10-Q 1 d567297d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2018

Commission file number: 001-35309

 

 

BSB BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Maryland   80-0752082

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S Employer

Identification No.)

2 Leonard Street

Belmont, Massachusetts

  02478
(Address of Principal Executive Officers)   (Zip Code)

(617) 484-6700

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    Yes  ☐    No  ☒

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

The Registrant had 9,751,597 shares of common stock, par value $0.01 per share, outstanding as of July 27, 2018.

 

 

 


Table of Contents

BSB BANCORP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

         Page  

PART I. FINANCIAL INFORMATION

  

Item 1.

 

Consolidated Financial Statements

  
 

- Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017

     3  
 

- Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)

     4  
 

- Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)

     5  
 

- Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2018 and 2017 (unaudited)

     6  
 

- Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (unaudited)

     7  
 

- Notes to Unaudited Consolidated Financial Statements

     9  

Item 2.

 

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

     38  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     53  

Item 4.

 

Controls and Procedures

     53  

PART II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     54  

Item 1A.

 

Risk Factors

     54  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     54  

Item 3.

 

Defaults Upon Senior Securities

     55  

Item 4.

 

Mine Safety Disclosures

     55  

Item 5.

 

Other Information

     55  

Item 6.

 

Exhibits

     55  

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

     June 30, 2018     December 31, 2017  
     (unaudited)        

ASSETS

    

Cash and due from banks

   $ 2,087     $ 1,771  

Interest-bearing deposits in other banks

     101,615       109,117  
  

 

 

   

 

 

 

Cash and cash equivalents

     103,702       110,888  

Interest-bearing time deposits with other banks

     2,415       2,440  

Investments in available-for-sale securities

     4,042       16,921  

Investments in held-to-maturity securities (fair value of $149,932 as of June 30, 2018 (unaudited) and $158,385 as of December 31, 2017)

     153,654       160,090  

Federal Home Loan Bank stock, at cost

     40,082       32,382  

Loans held-for-sale

     4,104       —    

Loans, net of allowance for loan losses of $17,296 as of June 30, 2018 (unaudited) and $16,312 as of December 31, 2017

     2,539,318       2,296,958  

Premises and equipment, net

     2,335       2,254  

Accrued interest receivable

     6,950       6,344  

Deferred tax asset, net

     5,924       5,794  

Income taxes receivable

     476       53  

Bank-owned life insurance

     37,496       36,967  

Other assets

     8,612       5,474  
  

 

 

   

 

 

 

Total assets

   $ 2,909,110     $ 2,676,565  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Deposits:

    

Noninterest-bearing

   $ 194,700     $ 221,462  

Interest-bearing

     1,639,163       1,529,789  
  

 

 

   

 

 

 

Total deposits

     1,833,863       1,751,251  

Federal Home Loan Bank advances

     855,250       723,150  

Securities sold under agreements to repurchase

     3,999       3,268  

Accrued interest payable

     2,004       1,594  

Deferred compensation liability

     8,232       7,919  

Other liabilities

     14,554       11,354  
  

 

 

   

 

 

 

Total liabilities

     2,717,902       2,498,536  
  

 

 

   

 

 

 

Stockholders’ Equity:

    

Common stock; $0.01 par value per share, 100,000,000 shares authorized; 9,748,669 and 9,707,665 shares issued and outstanding at June 30, 2018 (unaudited) and December 31, 2017, respectively

     97       97  

Additional paid-in capital

     95,741       94,590  

Retained earnings

     98,943       86,884  

Accumulated other comprehensive (loss) income

     (17     89  

Unearned compensation - ESOP

     (3,556     (3,631
  

 

 

   

 

 

 

Total stockholders’ equity

     191,208       178,029  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,909,110     $ 2,676,565  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2018      2017      2018      2017  
     (unaudited)      (unaudited)  

Interest and dividend income:

           

Interest and fees on loans

   $ 22,320      $ 17,508      $ 43,018      $ 33,895  

Interest on taxable debt securities

     823        849        1,771        1,624  

Dividends

     450        290        834        546  

Other interest income

     289        117        678        205  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest and dividend income

     23,882        18,764        46,301        36,270  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Interest on deposits

     5,427        2,988        9,849        5,601  

Interest on Federal Home Loan Bank advances

     3,350        1,827        6,209        3,458  

Interest on securities sold under agreements to repurchase

     2        1        3        2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     8,779        4,816        16,061        9,061  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest and dividend income

     15,103        13,948        30,240        27,209  

Provision for loan losses

     726        707        1,001        1,536  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest and dividend income after provision for loan losses

     14,377        13,241        29,239        25,673  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Customer service fees

     205        199        406        382  

Income from bank-owned life insurance

     261        294        529        546  

Net gain on sales of loans

     24        338        336        347  

Loan servicing fee income

     88        101        205        217  

Loan level derivative income

     1,032        —          1,032        —    

Other income

     101        63        96        133  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     1,711        995        2,604        1,625  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expense:

           

Salaries and employee benefits

     5,022        4,789        9,883        9,447  

Director compensation

     227        356        422        659  

Occupancy expense

     236        232        500        498  

Equipment expense

     93        103        175        227  

Deposit insurance

     495        416        984        818  

Data processing

     729        694        1,463        1,388  

Professional fees

     283        270        544        558  

Marketing

     248        283        514        561  

Other expense

     463        502        991        965  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     7,796        7,645        15,476        15,121  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax expense

     8,292        6,591        16,367        12,177  

Income tax expense

     2,224        2,579        4,289        4,499  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 6,068      $ 4,012      $ 12,078      $ 7,678  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share

           

Basic

   $ 0.68      $ 0.45      $ 1.35      $ 0.87  

Diluted

   $ 0.65      $ 0.43      $ 1.29      $ 0.83  

The accompanying notes are an integral part of these consolidated financial statements.

 

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BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

 

     Three months ended     Six months ended  
     June 30,     June 30,  
     2018     2017     2018     2017  
     (unaudited)     (unaudited)  

Net income

   $ 6,068     $ 4,012     $ 12,078     $ 7,678  

Other comprehensive income (loss), net of tax:

        

Net change in fair value of securities available for sale

     (13     (3     (68     64  

Net change in fair value of cash flow hedge

     73       —         (57     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     60       (3     (125     64  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 6,128     $ 4,009     $ 11,953     $ 7,742  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)

 

                              Accumulated              
                  Additional           Other     Unearned     Total  
     Common Stock      Paid-In     Retained     Comprehensive     Compensation -     Stockholders’  
     Shares     Amount      Capital     Earnings     Income (Loss)     ESOP     Equity  

Balance at December 31, 2016

     9,110,077     $ 91      $ 92,013     $ 72,498     $ 103     $ (3,784   $ 160,921  

Net income

     —         —          —         7,678       —         —         7,678  

Other comprehensive income

     —         —          —         —         64       —         64  

ESOP shares committed to be released

     —         —          141       —         —         77       218  

Stock based compensation-restricted stock awards

     —         —          807       —         —         —         807  

Stock based compensation-stock options

     —         —          385       —         —         —         385  

Restricted stock awards granted

     487,200       5        (5     —         —         —         —    

Proceeds from exercises of stock options, net of cash paid for income taxes

     96,983       1        (249     —         —         —         (248
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2017

     9,694,260     $ 97      $ 93,092     $ 80,176     $ 167     $ (3,707   $ 169,825  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

     9,707,665     $ 97      $ 94,590     $ 86,884     $ 89     $ (3,631   $ 178,029  

Net income

     —         —          —         12,078       —         —         12,078  

Other comprehensive loss

     —         —          —         —         (125     —         (125

Reclassification of income tax effects related to items stranded within accumulated other comprehensive income from the Tax Cuts and Jobs Act

     —         —          —         (19     19       —         —    

ESOP shares committed to be released

     —         —          166       —         —         75       241  

Stock based compensation-restricted stock awards

     —         —          657       —         —         —         657  

Stock based compensation-stock options

     —         —          45       —         —         —         45  

Restricted stock awards granted net of awards surrendered to cover income taxes

     (8,971     —          (274     —         —         —         (274

Proceeds from exercises of stock options, net of cash paid for income taxes

     49,975       —          557       —         —         —         557  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2018

     9,748,669     $ 97      $ 95,741     $ 98,943     $ (17   $ (3,556   $ 191,208  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     Six months ended June 30,  
     2018     2017  

Cash flows from operating activities:

    

Net income

   $ 12,078     $ 7,678  

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

    

Amortization of securities, net

     442       406  

Gain on sales of loans, net

     (336     (347

Loans originated for sale

     (6,876     (2,564

Proceeds from sales of loans

     23,592       26,388  

Provision for loan losses

     1,001       1,536  

Change in net unamortized mortgage premiums

     (604     (1,133

Change in net deferred loan costs

     (75     145  

ESOP expense

     241       218  

Stock based compensation expense

     702       1,192  

Depreciation and amortization expense

     284       303  

Impairment of fixed assets

     2       18  

Gain on the sale of fixed assets

     (11     —    

Deferred income tax (benefit) expense

     (80     359  

Increase in bank-owned life insurance

     (529     (546

Net change in:

    

Accrued interest receivable

     (606     (480

Other assets

     (1,692     (475

Income taxes receivable

     (423     (610

Accrued interest payable

     410       270  

Deferred compensation liability

     313       421  

Other liabilities

     1,446       918  
  

 

 

   

 

 

 

Net cash provided by operating activities

     29,279       33,697  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Maturities of interest-bearing time deposits with other banks

     625       134  

Purchases of interest-bearing time deposits with other banks

     (600     (135

Proceeds from maturities of available-for-sale securities

     12,750       —    

Proceeds from maturities, payments and calls of held-to-maturity securities

     24,264       13,014  

Purchases of held-to-maturity securities

     (18,237     (23,709

Redemption of Federal Home Loan Bank stock

     6,930       642  

Purchases of Federal Home Loan Bank stock

     (14,630     (5,999

Recoveries of loans previously charged off

     12       17  

Loan originations and principal collections, net

     (81,339     (19,145

Purchases of loans

     (181,839     (206,446

Proceeds from the sale of fixed assets

     25       —    

Capital expenditures

     (381     (299

Premiums paid on bank-owned life insurance

     —         (5
  

 

 

   

 

 

 

Net cash used in investing activities

     (252,420     (241,931
  

 

 

   

 

 

 

 

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BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

(Continued)

 

 

     Six months ended June 30,  
     2018     2017  

Cash flows from financing activities:

    

Net increase in demand deposits, interest-bearing checking and savings accounts

     5,083       62,931  

Net increase in time deposits

     77,529       78,462  

Net proceeds from long-term Federal Home Loan Bank borrowings

     90,000       95,000  

Principal payments on long-term Federal Home Loan Bank borrowings

     (20,000     —    

Net change in short-term Federal Home Loan Bank advances

     62,100       (36,600

Payment to counterparty for interest rate cap contract

     (1,525     —    

Net increase in securities sold under agreement to repurchase

     731       1,045  

Net increase in mortgagors’ escrow accounts

     1,754       826  

Net proceeds from exercise of stock options

     557       183  

Payment of income taxes for shares withheld in stock based award activity

     (274     (448
  

 

 

   

 

 

 

Net cash provided by financing activities

     215,955       201,399  
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (7,186     (6,835

Cash and cash equivalents at beginning of period

     110,888       58,876  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 103,702     $ 52,041  
  

 

 

   

 

 

 

Supplemental disclosures:

    

Interest paid

   $ 15,651     $ 8,791  

Income taxes paid

     4,792       4,750  

Transfer of loans held for investment to loans held for sale

     20,519       23,559  

The accompanying notes are an integral part of these consolidated financial statements.

 

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BSB BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of BSB Bancorp, Inc. have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The consolidated financial statements of BSB Bancorp, Inc. include the balances and results of operations of BSB Bancorp, Inc., a Maryland corporation, and its wholly-owned subsidiaries, Belmont Savings Bank (the “Bank”) and BSB Funding Corporation and the Bank’s wholly owned subsidiary, BSB Investment Corporation (referred to herein as “the Company,” “we,” “us,” or “our”). Intercompany transactions and balances are eliminated in consolidation.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position as of June 30, 2018 and December 31, 2017 and the results of operations and cash flows for the interim periods ended June 30, 2018 and 2017. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the fiscal year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Certain previously reported amounts have been reclassified to conform to the current period’s presentation.

NOTE 2 – RECENT ACCOUNTING STANDARDS UPDATES

In May 2014, the Financial Accounting Standards Board (“FASB”) issued amendments to Accounting Standards Codification (“ASC”) section 606 “Revenue from Contracts with Customers” through the issuance of ASU No. 2014-09, “Revenue from Contracts with Customers.” The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606).” The amendments in ASU 2015-14 deferred the effective date of ASU 2014-09 for all entities by one year to interim and annual reporting periods beginning after December 15, 2017.

Our revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company adopted this standard as of January 1, 2018 utilizing the modified restrospective approach. As a result, we did not identify any significant changes to our methodology of recognizing revenue and as such, no cumulative effect adjustment to opening retained earnings was deemed necessary. The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our consolidated statements of operations as components of non-interest income are as follows:

 

    Customer service fees - these represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer, debit card transaction or ATM withdrawal). Payment for such performance obligations is generally received at the time the performance obligations are satisfied.

