Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

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

For the quarterly period ended September 30, 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  x    No  ¨

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

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

 

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

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

At November 1, 2013, the registrant had 22,114,611 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 September 30, 2013 and December 31, 2012 (Unaudited)

     3   
 

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

     4   
 

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

     5   
 

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

     6   
 

Consolidated Statements of Cash Flows for the nine months ended September 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

     45   

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     46   

Item 1A.

 

Risk Factors

     46   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     46   

Item 3.

 

Defaults Upon Senior Securities

     47   

Item 4.

 

Mine Safety Disclosures

     47   

Item 5.

 

Other Information

     47   

Item 6.

 

Exhibits

     48   

Signatures

       49   

Exhibit 31.1

       50   

Exhibit 31.2

       51   

Exhibit 32.0

       52   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     September 30,     December 31,  
     2013     2012  
     (Dollars in thousands)  
ASSETS     

Cash and due from banks

   $ 206,233      $ 93,129   

Federal funds sold

     —          63   
  

 

 

   

 

 

 

Total cash and cash equivalents

     206,233        93,192   

Securities available for sale, at fair value

     204,897        262,785   

Federal Home Loan Bank stock, at cost

     11,907        12,064   

Loans held for sale

     6,294        14,502   

Loans

     2,136,105        1,806,843   

Less allowance for loan losses

     (23,679     (20,504
  

 

 

   

 

 

 

Loans, net

     2,112,426        1,786,339   

Bank-owned life insurance

     37,137        36,251   

Foreclosed real estate, net

     1,782        2,604   

Premises and equipment, net

     39,368        38,719   

Accrued interest receivable

     6,885        6,745   

Deferred tax asset, net

     10,843        9,710   

Goodwill

     13,687        13,687   

Other assets

     3,521        2,173   
  

 

 

   

 

 

 

Total assets

   $ 2,654,980      $ 2,278,771   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Deposits:

    

Non interest-bearing

   $ 247,283      $ 204,079   

Interest-bearing

     1,957,820        1,661,354   
  

 

 

   

 

 

 

Total deposits

     2,205,103        1,865,433   

Long-term debt

     187,700        161,254   

Accrued expenses and other liabilities

     18,527        18,141   
  

 

 

   

 

 

 

Total liabilities

     2,411,330        2,044,828   
  

 

 

   

 

 

 

Stockholders’ equity:

    

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

     —          —     

Additional paid-in capital

     99,050        98,338   

Retained earnings

     158,373        146,959   

Accumulated other comprehensive income

     3,309        4,915   

Treasury stock, at cost, 743,627 and 660,800 shares at September 30, 2013 and December 31, 2012, respectively

     (9,923     (8,331

Unearned compensation - ESOP, 589,950 and 621,000 shares at September 30, 2013 and December 31, 2012, respectively

     (5,899     (6,210

Unearned compensation - restricted shares, 193,180 and 203,345 at September 30, 2013 and December 31, 2012, respectively

     (1,260     (1,728
  

 

 

   

 

 

 

Total stockholders’ equity

     243,650        233,943   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,654,980      $ 2,278,771   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3


Table of Contents

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME

(Unaudited)

 

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

Interest and dividend income:

          

Interest and fees on loans

   $ 22,889      $ 19,139       $ 65,413       $ 55,692   

Interest on debt securities

     997        1,574         3,266         5,778   

Dividends on equity securities

     348        389         1,061         1,042   

Interest on certificates of deposit

     —          8         —           26   

Other interest and dividend income

     86        71         251         248   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest and dividend income

     24,320        21,181         69,991         62,786   
  

 

 

   

 

 

    

 

 

    

 

 

 

Interest expense:

          

Interest on deposits

     4,427        3,905         12,516         11,725   

Interest on borrowings

     796        837         2,433         2,376   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest expense

     5,223        4,742         14,949         14,101   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income

     19,097        16,439         55,042         48,685   

Provision for loan losses

     151        2,344         4,630         5,778   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income, after provision for loan losses

     18,946        14,095         50,412         42,907   
  

 

 

   

 

 

    

 

 

    

 

 

 

Non-interest income:

          

Customer service fees

     1,857        1,834         5,219         4,918   

Loan fees

     185        51         349         290   

Mortgage banking (loss) gain, net

     (102     750         456         1,912   

Gain on sales of securities, net

     2,995        1,602         7,396         3,944   

Income from bank-owned life insurance

     299        296         886         892   

Equity income on investment in affiliate bank

     —          —           —           310   

Gain on sale of investment in affiliate bank

     —          —           —           4,819   

Other income

     —          6         9         7   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total non-interest income

     5,234        4,539         14,315         17,092   
  

 

 

   

 

 

    

 

 

    

 

 

 

Non-interest expenses:

          

Salaries and employee benefits

     10,033        8,644         29,584         26,587   

Occupancy and equipment

     2,103        1,882         6,523         5,977   

Data processing

     1,089        896         3,159         2,585   

Marketing and advertising

     539        557         2,042         1,766   

Professional services

     453        727         1,591         2,430   

Foreclosed real estate

     (31     208         161         494   

Deposit insurance

     525        427         1,522         1,298   

Other general and administrative

     876        1,025         2,892         3,294   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total non-interest expenses

     15,587        14,366         47,474         44,431   
  

 

 

   

 

 

    

 

 

    

 

 

 

Income before income taxes

     8,593        4,268         17,253         15,568   

Provision for income taxes

     3,272        1,554         5,839         5,251   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income

   $ 5,321      $ 2,714       $ 11,414       $ 10,317   
  

 

 

   

 

 

    

 

 

    

 

 

 

Income per share:

          

Basic

   $ 0.25      $ 0.13       $ 0.53       $ 0.48   

Diluted

   $ 0.24      $ 0.12       $ 0.52       $ 0.47   

Weighted average shares:

          

Basic

     21,632,828        21,606,540         21,640,435         21,633,654   

Diluted

     22,000,504        21,871,578         21,971,890         21,835,894   

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 September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  
     (In thousands)  

Net income

   $ 5,321      $ 2,714      $ 11,414      $ 10,317   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of taxes:

        

Unrealized holding gain on securities available for sale

     2,123        2,815        4,749        7,596   

Reclassification adjustment for gains realized in income (1)

     (2,995     (1,602     (7,396     (3,944
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized (loss) gain

     (872     1,213        (2,647     3,652   

Tax effect

     343        (471     1,041        (1,410
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

     (529     742        (1,606     2,242   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 4,792      $ 3,456      $ 9,808      $ 12,559   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amounts are included in gain on sales of securities, net in the unaudited Consolidated Statements of Net Income in total non-interest income. Income tax associated with the reclassification adjustment for the three months ended September 30, 2013 and 2012 was $903 and $622, and for the nine months ended September 30, 2013 and 2012 was $2,909 and $1,523, respectively.

See accompanying notes to unaudited consolidated financial statements.

