
     Three Months Ended June 30, 2013      Three Months Ended June 30, 2012  
                   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

   $ 4,688       $ 59       $ 46       $ 3,993       $ 60       $ 49   

Multi-family

     5,143         90         59         6,319         143         138   

Home equity lines of credit

     22         —           —           23         —           —     

Commercial real estate

     10,332         190         152         10,988         186         81   

Construction

     17,260         279         118         28,831         441         294   

Commercial business loans

     456         16         16         1,115         23         17   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 37,901       $ 634       $ 391       $ 51,269       $ 853       $ 579   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Six Months Ended June 30, 2013      Six Months Ended June 30, 2012  
                   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

   $ 4,621       $ 117       $ 94       $ 3,967       $ 121       $ 98   

Multi-family

     5,356         179         168         5,965         278         260   

Home equity lines of credit

     22         —           —           23         —           —     

Commercial real estate

     10,937         354         226         11,572         398         249   

Construction

     17,613         548         276         30,642         1,050         548   

Commercial business loans

     445         22         22         1,115         45         39   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 38,994       $ 1,220       $ 786       $ 53,284       $ 1,892       $ 1,194   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2013, additional funds of $1.0 million are committed to be advanced in connection with impaired construction loans.

 

19


Table of Contents

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

 

     June 30,      December 31,  
     2013      2012  
     (In thousands)  

TDRs on accrual status:

     

One- to four-family

   $ 2,238       $ 1,992   

Multi-family

     110         110   

Home equity lines of credit

     22         22   

Commercial real estate

     1,380         1,393   

Construction

     —           3,319   
  

 

 

    

 

 

 

Total TDRs on accrual status

     3,750         6,836   
  

 

 

    

 

 

 

TDRs on non-accrual status:

     

One- to four-family

     2,405         2,493   

Commercial real estate

     4,388         4,466   

Construction

     6,914         3,838   

Commercial business loans

     192         —     
  

 

 

    

 

 

 

Total TDRs on non-accrual status

     13,899         10,797   
  

 

 

    

 

 

 

Total TDRs

   $ 17,649       $ 17,633   
  

 

 

    

 

 

 

The following is a summary of troubled debt restructurings during the periods indicated.

 

     Three Months Ended June 30,  
     2013      2012  
     Number of
Loans
     Pre-Modification
Balance
     Post-Modification
Balance
     Number of
Loans
     Pre-Modification
Balance
     Post-Modification
Balance
 
     (Dollars in thousands)  

Real estate loans:

                 

One- to four-family

     —         $ —         $ —           1       $ 175       $ 175   

Commercial business loans

     1         207         207         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 207       $ 207         1       $ 175       $ 175   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Six Months Ended June 30,  
     2013      2012  
     Number of
Loans
     Pre-Modification
Balance
     Post-Modification
Balance
     Number of
Loans
     Pre-Modification
Balance
     Post-Modification
Balance
 
     (Dollars in thousands)  

Real estate loans:

                 

One- to four-family

     1       $ 265       $ 265         4       $ 851       $ 851   

Commercial business loans

     1         207         207         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 472       $ 472         4       $ 851       $ 851   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2013      2012      2013      2012  
     (In thousands)  

Adjusted interest rates

   $ —         $ 175       $ 265       $ 851   

Combination of interest rate and maturity date adjustment

     207         —           207         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 207       $ 175       $ 472       $ 851   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

The Company generally places loans modified as TDRs on non-accrual status for a minimum period of six months. Loans modified as TDRs qualify for return to accrual status once they have demonstrated performance with the modified terms of the loan agreement for a minimum of six months and future payments are reasonably assured. TDRs are reported as impaired loans with an allowance established as part of the allocated component of the allowance for loan losses when the discounted cash flows of the impaired loan is lower than the carrying value of that loan. TDRs may be removed from impairment disclosures in the year following the restructure if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring. At June 30, 2013 and 2012, the allowance for loan losses included an allocated component of $80,000 and $6,000, respectively, with no charge-offs related to the TDRs modified during the six months ended June 30, 2013 and 2012.

The following table is a summary of TDRs that defaulted (became 90 days past due) in the first twelve months after restructure during the periods presented:

 

     Six Months Ended June 30,  
     2013      2012  
     Number of
Loans
     Recorded
Investment
     Number of
Loans
     Recorded
Investment
 
     (Dollars in thousands)  

Real estate loans:

           

One- to four-family

     2       $ 469         2       $ 435   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 469         2       $ 435   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans modified as TDRs with payment defaults are considered in the allocated component of the allowance for loan losses for each of the Company’s loan portfolio segments. The Company’s historical loss experience factors include charge-offs on loans modified as TDRs, if any, as adjusted for additional qualitative factors such as levels/trends in delinquent and non-accrual loans.

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

 

   

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

 

   

Loans rated 4 and 4A: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

 

   

Loans rated 5: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

 

   

Loans rated 6: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

 

   

Loans rated 7: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

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

 

21


Table of Contents

The following tables provide information with respect to the Company’s risk rating at the dates indicated.