 

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In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update were effective for the Company on January 1, 2018 with a change to the exit price notion methodology for the Company’s fair value disclosures of financial instruments. The adoption of this guidance was not material to the Company’s consolidated financial statements. Refer to Note 11 – Fair Value Measurements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be recognized on the balance sheet. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods therein. Early adoption is permitted. We are currently evaluating the impact of adopting the new guidance on the Company’s consolidated financial statements and plan to adopt the new guidance in the first quarter of 2019.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The update changes the impairment model for most financial assets and sets forth a “current expected credit loss” (CECL) model which will require the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This method is forward-looking and will generally result in earlier recognition of allowances for losses. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and also applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of adopting the new guidance on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and

Cash Payments. The update provides guidance on the classification of certain cash receipts and cash payments for presentation in the statement of cash flows. The amendments in this update were effective for the Company on January 1, 2018 and did not have a material impact on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” The update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update were effective for the Company on January 1, 2018 and did not have a material impact on its consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” This ASU is meant to clarify the scope of Accounting Standards Codification (“ASC”) Subtopic 610-20, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets. The guidance is to be applied using a full retrospective method or a modified retrospective method. The amendments in this update were effective for the Company on January 1, 2018 and did not have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This ASU is meant to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments in this ASU require that an employer report the service

 

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cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately. The amendments in this update were effective for the Company on January 1, 2018 and did not have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.” The amendments in Part I of this ASU change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The amendments in Part II of this ASU recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. For public business entities, the amendments in Part I of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period for which financial statements (interim or annual) have not been issued or have not been made available for issuance. The amendments in Part II of this ASU do not require any transition guidance because those amendments do not have an accounting effect. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities”. The purpose of this ASU is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. This ASU requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. The Company adopted this ASU as of January 1, 2018. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. Refer to Note 13 of the Company’s consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. The purpose of this ASU is to eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act. The underlying guidance that requires the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company early adopted this ASU on January 1, 2018 with a reclassification adjustment of $19,000 from accumulated other comprehensive income to retained earnings.

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” The purpose of this ASU is to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The ASU applies the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018 including interim periods within that fiscal year. Early adoption is permitted, but no earlier than the adoption of Topic 606. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

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NOTE 3 - INVESTMENTS IN SECURITIES

The amortized cost basis of available-for-sale and held-to-maturity securities and their approximate fair values were as follows at the dates indicated (in thousands):

 

     June 30, 2018      December 31, 2017  
     Amortized      Gross      Gross            Amortized      Gross      Gross        
     Cost      Unrealized      Unrealized     Fair      Cost      Unrealized      Unrealized     Fair  
     Basis      Gains      Losses     Value      Basis      Gains      Losses     Value  
     (unaudited)                             

Available-for-sale securities:

                     

Corporate debt securities

   $ 4,192      $ —        $ (150   $ 4,042      $ 16,975      $ 24      $ (78   $ 16,921  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 4,192      $ —        $ (150   $ 4,042      $ 16,975      $ 24      $ (78   $ 16,921  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity securities:

                     

U.S. government sponsored mortgage-backed securities

   $ 142,919      $ 92      $ (3,720   $ 139,291      $ 142,383      $ 145      $ (2,089   $ 140,439  

Corporate debt securities

     10,735        10        (104     10,641        17,707        239        —         17,946  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 153,654      $ 102      $ (3,824   $ 149,932      $ 160,090      $ 384      $ (2,089   $ 158,385  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost basis and estimated fair value of debt securities by contractual maturity at June 30, 2018 is as follows (in thousands and unaudited). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     June 30, 2018  
     Available-for-Sale      Held-to-Maturity  
     Amortized      Fair      Amortized      Fair  
     Cost Basis      Value      Cost Basis      Value  
     (unaudited)      (unaudited)  

Due within one year

   $ —        $ —        $ —        $ —    

Due after one year through five years

     4,192        4,042        12,401        12,243  

Due after five years through ten years

     —          —          32,332        31,248  

Due after ten years

     —          —          108,921        106,441  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,192      $ 4,042      $ 153,654      $ 149,932  
  

 

 

    

 

 

    

 

 

    

 

 

 

When securities are sold, the adjusted cost basis of the specific security sold is used to compute the gain or loss on the sale. During the three and six months ended June 30, 2018 and 2017 (unaudited), there were no sales of available-for-sale securities.

In addition to the securities listed above, the Company holds investments in a Rabbi Trust that are used to fund the executive and director non-qualified deferred compensation plan. These investments are available to satisfy the claims of general creditors of the Company in the event of bankruptcy and are included in our consolidated balance sheets in other assets. The investments consisted primarily of mutual funds and are classified as trading securities and recorded at fair value through net income. The fair value of these investments at June 30, 2018 (unaudited) and December 31, 2017 was $2.8 million. For the three months ending June 30, 2018 and 2017 (unaudited), the net gain on these investments still held at the reporting date was $32,000 and $38,000, respectively. For the six months ending June 30, 2018 and 2017 (unaudited), the net gain on these investments still held at the reporting date was $8,000 and $83,000, respectively. Refer to Note 7 – Employee and Director Benefit Plans, for more information.

 

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Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position is as follows (in thousands):

 

          Less than 12 Months     Over 12 Months  
    # of     Fair     Unrealized     Fair     Unrealized  
    Holdings     Value     Losses     Value     Losses  

June 30, 2018 (unaudited):

         

Available-for-sale

         

Corporate debt securities

    1     $ —       $ —       $ 4,042     $ (150

Held-to-maturity

         

Corporate debt securities

    2       7,730       (104     —         —    

U.S. government sponsored mortgage-backed securities

    83       51,683       (1,034     74,738       (2,686
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total temporarily impaired securities

    86     $ 59,413     $ (1,138   $ 78,780     $ (2,836
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2017:

         

Available-for-sale

         

Corporate debt securities

    1     $ —       $ —       $ 4,144     $ (78

Held-to-maturity

         

U.S. government sponsored mortgage-backed securities

    81       64,056       (718     62,798       (1,371
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total temporarily impaired securities

    82     $ 64,056     $ (718   $ 66,942     $ (1,449
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. When there are securities in an unrealized loss position, consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At June 30, 2018 (unaudited), 86 debt securities were in an unrealized loss position. Based on the Company’s June 30, 2018 (unaudited) quarterly review of securities in the investment portfolio, management has determined that unrealized losses related to the 86 debt securities with aggregate depreciation of 2.80% from the Company’s amortized cost basis were caused primarily by changes in market 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 securities would not be settled at a price less than the par value of the investment. Because the Company does not intend to sell the investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost basis, it does not consider these investments to be other-than-temporarily impaired at June 30, 2018 (unaudited).

At December 31, 2017, 82 debt securities had unrealized losses with aggregate depreciation of 1.63% from the Company’s amortized cost basis. The Company’s unrealized losses on debt securities are primarily caused by changes in market interest rates.

NOTE 4 – LOANS, ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, deferred fees or costs on originated loans, and any premiums or discounts on purchased loans.

Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

The accrual of interest on all loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in the process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. 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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Payments received on impaired loans are applied to reduce the recorded investment in the loan principal to the extent necessary to eliminate doubt as to the collectability of the net carrying amount of the loan. Some or all of the payments received on impaired loans are recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance for loan losses when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses.

The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses consists of general, allocated and unallocated components, as further described below.

General Component:

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, home equity lines of credit, commercial real estate, multi-family real estate, construction, commercial, indirect auto and other consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the three and six months ended June 30, 2018. However, during the three months ended June 30, 2018, the Company determined that multi-family real estate loans should be evaluated separately from other commercial real estate loans as its own homogenous loan segment. Accordingly, the related prior year amounts have been reclassified to reflect this change.

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate loans and home equity lines of credit – The Company generally does not originate or purchase loans with a loan-to-value ratio greater than 80 percent and generally does not grant subprime loans. Loans in this segment are generally collateralized by owner-occupied residential real estate and repayment is dependent on the cash flow and credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the performance of this segment.

Commercial real estate loans – Loans in this segment are primarily secured by income-producing properties in eastern Massachusetts. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy and increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management generally performs on-site inspections, obtains rent rolls and leases annually and continually monitors the cash flows of these borrowers.

Multi-family real estate loans - These loans are primarily secured by five or more unit residential properties. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy and increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management generally performs on-site inspections, obtains rent rolls annually and continually monitors the cash flows of these borrowers.

Construction loans – Loans in this segment primarily include speculative real estate development loans for which payment is derived from sale and/or lease up of the property. Credit risk is affected by cost overruns, time to sell, or lease at adequate prices and market conditions.

Commercial loans – Loans in this segment are made to businesses and are primarily secured by real estate and in some cases, other assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer and business spending, will have an effect on the credit quality in this segment.

Indirect auto loans – Loans in this segment are secured installment loans that were originated through a network of select regional automobile dealerships. The Company’s interest in the vehicle is secured with a recorded lien on the state title of each automobile. Collections are sensitive to changes in borrower financial circumstances, and the collateral can depreciate or be damaged in the event of repossession. Repayment is primarily dependent on the credit worthiness and the cash flow of the individual borrower and secondarily, liquidation of the collateral.

 

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Other consumer loans - Loans in this segment include secured and unsecured consumer loans including passbook loans, consumer lines of credit, overdraft protection and other consumer unsecured loans. Repayment is dependent on the credit quality and the cash flow of the individual borrower.

Allocated Component:

The allocated component relates to loans that are classified as impaired. A loan is considered impaired when, based on current information and events, it is probable that the Company 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. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

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 troubled debt restructuring (“TDR”). All TDRs are classified as impaired.

Impaired loans are measured for impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral-dependent. Generally, TDRs are measured for impairment using the discounted cash flow method except in instances where foreclosure is probable in which case the fair value of collateral method is used. When the fair value of the impaired loan is determined to be less than the recorded investment in the loan, the impairment is recorded through the valuation allowance. However, for collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance amount when such an amount has been identified definitively as uncollectable.

Unallocated Component:

An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of incurred losses. The unallocated component of the allowance for loan losses reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. At June 30, 2018 (unaudited) and December 31, 2017, the Company had unallocated reserves of $664,000 and $621,000, respectively.

 

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Loans consisted of the following (dollars in thousands):

 

     June 30, 2018     December 31, 2017  
     Amount      Percent     Amount      Percent  
     (unaudited)               

Mortgage loans:

          

Residential one-to-four family

   $ 1,520,873        59.79   $ 1,333,058        57.93

Commercial real estate loans

     544,347        21.40       486,392        21.13  

Multi-family real estate loans

     185,000        7.27       155,680        6.77  

Home equity lines of credit

     171,741        6.75       178,624        7.76  

Construction loans

     38,460        1.51       53,045        2.31  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage loans

     2,460,421        96.72       2,206,799        95.90  
  

 

 

    

 

 

   

 

 

    

 

 

 

Commercial loans

     63,215        2.48       63,722        2.77  

Consumer loans:

          

Indirect auto loans

     19,804        0.78       30,227        1.31  

Other consumer loans

     408        0.02       435        0.02  
  

 

 

    

 

 

   

 

 

    

 

 

 
     83,427        3.28       94,384        4.10  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

     2,543,848        100.00     2,301,183        100.00
     

 

 

      

 

 

 

Net deferred loan costs

     3,501          3,426     

Net unamortized mortgage premiums

     9,265          8,661     

Allowance for loan losses

     (17,296        (16,312   
  

 

 

      

 

 

    

Total loans, net

   $ 2,539,318        $ 2,296,958     
  

 

 

      

 

 

    

The following tables (in thousands) present the activity in the allowance for loan losses by portfolio class for the three and six months ended June 30, 2018 and 2017 (unaudited); and the balances of the allowance for loan losses and recorded investment in loans by portfolio class based on impairment method at June 30, 2018 (unaudited) and December 31, 2017. The recorded investment in loans in any of the following tables does not include accrued and unpaid interest, any deferred loan fees or costs or any premiums, as the amounts are not significant.

 

     Three Months Ended June 30, 2018  
     Beginning balance      Provision (benefit)     Charge-offs     Recoveries      Ending balance  

Residential one-to-four family

   $ 6,584      $ 560     $ —       $ —        $ 7,144  

Commercial real estate

     5,148        538       —         —          5,686  

Multi-family real estate

     1,820        (248     —         —          1,572  

Home equity lines of credit

     950        (109     —         —          841  

Construction

     458        92       —         —          550  

Commercial

     789        (101     —         —          688  

Indirect auto

     193        (33     (16     2        146  

Other consumer

     5        —         —         —          5  

Unallocated

     637        27       —         —          664  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 16,584      $ 726     $ (16   $ 2      $ 17,296  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     Three Months Ended June 30, 2017  
     Beginning balance      Provision (benefit)     Charge-offs     Recoveries      Ending balance  

Residential one-to-four family

   $ 5,223      $ 441     $ —       $ —        $ 5,664  

Commercial real estate

     3,924        398       —         —          4,322  

Multi-family real estate

     1,326        (36     —         —          1,290  

Home equity lines of credit

     1,011        13       —         —          1,024  

Construction

     1,297        (144     —         —          1,153  

Commercial

     713        5       —         —          718  

Indirect auto

     335        1       (9     12        339  

Other consumer

     8        2       (4     1        7  

Unallocated

     545        27       —         —          572  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 14,382      $ 707     $ (13   $ 13      $ 15,089  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents
     Six Months Ended June 30, 2018  
     Beginning balance      Provision (benefit)     Charge-offs     Recoveries      Ending balance  

Residential one-to-four family

   $ 6,400      $ 744     $ —       $ —        $ 7,144  

Commercial real estate

     4,979        707       —         —          5,686  

Multi-family real estate

     1,604        (32     —         —          1,572  

Home equity lines of credit

     947        (106     —         —          841  

Construction

     764        (214     —         —          550  

Commercial

     758        (66     (4     —          688  

Indirect auto

     230        (73     (22     11        146  

Other consumer

     9        (2     (3     1        5  

Unallocated

     621        43       —         —          664  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 16,312      $ 1,001     $ (29   $ 12      $ 17,296  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     Six Months Ended June 30, 2017  
     Beginning balance      Provision (benefit)     Charge-offs     Recoveries      Ending balance  