 

5


Table of Contents

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September 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)  

Nine Months Ended September 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

    —          —          10,317        2,242        —          —          —          12,559   

Stock option exercise

    3,790        (39     —          —          47        —          —          8   

Purchase of treasury stock

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

ESOP shares earned (31,050 shares)

    —          122        —          —          —          311        —          433   

Share-based compensation expense

    8,970        446        —          —          —          —          429        875   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

    22,075,865      $ 98,198      $ 144,850      $ 6,227      $ (8,411   $ (6,313   $ (1,873   $ 232,678   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 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

    —          —          11,414        (1,606     —          —          —          9,808   

Stock option exercise

    8,259        (72     —          —          106        —          —          34   

Purchase of treasury stock

    (91,086     —          —          —          (1,698     —          —          (1,698

ESOP shares earned (31,050 shares)

    —          271        —          —          —          311        —          582   

Share-based compensation expense

    10,165        513        —          —          —          —          468        981   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

    22,063,193      $ 99,050      $ 158,373      $ 3,309      $ (9,923   $ (5,899   $ (1,260   $ 243,650   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6


Table of Contents

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended September 30,  
     2013     2012  
     (In thousands)  

Cash flows from operating activities:

    

Net income

   $ 11,414      $ 10,317   

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

    

Accretion of acquisition fair value adjustments

     (240     (380

Earned ESOP shares

     582        433   

Provision for loan losses

     4,630        5,778   

(Accretion) amortization of net deferred loan origination costs

     (50     20   

Net (accretion) amortization of securities available for sale

     (6     177   

Capitalization of mortgage servicing rights

     (97     (629

Amortization of mortgage servicing rights

     248        240   

Depreciation and amortization expense

     1,706        1,600   

Gain on sales of securities, net

     (7,396     (3,944

Loss and provision for foreclosed real estate, net

     42        310   

Deferred income tax benefit

     (92     (45

Income from bank-owned life insurance

     (886     (892

Equity income on investment in affiliate bank

     —          (310

Gain on sale of investment in affiliate bank

     —          (4,819

Share-based compensation expense

     981        875   

Net changes in:

    

Loans held for sale

     8,208        (19,070

Accrued interest receivable

     (140     816   

Prepaid deposit insurance

     —          1,208   

Other assets

     (595     528   

Accrued expenses and other liabilities

     (43     (472
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     18,266        (8,259
  

 

 

   

 

 

 

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

     31,607        140,124   

Redemption (purchase) of mutual funds, net

     11,792        (6,300

Proceeds from sales

     45,826        31,988   

Purchases

     (27,088     (86,756

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

     (331,139     (290,273

Purchases of premises and equipment

     (2,293     (2,838

Proceeds from sales of foreclosed real estate

     1,133        1,410   
  

 

 

   

 

 

 

Net cash used in investing activities

     (270,005     (203,071
  

 

 

   

 

 

 

(continued)

See accompanying notes to unaudited consolidated financial statements.

 

7


Table of Contents

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended September 30,  
     2013     2012  
     (In thousands)  

Cash flows from financing activities:

    

Net increase in deposits

     339,693        192,390   

Net change in borrowings with maturities less than three months

     —          (6,459

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

     47,500        90,000   

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

     (20,749     (42,641

Stock option exercise

     34        8   

Purchase of treasury stock

     (1,698     (1,141
  

 

 

   

 

 

 

Net cash provided by financing activities

     364,780        232,157   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     113,041        20,827   

Cash and cash equivalents at beginning of period

     93,192        156,685   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 206,233      $ 177,512   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid on deposits

   $ 12,503      $ 11,860   

Interest paid on borrowings

     2,759        2,935   

Income taxes paid, net of refunds

     6,465        4,911   

Non-cash investing and financing activities:

    

Transfers from loans to foreclosed real estate

     353        354   

Receipt of common stock from sale of investment in affiliate bank

     —          11,136   

Net amounts due from broker on security transactions

     475        —     

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

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 59.7%-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 nine months ended September 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 September 30,      Nine Months Ended September 30,  
     2013      2012      2013      2012  
     (Dollars in thousands, except per share amounts)  

Net income available to common stockholders

   $ 5,321       $ 2,714       $ 11,414       $ 10,317   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average number of common shares outstanding

     21,483,908         21,437,150         21,504,227         21,463,122   

Effect of unvested stock awards

     148,920         169,390         136,208         170,532   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average shares outstanding

     21,632,828         21,606,540         21,640,435         21,633,654   

Effect of dilutive stock options

     367,676         265,038         331,455         202,240   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     22,000,504         21,871,578         21,971,890         21,835,894   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.25       $ 0.13       $ 0.53       $ 0.48   

Diluted

   $ 0.24       $ 0.12       $ 0.52       $ 0.47   

Options for the exercise of 6,966 and 63,600 shares for the three months ended September 30, 2013 and 2012, respectively, and options for the exercise of 17,899 and 64,433 shares for the nine months ended September 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.

 

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

September 30, 2013

          

Debt securities:

          

Corporate bonds:

          

Financial services

   $ 61,150       $ 1,330       $ (63   $ 62,417   

Industry and manufacturing

     13,881         321         (17     14,185   

Consumer products and services

     9,240         101         —          9,341   

Technology

     2,503         22         —          2,525   

Healthcare

     11,020         260         —          11,280   

Other

     1,013         48         —          1,061   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total corporate bonds

     98,807         2,082         (80     100,809   

Government-sponsored enterprises

     34,566         3         (1,121     33,448   

Municipal bonds

     7,172         130         —          7,302   

Residential mortgage-backed securities:

          

Government-sponsored enterprises

     11,872         618         —          12,490   

Private label

     1,677         68         —          1,745   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     154,094         2,901         (1,201     155,794   
  

 

 

    

 

 

    

 

 

   

 

 

 

Marketable equity securities:

          

Common stocks:

          

Financial services

     4,200         155         (46     4,309   

Industry and manufacturing

     15,728         1,820         (312     17,236   

Consumer products and services

     10,882         1,598         (41     12,439   

Technology

     3,191         123         (48     3,266   

Healthcare

     4,902         873         (61     5,714   

Other

     3,441         693         —          4,134   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total common stocks

     42,344         5,262         (508     47,098   

Money market mutual funds

     2,041         —           (36     2,005   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total marketable equity securities

     44,385         5,262         (544     49,103   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 198,479       $ 8,163       $ (1,745   $ 204,897   
  

 

 

    

 

 

    

 

 

   

 

 

 

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 September 30, 2013, securities with an amortized cost of $25.1 million and $2.4 million, respectively, were pledged as collateral for Federal Home Loan Bank of Boston borrowings and Federal Reserve Bank discount window borrowings.