 

     June 30, 2013  
     Multi-family
residential
real estate
     Commercial
real estate
     Construction      Commercial
business
 
     (In thousands)  

Loans rated 1 - 4A

   $ 169,949       $ 932,161       $ 193,760       $ 177,842   

Loans rated 5

     7,799         14,828         38,748         550   

Loans rated 6

     —           —           —           —     

Loans rated 7

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 177,748       $ 946,989       $ 232,508       $ 178,392   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2012  
     Multi-family
residential
real estate
     Commercial
real estate
     Construction      Commercial
business
 
     (In thousands)  

Loans rated 1 - 4A

   $ 172,825       $ 784,060       $ 154,969       $ 147,258   

Loans rated 5

     6,123         11,582         18,286         556   

Loans rated 6

     —           —           —           —     

Loans rated 7

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 178,948       $ 795,642       $ 173,255       $ 147,814   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

6. COMMITMENTS AND DERIVATIVES

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

Loan Commitments

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

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

 

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A summary of outstanding financial instruments whose contract amounts represent credit risk is as follows:

 

     June 30,
2013
     December 31,
2012
 
     (In thousands)  

Unadvanced portion of existing loans:

     

Construction

   $ 212,715       $ 166,482   

Home equity line of credit

     37,952         39,698   

Other lines and letters of credit

     101,566         56,174   

Commitments to originate:

     

One- to four-family

     28,018         17,752   

Commercial real estate

     76,684         51,540   

Construction

     60,793         83,078   

Commercial business loans

     13,582         24,355   

Other loans

     3,613         205   
  

 

 

    

 

 

 

Total loan commitments outstanding

   $ 534,923       $ 439,284   
  

 

 

    

 

 

 

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.

Derivative Loan Commitments

Residential real estate loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential real estate loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market. A residential loan commitment requires the Company to originate a loan at a specific interest rate upon the completion of various underwriting requirements. Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from the exercise of the loan commitment might decline from the inception of the rate lock to funding of the loan due to increases in loan interest rates. If interest rates increase, the value of these commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increase. Derivative loan commitments with a notional amount of $21.6 million and $35.9 million were outstanding at June 30, 2013 and December 31, 2012, respectively. The fair value of such commitments was a net liability of $480,000 at June 30, 2013 and an asset of $288,000 at December 31, 2012.

Forward Loan Sale Commitments

To protect against the price risk inherent in derivative loan commitments, the Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Under a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay the investor a “pair-off” fee, based on then-current market prices, to compensate the investor for the shortfall. Under a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor and the investor commits to a price that it will purchase the loan from the Company if the loan to the underlying borrower closes. The Company generally enters into forward sale contracts on the same day it commits to lend funds to a potential borrower. The Company expects that these forward

 

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loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments. Forward loan sale commitments with a notional amount of $28.5 million and $44.4 million were outstanding at June 30, 2013 and December 31, 2012, respectively. The fair value of such commitments was a net asset of $930,000 at June 30, 2013 and a liability of $12,000 at December 31, 2012.

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

 

     June 30, 2013  
     Assets      Liabilities  
     Balance Sheet
Location
   Fair
    Value    
     Balance Sheet
Location
   Fair
    Value    
 
     (In thousands)  

Derivative loan commitments

   Other assets    $ 40       Other liabilities    $ 520   

Forward loan sale commitments

   Other assets      949       Other liabilities      19   
     

 

 

       

 

 

 

Total

      $ 989          $ 539   
     

 

 

       

 

 

 
     December 31, 2012  
     Assets      Liabilities  
     Balance Sheet
Location
   Fair
Value
     Balance Sheet
Location
   Fair
Value
 
     (In thousands)  

Derivative loan commitments

   Other assets    $ 288       N/A    $ —     

Forward loan sale commitments

   N/A      —         Other liabilities      12   
     

 

 

       

 

 

 

Total

      $ 288          $ 12   
     

 

 

       

 

 

 

The following table presents information pertaining to the Company’s derivative instruments included in the consolidated statement of net income:

 

         Amount of Gain/(Loss)     Amount of Gain/(Loss)  
         For the Three Months Ended June 30,     For the Six Months Ended June 30,  

Derivative Instrument

 

Location of Gain/(Loss)

   2013     2012     2013     2012  
         (In thousands)     (In thousands)  

Derivative loan commitments

  Mortgage banking gains, net    $ (699   $ 454      $ (768   $ 240   

Forward loan sale commitments

  Mortgage banking gains, net      950        (435     942        (353
    

 

 

   

 

 

   

 

 

   

 

 

 

Total

     $ 251      $ 19      $ 174      $ (113
    

 

 

   

 

 

   

 

 

   

 

 

 

For the six months ended June 30, 2013, the Company recognized net mortgage banking gains of $558,000, consisting of $384,000 in net gains on sale of loans and $174,000 in net derivative mortgage banking gains. For the six months ended June 30, 2012, the Company recognized net mortgage banking gains of $1.2 million, consisting of $1.3 million in net gains on sale of loans and $113,000 in net derivative mortgage banking losses.

Other Commitments

In July 2010, we extended the contract with our core data processing provider through December 2017. This contract extension resulted in an outstanding commitment of $10.1 million as of June 30, 2013, with total annual payments of $2.2 million.

 

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7. FAIR VALUE OF ASSETS AND LIABILITIES

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 Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 — Valuation is based on quoted prices in active markets for identical assets or liabilities. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.