Residential one-to-four family

   $ 4,828      $ 836     $ —       $ —        $ 5,664  

Commercial real estate

     3,676        646       —         —          4,322  

Multi-family real estate

     1,209        81       —         —          1,290  

Home equity lines of credit

     1,037        (13     —         —          1,024  

Construction

     1,219        (66     —         —          1,153  

Commercial

     728        (10     —         —          718  

Indirect auto

     362        1       (40     16        339  

Other consumer

     9        6       (9     1        7  

Unallocated

     517        55       —         —          572  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 13,585      $ 1,536     $ (49   $ 17      $ 15,089  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

    June 30, 2018  
    Individually evaluated for impairment     Collectively evaluated for impairment     Total  
    Loan balance     Allowance     Loan balance     Allowance     Loan balance     Allowance  

Residential one-to-four family

  $ 2,109     $ 6     $ 1,518,764     $ 7,138     $ 1,520,873     $ 7,144  

Commercial real estate

    2,851       —         541,496       5,686       544,347       5,686  

Multi-family real estate

    —         —         185,000       1,572       185,000       1,572  

Home equity lines of credit

    50       —         171,691       841       171,741       841  

Construction

    —         —         38,460       550       38,460       550  

Commercial

    —         —         63,215       688       63,215       688  

Indirect auto

    1       —         19,803       146       19,804       146  

Other consumer

    —         —         408       5       408       5  

Unallocated

    —         —         —         664       —         664  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 5,011     $ 6     $ 2,538,837     $ 17,290     $ 2,543,848     $ 17,296  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    December 31, 2017  
    Individually evaluated for impairment     Collectively evaluated for impairment     Total  
    Loan balance     Allowance     Loan balance     Allowance     Loan balance     Allowance  

Residential one-to-four family

  $ 2,688     $ 147     $ 1,330,370     $ 6,253     $ 1,333,058     $ 6,400  

Commercial real estate

    2,877       —         483,515       4,979       486,392       4,979  

Multi-family real estate

    —         —         155,680       1,604       155,680       1,604  

Home equity lines of credit

    —         —         178,624       947       178,624       947  

Construction

    —         —         53,045       764       53,045       764  

Commercial

    —         —         63,722       758       63,722       758  

Indirect auto

    4       —         30,223       230       30,227       230  

Other consumer

    —         —         435       9       435       9  

Unallocated

    —         —         —         621       —         621  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 5,569     $ 147     $ 2,295,614     $ 16,165     $ 2,301,183     $ 16,312  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Information about loans that meet the definition of an impaired loan under ASC 310-10-35 is as follows as of June 30, 2018 (unaudited and in thousands) and December 31, 2017 (in thousands):

 

     Impaired loans with a related allowance for credit losses at June 30, 2018  
            Unpaid      Related  
     Recorded      Principal      Allowance for  
     Investment      Balance      Credit Losses  

Residential one-to-four family

   $ 195      $ 195      $ 6  
  

 

 

    

 

 

    

 

 

 

Totals

   $ 195      $ 195      $ 6  
  

 

 

    

 

 

    

 

 

 

 

     Impaired loans with no related allowance for  
     for credit losses at June 30, 2018  
            Unpaid  
     Recorded      Principal  
     Investment      Balance  

Residential one-to-four family

   $ 1,914      $ 2,028  

Commercial real estate

     2,851        2,851  

Home equity lines of credit

     50        50  

Indirect auto

     1        1  
  

 

 

    

 

 

 

Totals

   $ 4,816      $ 4,930  
  

 

 

    

 

 

 

 

     Impaired loans with a related allowance for credit losses at December 31, 2017  
            Unpaid      Related  
     Recorded      Principal      Allowance for  
     Investment      Balance      Credit Losses  

Residential one-to-four family

   $ 725      $ 725      $ 147  
  

 

 

    

 

 

    

 

 

 

Totals

   $ 725      $ 725      $ 147  
  

 

 

    

 

 

    

 

 

 

 

     Impaired loans with no related allowance for  
     credit losses at December 31, 2017  
            Unpaid  
     Recorded      Principal  
     Investment      Balance  

Residential one-to-four family

   $ 1,963      $ 2,052  

Commercial real estate

     2,877        2,877  

Indirect auto

     4        4  
  

 

 

    

 

 

 

Totals

   $ 4,844      $ 4,933  
  

 

 

    

 

 

 

 

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The following tables set forth information regarding interest income recognized on impaired loans, by portfolio segment, for the periods indicated (unaudited and in thousands):

 

     Three months ended June 30, 2018      Three months ended June 30, 2017  
     Average      Interest      Average      Interest  
     Recorded      Income      Recorded      Income  

With an allowance recorded

   Investment      Recognized      Investment      Recognized  

Residential one-to-four family

   $ 195      $ 2      $ 1,229      $ 8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 195      $ 2      $ 1,229      $ 8  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Three months ended June 30, 2018      Three months ended June 30, 2017  
     Average      Interest      Average      Interest  
     Recorded      Income      Recorded      Income  

Without an allowance recorded

   Investment      Recognized      Investment      Recognized  

Residential one-to-four family

   $ 1,923      $ 8      $ 1,767      $ 6  

Commercial real estate

     2,856        32        3,215        36  

Home equity lines of credit

     33        —          65        2  

Indirect auto

     3        —          7        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 4,815      $ 40      $ 5,054      $ 44  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Six months ended June 30, 2018      Six months ended June 30, 2017  
     Average      Interest      Average      Interest  
     Recorded      Income      Recorded      Income  

With an allowance recorded

   Investment      Recognized      Investment      Recognized  

Residential one-to-four family

   $ 283      $ 7      $ 1,066      $ 16  
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 283      $ 7      $ 1,066      $ 16  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Six months ended June 30, 2018      Six months ended June 30, 2017  
     Average      Interest      Average      Interest  
     Recorded      Income      Recorded      Income  

Without an allowance recorded

   Investment      Recognized      Investment      Recognized  

Residential one-to-four family

   $ 1,936      $ 16      $ 1,953      $ 9  

Commercial real estate

     2,864        62        3,260        72  

Home equity lines of credit

     17        —          212        13  

Indirect auto

     5        —          8        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 4,822      $ 78      $ 5,433      $ 94  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following is a summary of past due and non-accrual loans (in thousands):

 

     June 30, 2018 (unaudited)  
                                 90 days         
                   90 Days      Total      or more      Loans on  
     30–59 Days      60–89 Days      or More      Past Due      and accruing      Non-accrual  

Real estate loans:

                 

Residential one-to-four family

   $ 2,008      $ 1      $ 260      $ 2,269      $ —        $ 707  

Home equity lines of credit

     138        —          —          138        —          50  

Other loans:

                 

Indirect auto

     246        56        1        303        —          1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,392      $ 57      $ 261      $ 2,710      $ —        $ 758  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017  
                                 90 days         
                   90 Days      Total      or more      Loans on  
     30–59 Days      60–89 Days      or More      Past Due      and accruing      Non-accrual  

Real estate loans:

                 

Residential one-to-four family

   $ 711      $ —        $ 260      $ 971      $ —        $ 1,372  

Home equity lines of credit

     716        —          —          716        —          —    

Other loans:

                 

Indirect auto

     347        30        4        381        —          4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,774      $ 30      $ 264      $ 2,068      $ —        $ 1,376  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit Quality Information

The Company utilizes a nine-grade internal loan rating system for commercial, multi-family, commercial real estate and construction loans, and a five-grade internal loan rating system for certain residential real estate and home equity lines of credit that are rated if the loans become delinquent, impaired or are restructured as a TDR.

Loans rated 1, 2, 2.5, 3 and 3.5: Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 4: 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 as 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 commercial, commercial real estate, multi-family real estate and construction loans. On an annual basis, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.

On a quarterly basis, the Company formally reviews the ratings on all residential real estate and home equity lines of credit if they have become delinquent. Criteria used to determine the rating consists of loan-to-value and the number of days delinquent.

 

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Table of Contents

The following tables present the Company’s loans by risk rating at June 30, 2018 (unaudited and in thousands) and December 31, 2017 (in thousands). There were no loans rated as 6 (“doubtful”) or 7 (“loss”) at the dates indicated.

 

     June 30, 2018  
     Loans rated 1-3.5      Loans rated 4      Loans rated 5      Loans not rated (A)      Total  

Residential one-to-four family

   $ —        $ 339      $ 1,387      $ 1,519,147      $ 1,520,873  

Commercial real estate

     540,568        —          3,779        —          544,347  

Multi-family real estate

     185,000        —          —          —          185,000  

Home equity lines of credit

     —          —          49        171,692        171,741  

Construction

     38,460        —          —          —          38,460  

Commercial

     63,215        —          —          —          63,215  

Indirect auto

     —          —          —          19,804        19,804  

Other consumer

     —          —          —          408        408  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 827,243      $ 339      $ 5,215      $ 1,711,051      $ 2,543,848  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017  
     Loans rated 1-3.5      Loans rated 4      Loans rated 5      Loans not rated (A)      Total  

Residential one-to-four family

   $ —        $ 344      $ 2,060      $ 1,330,654      $ 1,333,058  

Commercial real estate

     482,574        —          3,818        —          486,392  

Multi-family real estate

     155,680        —          —          —          155,680  

Home equity lines of credit

     —          —          772        177,852        178,624  

Construction

     53,045        —          —          —          53,045  

Commercial

     63,682        40        —          —          63,722  

Indirect auto

     —          —          —          30,227        30,227  

Consumer

     —          —          —          435        435  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 754,981      $ 384      $ 6,650      $ 1,539,168      $ 2,301,183  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(A) Residential real estate and home equity lines of credit are not formally risk rated by the Company unless the loans become delinquent, impaired or are restructured as a TDR.

The Company periodically modifies loans to extend the term, reduce the interest rate or make other concessions to help a borrower stay current on their loan and to avoid foreclosure. Any loans that are modified are reviewed by the Company to determine if a TDR has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. During the three and six months ended June 30, 2018 (unaudited), there were no loans modified and determined to be TDRs. During the three and six months ended June 30, 2017 (unaudited), one existing TDR was modified again to extend the maturity.

 

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Table of Contents

The following table shows the Company’s total TDRs and other pertinent information as of the dates indicated (in thousands):

 

     June 30, 2018      December 31, 2017  
     (unaudited)         

TDRs on Accrual Status

   $ 4,253      $ 4,194  

TDRs on Nonaccrual Status

     —          645  
  

 

 

    

 

 

 

Total TDRs

   $ 4,253      $ 4,839  
  

 

 

    

 

 

 

Amount of specific allocation included in the allowance for loan losses associated with TDRs

   $ 6      $ 147  

Additional commitments to lend to a borrower who has been a party to a TDR

   $ —        $ —    

The following tables show the TDR modifications which occurred during the three and six months ended June 30, 2017 and the change in the recorded investment subsequent to the modifications occurring (dollars in thousands and unaudited):

 

     Three months ended  
     June 30, 2017  
            Pre-modification      Post-modification  
     # of      outstanding      outstanding  
     Contracts      recorded investment      recorded investment  

Real estate loans:

        

Commercial real estate loans

     1      $ 273      $ 273  
  

 

 

    

 

 

    

 

 

 

Total

     1      $ 273      $ 273  
  

 

 

    

 

 

    

 

 

 
     Six months ended  
     June 30, 2017  
            Pre-modification      Post-modification  
     # of      outstanding      outstanding  
     Contracts      recorded investment      recorded investment  

Real estate loans:

        

Commercial real estate loans

     1      $ 273      $ 273  
  

 

 

    

 

 

    

 

 

 

Total

     1      $ 273      $ 273  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table shows the Company’s post-modification balance of TDRs listed by type of modification during the three and six months ended June 30, 2017 (in thousands and unaudited):

 

     Three months ended  
     June 30, 2017  

Extended maturity

   $ 273  
  

 

 

 

Total

   $ 273  
  

 

 

 
     Six months ended  
     June 30, 2017  

Extended maturity

   $ 273  
  

 

 

 

Total

   $ 273  
  

 

 

 

The Company generally considers a loan to have defaulted when it reaches 90 days past due. There were no loans that have been modified as TDRs during the past twelve months which have subsequently defaulted during during the three and six months ended June 30, 2018 and 2017 (unaudited).

The impact of TDRs and subsequently defaulted TDRs did not have a material impact on the allowance for loan losses.

Foreclosure Proceedings

The Company had one consumer mortgage loan for $260,000 collateralized by residential real estate property that was in the process of foreclosure as of June 30, 2018 (unaudited). There were no consumer mortgage loans collateralized by residential real estate property in the process of foreclosure as of December 31, 2017.

NOTE 5 – TRANSFERS AND SERVICING

Certain residential mortgage loans are periodically sold by the Company to the secondary market. Generally, these loans are sold without recourse or other credit enhancements. The Company sells loans and both releases and retains the servicing rights. For loans sold with the servicing rights retained, we provide the servicing for the loans on a per-loan fee basis. The Company has also periodically sold auto loans to other financial institutions without recourse or other credit enhancements, and the Company generally provides servicing for these loans.

At June 30, 2018 (unaudited) and December 31, 2017, residential loans previously sold and serviced by the Company were $129.0 million and $114.5 million, respectively. At June 30, 2018 (unaudited) and December 31, 2017, indirect auto loans previously sold and serviced by the Company were $5.5 million and $10.5 million, respectively.