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

 

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

Corporate bonds:

                       

Financial services

   $ 16,406       $ 16,621       $ 44,744       $ 45,796       $ —         $ —         $ 61,150       $ 62,417   

Industry and manufacturing

     4,983         5,065         8,898         9,120         —           —           13,881         14,185   

Consumer products and services

     9,240         9,341         —           —           —           —           9,240         9,341   

Technology

     2,503         2,525         —           —           —           —           2,503         2,525   

Healthcare

     5,010         5,077         6,010         6,203         —           —           11,020         11,280   

Other

     —           —           1,013         1,061         —           —           1,013         1,061   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate bonds

     38,142         38,629         60,665         62,180         —           —           98,807         100,809   

Government-sponsored enterprises

     —           —           67         69         34,499         33,379         34,566         33,448   

Municipal bonds

     1,450         1,451         5,722         5,851         —           —           7,172         7,302   

Residential mortgage-backed securities:

                       

Government-sponsored enterprises

     —           —           3         3         11,869         12,487         11,872         12,490   

Private label

     —           —           —           —           1,677         1,745         1,677         1,745   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 39,592       $ 40,080       $ 66,457       $ 68,103       $ 48,045       $ 47,611       $ 154,094       $ 155,794   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended September 30, 2013 and 2012, proceeds from sales of securities available for sale amounted to $18.1 million and $15.6 million, respectively. During the 2013 and 2012 periods, gross gains of $3.0 million and $1.6 million and gross losses of $0 and $2,000, respectively, were realized on the sales. For the nine months ended September 30, 2013 and 2012, proceeds from sales of securities available for sale amounted to $45.8 million and $32.0 million, respectively. During the 2013 and 2012 periods, gross gains of $7.4 million and $4.0 million and gross losses of $10,000 and $100,000, respectively, were realized on the sales.

Information pertaining to securities available for sale as of September 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:

 

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

September 30, 2013

           

Debt securities:

           

Corporate bonds:

           

Financial services

   $ 13       $ 5,987       $ 50       $ 1,450   

Industry and manufacturing

     17         983         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate bonds

     30         6,970         50         1,450   

Government-sponsored enterprises

     1,121         33,379         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     1,151         40,349         50         1,450   
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities:

           

Common stocks:

           

Financial services

     46         1,855         —           —     

Industry and manufacturing

     312         2,463         —           —     

Consumer products and services

     41         1,358         —           —     

Technology

     48         975         —           —     

Healthcare

     61         1,890         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total common stocks

     508         8,541         —           —     

Money market mutual funds

     —           —           36         999   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable equity securities

     508         8,541         36         999   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 1,659       $ 48,890       $ 86       $ 2,449   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

December 31, 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 nine months ended September 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 September 30, 2013, the net unrealized gain on the total debt securities portfolio was $1.7 million. At September 30, 2013, 30 debt securities had unrealized losses with aggregate depreciation of 2.8% 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 September 30, 2013.

As of September 30, 2013, the net unrealized gain on the total marketable equity securities portfolio was $4.7 million. At September 30, 2013, 18 marketable equity securities have unrealized losses with aggregate depreciation of 5.4% from the Company’s cost basis. 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 analysts’ reports, financial performance and projected target prices of investment analysts within a one-year time

 

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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:

 

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

Real estate loans:

        

Residential real estate:

        

One- to four-family

   $ 446,003        20.9   $ 443,228        24.5

Multi-family

     282,116        13.2        178,948        9.9   

Home equity lines of credit

     55,569        2.6        60,907        3.4   

Commercial real estate

     972,992        45.5        795,642        44.0   

Construction

     192,910        9.0        173,255        9.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

     1,949,590        91.2        1,651,980        91.4   

Commercial business loans

     180,761        8.5        147,814        8.2   

Consumer

     6,918        0.3        7,143        0.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     2,137,269        100.0     1,806,937        100.0
    

 

 

     

 

 

 

Allowance for loan losses

     (23,679       (20,504  

Net deferred loan origination fees

     (1,164       (94  
  

 

 

     

 

 

   

Loans, net

   $ 2,112,426        $ 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 consolidated balance sheets. The Company and participating lenders share ratably in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments to participating lenders and disburses required escrow funds to relevant parties. At September 30, 2013 and December 31, 2012, the Company was servicing loans for participants aggregating $48.6 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 with a 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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Table of Contents

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

 

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

Real estate loans:

    

Residential real estate:

    

One- to four-family

   $ 6,785      $ 7,581   

Multi-family

     852        1,280   

Home equity lines of credit

     511        568   

Commercial real estate

     727        1,646   
  

 

 

   

 

 

 

Total real estate loans

     8,875        11,075   

Commercial business loans

     78        78   

Consumer

     4        4   
  

 

 

   

 

 

 

Outstanding principal balance

     8,957        11,157   

Discount

     (2,232     (2,595
  

 

 

   

 

 

 

Carrying amount

   $ 6,725      $ 8,562   
  

 

 

   

 

 

 

A rollforward of accretable yield follows:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  
     (In thousands)  

Beginning balance

   $ 903      $ 1,144      $ 1,047      $ 1,181   

Accretion

     (6     —          (20     (37

Disposals

     (31     (90     (161     (90
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 866      $ 1,054      $ 866      $ 1,054   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

    For the Three Months Ended September 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

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

Provision (credit) for loan losses

    129        772        (7     174        (1,358     396        45        —          151   

Charge-offs

    (135     —          —          —          (369     —          (71     —          (575

Recoveries

    88        —          —          —          537        4        24        —          653   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 1,967      $ 2,080      $ 153      $ 12,355      $ 4,057      $ 2,986      $ 81      $ —        $ 23,679   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Three Months Ended September 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

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

Provision for loan losses

    264        85        92        286        940        629        48        —          2,344   

Charge-offs

    (47     —          —          —          (1     —          (32     —          (80

Recoveries

    72        —          —          —          7        4        4        —          87   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 2,611      $ 1,537      $ 256      $ 7,423      $ 4,540      $ 2,144      $ 111      $ —        $ 18,622   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents
    For the Nine Months Ended September 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 losses

    (130     745        (73     1,950        1,215        791        132        —          4,630   

Charge-offs

    (531     (96     —          —          (1,362     —          (224     —          (2,213

Recoveries

    121        —          —          —          548        21        68        —          758   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 1,967      $ 2,080      $ 153      $ 12,355      $ 4,057      $ 2,986      $ 81      $ —        $ 23,679   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Nine Months Ended September 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 for loan losses

    914        248        63        225        3,171        1,075        82        —          5,778   

Charge-offs

    (414     (72     (52     (9     (299     —          (107     —          (953

Recoveries

    250        —          —          227        238        8        21        —          744   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 2,611      $ 1,537      $ 256      $ 7,423      $ 4,540      $ 2,144      $ 111      $ —        $ 18,622   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    At September 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

  $ 123      $ —        $ —        $ 194      $ 22      $ 288      $ —        $ —        $ 627   

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

    1,844        2,080        153        12,161        4,035        2,698        81        —          23,052   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,967      $ 2,080      $ 153      $ 12,355      $ 4,057      $ 2,986      $ 81      $ —        $ 23,679   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 33      $ —        $ —        $ 11      $ —        $ —        $ —        $ —        $ 44   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 4,325      $ 4,023      $ 21      $ 10,869      $ 15,169      $ 1,264      $ —          $ 35,671   

Loans not deemed to be impaired

    441,678        278,093        55,548        962,123        177,741        179,497        6,918          2,101,598   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
  $ 446,003      $ 282,116      $ 55,569      $ 972,992      $ 192,910      $ 180,761      $ 6,918        $ 2,137,269   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

 

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.