Mortgage servicing rights (“MSR”) are initially recorded as an asset and measured at fair value when loans are sold to third parties with servicing rights retained. MSR assets are amortized in proportion to, and over the period of, estimated net servicing revenues. The carrying value of these assets is periodically reviewed for impairment using the lower of amortized cost or fair value methodology. The fair value of MSR are determined by estimating the present value of future net cash flows, taking into consideration market loan prepayment speeds, discount rates, servicing costs and other economic factors. For purposes of measuring impairment, the underlying loans are stratified into relatively homogeneous pools based on predominant risk characteristics which include product type (i.e., fixed or adjustable) and interest rate bands. If the aggregate carrying value of the capitalized MSR for a stratum exceeds its fair value, MSR impairment is recognized in earnings through a valuation allowance for the difference. As the loans are repaid and net servicing revenue is earned, the MSR asset is amortized as an offset to loan servicing income. Servicing revenues are expected to exceed this amortization expense. However, if actual prepayment experience or defaults exceed what was originally anticipated, net servicing revenues may be less than expected and MSR may become impaired. No servicing assets or liabilities related to auto loans were recorded, as the contractual servicing fees are adequate to compensate the Company for its servicing responsibilities.

 

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Table of Contents

Changes in MSR, which are included in other assets, were as follows (in thousands):

 

     Three months ended June 30,      Six months ended June 30,  
     2018      2017      2018      2017  
     (unaudited)      (unaudited)  

Balance at beginning of period

   $ 1,053      $ 414      $ 855      $ 403  

Capitalization

     5        180        213        185  

Amortization

     (49      (27      (98      (51

Valuation allowance adjustment

     8        17        47        47  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 1,017      $ 584      $ 1,017      $ 584  
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 6 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS

The securities sold under agreements to repurchase as of June 30, 2018 (unaudited) and December 31, 2017 are securities sold on a short-term basis by the Company that have been accounted for not as sales but as secured borrowings. The securities consisted of mortgage-backed securities issued by a U.S. government sponsored entity. The securities were held in the Company’s safekeeping account at the Federal Home Loan Bank (“FHLB”) of Boston under the control of the Company. The securities are pledged to the purchasers of the securities. The purchasers have agreed to sell to the Company identical securities at the maturity of the agreements. The balance of securities sold under agreements to repurchase as of June 30, 2018 (unaudited) and December 31, 2017 was $4.0 million and $3.3 million, respectively.

NOTE 7 – EMPLOYEE AND DIRECTOR BENEFIT PLANS

Belmont Savings Bank Supplemental Executive Retirement Plan

The purpose of the Belmont Savings Bank Supplemental Executive Retirement Plan is to remain competitive with our peers in our compensation arrangements and to help us retain certain executive officers of the Company. At June 30, 2018 (unaudited) and December 31, 2017, there were four participants in the Plan. Participants are fully vested after the completion of between five and ten years of service. The plan is unfunded. The estimated liability at June 30, 2018 (unaudited) and December 31, 2017 relating to this plan was $2.0 million and $1.8 million, respectively.

Other Supplemental Retirement Plans

The Company has supplemental retirement plans for eligible executive officers that provide for a lump sum benefit upon termination of employment at or after age 55 and completing 10 or more years of service (certain reduced benefits are available prior to attaining age 55 or fewer than 10 years of service), subject to certain limitations as set forth in the agreements. The present value of these future payments is being accrued over the service period. The estimated liability at June 30, 2018 (unaudited) and December 31, 2017 relating to these plans was $2.7 million and $2.6 million, respectively.

The Company has a supplemental retirement plan for eligible directors that provides for monthly benefits based upon years of service to the Company, subject to certain limitations as set forth in the agreements. The present value of these future payments is being accrued over the estimated period of service. The estimated liability at June 30, 2018 (unaudited) and December 31, 2017 relating to this plan was $696,000 and $697,000, respectively.

Incentive Compensation Plan

The Incentive Compensation Plan is a discretionary annual cash-based incentive plan that is an integral part of the participant’s total compensation package and supports the continued growth, profitability and risk management of the Company. Each year participants are awarded for the achievement of certain performance objectives on a company-wide and individual basis. Compensation expense recognized was $501,000 and $461,000 for the three months ended June 30, 2018 and 2017 (unaudited), respectively and $1.1 million and $973,000 for the six months ended June 30, 2018 and 2017 (unaudited), respectively. The liability at June 30, 2018 (unaudited) and December 31, 2017 was $1.1 million and $2.1 million, respectively.

 

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Defined Contribution Plan

The Company sponsors a 401(k) plan covering substantially all employees meeting certain eligibility requirements. Under the provisions of the plan, employees are able to contribute up to an annual limit of the lesser of 75% of eligible compensation or the maximum allowed by the Internal Revenue Service. The Company’s contributions for the three months ended June 30, 2018 and 2017 (unaudited) totaled $245,000 and $210,000, respectively, and $498,000 and $453,000 for the six months ended June 30, 2018 and 2017 (unaudited), respectively.

Deferred Compensation Plan

The Company has a compensation deferral plan by which selected employees and directors of the Company are entitled to elect, prior to the beginning of each year, to defer the receipt of an amount of their compensation for the forthcoming year. Each agreement allows for the individual to elect to defer a portion of his or her compensation to an individual deferred compensation account established by the Company. In April 2013, the Company created a Rabbi Trust, or grantor trust. The Rabbi Trust is maintained by the Company primarily for purposes of holding deferred compensation for certain directors and employees of the Company. The plan is administered by a third party and permits participants to select from a number of investment options for the investment of their account balances. Each participant is always 100% vested in his or her deferred compensation account balance. As of June 30, 2018 (unaudited) and December 31, 2017, the recorded liability relating to the deferred compensation plan was $2.8 million.

Employee Stock Ownership Plan

The Company maintains an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Company stock. This plan is a tax-qualified retirement plan for the benefit of all Company employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax law limits.

The Company contributed funds to a subsidiary to enable it to grant a loan to the ESOP for the purchase of 458,643 shares of the Company’s common stock at a price of $10.00 per share. The loan obtained by the ESOP from the Company’s subsidiary to purchase Company common stock is payable annually over 30 years at a rate per annum equal to the Prime Rate on the first business day of each calendar year (4.5% for 2018, unaudited). Loan payments are principally funded by cash contributions from the Bank. The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid.

Cash dividends paid on allocated shares are distributed to participants and cash dividends paid on unallocated shares are used to repay the outstanding debt of the ESOP. Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid. The Company incurred expenses of $126,000 and $111,000 for the three months ended June 30, 2018 and 2017 (unaudited), respectively, and $241,000 and $218,000 for the six months ended June 30, 2018 and 2017 (unaudited), respectively.

Severance Agreements

The Company has entered into employment agreements and change in control agreements with certain executive officers which would provide the executive officers with severance payments based on salary, and the continuation of other benefits, upon a change in control as defined in the agreements.

 

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NOTE 8 – PLEDGED ASSETS

The following securities and loans were pledged to secure securities sold under agreements to repurchase, FHLB advances and letters of credit and credit facilities available (in thousands):

 

June 30, 2018 (unaudited)    Securities held to
maturity (at cost)
     Loans
receivable
     Total pledged
assets
 

Repurchase agreements

   $ 6,143      $ —        $ 6,143  

FHLB borrowings

     44,783        1,663,046        1,707,829  

Federal Reserve Bank line of credit

     8,801        —          8,801  
  

 

 

    

 

 

    

 

 

 

Total pledged assets

   $ 59,727      $ 1,663,046      $ 1,722,773  
  

 

 

    

 

 

    

 

 

 
December 31, 2017    Securities held to
maturity (at cost)
     Loans
receivable
     Total pledged
assets
 

Repurchase agreements

   $ 5,582      $ —        $ 5,582  

FHLB borrowings

     47,666        1,406,483        1,454,149  

Federal Reserve Bank line of credit

     15,780        —          15,780  
  

 

 

    

 

 

    

 

 

 

Total pledged assets

   $ 69,028      $ 1,406,483      $ 1,475,511  
  

 

 

    

 

 

    

 

 

 

NOTE 9 – EARNINGS PER SHARE

Basic earnings per share (“EPS”) excludes dilution and is calculated by dividing net income allocated to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents (such as stock options and unvested restricted stock not meeting the definition of a participating security) were issued during the period.

Earnings per share consisted of the following components for the periods indicated (unaudited and dollars in thousands except per share data):

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2018      2017      2018      2017  

Net income

   $ 6,068      $ 4,012      $ 12,078      $ 7,678  

Undistributed earnings attributable to participating securities

     (1      (33      (2      (64
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocated to common stockholders

   $ 6,067      $ 3,979      $ 12,076      $ 7,614  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding, basic

     8,948,092        8,754,917        8,917,697        8,715,635  

Effect of dilutive shares

     452,904        429,742        452,640        415,744  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding, assuming dilution

     9,400,996        9,184,659        9,370,337        9,131,379  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic EPS

   $ 0.68      $ 0.45      $ 1.35      $ 0.87  

Effect of dilutive shares

     (0.03      (0.02      (0.06      (0.04
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 0.65      $ 0.43      $ 1.29      $ 0.83  
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no options to purchase shares of common stock outstanding and not included in the computation of EPS because they were antidilutive under the treasury stock method during the three and six months ended June 30, 2018 and 2017 (unaudited).

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.

On June 22, 2013, the Company’s Board of Directors authorized a program to repurchase, from time-to-time and as market and business conditions warrant, up to 500,000 shares of the Company’s common stock. During the three and six months ended June 30, 2018 and 2017 (unaudited), the Company did not repurchase any shares under the repurchase program.

NOTE 10 – STOCK BASED COMPENSATION

On February 8, 2017, the stockholders of the Company approved the Company’s 2017 Equity Incentive Plan (“the Plan”). On March 15, 2017, 487,200 restricted stock awards were granted under the Plan. The shares had a grant date fair value of $27.10 per share and

 

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vest over ten years with an estimated forfeiture rate of 2.64%. The awards are not deemed to be participating securities. On April 23, 2018, 3,898 restricted stock awards were granted under the Plan. The shares had a grant date fair value of $32.30 and vest over ten years with an estimated forfeiture rate of 2.27%. The awards are not deemed to be participating securities.

The following table presents the pre-tax expense associated with stock options and restricted stock awards and the related tax benefits recognized (in thousands and unaudited):

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2018      2017      2018      2017  

Stock options

   $ 23      $ 196      $ 45      $ 385  

Restricted stock awards

     327        539        657        807  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock based compensation expense

   $ 350      $ 735      $ 702      $ 1,192  
  

 

 

    

 

 

    

 

 

    

 

 

 

Related tax benefits recognized in earnings

   $ 92      $ 254      $ 186      $ 397  
  

 

 

    

 

 

    

 

 

    

 

 

 

The adoption of ASU 2016-09 required that the excess tax benefit associated with stock compensation transactions be recorded through earnings while the previous guidance required the recognition of the excess tax benefit through additional paid-in capital. Excess tax benefits recognized from stock-based compensation for the periods indicated below are as follows (in thousands and unaudited):

 

     Three months ended
June 30,
 
     2018      2017  

After tax benefits recognized in net income

   $ 18      $ 63  
  

 

 

    

 

 

 
     Six months
ended June 30,
 
     2018      2017  

After tax benefits recognized in net income

   $ 127      $ 781  
  

 

 

    

 

 

 

Total unrecognized compensation cost related to non-vested awards and the weighted average period (in years) over which it is expected to be recognized is as follows (in thousands):

 

     As of June 30, 2018  
     (unaudited)  
     Amount      Weighted
average period
 

Stock options

   $ 95        2.21  

Restricted stock

     10,171        8.71  
  

 

 

    

Total

   $ 10,266     
  

 

 

    

NOTE 11 – FAIR VALUE MEASUREMENTS

Determination of Fair Value

The fair value of an asset or liability 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. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from one level to another. 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 the present value of cash flows 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 instrument.

 

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

Level 1 - Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 - Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 - Level 3 inputs are unobservable inputs for the asset or liability.

For assets and liabilities, the fair value level is based upon the lowest level of input that is significant to the fair value measurement.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use, as inputs, observable market based parameters. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the consolidated balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth below. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value for June 30, 2018 (unaudited) and December 31, 2017. There were no significant transfers between the levels of the fair value hierarchy during the three and six months ended June 30, 2018 (unaudited) and the year ended December 31, 2017.

Financial Assets and Financial Liabilities: Financial assets and financial liabilities measured at fair value on a recurring basis include the following:

Investment Securities Available-for-Sale: The Company’s investment in corporate debt securities is generally classified within Level 2 of the fair value hierarchy. For these securities, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include reported trades, dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

Investments held in the Rabbi Trust: Investments held in the Rabbi Trust consist primarily of exchange-traded mutual funds and were recorded at fair value and included in other assets. The purpose of these investments is to fund certain director and executive non-qualified retirement benefits and deferred compensation. The exchange-traded mutual funds were valued based on quoted market prices and are categorized as Level 1.

Derivatives: Currently, the Company uses an interest rate cap and loan level derivatives, including interest rate swap agreements and risk participation-out agreements, to manage its interest rate risk. The valuations of these derivative instruments are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative instrument. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.

The fair value of the interest rate cap is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the contract (caps). The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.

The fair values for the loan level derivatives are based on settlement values adjusted for credit risks associated with the counterparties and the Company and observable market interest rate curves. Credit risk adjustments consider factors such as the likelihood of default by the Company and its counterparties, its net exposures and remaining contractual life. To date, the Company has not realized any losses due to a counterparty’s inability to pay any net uncollateralized position.

 

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To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

The Company had no derivative assets or liabilities as of December 31, 2017.