 

     September 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

   $ 6,452       $ 2,361       $ 5,478       $ 14,291       $ 17,247   

Home equity lines of credit

     1,404         409         405         2,218         2,667   

Commercial real estate

     451         354         2,469         3,274         9,008   

Construction

     —           4,149         9,251         13,400         13,400   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     8,307         7,273         17,603         33,183         42,322   

Commercial business loans

     3         361         948         1,312         1,264   

Consumer

     347         254         —           601         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,657       $ 7,888       $ 18,551       $ 35,096       $ 43,586   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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 September 30, 2013 and December 31, 2012, the Company did not have any accruing loans past due 90 days or more. Delinquent loans at September 30, 2013 and December 31, 2012 included $935,000 and $2.3 million of loans acquired with evidence of credit deterioration. At September 30, 2013 and December 31, 2012, non-accrual loans included $1.5 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:

 

     September 30, 2013      December 31, 2012  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 
     (In thousands)  

Impaired loans without a valuation allowance:

                 

One- to four-family

   $ 2,316       $ 2,594          $ 2,157       $ 2,465      

Multi-family

     4,023         4,023            5,419         5,893      

Home equity lines of credit

     21         21            22         22      

Commercial real estate

     9,243         9,470            9,752         10,054      

Construction

     14,787         16,591            16,726         17,818      

Commercial business loans

     816         894            424         502      
  

 

 

    

 

 

       

 

 

    

 

 

    

Total

     31,206         33,593            34,500         36,754      
  

 

 

    

 

 

       

 

 

    

 

 

    

Impaired loans with a valuation allowance:

                 

One- to four-family

     2,009         2,108       $ 123         2,329         2,330       $ 128   

Multi-family

     —           —           —           365         482         90   

Commercial real estate

     1,626         1,626         194         2,394         2,394         204   

Construction

     382         382         22         1,593         1,787         227   

Commercial business loans

     448         448         288         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4,465         4,564         627         6,681         6,993         649   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 35,671       $ 38,157       $ 627       $ 41,181       $ 43,747       $ 649   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents
     Three Months Ended September 30, 2013      Three Months Ended September 30, 2012  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Recognized
on Cash Basis
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Recognized
on Cash Basis
 
     (In thousands)  

One- to four-family

   $ 4,484       $ 54       $ 42       $ 4,506       $ 53       $ 44   

Multi-family

     4,331         81         80         4,462         84         80   

Home equity lines of credit

     21         —           —           23         —           —     

Commercial real estate

     10,373         141         95         10,751         197         92   

Construction

     16,160         274         41         22,883         393         156   

Commercial business loans

     887         49         19         1,129         22         16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 36,256       $ 599       $ 277       $ 43,754       $ 749       $ 388   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Nine Months Ended September 30, 2013      Nine Months Ended September 30, 2012  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Recognized
on Cash Basis
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Recognized
on Cash Basis
 
     (In thousands)  

One- to four-family

   $ 4,547       $ 163       $ 134       $ 4,369       $ 186       $ 146   

Multi-family

     5,023         247         237         5,287         362         341   

Home equity lines of credit

     22         1         1         23         1         1   

Commercial real estate

     10,920         307         184         11,401         595         341   

Construction

     17,002         823         317         28,701         1,444         703   

Commercial business loans

     650         66         39         1,116         68         56   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 38,164       $ 1,607       $ 912       $ 50,897       $ 2,656       $ 1,588   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2013, additional funds of $1.8 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:

 

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

TDRs on accrual status:

     

One- to four-family

   $ 2,607       $ 1,992   

Multi-family

     110         110   

Home equity lines of credit

     21         22   

Commercial real estate

     1,374         1,393   

Construction

     —           3,319   
  

 

 

    

 

 

 

Total TDRs on accrual status

     4,112         6,836   
  

 

 

    

 

 

 

TDRs on non-accrual status:

     

One- to four-family

     1,843         2,493   

Commercial real estate

     4,349         4,466   

Construction

     6,543         3,838   

Commercial business loans

     192         —     
  

 

 

    

 

 

 

Total TDRs on non-accrual status

     12,927         10,797   
  

 

 

    

 

 

 

Total TDRs

   $ 17,039       $ 17,633   
  

 

 

    

 

 

 

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

 

    Three Months Ended September 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      $ 126      $ 126        2      $ 582      $ 582   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    1      $ 126      $ 126        2      $ 582      $ 582   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Nine Months Ended September 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

    2      $ 391      $ 391        6      $ 1,433      $ 1,433   

Commercial business loans

    1        207        207        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    3      $ 598      $ 598        6      $ 1,433      $ 1,433   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2013      2012      2013      2012  
     (In thousands)  

Adjusted interest rates

   $ 126       $ 582       $ 391       $ 1,433   

Combination of interest rate and maturity date adjustment

     —           —           207         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 126       $ 582       $ 598       $ 1,433   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 September 30, 2013 and 2012, the allowance for loan losses included an allocated component of $60,000 and $42,000, respectively, with no charge-offs related to the TDRs modified during the nine months ended September 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:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2013      2012      2013      2012  
     Number of      Recorded      Number of      Recorded      Number of      Recorded      Number of      Recorded  
     Loans      Investment      Loans      Investment      Loans      Investment      Loans      Investment  
     (Dollars in thousands)  

Real estate loans:

                       

One- to four-family

     1       $ 288         2       $ 361         3       $ 757         4       $ 796   

Commercial business loans

     1         207         —           —           1         207         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 495         2       $ 361         4       $ 964         4       $ 796   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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

 

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

Loans rated 1 - 4A

   $ 265,666       $ 960,021       $ 161,438       $ 179,497   

Loans rated 5

     16,450         12,971         31,472         1,264   

Loans rated 6

     —           —           —           —     

Loans rated 7

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 282,116       $ 972,992       $ 192,910       $ 180,761   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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:

 

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

Unadvanced portion of existing loans:

     

Construction

   $ 218,089       $ 166,482   

Home equity line of credit

     37,532         39,698   

Other lines and letters of credit

     105,939         56,174   

Commitments to originate:

     

One- to four-family

     23,757         17,752   

Commercial real estate

     66,009         51,540   

Construction

     53,403         83,078   

Commercial business loans

     67,003         24,355   

Other loans

     1,609         205   
  

 

 

    

 

 

 

Total loan commitments outstanding

   $ 573,341       $ 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 $9.9 million and $35.9 million were outstanding at September 30, 2013 and December 31, 2012, respectively. The fair value of such commitments was a net asset of $205,000 and $288,000 at September 30, 2013 and December 31, 2012, respectively.

Forward Loan Sale Commitments

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

 

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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 $13.6 million and $44.4 million were outstanding at September 30, 2013 and December 31, 2012, respectively. The fair value of such commitments was a liability of $224,000 and $12,000 at September 30, 2013 and December 31, 2012, respectively.

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

 

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

Derivative loan commitments

   Other assets    $ 209       Other liabilities    $ 4   

Forward loan sale commitments

   N/A      —         Other liabilities      224   
     

 

 

       

 

 

 

Total

      $ 209          $ 228   
     

 

 

       

 

 

 

 

     December 31, 2012  
     Assets      Liabilities  
     Balance Sheet    Fair      Balance Sheet    Fair  
     Location    Value      Location    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)  
          Three Months Ended September 30,     Nine Months Ended September 30,  

Derivative Instrument

  

Location of Gain/(Loss)

   2013     2012     2013     2012  
         

(In thousands)

 

Derivative loan commitments

  

Mortgage banking gains, net

   $ 685      $ 76      $ (83   $ 316   

Forward loan sale commitments

  

Mortgage banking gains, net

     (1,154     (179     (212     (532
     

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ (469   $ (103   $ (295   $ (216
     

 

 

   

 

 

   

 

 

   

 

 

 

For the nine months ended September 30, 2013, the Company recognized net mortgage banking gains of $456,000, consisting of $751,000 in net gains on sale of loans and $295,000 in net derivative mortgage banking losses. For the nine months ended September 30, 2012, the Company recognized net mortgage banking gains of $1.9 million, consisting of $2.1 million in net gains on sale of loans and $216,000 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 $9.5 million as of September 30, 2013, with total annual payments of $2.2 million. As of September 30, 2013, the Company had outstanding commitments totaling $451,000 for leasehold improvements of a new branch located in Somerville, Massachusetts.

 

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Table of Contents
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.

Level 2 — Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using unobservable inputs to pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Transfers between levels are recognized at the end of a reporting period, if applicable.

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

Cash and cash equivalents — The carrying amounts of cash and short-term instruments approximate fair values, based on the short-term nature of the assets.

Securities available for sale — All fair value measurements are obtained from a third party pricing service and are not adjusted by management. Marketable equity securities are measured at fair value utilizing quoted market prices (Level 1). Corporate bonds, obligations of government-sponsored enterprises, municipal bonds and mortgage-backed securities are determined by pricing models that consider standard input factors such as observable market data, benchmark yields, reported trades, broker/dealer quotes, credit spreads, benchmark securities, as well as new issue data, monthly payment information, and collateral performance, among others (Level 2).

Federal Home Loan Bank stock — The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

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

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

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

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

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

 

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Forward loan sale commitments and derivative loan commitments — Forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Management judgment and estimation is required in determining these fair value measurements.

Off-balance sheet credit-related instruments — Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these instruments is considered immaterial.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized as follows:

 

     September 30, 2013  
     Level 1      Level 2      Level 3      Total Fair
Value
 
     (In thousands)  

Assets:

           

Debt securities

   $ —         $ 155,794       $ —         $ 155,794   

Marketable equity securities

     49,103         —           —           49,103   

Derivative loan commitments

     —           —           209         209   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 49,103       $ 155,794       $ 209       $ 205,106   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative loan commitments

   $ —         $ —         $ 4       $ 4   

Forward loan sale commitments

     —           —           224         224   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —         $ —         $ 228       $ 228   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  
     Level 1      Level 2      Level 3      Total Fair
Value
 
     (In thousands)  

Assets:

           

Debt securities

   $ —         $ 202,637       $ —         $ 202,637   

Marketable equity securities

     60,148         —           —           60,148   

Derivative loan commitments

     —           —           288         288   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 60,148       $ 202,637       $ 288       $ 263,073   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Forward loan sale commitments

   $ —         $ —         $ 12       $ 12   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —         $ —         $ 12       $ 12   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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For the nine months ended September 30, 2013 and 2012, there were no transfers in or out of Levels 1 and 2 and the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis are as follows:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  
     (In thousands)  

Derivative loan commitments and forward sale commitments, net:

        

Beginning balance

   $ 450      $ 395      $ 276      $ 508   

Total realized and unrealized losses included net income

     (469     (103     (295     (216
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ (19   $ 292      $ (19   $ 292   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total realized gain relating to instruments still held at period end

   $ (19   $ 292      $ (19   $ 292   
  

 

 

   

 

 

   

 

 

   

 

 

 

Assets Measured at Fair Value on a Non-recurring Basis

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

The following tables summarize the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets. The gain/loss represents the amount of write-down, charge-off or specific reserve recorded during the periods noted on the assets held at period end. There were no liabilities measured at fair value on a non-recurring basis.

 

                          Three Months Ended     Nine Months Ended  
     September 30, 2013      September 30, 2013     September 30, 2013  
     Level 1      Level 2      Level 3      Total Loss     Total Loss  
     (In thousands)  

Impaired loans

   $ —         $ —         $ 11,783       $ (226   $ (627

Foreclosed real estate

     —           —           1,782         —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ —         $ —         $ 13,565       $ (226   $ (627
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

                          Three Months Ended     Nine Months Ended  
     December 31, 2012      September 30, 2012     September 30, 2012  
     Level 1      Level 2      Level 3      Total Loss     Total Loss  
     (In thousands)  

Impaired loans

   $ —         $ —         $ 7,867       $ (550   $ (1,040

Foreclosed real estate

     —           —           2,604         (185     (356
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ —         $ —         $ 10,471       $ (735   $ (1,396
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Certain impaired loans were adjusted to fair value, less cost to sell, of the underlying collateral securing these loans resulting in losses. The loss is not recorded directly as an adjustment to current earnings, but rather as a component in determining the allowance for loan losses. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties.

Certain properties in foreclosed real estate were adjusted to fair value using appraised values of collateral, less cost to sell, and adjusted as necessary by management based on unobservable inputs for specific properties. The loss on foreclosed assets represents adjustments in valuation recorded during the time period indicated and not for losses incurred on sales.

 

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Table of Contents

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.

 

     September 30, 2013  
     Carrying      Fair Value  
     Amount      Level 1      Level 2      Level 3      Total  
     (In thousands)  

Financial assets:

              

Cash and cash equivalents

   $ 206,233       $ 206,233       $ —         $ —         $ 206,233   

Securities available for sale

     204,897         49,103         155,794         —           204,897   

Federal Home Loan Bank stock

     11,907         —           —           11,907         11,907   

Loans and loans held for sale, net

     2,118,720         —           —           2,142,839         2,142,839   

Accrued interest receivable

     6,885         —           —           6,885         6,885   

Financial liabilities:

              

Deposits

     2,205,103         —           —           2,210,553         2,210,553   

Borrowings

     187,700         —           186,526         —           186,526   

Accrued interest payable

     864         —           —           864         864   

On-balance sheet derivative financial instruments:

              

Derivative loan commitments:

              

Assets

     209         —           —           209         209   

Liabilities

     4         —           —           4         4   

Forward loan sale commitments:

              

Liabilities

     224         —           —           224         224   

 

     December 31, 2012  
     Carrying      Fair Value  
     Amount      Level 1      Level 2      Level 3      Total  
     (In thousands)  

Financial assets:

              

Cash and cash equivalents

   $ 93,192       $   93,192       $ —         $ —         $ 93,192   

Securities available for sale

     262,785         60,148         202,637         —           262,785   

Federal Home Loan Bank stock

     12,064         —           —           12,064         12,064   

Loans and loans held for sale, net

     1,800,841         —           —           1,843,529         1,843,529   

Accrued interest receivable

     6,745         —           —           6,745         6,745   

Financial liabilities:

              

Deposits

     1,865,433         —           —           1,874,226         1,874,226   

Borrowings

     161,254         —           164,176         —           164,176   

Accrued interest payable

     849         —           —           849         849   

On-balance sheet derivative financial instruments:

              

Derivative loan commitments:

              

Assets

     288         —           —           288         288   

Forward loan sale commitments:

              

Liabilities

     12         —           —           12         12   

 

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

Management’s discussion and analysis of the financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Meridian Interstate Bancorp, Inc. The following discussion should be read in conjunction with the consolidated financial statements, notes and tables included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission.