A majority of the inputs used to value the Company’s derivatives fall within Level 2 of the fair value hierarchy. Any related credit value adjustments generally utilize Level 3 inputs such as estimates of credit spreads. However, as of June 30, 2018 (unaudited), the Company has assessed the valuation methodology of these derivatives and determined that the credit valuation adjustments do not materially impact the overall valuation of the derivative positions; accordingly, the Company classifies these instruments entirely within Level 2 of the fair value hierarchy.

The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2018 (unaudited) and December 31, 2017, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

 

     Level 1      Level 2      Level 3      Total
Fair Value
 

At June 30, 2018 (unaudited)

           

Assets:

           

Securities available for sale

           

Corporate debt securities

   $ —        $ 4,042      $ —        $ 4,042  

Trading securities

           

Rabbi trust investments

     2,837        —          —          2,837  

Derivatives:

           

Interest rate cap

     —          1,446        —          1,446  

Interest rate swaps

     —          905        —          905  

Risk participation-out agreements

     —          16        —          16  
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 2,837      $ 6,409      $ —        $ 9,246  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivatives:

           

Interest rate swaps

   $ —        $ 966      $ —        $ 966  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ 966      $ —        $ 966  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Level 1      Level 2      Level 3      Total
Fair Value
 

At December 31, 2017

           

Securities available for sale

           

Corporate debt securities

   $ —        $ 16,921      $ —        $ 16,921  

Trading securities

           

Rabbi trust investments

     2,808        —          —          2,808  
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 2,808      $ 16,921      $ —        $ 19,729  
  

 

 

    

 

 

    

 

 

    

 

 

 

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets measured at fair value on a non-recurring basis during the reported periods include certain impaired loans reported at the fair value of the underlying collateral. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally,

 

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commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, real estate collateral related nonrecurring fair value measurement adjustments have generally been classified as Level 3. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. Financial assets measured at fair value on a non-recurring basis during the reported periods also include loans held for sale. Residential mortgage loans held for sale are recorded at the lower of cost or fair value and therefore may be measured at fair value on a non-recurring basis. The fair values for loans held for sale are estimated based on commitments in effect from investors or prevailing market prices for loans with similar terms to borrowers of similar credit quality and are included in Level 3.

There were no impaired loans that were re-measured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses or charge off based upon the fair value of the underlying collateral at June 30, 2018 (unaudited) and December 31, 2017.

The following table (in thousands) presents loans held-for-sale at June 30, 2018 (unaudited) and December 31, 2017.

 

     June 30, 2018  
     Level 1      Level 2      Level 3  

Loans held for sale

   $ —        $ —        $ 4,104  
  

 

 

    

 

 

    

 

 

 

Totals

   $ —        $ —        $ 4,104  
  

 

 

    

 

 

    

 

 

 
     December 31, 2017  
     Level 1      Level 2      Level 3  

Loans held for sale

   $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

 

Totals

   $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

 

Non-Financial Assets and Non-Financial Liabilities: The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Non-financial assets measured at fair value on a non-recurring basis include mortgage servicing right assets that are re-measured and reported at the lower of amortized cost or fair value.

The following table (in thousands) presents the non-financial assets that were re-measured and reported at the lower of amortized cost or fair value at the periods indicated:

 

     June 30, 2018  
     Level 1      Level 2      Level 3  
            (unaudited)         

Mortgage servicing rights

   $ —        $ —        $ 1,017  
  

 

 

    

 

 

    

 

 

 

Totals

   $ —        $ —        $ 1,017  
  

 

 

    

 

 

    

 

 

 

 

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     December 31, 2017  
     Level 1      Level 2      Level 3  

Mortgage servicing rights

   $ —        $ —        $ 855  
  

 

 

    

 

 

    

 

 

 

Totals

   $ —        $ —        $ 855  
  

 

 

    

 

 

    

 

 

 

ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated fair value approximates the carrying value for cash and cash equivalents, FHLB stock, accrued interest receivable and payable, bank owned life insurance, securities sold under agreements to repurchase and mortgagors’ escrow accounts. ASU 2016-01 requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The exit price notion is a market-based measurement of fair value that is represented by the price to sell an asset or transfer a liability in the principal market (or most advantageous market in the absence of a principal market) on the measurement date. For June 30, 2018 (unaudited), fair values of loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. This is not comparable with the fair values disclosed for December 31, 2017, which were based on an entrance price basis.

Summary of Fair Values of Financial Instruments not Carried at Fair Value

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows (in thousands):

 

     June 30, 2018  
     Carrying      Fair                       
     Amount      Value      Level 1      Level 2      Level 3  
                   (unaudited)                

Financial assets:

              

Cash and cash equivalents

   $ 103,702      $ 103,702      $ 103,702      $ —        $ —    

Interest-bearing time deposits with other banks

     2,415        2,415        —          2,415        —    

Held-to-maturity securities

     153,654        149,932        —          149,932        —    

Federal Home Loan Bank stock

     40,082        40,082        —          40,082        —    

Loans, net

     2,539,318        2,440,843        —          —          2,440,843  

Accrued interest receivable

     6,950        6,950        6,950        —          —    

Bank-owned life insurance

     37,496        37,496        —          37,496        —    

Financial liabilities:

              

Deposits

     1,833,863        1,828,030        1,251,620        576,410        —    

Federal Home Loan Bank advances

     855,250        849,207        —          849,207        —    

Securities sold under agreements to repurchase

     3,999        3,999        —          3,999        —    

Accrued interest payable

     2,004        2,004        2,004        —          —    

Mortgagors’ escrow accounts

     6,444        6,444        —          6,444        —    

 

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Table of Contents
     December 31, 2017  
     Carrying      Fair                       
     Amount      Value      Level 1      Level 2      Level 3  

Financial assets:

              

Cash and cash equivalents

   $ 110,888      $ 110,888      $ 110,888      $ —        $ —    

Interest-bearing time deposits with other banks

     2,440        2,440        —          2,440        —    

Held-to-maturity securities

     160,090        158,385        —          158,385        —    

Federal Home Loan Bank stock

     32,382        32,382        —          32,382        —    

Loans, net

     2,296,958        2,251,971        —          —          2,251,971  

Accrued interest receivable

     6,344        6,344        6,344        —          —    

Bank-owned life insurance

     36,967        36,967        —          36,967        —    

Financial liabilities:

              

Deposits

     1,751,251        1,748,995        1,246,537        502,458        —    

Federal Home Loan Bank advances

     723,150        719,430        —          719,430        —    

Securities sold under agreements to repurchase

     3,268        3,268        —          3,268        —    

Accrued interest payable

     1,594        1,594        1,594        —          —    

Mortgagors’ escrow accounts

     4,690        4,690        —          4,690        —    

The financial instruments in the tables above are included in the consolidated balance sheets under the indicated captions except for mortgagors’ escrow accounts which are included in other liabilities.

NOTE 12 – OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents a reconciliation of the changes in the components of other comprehensive income (loss) for the dates indicated, including the amount of income tax (expense) benefit allocated to each component of other comprehensive income (loss):

 

     Three months ended June 30, 2018     Three months ended June 30, 2017  
     (unaudited and in thousands)     (unaudited and in thousands)  
     Pre Tax     Tax Benefit     After Tax     Pre Tax     Tax     After Tax  
     Amount     (Expense)     Amount     Amount     Benefit     Amount  

Securities available-for-sale:

            

Change in fair value of securities available-for-sale

   $ (18   $ 5     $ (13   $ (5   $ 2     $ (3

Cash flow hedges:

            

Net change in fair value of cash flow hedges

     101       (28     73       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

   $ 83     $ (23   $ 60     $ (5   $ 2     $ (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six months ended June 30, 2018     Six months ended June 30, 2017  
     (unaudited and in thousands)     (unaudited and in thousands)  
     Pre Tax     Tax     After Tax     Pre Tax     Tax     After Tax  
     Amount     Benefit     Amount     Amount     Expense     Amount  

Securities available-for-sale:

            

Change in fair value of securities available-for-sale

   $ (96   $ 28     $ (68   $ 108     $ (44   $ 64  

Cash flow hedges:

            

Net change in fair value of cash flow hedges

     (79     22       (57     —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

   $ (175   $ 50     $ (125   $ 108     $ (44   $ 64  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The components of accumulated other comprehensive (loss) income, included in stockholders’ equity, are as follows: (in thousands):

 

     June 30, 2018      December 31, 2017  
     (unaudited)         

Net unrealized holding loss on available-for-sale securities, net of tax

   $ (108    $ (32

Unrecognized benefit pertaining to defined benefit plan, net of tax

     148        121  

Net unrealized holding loss on cash flow hedges, net of tax

     (57      —    
  

 

 

    

 

 

 

Accumulated other comprehensive (loss) income

   $ (17    $ 89  
  

 

 

    

 

 

 

Accumulated other comprehensive income at December 31, 2017 included $19,000 related to stranded amounts resulting from the re-measurement of deferred tax assets and liabilities in connection with the enactment of the Tax Reform Act on December 22, 2017. In February 2018, the FASB issued ASU 2018-02, that allowed companies to elect to reclassify the tax effects stranded in accumulated other comprehensive (loss) income to retained earnings rather than income tax benefit or expense. The Company reclassified the $19,000 related to stranded amounts in accumulated other comprehensive income under ASU 2018-02 during the six months ended June 30, 2018.

NOTE 13 – DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments when deemed appropriate.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company has purchased an interest rate cap and entered into certain interest rate swap contracts and risk participation-out agreements (“loan level derivatives”) as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium payment. Interest rate caps can minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility.

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate such customers’ respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

Additionally, the Company has risk participation agreements with other banks. Risk participation agreements occur when the Company participates out a portion of the loan and the related swap to another bank or participates in a loan and related swap where another bank is the lead. With a risk participation out, the Company pays another bank to take on the risk associated with the participant bank’s pro-rata swap portion should the borrower default. With a risk participation in, the Company gets paid a fee to take on the risk associated with having to make the lead bank whole on the Company’s portion of the pro-rata swap should the borrower default. Changes in fair value of risk participation agreements are recorded in current period earnings.

 

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The Company recognizes its derivative instruments on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Company designates whether the derivative is part of a hedging relationship (i.e. cash flow or fair value hedge). The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedging transactions. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items.

Changes in the fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income, net of tax. Any ineffective portion is recorded in earnings. The Company discontinues hedge accounting when it is determined that the derivative instrument is no longer effective in offsetting changes of the hedged risk on the hedged item, or management determines that the designation of the derivative instrument as a hedging instrument is no longer appropriate.

Included in loan level derivative income within the consolidated statements of operations is interest rate swap fee income received from dealer counterparties net of fees paid to third party advisors as well as the change in the fair values of interest rate swaps and risk participation agreements.

Cash Flow Hedges of Interest Rate Risk

In March of 2018, a $100 million notional interest rate cap agreement was purchased to limit the Company’s exposure to rising interest rates related to $100 million of rolling, three-month FHLB advances. Under the terms of the agreement, the Company paid a premium of $1.5 million for the right to receive cash flow payments if 3-month LIBOR rises above the cap’s strike price of 3.00%, thus effectively ensuring interest expense is capped at a maximum rate of 3.00% for the duration of the agreement. The maturity date of the agreement is March 21, 2023 and the unamortized cap fee was $1.5 million as of June 30, 2018 (unaudited). The interest rate cap agreement was designated as a cash flow hedge. The fair value of the interest rate cap agreement is included in other assets on the Company’s consolidated balance sheets. Changes in the fair value, representing unrealized gains or losses, are recorded in accumulated other comprehensive income, net of tax and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s borrowings. During the next twelve months, the Company estimates that an additional $47,000 will be reclassified as an increase to interest expense. The premium paid on the interest rate cap agreement is being recognized as an increase to interest expense over the duration of the agreement using the caplet method. For the three and six months ended June 30, 2018, premium amortization was immaterial to the consolidated financial statements. The notional amount of the financial derivative instrument does not represent exposure to credit loss. The Company is exposed to credit loss only to the extent the counterparty defaults in its responsibility to pay interest under the terms of the agreement. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that management believes to be creditworthy and by limiting the amount of exposure to each counterparty.