Forward Looking Statements

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

 

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

 

    inflation and changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

 

    changes in the quality or composition of the Company’s loan or investment portfolios;

 

    increased competitive pressures among financial services companies;

 

    changes in consumer spending, borrowing and savings habits;

 

    our ability to enter new markets successfully and take advantage of growth opportunities, and the possible dilutive effect of potential acquisitions or de novo branches, if any;

 

    legislative or regulatory changes that adversely affect our business;

 

    effects of shutdown of the federal government;

 

    adverse changes in the securities markets;

 

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

 

    inability of third-party providers to perform their obligations to us; and

 

    changes in our organization, compensation and benefit plans.

Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission on March 15, 2013, 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 as 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.

 

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Critical Accounting Policies

The Company’s summary of significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in the 2012 Annual Report on Form 10-K for the year ended December 31, 2012. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management has identified accounting for the allowance for loan losses, the valuation of goodwill and analysis for impairment, other-than-temporary impairment of securities and the valuation of deferred tax assets as the Company’s critical accounting policies.

Comparison of Financial Condition at September 30, 2013 and December 31, 2012

Assets

Total assets increased $376.2 million, or 16.5%, to $2.655 billion at September 30, 2013 from $2.279 billion at December 31, 2012. Net loans increased $326.1 million, or 18.3%, to $2.112 billion at September 30, 2013 from $1.786 billion at December 31, 2012. The net increase in loans for the nine months ended September 30, 2013 was primarily due to increases of $177.4 million in commercial real estate loans, $103.2 million in multi-family loans, $19.7 million in construction loans and $32.9 million in commercial business loans. Cash and cash equivalents increased $113.0 million, or 121.3%, to $206.2 million at September 30, 2013 from $93.2 million at December 31, 2012. Securities available for sale decreased $57.9 million, or 22.0%, to $204.9 million at September 30, 2013 from $262.8 million at December 31, 2012.

Asset Quality

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.

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

Delinquencies

Total past due loans increased $3.1 million, or 9.8%, to $35.1 million at September 30, 2013 from $32.0 million at December 31, 2012, reflecting an increase of $5.2 million in loans 30 to 89 days past due partially offset by a decrease of $2.1 million in loans 90 days or more past due. Delinquent loans at September 30, 2013 included $12.4 million of loans acquired in the Mt. Washington merger, including $4.0 million that were 30 to 59 days past due, $1.1 million that were 60 to 89 days past due and $7.3 million that were 90 days or more past due. At September 30, 2013, non-accrual loans exceed loans 90 days or more past due primarily due to loans which were placed on non-accrual status based on a determination that the ultimate collection of all principal and interest due was not expected and certain loans that remain on non-accrual status until they attain a sustained payment history of six months.

Non-performing Assets

Non-performing assets include loans that are 90 or more days past due or on non-accrual status and real estate and other loan collateral acquired through foreclosure and repossession. Loans 90 days or more past due may remain on an accrual basis if adequately collateralized and in the process of collection. At September 30, 2013, the Company did not have any accruing loans past due 90 days or more. 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.

 

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Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until it is sold. When property is acquired, it is initially recorded at the fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value after acquisition of the property result in charges against income.

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

 

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

Loans accounted for on a non-accrual basis:

    

Real estate loans:

    

Residential real estate:

    

One- to four-family

   $ 17,247      $ 18,870   

Multi-family

     —          976   

Home equity lines of credit

     2,667        2,674   

Commercial real estate

     9,008        8,844   

Construction

     13,400        7,785   
  

 

 

   

 

 

 

Total real estate loans

     42,322        39,149   

Commercial business loans

     1,264        424   
  

 

 

   

 

 

 

Total non-accrual loans (1)

     43,586        39,573   

Foreclosed assets

     1,782        2,604   
  

 

 

   

 

 

 

Total non-performing assets

   $ 45,368      $ 42,177   
  

 

 

   

 

 

 

Non-accrual loans to total loans

     2.04     2.19

Non-accrual loans to total assets

     1.64     1.74

Non-performing assets to total assets

     1.71     1.85

 

(1) TDRs on accrual status not included above totaled $4.1 million at September 30, 2013 and $6.8 million at December 31, 2012.

Non-accrual loans increased $4.0 million, or 10.1%, to $43.6 million, or 2.04% of total loans outstanding, at September 30, 2013, from $39.6 million, or 2.19% of total loans outstanding, at December 31, 2012, primarily due to a net increase of $5.6 million in non-accrual construction loans. The increase in non-accrual construction loans resulted from two construction loan relationships totaling $9.2 million that were placed on non-accrual loan status due to loan performance changes during the quarter ended March 31, 2013. We are pursuing the resolution of one such loan relationship totaling $5.7 million following a charge-off of $626,000 recorded against the allowance for loan losses during the quarter ended March 31, 2013. The second of these loan relationships totaling $3.5 million is a TDR that we expect to collect in full. Foreclosed real estate decreased $822,000, or 31.6%, to $1.8 million at September 30, 2013 from $2.6 million at December 31, 2012. Non-performing assets increased $3.2 million, or 7.6%, to $45.4 million, or 1.71% of total assets, at September 30, 2013, from $42.2 million, or 1.85% of total assets, at December 31, 2012. Non-performing assets at September 30, 2013 included $16.7 million of assets acquired in the January 2010 Mt. Washington Co-operative Bank merger, comprised of $16.2 million of non-accrual loans and $473,000 of foreclosed real estate. Interest income that would have been recorded for the nine months ended September 30, 2013 had non-accruing loans been current according to their original terms amounted to $1.1 million.

Troubled Debt Restructurings

In the course of resolving non-accrual loans, the Bank may choose to restructure the contractual terms of certain loans, with terms modified to fit the ability of the borrower to repay in line with its current financial status. A loan is considered a troubled debt restructuring 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 $594,000, or 3.4%, to $17.0 million at September 30, 2013 from $17.6 million at December 31, 2012, consisting of a decrease of $2.7 million in TDRs on accrual status partially offset by an increase of $2.1 million in TDRs on non-accrual status. Construction TDRs on non-accrual status increased as the result of a loan relationship totaling $3.3 million that was transferred to non-accrual status from accrual status during the nine months ended September 30, 2013. The increase in commercial business TDRs was the result of a loan that was transferred to non-accrual status from accrual status during the nine months ended September 30, 2013. In addition, one- to four-family TDRs on non-accrual status decreased $650,000 due to one residential loan modification that was paid in full and one residential loan modification that was returned to accrual status. Modifications of one- to four-family TDRs consist of rate reductions, loan term extensions or provisions for interest-only payments for specified periods up to 12 months. The Company has generally been successful with the concessions it has offered to borrowers to date. The Company generally returns TDRs to accrual status when they have sustained payments for six months based on the restructured terms and future payments are reasonably assured. The decrease in commercial real estate TDRs on non-accrual status was due to contractual payments received during the nine months ended September 30, 2013. Interest income that would have been recorded for the nine months ended September 30, 2013 had TDRs been current according to their original terms amounted to $347,000.

Potential Problem Loans

Certain loans are identified during the Company’s loan review process that are currently performing in accordance with their contractual terms and we 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. There were no potential problem loans identified at September 30, 2013 other than those already classified as non-accrual, impaired or troubled debt restructurings.

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.

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

 

    September 30, 2013     December 31, 2012  
                % of                 % of  
          % of     Loans in           % of     Loans in  
          Allowance     Category           Allowance     Category  
          to Total     of Total           to Total     of Total  
    Amount     Allowance     Loans     Amount     Allowance     Loans  
    (Dollars in thousands)  

Real estate loans:

           

Residential real estate:

           

One- to four-family

  $ 1,967        8.3     20.9   $ 2,507        12.2     24.5

Multi-family

    2,080        8.8        13.2        1,431        7.0        9.9   

Home equity lines of credit

    153        0.6        2.6        226        1.1        3.4   

Commercial real estate

    12,355        52.2        45.5        10,405        50.8        44.0   

Construction

    4,057        17.1        9.0        3,656        17.8        9.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

    20,612        87.0        91.2        18,225        88.9        91.4   

Commercial business loans

    2,986        12.6        8.5        2,174        10.6        8.2   

Consumer

    81        0.4        0.3        105        0.5        0.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 23,679        100.0     100.0   $ 20,504        100.0     100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance to non-accrual loans

    54.33         51.81    

Allowance to total loans outstanding

    1.11         1.13    

Net charge-offs to average loans outstanding (annualized)

    0.10         0.07    

 

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The Company’s provision for loan losses was $151,000 for the quarter ended September 30, 2013 compared to $2.3 million for the quarter ended September 30, 2012. For the nine months ended September 30, 2013, the provision for loan losses was $4.6 million compared to $5.8 million for the nine months ended September 30, 2012. These changes were based on management’s assessment of loan portfolio growth and composition changes, an ongoing evaluation of credit quality and current economic conditions. In addition, the reductions in the provision for loan losses reflected lower provision expense related to specific reserves recorded for impaired loans for the third quarter and nine months ended September 30, 2013 compared to the same periods in 2012. The allowance for loan losses was $23.7 million or 1.11% of total loans outstanding at September 30, 2013, compared to $20.5 million or 1.13% of total loans outstanding at December 31, 2012. Net recoveries totaled $78,000 for the quarter ended September 30, 2013, or 0.02% of average loans outstanding, and net charge-offs totaled $1.5 million for the nine months ended September 30, 2013, or 0.10% of average loans outstanding.

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, whereby an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan.

The Company had impaired loans totaling $35.7 million and $41.2 million as of September 30, 2013 and December 31, 2012, respectively. At September 30, 2013, impaired loans totaling $4.5 million had an allocated allowance component of $627,000. Impaired loans totaling $6.7 million had an allocated allowance component of $649,000 at December 31, 2012. The Company’s average investment in impaired loans was $38.2 million and $50.9 million for the nine months ended September 30, 2013 and 2012, respectively.

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.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual one- to four-family residential and consumer loans for impairment disclosures, unless such loans are subject to a TDR. The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a TDR. All TDRs are initially classified as impaired.

We review residential and commercial loans for impairment based on the fair value of collateral, if collateral-dependent, or the present value of expected cash flows. Management has reviewed the collateral value for all impaired and non-accrual loans that were collateral-dependent as of September 30, 2013 and considered any probable loss in determining the allowance for loan losses.

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

 

    When a loan becomes seriously delinquent, generally 60 days past, 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.

 

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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 payment history of at least six 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 collectibility of principal or interest, even though the loan is currently performing. Loan losses are charged against the allowance when we believe the uncollectibility of a loan balance is confirmed, generally when appraised values (as adjusted values, if applicable) less estimated costs to sell, are less than the Company’s 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

The securities portfolio decreased $57.9 million, or 22.0% to $204.9 million, or 7.7% of total assets at September 30, 2013 as compared to $262.8 million, or 11.5% of total assets at December 31, 2012. At September 30, 2013, 49.2% of the securities portfolio, or $100.8 million, was invested in corporate bonds. The amortized cost and fair value of corporate bonds in the financial services sector was $61.2 million, and $62.4 million, respectively. The remainder of the corporate bond portfolio includes companies from a variety of industries. Refer to Note 4 Securities Available for Sale in the Notes to the Unaudited Consolidated Financial Statements within this report for more detail regarding the investments held in the Company’s securities portfolio along with the Company’s assessment of other-than-temporary impairment.

Deposits

Deposits are a major source of our funds for lending and other investment purposes. Deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Our deposit base is comprised of demand, NOW, money market, regular savings and other deposits, and certificates of deposit. We consider demand, NOW, money market, and regular savings and other deposits to be core deposits. Total deposits increased $339.7 million, or 18.2%, to $2.205 billion at September 30, 2013 from $1.865 billion at December 31, 2012. Our continuing focus on the acquisition and expansion of core deposit relationships resulted in net growth in those non-term balances of $280.9 million, or 22.7%, to $1.518 billion, or 68.8% of total deposits, at September 30, 2013.

 

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The following table summarizes the period end balance and the composition of deposits:

 

    September 30, 2013     December 31, 2012  
          Percent of           Percent of  
    Balance     Total Deposits     Balance     Total Deposits  
    (Dollars in thousands)  

Demand deposits

  $ 247,283        11.1   $ 204,079        10.9

NOW deposits

    208,856        9.5        180,629        9.7   

Money market deposits

    806,931        36.6        606,861        32.5   

Regular savings and other deposits

    254,999        11.6        245,634        13.2   

Certificates of deposit

    687,034        31.2        628,230        33.7   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,205,103        100.0   $ 1,865,433        100.0
 

 

 

   

 

 

   

 

 

   

 

 

 

Borrowings

We use borrowings from the Federal Home Loan Bank of Boston to supplement our supply of funds for loans and investments. In addition, we may also purchase federal funds from local banking institutions as an additional short-term funding source for the Bank. Total borrowings increased $26.4 million, or 16.4%, to $187.7 million at September 30, 2013 from $161.3 million at December 31, 2012. The Bank entered into new advances with the Federal Home Loan Bank of Boston totaling $47.5 million with terms of two to seven years and fixed interest rates of 0.61% to 1.22% during the nine months ended September 30, 2013. At September 30, 2013, we also had an available line of credit of $9.4 million with the Federal Home Loan Bank of Boston and the availability of $2.5 million from the Federal Reserve discount window, none of which was outstanding at that date.