 

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The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheet as of the periods presented (in thousands):

 

                   Fair Value of Derivative Instruments  
                   Asset Derivatives  
                   June 30, 2018                              
                   (unaudited)                    December 31, 2017  
     Number of
Transactions
     Notional Amount      Balance Sheet
Location
     Fair Value      Number of
Transactions
     Notional
Amount
     Balance Sheet
Location
     Fair Value  

Derivatives designated as hedging instruments:

                       

Interest rate cap

     1      $ 100,000        Other Assets      $ 1,446        —        $ —          Other Assets      $ —    
           

 

 

             

 

 

 

Total derivatives designated as hedging instruments

            $ 1,446               $ —    
           

 

 

             

 

 

 

Derivatives not designated as hedging instruments:

                       

Interest Rate Swaps - Commerical Loan Customers

     4      $ 54,370        Other Assets      $ 905        —        $ —          Other Assets      $ —    

Risk Participation-Out Agreements - Third Party Financial Institution

     3      $ 6,340        Other Assets        16        —        $ —          Other Assets        —    
           

 

 

             

 

 

 

Total derivatives not designated as hedging instruments

            $ 921               $ —    
           

 

 

             

 

 

 
                   Fair Value of Derivative Instruments  
                   Liability Derivatives  
                   June 30, 2018                       
                   (unaudited)                    December 31, 2017  
     Number of
Transactions
     Notional Amount      Balance Sheet
Location
     Fair Value      Number of
Transactions
     Notional
Amount
     Balance Sheet
Location
     Fair Value  

Derivatives not designated as hedging instruments:

                       

Interest Rate Swaps - Third Party Financial Institution

     4      $ 54,370        Other Liabilities      $ 966        —        $ —          Other Liabilities      $ —    

Total derivatives not designated as hedging instruments

            $ 966               $ —    
           

 

 

             

 

 

 

 

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The following table presents the effect of the Company’s derivative financial instruments included in other comprehensive income and reclassifications into earnings for the periods indicated:

 

    Amount of Gain (Loss) Recognized in Other
Comprehensive Income on Derivatives
   

Location of Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive

Income into Income

    Amount of Gain (Loss) Reclassified from
Accumulated Other Comprehensive Income

into Income
 
    Three Months
Ended June 30,
2018
    Three Months
Ended June 30,
2017
          Three Months
Ended June 30,
2018
    Three Months
Ended June 30,
2017
 
    (Unaudited)     (Unaudited)           (Unaudited)     (Unaudited)  

Derivatives in Cash Flow Hedging Relationships

   

Interest Rate Products

  $ 101     $ —         Interest expense     $ —       $ —    
 

 

 

   

 

 

     

 

 

   

 

 

 

Total

  $ 101     $ —         $ —       $ —    
 

 

 

   

 

 

     

 

 

   

 

 

 
    Amount of Gain (Loss) Recognized in Other
Comprehensive Income on Derivatives
    Location of Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive Income into
Income
    Amount of Gain (Loss) Reclassified from
Accumulated Other Comprehensive Income into

Income
 
    Six Months Ended
June 30, 2018
    Six Months Ended
June 30, 2017
          Six Months Ended
June 30, 2018
    Six Months Ended
June 30, 2017
 
    (Unaudited)     (Unaudited)           (Unaudited)     (Unaudited)  

Derivatives in Cash Flow Hedging Relationships

   

Interest Rate Products

  $ (79   $ —         Interest expense     $ —       $ —    
 

 

 

   

 

 

     

 

 

   

 

 

 

Total

  $ (79   $ —         $ —       $ —    
 

 

 

   

 

 

     

 

 

   

 

 

 

 

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The following table presents the effect of the Company’s derivative financial instruments included in current earnings for the periods indicated:

 

   

Location of Gain (Loss)

Recognized in Income on
Derivative Instruments

  Amount of Gain (Loss) Recognized in Income on Derivative Instruments  
        Three Months Ended June 30, 2018     Three Months Ended June 30, 2017  
        (Unaudited)     (Unaudited)  

Interest Rate Swaps

  Loan level derivative income   $ (61   $ —    

Risk Participation-Out Agreements

  Loan level derivative income     (16     —    
   

 

 

   

 

 

 

Total

    $ (77   $ —    
   

 

 

   

 

 

 
   

Location of Gain (Loss)

Recognized in Income on
Derivative Instruments

  Amount of Gain (Loss) Recognized in Income on Derivative Instruments  
        Six Months Ended June 30, 2018     Six Months Ended June 30, 2017  
        (Unaudited)     (Unaudited)  

Interest Rate Swaps

  Loan level derivative income   $ (61   $ —    

Risk Participation-Out Agreements

  Loan level derivative income     (16     —    
   

 

 

   

 

 

 

Total

    $ (77   $ —    
   

 

 

   

 

 

 

Certain derivative agreements contain provisions that require the Company or the third party financial institution to post collateral if the derivative exposure exceeds a certain threshold. The Company has not posted collateral in connection with this arrangement as of June 30, 2018 (unaudited); however, the third party financial institution posted $740,000 of cash collateral on deposit with the Bank. The Company has agreements with certain of its derivative counterparties that contain credit-risk-related contingent provisions. These provisions provide the counterparty with the right to terminate its derivative positions and require the Company to settle its obligations under the agreements if the Company defaults on certain of its indebtedness or if the Company fails to maintain its status as a well-capitalized institution.

Counterparty Credit Risk. By utilizing derivative instruments, the Company is exposed to credit risk to the extent that counterparties to the derivative instruments do not perform as required. Should a counterparty fail to perform under the terms of a derivative instrument, the Company’s credit exposure is limited to the net positive fair value and accrued interest of all derivative instruments with each counterparty. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. Institutional counterparties must have an investment grade credit rating and be approved by the Company’s Board of Directors. As such, management believes the risk of incurring credit losses on derivative instruments with institutional counterparties is remote. The Company’s exposure relating to institutional counterparties was $481,000 at June 30, 2018 (unaudited). Credit exposure is mitigated by the value of collateral pledged by the counterparty.

NOTE 14 – BALANCE SHEET OFFSETTING

Certain financial instruments, including derivatives, may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. Our derivative transactions with upstream financial institution counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. The Company does not offset fair value amounts recognized for derivative instruments or repurchase agreements. The Company does net the amount recognized for the right to reclaim cash collateral against the obligation to return cash collateral arising from derivative instruments executed with the same counterparty under a master netting arrangement. Collateral legally required to be maintained at dealer banks by the Company is monitored and adjusted as necessary.

 

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The following tables present the Company’s asset and liability derivative positions and repurchase agreements and the potential effect of netting arrangements on its financial position, as of the periods indicated:

 

   

June 30, 2018

(in Thousands and Unaudited)

 
                      Gross Amounts Not Offset in the Statement
of Financial Position
 
    Gross Amounts of
Recognized Assets
    Gross Amounts Offset in
the Statement of
Financial Position
    Net Amounts of Assets
Presented in the Statement
of Financial Position
    Financial
Instruments
    Collateral Pledged
(Received)
    Net Amount  

Derivative Assets

  $ 2,367     $ —       $ 2,367     $ 966     $ (481   $ 920  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                      Gross Amounts Not Offset in the Statement
of Financial Position
 
    Gross Amounts of
Recognized
Liabilities
    Gross Amounts Offset in
the Statement of
Financial Position
    Net Amounts of Liabilities
Presented in the Statement
of Financial Position
    Financial
Instruments
    Collateral Pledged
(Received)
    Net Amount  

Derivative Liabilities

  $ 966     $ —       $ 966     $ 966     $ —       $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities sold under agreements to repurchase

  $ 3,999     $ —       $ 3,999     $ —       $ 3,999     $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    December 31, 2017  
    (in Thousands)  
                      Gross Amounts Not Offset in the Statement of
Financial Position
 
    Gross Amounts of
Recognized Liabilities
    Gross Amounts Offset
in the Statement of
Financial Position
    Net Amounts of Liabilities
Presented in the
Statement of Financial
Position
    Financial
Instruments
    Collateral Pledged
(Received)
    Net Amount  

Securities sold under agreements to repurchase

  $ 3,268     $ —       $ 3,268     $ —       $ 3,268     $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Item 2.

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

The following analysis discusses the changes in financial condition and results of operation of the Company, and should be read in conjunction with both the unaudited consolidated interim financial statements and notes thereto, appearing in Part 1, Item 1 of this report.

Forward-Looking Statements

This report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

   

statements of our goals, intentions and expectations;

 

   

statements regarding our business plans, prospects, growth and operating strategies;

 

   

statements regarding the asset quality of our loan and investment portfolios; and

 

   

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We do not undertake any obligation to update any forward-looking statements after the date of this document, except as required by law.

 

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The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

    our ability to successfully implement our business strategy, which includes significant asset and liability growth;

 

    our ability to increase our market share in our market areas and capitalize on growth opportunities;

 

    our ability to successfully implement our branch network strategy;

 

    general economic conditions, either nationally or in our market areas, and conditions in the real estate markets that could affect the demand for our loans and other products and the ability of borrowers to repay loans, which could lead to declines in credit quality and increased loan losses, and negatively affect the value and salability of the real estate that is the collateral for many of our loans;

 

    competition among depository and other financial institutions;

 

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

 

    adverse changes in the securities markets;

 

    changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and U.S. tax laws;

 

    increases in Federal Deposit Insurance Corporation (“FDIC”) deposit insurance premiums and assessments that could adversely affect our financial condition;

 

    government shutdowns;

 

    severe weather, natural disasters, acts of war or terrorism and other external events which could significantly impact our business;

 

    our inability to adapt to changes in information technology;

 

    system failures or breaches of our network security;

 

    electronic fraudulent activity within the financial services industry;

 

    our ability to successfully integrate acquired entities, if any;

 

    changes in consumer spending, borrowing and savings habits;

 

    negative publicity could damage our reputation and business;

 

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

 

    changes in our organization, compensation and benefit plans;

 

    changes in our financial condition or results of operations that reduce capital available; and

 

    changes in the financial condition or future prospects of issuers of securities that we own.

Additional factors that could cause results to differ materially from those described in the forward-looking statements can be found in the filings made by BSB Bancorp, Inc. with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended December 31, 2017 under the heading “Item 1A. Risk Factors.” Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

 

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Critical Accounting Policies

There are no material changes to the critical accounting policies from those disclosed in BSB Bancorp, Inc.’s 2017 Annual Report on Form 10-K. In applying these accounting policies, management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. As discussed in the Company’s 2017 Annual Report on Form 10-K, the most significant areas in which management applies critical assumptions and estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses, investment classification and impairment and deferred income taxes. Management’s estimates and assumptions affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from the amounts derived from management’s estimates and assumptions under different conditions.

Comparison of Financial Condition at June 30, 2018 (Unaudited) and December 31, 2017

Total Assets. Total assets increased $232.5 million or 8.7% to $2.91 billion at June 30, 2018 (unaudited) from $2.68 billion at December 31, 2017. The increase was primarily the result of a $246.5 million or 10.7% increase in net loans including loans held-for-sale and a $7.7 million or 23.8% increase in Federal Home Loan Bank stock. Partially offsetting these increases was a $12.9 million or 76.1% decrease in investments in available-for-sale securities, a $6.4 million or 4.0% decrease in investments in held-to-maturity securities and a $7.2 million or 6.5% decrease in cash and cash equivalents.

Cash and Cash Equivalents. Cash and cash equivalents decreased by $7.2 million or 6.5% to $103.7 million at June 30, 2018 (unaudited) from $110.9 million at December 31, 2017. The decrease is due to lower amounts of cash held at the Federal Reserve.

Investment Securities. Total investment securities decreased $19.3 million or 10.9% to $157.7 million at June 30, 2018 (unaudited) from $177.0 million at December 31, 2017. The decrease in securities available for sale was driven by the maturity of securities with a par value of $14.8 million. The decrease in securities held to maturity was driven by the maturity of one security with a par value of $5.0 million and paydowns on mortgage backed securities.

Loans. Management continues to focus on prudently growing the residential and commercial real estate loan portfolios. We experienced steady growth during the six months ended June 30, 2018 (unaudited). Net loans increased by $242.4 million or 10.6% to $2.54 billion at June 30, 2018 (unaudited) from $2.30 billion at December 31, 2017. The increase in net loans was primarily due to increases of $187.8 million or 14.1% in one-to-four family residential real estate loans, $58.0 million or 11.9% in commercial real estate loans and $29.3 million or 18.8% in multi-family real estate loans. Partially offsetting these increases were decreases of $14.6 million or 27.5% in construction loans, $10.4 million or 34.5% in indirect auto loans and $6.9 million or 3.9% in home equity lines of credit. The decrease in construction loans was due to the completion of certain construction projects and conversion into permanent credit facilities as well as successful sell outs and loan payoffs. The decrease in indirect auto loans was driven by the suspension of new originations during 2015 due to market conditions. The decrease in home equity lines of credit was due to both payoffs and paydowns of lines. Credit quality remains high with total non-performing loans to total loans of 0.03% and 0.06% as of June 30, 2018 (unaudited) and December 31, 2017, respectively.

Bank-Owned Life Insurance. The Company invests in bank-owned life insurance to help defray the cost of our employee benefit plan obligations. Bank-owned life insurance generally provides noninterest income that is nontaxable. At June 30, 2018 (unaudited), our investment in bank-owned life insurance was $37.5 million or an increase of $529,000 and 1.4% from $37.0 million at December 31, 2017. This increase was due to $529,000 in income from bank-owned life insurance during the six months ended June 30, 2018 (unaudited).

Federal Home Loan Bank Stock. The Company held an investment in FHLB of Boston stock of $40.1 million as of June 30, 2018 (unaudited). This was an increase of $7.7 million or 23.8% from $32.4 million as of December 31, 2017. The FHLB is a cooperative that provides services to its member banking institutions. The primary reason for our FHLB of Boston membership is to gain access to a reliable source of wholesale funding, particularly term funding, as a tool to help fund asset growth and manage interest rate risk. The purchase of stock in the FHLB is a requirement for a member to gain access to funding. The Company purchases FHLB stock proportional to the volume of funding received and views the purchases as a necessary long-term investment for the purposes of balance sheet liquidity and interest rate risk management.

Deposits. Deposits increased $82.6 million or 4.7% to $1.83 billion at June 30, 2018 (unaudited) from $1.75 billion at December 31, 2017. The increase in deposits was due to an increase of $77.5 million or 15.4% in certificates of deposit (“CDs”) accounts, an increase of $28.6 million or 3.4% in savings accounts and an increase of $2.8 million or 1.7% in interest-bearing checking accounts, partially offset by a decrease of $26.8 million or 12.1% in demand deposits. Core deposits, which we consider to include all deposits other than CDs, increased by $5.1 million or 0.4%. The introduction of new competitive retail products, as well as a strategic focus on not for profit customer acquisition drove this deposit growth. In addition, the implementation of cash management services continues to expand our municipal banking relationships.