Stockholders’ Equity

Total stockholders’ equity increased $9.7 million, or 4.1%, to $243.7 million at September 30, 2013, from $233.9 million at December 31, 2012. The increase for the nine months ended September 30, 2013 was due primarily to $11.4 million in net income, partially offset by a decrease of $1.6 million in accumulated other comprehensive income reflecting a decrease in the fair value of available for sale securities, net of tax and a $1.7 million increase in treasury stock resulting from the Company’s repurchase of 91,086 shares. Stockholders’ equity to assets was 9.18% at September 30, 2013, compared to 10.27% at December 31, 2012. Book value per share increased to $11.04 at September 30, 2013 from $10.57 at December 31, 2012. Tangible book value per share increased to $10.42 at September 30, 2013 from $9.95 at December 31, 2012. Market price per share increased $5.01, or 29.9%, to $21.79 at September 30, 2013 from $16.78 at December 31, 2012. At September 30, 2013, the Company and the Bank continued to exceed all regulatory capital requirements. For further information regarding regulatory capital requirements and the actual capital amounts and ratios for the Bank and the Company, refer to “Capital Management.”

 

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Average Balance Sheets and Related Yields and Rates

The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using daily average balances, and non-accrual loans are included in average balances but are not deemed material. Loan fees are included in interest income on loans but are not material.

 

    For the Three Months Ended September 30,  
    2013     2012  
    Average           Yield/     Average           Yield/  
    Balance     Interest (1)     Cost (6)     Balance     Interest (1)     Cost (6)  
    (Dollars in thousands)  

Assets:

           

Interest-earning assets:

           

Loans (2)

  $ 2,070,990      $ 23,224        4.45   $ 1,597,528      $ 19,346        4.82

Securities and certificates of deposits

    219,907        1,499        2.70        286,257        2,141        2.98   

Other interest-earning assets (3)

    160,150        86        0.21        152,519        71        0.19   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

    2,451,047        24,809        4.02        2,036,304        21,558        4.21   
   

 

 

       

 

 

   

Noninterest-earning assets

    118,162            122,327       
 

 

 

       

 

 

     

Total assets

  $ 2,569,209          $ 2,158,631       
 

 

 

       

 

 

     

Liabilities and stockholders’ equity:

           

Interest-bearing liabilities:

           

NOW deposits

  $ 191,192        254        0.53      $ 159,302        192        0.48   

Money market deposits

    754,841        1,770        0.93        542,576        1,173        0.86   

Regular savings and other deposits

    254,401        168        0.26        234,869        225        0.38   

Certificates of deposit

    688,478        2,235        1.29        628,017        2,315        1.47   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing deposits

    1,888,912        4,427        0.93        1,564,764        3,905        0.99   

Borrowings

    188,032        796        1.68        169,736        837        1.96   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    2,076,944        5,223        1.00        1,734,500        4,742        1.09   
   

 

 

       

 

 

   

Noninterest-bearing demand deposits

    233,893            177,444       

Other noninterest-bearing liabilities

    16,165            15,518       
 

 

 

       

 

 

     

Total liabilities

    2,327,002            1,927,462       

Total stockholders’ equity

    242,207            231,169       
 

 

 

       

 

 

     

Total liabilities and stockholders’ equity

  $ 2,569,209          $ 2,158,631       
 

 

 

       

 

 

     

Net interest-earning assets

  $ 374,103          $ 301,804       
 

 

 

       

 

 

     

Fully tax-equivalent net interest income

      19,586            16,816     

Less: tax-equivalent adjustments

      (489         (377  
   

 

 

       

 

 

   

Net interest income

    $ 19,097          $ 16,439     
   

 

 

       

 

 

   

Interest rate spread (4)

        3.02         3.12

Net interest margin (5)

        3.17         3.29

Average interest-earning assets to average interest-bearing liabilities

    118.01         117.40    

Supplemental Information:

           

Total deposits, including noninterest-bearing demand deposits

  $ 2,122,805      $ 4,427        0.83   $ 1,742,208      $ 3,905        0.89

Total deposits and borrowings, including noninterest-bearing demand deposits

  $ 2,310,837      $ 5,223        0.90   $ 1,911,944      $ 4,742        0.99

 

(1) Income on debt securities, equity securities and revenue bonds included in commercial real estate loans is 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.
(2) Loans on non-accrual status are included in average balances.
(3) Includes Federal Home Loan Bank stock and associated dividends.
(4) Interest rate spread represents the difference between the 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.

 

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    For the Nine Months Ended September 30,  
    2013     2012  
    Average           Yield/     Average           Yield/  
    Balance     Interest (1)     Cost (6)     Balance     Interest (1)     Cost (6)  
    (Dollars in thousands)  

Assets:

           

Interest-earning assets:

           

Loans (2)

  $ 1,946,945      $ 66,310        4.55   $ 1,495,449      $ 56,226        5.02

Securities and certificates of deposits

    234,989        4,796        2.73        308,027        7,309        3.17   

Other interest-earning assets (3)

    143,639        251        0.23        136,217        248        0.24   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

    2,325,573        71,357        4.10        1,939,693        63,783        4.39   
   

 

 

       

 

 

   

Noninterest-earning assets

    118,802            126,110       
 

 

 

       

 

 

     

Total assets

  $ 2,444,375          $ 2,065,803       
 

 

 

       

 

 

     

Liabilities and stockholders’ equity:

           

Interest-bearing liabilities:

           

NOW deposits

  $ 181,421        713        0.53      $ 148,942        517        0.46   

Money market deposits

    677,728        4,615        0.91        501,858        3,191        0.85   

Regular savings and other deposits

    251,402        495        0.26        227,959        655        0.38   

Certificates of deposit

    674,883        6,693        1.33        630,742        7,362        1.56   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing deposits

    1,785,434        12,516        0.94        1,509,501        11,725        1.04   

Borrowings

    184,080        2,433        1.77        148,417        2,376        2.14   
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    1,969,514        14,949        1.01        1,657,918        14,101        1.14   
   

 

 

       

 

 

   

Noninterest-bearing demand deposits

    218,061            164,571       

Other noninterest-bearing liabilities

    17,263            15,912       
 

 

 

       

 

 

     

Total liabilities

    2,204,838            1,838,401       

Total stockholders’ equity

    239,537            227,402       
 

 

 

       

 

 

     

Total liabilities and stockholders’ equity

  $ 2,444,375          $ 2,065,803       
 

 

 

       

 

 

     

Net interest-earning assets

  $ 356,059        </