 

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The following table sets forth the Company’s deposit mix at the dates indicated (dollars in thousands):

 

     June 30, 2018     December 31, 2017  
     Amount      Percent     Amount      Percent  
     (unaudited)               

Deposit type:

          

Demand deposits

   $ 194,700        10.62   $ 221,462        12.65
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest-bearing accounts

     194,700        10.62       221,462        12.65  
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest-bearing checking accounts

     166,648        9.09       163,825        9.35  

Savings accounts

     881,981        48.09       853,363        48.73  

Money market deposits

     8,291        0.45       7,887        0.45  

Certificate of deposit accounts

     582,243        31.75       504,714        28.82  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing deposits

     1,639,163        89.38       1,529,789        87.35  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total deposits

   $ 1,833,863        100.00   $ 1,751,251        100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Borrowings. At June 30, 2018 (unaudited), borrowings consisted of advances from the FHLB of Boston and securities sold to customers under agreements to repurchase (“repurchase agreements”).

Total borrowings increased $132.8 million or 18.3% to $859.2 million at June 30, 2018 (unaudited), from $726.4 million at December 31, 2017. This increase was driven by advances from the FHLB of $132.1 million to a balance of $855.3 million at June 30, 2018 (unaudited), from $723.2 million at December 31, 2017. The additional advances were utilized to help fund the strong asset growth.

The following table sets forth the Company’s short-term borrowings and long-term debt for the dates indicated (in thousands):

 

     June 30, 2018      December 31, 2017  
     (unaudited)         

Long-term borrowed funds:

     

Federal Home Loan Bank of Boston long-term advances

   $ 487,250      $ 417,250  
  

 

 

    

 

 

 
     487,250        417,250  
  

 

 

    

 

 

 

Short-term borrowed funds:

     

Federal Home Loan Bank of Boston short-term advances

     368,000        305,900  

Repurchase agreements

     3,999        3,268  
  

 

 

    

 

 

 
     371,999        309,168  
  

 

 

    

 

 

 

Total borrowed funds

   $ 859,249      $ 726,418  
  

 

 

    

 

 

 

Stockholders’ Equity. Total stockholders’ equity increased $13.2 million or 7.4%, to $191.2 million at June 30, 2018 (unaudited) from $178.0 million as of December 31, 2017. This increase is primarily the result of earnings of $12.1 million and a $1.2 million increase in additional paid-in capital related to stock-based compensation.

 

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Non-Performing Assets. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated (dollars in thousands):

 

     At June 30,
2018
    At December 31,
2017
 
     (unaudited)        

Non-accrual loans:

    

Real estate loans:

    

Residential one-to-four family

   $ 707     $ 1,372  

Home equity lines of credit

     50       —    

Consumer loans:

    

Indirect auto loans

     1       4  
  

 

 

   

 

 

 

Total non-accrual loans

   $ 758     $ 1,376  
  

 

 

   

 

 

 

Other non-performing assets (NPAs):

    

Repossessed automobiles

     15       —    
  

 

 

   

 

 

 

Total non-performing assets (NPAs)

   $ 773     $ 1,376  
  

 

 

   

 

 

 

Troubled debt restructurings:

    

Troubled debt restructures included in NPAs

   $ —       $ 645  

Troubled debt restructures not included in NPAs

     4,253       4,194  
  

 

 

   

 

 

 

Total troubled debt restructures

   $ 4,253     $ 4,839  
  

 

 

   

 

 

 

Ratios:

    

Non-performing loans to total loans

     0.03     0.06

Non-performing assets to total assets

     0.03     0.05

It is the general policy of the Company to consider any loan on non-accrual as an impaired loan. Exceptions to this policy can be made when, in the opinion of senior management, a loan is adequately secured, properly documented and in the process of collection. Any exceptions to policy are reviewed on a monthly basis and must be approved by senior management. At June 30, 2018 (unaudited) and December 31, 2017, there were no loans on non-accrual that were determined to not be impaired. At June 30, 2018 (unaudited) and December 31, 2017 there were no loans delinquent 90 days or more and still accruing.

Troubled Debt Restructurings. We occasionally modify loans to extend the term or make other concessions to help a borrower stay current on their loan and to avoid foreclosure or collection activity. We generally do not forgive principal or interest on loans. At June 30, 2018 (unaudited), we had $4.3 million of TDRs as compared to $4.8 million of TDRs at December 31, 2017. The decrease in the balance was driven by the sale of one of our TDRs and scheduled regular principal payments.

Comparison of Operating Results for the Three Months Ended June 30, 2018 and 2017 (Unaudited)

General. Net income for the three months ended June 30, 2018 was $6.1 million compared to net income of $4.0 million for the three months ended June 30, 2017. Earnings per diluted share for the three months ended June 30, 2018 were $0.65 compared to earnings per diluted share for the three months ended June 30, 2017 of $0.43. The improvement in operating results of $2.1 million or 51.2% for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 resulted from an increase in net interest and dividend income after the provision for loan losses of $1.1 million or 8.6%, an increase in noninterest income of $716,000 or 72.0% and a decrease in income tax expense of $355,000 or 13.8%, partially offset by an increase in noninterest expense of $151,000 or 2.0%.

Net Interest and Dividend Income. Net interest and dividend income increased $1.2 million or 8.3% to $15.1 million for the three months ended June 30, 2018 compared to $13.9 million for the three months ended June 30, 2017. The increase in net interest and dividend income was due to an increase in average net interest-earning assets of $29.4 million or 9.5% to $337.9 million for the three months ended June 30, 2018 from $308.4 million for the three months ended June 30, 2017, partially offset by a decrease in our net interest rate spread of 33 basis points to 1.97% during the three months ended June 30, 2018 from 2.30% during the three months ended June 30, 2017.

Interest and Dividend Income. Interest and dividend income increased $5.1 million or 27.3% to $23.9 million for the three months ended June 30, 2018 from $18.8 million for the three months ended June 30, 2017. The increase in interest and dividend income was primarily due to a $4.8 million increase in interest and fees on loans. The increase in interest and fees on loans was driven by an increase in the average balance of loans of $450.6 million to $2.48 billion for the three months ended June 30, 2018 from $2.03 billion for the three months ended June 30, 2017 as well as a 15 basis point increase in the yield on loans to 3.61% for the three months ended June 30, 2018 from 3.46% for the three months ended June 30, 2017.

 

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Interest Expense. Interest expense increased $4.0 million or 82.3% to $8.8 million for the three months ended June 30, 2018 from $4.8 million for the three months ended June 30, 2017. The increase resulted from a 48 basis point increase in the cost of interest-bearing liabilities to 1.48% during the three months ended June 30, 2018 from 1.00% during the three months ended June 30, 2017 as well as a $450.3 million or 23.2% increase in the average balance of interest-bearing liabilities to $2.39 billion for the three months ended June 30, 2018 from $1.94 billion for the three months ended June 30, 2017.

Interest expense on interest-bearing deposits increased by $2.4 million to $5.4 million for the three months ended June 30, 2018 from $3.0 million for the three months ended June 30, 2017. This increase was primarily due to an increase in the interest expense on CDs and savings accounts of $1.4 million and $1.0 million, respectively. The increase in interest expense on CDs of $1.4 million from $1.4 million to $2.8 million was driven by an increase in the average balance of $176.1 million as well as a 52 basis point increase in the cost of CD accounts to 1.94% from 1.42%. The increase in interest expense on savings accounts of $1.0 million from $1.4 million to $2.5 million was driven by a 36 basis point increase in the cost of savings accounts to 1.03% from 0.67% and an increase in the average balance of $98.4 million.

Interest expense on total borrowings increased $1.5 million to $3.4 million for the three months ended June 30, 2018 from $1.8 million for the three months ended June 30, 2017. This increase was primarily due to an increase in the average cost of FHLB advances of 58 basis points to 1.95% for the three months ended June 30, 2018 from 1.37% for the three months ended June 30, 2017 and an increase in the average balance of FHLB advances of $152.2 million or 28.4% to $688.1 million for the three months ended June 30, 2018 from $535.9 million for the three months ended June 30, 2017. Recent increases in short term interest rates have increased the cost of our short term FHLB advances. In addition, we have increased the balance of our long-term advances to help manage interest rate risk.

Provision for Loan Losses. Based on our methodology for establishing the allowance for loan losses and provision for loan losses as discussed in Note 4 to the Consolidated Financial Statements included in this Form 10-Q, we recorded a provision for loan losses of $726,000 for the three months ended June 30, 2018, compared to $707,000 for the three months ended June 30, 2017. The increase in the provision was driven by higher loan growth during the three months ended June 30, 2018 as compared to the three months ended June 30, 2017, partially offset by the elimination of a $141,000 specific reserve on an impaired loan that was sold and improvements in the qualitative factors used to estimate the allowance for loan losses. The improvements in the qualitative factors were primarily related to evaluating multi-family real estate loans as a separate segment from the commercial real estate loan portfolio. Management determined that multi-family real estate loans exhibit lower risk characteristics than the other commercial real estate loans. For the three months ended June 30, 2018, separately evaluating commercial real estate loans and multi-family real estate loans resulted in a net reduction in the provision for loan losses of $225,000 related to qualitative factor adjustments. The allowance for loan losses was $17.3 million or 0.68% of total loans at June 30, 2018, compared to $16.3 million or 0.71% of total loans at December 31, 2017.

Noninterest Income. Noninterest income increased by $716,000 to $1.7 million for the three months ended June 30, 2018 from $995,000 for the three months ended June 30, 2017. This was driven by an increase in loan level derivative income of $1.0 million due to the execution of interest rate swap agreements during the three months ended June 30, 2018, partially offset by a reduction in the net gains on sales of loans of $314,000 due to a lower number of loans sold. Management expects the loan level derivative income to fluctuate based on customer demand.

Noninterest Expense. Noninterest expense increased $151,000 or 2.0% to $7.8 million for the three months ended June 30, 2018 from $7.7 million for the three months ended June 30, 2017.

 

    Salaries and employee benefits increased $233,000 or 4.9% driven by merit increases, additional staffing and commissions related to higher loan originations.

 

    Director compensation decreased $129,000 or 36.2% driven by reduced stock-based compensation expense as the majority of stock awards granted under the 2012 Equity Incentive Plan were fully expensed in the fourth quarter of 2017.

 

    Deposit insurance expense increased by $79,000 or 19.0% primarily driven by asset growth.

Our efficiency ratio improved to 46.4% for the three months ended June 30, 2018 from 51.2% for the three months ended June 30, 2017 as we continue to grow the balance sheet and manage costs. A talented and committed colleague team along with continued operational enhancements have contributed to the improvement in our efficiency ratio.

Income Tax Expense. We recorded income tax expense of $2.2 million for the three months ended June 30, 2018 compared to income tax expense of $2.6 million for the three months ended June 30, 2017. The effective tax rate for the three months ended June 30, 2018 was 26.8% compared to 39.1% for the three months ended June 30, 2017. The decrease in our effective tax rate was driven by the reduction of the federal corporate income tax rate from 34% to 21% as of January 1, 2018 through the Tax Cuts and Jobs Act.

 

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The following tables set forth average balances of assets and liabilities, annualized average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

 

     For the Three Months Ended June 30,  
     (unaudited)  
     2018     2017  
     (Dollars in thousands)  
     Average                   Average                
     Outstanding                   Outstanding                
     Balance      Interest      Yield/Rate(1)     Balance      Interest      Yield/Rate(1)  

Interest-earning assets:

                

Total loans

   $ 2,478,933      $ 22,320        3.61   $ 2,028,341      $ 17,508        3.46

Securities

     160,174        823        2.06     162,259        849        2.10

Other

     86,136        289        1.35     54,949        117        0.85
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets (5)

     2,725,243      $ 23,432        3.45     2,245,549      $ 18,474        3.30

Non-interest-earning assets

     78,567             73,826        
  

 

 

         

 

 

       

Total assets

   $ 2,803,810           $ 2,319,375        
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Savings accounts

   $ 957,928      $ 2,462        1.03   $ 859,570      $ 1,444        0.67

Checking accounts

     154,886        194        0.50     132,386        136        0.41

Money market accounts

     8,298        1        0.05     8,297        1        0.05

Certificates of deposit

     574,088        2,770        1.94     397,976        1,407        1.42
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposits

     1,695,200        5,427        1.28     1,398,229        2,988        0.86

Federal Home Loan Bank advances

     688,096        3,350        1.95     535,880        1,827        1.37

Securities sold under agreements to repurchase

     4,082        2        0.20     3,001        1        0.13
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     2,387,378      $ 8,779        1.48     1,937,110      $ 4,816        1.00

Non-interest-bearing liabilities

     228,209             213,856        
  

 

 

         

 

 

       

Total liabilities

     2,615,587             2,150,966        

Stockholders’ Equity

     188,223             168,409        
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 2,803,810           $ 2,319,375        
  

 

 

         

 

 

       

Net interest income

      $ 14,653           $ 13,658     
     

 

 

         

 

 

    

Net interest rate spread (2)

           1.97           2.30

Net interest-earning assets (3)

   $ 337,865           $ 308,439        
  

 

 

         

 

 

       

Net interest margin (4)

           2.16           2.44

Average interest-earning assets to interest-bearing liabilities

           114.15           115.92

 

(1) Yields and rates for the three-month periods ended June 30, 2018 and 2017 are annualized.
(2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.
(5) FHLB stock dividends of $450,000 and $290,000 for the three months ended June 30, 2018 and 2017, respectively, are not included.

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

 

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     Three Months Ended June 30,  
     2018 vs. 2017 (unaudited)  
     Change      Change         
     Due to      Due to      Total  
     Volume      Rate      Change  
     (In thousands)  

Income on interest-earning assets:

        

Loans

   $ 4,030      $ 782      $ 4,812  

Securities

     (11      (15      (26

Other

     85        87        172  
  

 

 

    

 

 

    

 

 

 

Total interest-earning assets (1)

     4,104        854        4,958  
  

 

 

    

 

 

    

 

 

 

Expense on interest-bearing liabilities:

        

Savings accounts

     181        837        1,018  

Checking accounts

     25        33        58  

Money market accounts

     —          —          —    

Certificates of deposit

     747        616        1,363  
  

 

 

    

 

 

    

 

 

 

Total interest-bearing deposits

     953        1,486        2,439  

Federal Home Loan Bank advances

     608        915        1,523  

Securities sold under agreements to repurchase

     —          1        1  

Total interest-bearing liabilities

     1,561        2,402        3,963  
  

 

 

    

 

 

    

 

 

 

Change in net interest income

   $ 2,543      $ (1,548    $ 995  
  

 

 

    

 

 

    

 

 

 

 

(1) Does not include dividends on FHLB stock of $450,000 and $290,000 for the three months ended June 30, 2018 and 2017, respectively.

Comparison of Operating Results for the Six Months Ended June 30, 2018 and 2017 (Unaudited)

General. Net income for the six months ended June 30, 2018 was $12.1 million compared to net income of $7.7 million for the six months ended June 30, 2017. Earnings per diluted share for the six months ended June 30, 2018 were $1.29 compared to earnings per diluted share for the six months ended June 30, 2017 of $0.83. The improvement in operating results of $4.4 million or 57.3% for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 resulted from an increase in net interest and dividend income after the provision for loan losses of $3.6 million or 13.9%, an increase in noninterest income of $979,000 or 60.2% and a decrease in income tax expense of $210,000 or 4.7%, partially offset by an increase in noninterest expense of $355,000 or 2.3%.

Net Interest and Dividend Income. Net interest and dividend income increased $3.0 million or 11.1% to $30.2 million for the six months ended June 30, 2018 compared to $27.2 million for the six months ended June 30, 2017. The increase in net interest and dividend income was due to an increase in average net interest-earning assets of $31.1 million or 10.1% to $338.9 million for the six months ended June 30, 2018 from $307.8 million for the six months ended June 30, 2017, partially offset by a decrease in our net interest rate spread of 27 basis points to 2.04% during the six months ended June 30, 2018 from 2.31% during the six months ended June 30, 2017.

Interest and Dividend Income. Interest and dividend income increased $10.0 million or 27.7% to $46.3 million for the six months ended June 30, 2018 from $36.3 million for the six months ended June 30, 2017. The increase in interest and dividend income was primarily due to a $9.1 million increase in interest and fees on loans. The increase in interest and fees on loans was driven by an increase in the average balance of loans of $426.6 million to $2.41 billion for the six months ended June 30, 2018 from $1.99 billion for the six months ended June 30, 2017 as well as a 15 basis point increase in the yield on loans to 3.59% for the six months ended June 30, 2018 from 3.44% for the six months ended June 30, 2017.

 

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Interest Expense. Interest expense increased $7.0 million or 77.3% to $16.1 million for the six months ended June 30, 2018 from $9.1 million for the six months ended June 30, 2017. The increase resulted from a 42 basis point increase in the cost of interest-bearing liabilities to 1.39% during the six months ended June 30, 2018 from 0.97% during the six months ended June 30, 2017 as well as a $444.5 million or 23.5% increase in the average balance of interest-bearing liabilities to $2.33 billion for the six months ended June 30, 2018 from $1.89 billion for the six months ended June 30, 2017.

Interest expense on interest-bearing deposits increased by $4.2 million to $9.9 million for the six months ended June 30, 2018 from $5.6 million for the six months ended June 30, 2017. This increase was primarily due to an increase in the interest expense on CDs and savings accounts of $2.3 million and $1.8 million, respectively. The increase in interest expense on CDs of $2.3 million from $2.6 million to $5.0 million was driven by an increase in the average balance of $181.7 million as well as a 38 basis point increase in the cost of CD accounts to 1.81% from 1.43%. The increase in interest expense on savings accounts of $1.8 million from $2.7 million to $4.5 million was driven by a 32 basis point increase in the cost of savings accounts to 0.97% from 0.65% and an increase in the average balance of $94.7 million.

Interest expense on total borrowings increased $2.8 million to $6.2 million for the six months ended June 30, 2018 from $3.5 million for the six months ended June 30, 2017. This increase was primarily due to an increase in the average cost of FHLB advances of 54 basis points to 1.83% for the six months ended June 30, 2018 from 1.29% for the six months ended June 30, 2017 and an increase in the average balance of FHLB advances of $141.1 million or 26.0% to $683.3 million for the six months ended June 30, 2018 from $542.2 million for the six months ended June 30, 2017. Recent increases in short term interest rates have increased the cost of our short term FHLB advances. In addition, we have increased the balance of our long-term advances to help manage interest rate risk.

Provision for Loan Losses. Based on our methodology for establishing the allowance for loan losses and provision for loan losses as discussed in Note 4 to the Consolidated Financial Statements included in this Form 10-Q, we recorded a provision for loan losses of $1.0 million for the six months ended June 30, 2018, compared to $1.5 million for the six months ended June 30, 2017. The decrease in the provision was driven by the elimination of a $141,000 specific reserve on an impaired loan that was sold and improvements in the qualitative factors used to estimate the allowance for loan losses. The improvements in the qualitative factors were related to evaluating multi-family real estate loans as a separate segment from the commercial real estate loan portfolio. Management determined that multi-family real estate loans exhibit lower risk characteristics than the other commercial real estate loans. For the six months ended June 30, 2018, separately evaluating commercial real estate loans and multi-family real estate loans resulted in a net reduction in the provision for loan losses of $225,000 related to qualitative factor adjustments. The allowance for loan losses was $17.3 million or 0.68% of total loans at June 30, 2018, compared to $16.3 million or 0.71% of total loans at December 31, 2017.

Noninterest Income. Noninterest income increased by $979,000 to $2.6 million for the six months ended June 30, 2018, from $1.6 million for the six months ended June 30, 2017. This was driven by an increase in loan level derivative income of $1.0 million due to the execution of interest rate swap agreements during the six months ended June 30, 2018. Management expects the loan level derivative income to fluctuate based on customer demand.

Noninterest Expense. Noninterest expense increased $355,000 or 2.3% to $15.5 million for the six months ended June 30, 2018 from $15.1 million for the six months ended June 30, 2017.

 

    Salaries and employee benefits increased $436,000 or 4.6% driven by merit increases, additional staffing and commissions related to higher loan originations.

 

    Director compensation decreased $237,000 or 36.0% driven by reduced stock-based compensation expense as the majority of stock awards granted under the 2012 Equity Incentive Plan were fully expensed in the fourth quarter of 2017.

 

    Deposit insurance expense increased by $166,000 or 20.3% primarily driven by asset growth.

Our efficiency ratio improved to 47.1% for the six months ended June 30, 2018 from 52.4% for the six months ended June 30, 2017 as we continue to grow the balance sheet and manage costs. A talented and committed colleague team along with continued operational enhancements have contributed to the improvement in our efficiency ratio.

Income Tax Expense. We recorded income tax expense of $4.3 million for the six months ended June 30, 2018 compared to income tax expense of $4.5 million for the six months ended June 30, 2017. The effective tax rate for the six months ended June 30, 2018 was 26.2% compared to 37.0% for the six months ended June 30, 2017. The decrease in our effective tax rate was driven by the reduction of the federal corporate income tax rate from 34% to 21% as of January 1, 2018 through the Tax Cuts and Jobs Act.

 

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The following tables set forth average balances of assets and liabilities, annualized average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

 

     For the Six Months Ended June 30,  
     (unaudited)  
     2018     2017  
     (Dollars in thousands)  
     Average                   Average                
     Outstanding                   Outstanding                
     Balance      Interest      Yield/Rate(1)     Balance      Interest      Yield/Rate(1)  

Interest-earning assets:

                

Total loans

   $ 2,413,877      $ 43,018        3.59   $ 1,987,296      $ 33,895        3.44

Securities

     166,467        1,771        2.15     157,589        1,624        2.08

Other

     92,993        678        1.47     52,874        205        0.78
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets (5)

     2,673,337      $ 45,467        3.43     2,197,759      $ 35,724        3.28

Non-interest-earning assets

     76,390             73,088        
  

 

 

         

 

 

       

Total assets

   $ 2,749,727           $ 2,270,847        
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Savings accounts

   $ 937,291      $ 4,522        0.97   $ 842,573      $ 2,732        0.65

Checking accounts

     150,369        373        0.50     124,236        252        0.41

Money market accounts

     8,105        1        0.02     8,338        1        0.02

Certificates of deposit

     551,642        4,953        1.81     369,928        2,616        1.43
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposits

     1,647,407        9,849        1.21     1,345,075        5,601        0.84

Federal Home Loan Bank advances

     683,262        6,209        1.83     542,179        3,458        1.29

Securities sold under agreements to repurchase

     3,760        3        0.17     2,708        2        0.15
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     2,334,429      $ 16,061        0.00     1,889,962      $ 9,061        0.00

Non-interest-bearing liabilities

     230,000           1.39     214,802           0.97
  

 

 

         

 

 

       

Total liabilities

     2,564,429             2,104,764        

Stockholders’ Equity

     185,298             166,083        
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 2,749,727           $ 2,270,847        
  

 

 

         

 

 

       

Net interest income

      $ 29,406           $ 26,663     
     

 

 

         

 

 

    

Net interest rate spread (2)

           2.04           2.31

Net interest-earning assets (3)

   $ 338,908           $ 307,797        
  

 

 

         

 

 

       

Net interest margin (4)

           2.22           2.45

Average interest-earning assets to interest-bearing liabilities

           114.52           116.29

 

(1) Yields and rates for the six-month periods ended June 30, 2018 and 2017 are annualized.
(2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.
(5) FHLB stock dividends of $834,000 and $546,000 for the six months ended June 30, 2018 and 2017, respectively, are not included.

 

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The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

 

     Six Months Ended June 30,  
     2018 vs. 2017 (unaudited)  
     Change      Change         
     Due to      Due to      Total  
     Volume      Rate      Change  
     (In thousands)  

Income on interest-earning assets:

        

Loans

   $ 7,546      $ 1,577      $ 9,123  

Securities

     93        54        147  

Other

     219        254        473  
  

 

 

    

 

 

    

 

 

 

Total interest-earning assets (1)

     7,858        1,885        9,743  
  

 

 

    

 

 

    

 

 

 

Expense on interest-bearing liabilities:

        

Savings accounts

     335        1,455        1,790  

Checking accounts

     59        62        121  

Money market accounts

     —          —          —    

Certificates of deposit

     1,509        828        2,337  
  

 

 

    

 

 

    

 

 

 

Total interest-bearing deposits

     1,903        2,345        4,248  

Federal Home Loan Bank advances

     1,045        1,706        2,751  

Securities sold under agreements to repurchase

     1        —          1  

Total interest-bearing liabilities

     2,949        4,051        7,000  
  

 

 

    

 

 

    

 

 

 

Change in net interest income

   $ 4,909      $ (2,166    $ 2,743  
  

 

 

    

 

 

    

 

 

 

 

(1) Does not include dividends on FHLB stock of $834,000 and $546,000 for the six months ended June 30, 2018 and 2017, respectively.

Management of Market Risk

General. The Bank’s most significant form of market risk is interest rate risk because, as a financial institution, the majority of assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of the Bank’s operations is to manage interest rate risk and limit the exposure of the Bank’s financial condition and results of operations to changes in market interest rates. The Bank’s Asset/Liability Management Committee is responsible for evaluating the interest rate risk inherent in the Bank’s assets and liabilities, for determining the level of risk that is appropriate, given the Bank’s business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our Board of Directors.

Exposure to interest rate risk is managed by the Bank through periodic evaluations of the current interest rate risk inherent in its rate-sensitive assets and liabilities, primarily deposits, borrowings, loans and investment securities, coupled with determinations of the level of risk considered appropriate given the Bank’s capital and liquidity requirements, business strategy and performance objectives. Through such management, the Bank seeks to manage the vulnerability of its net interest income to changes in interest rates.

 

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Strategies used by the Bank to manage the potential volatility of its earnings may include:

 

    The origination and retention of adjustable rate residential one-to-four family loans, adjustable rate home equity lines of credit, adjustable rate commercial loans and commercial real estate loans;

 

    The sale of fixed rate loans and longer term adjustable rate loans;

 

    Investing in securities with relatively short maturities and/or expected average lives;

 

    Emphasizing growth in low-cost core deposits;

 

    Lengthening the maturity of liabilities such as term certificates of deposit, brokered certificates of deposit and FHLB of Boston borrowings as appropriate; and

 

    Use of interest rate derivatives, such as interest rate swaps and caps.

Net Interest Income Analysis. The Bank analyzes its sensitivity to changes in interest rates through a net interest income model. Net interest income (“NII”) is the difference between the interest income the Bank earns on its interest-earning assets, such as loans and securities, and the interest the Bank pays on its interest-bearing liabilities, such as deposits and borrowings. The impact of interest rate derivatives, such as interest rate swaps and caps, is also analyzed. The Bank estimates what its NII would be for a one-year period based on current interest rates. The Bank then calculates what the NII would be for the same period under different interest rate assumptions. The Bank also estimates the impact over a five-year time horizon. The following table shows the estimated impact on NII for the one-year period beginning June 30, 2018 resulting from potential changes in interest rates. These estimates require the Bank to make certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, the Bank cannot precisely predict the impact of changes in interest rates on its NII. Although the NII table below provides an indication of the Bank’s interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on its NII and will differ from actual results.

 

Change in Interest

Rates (basis points)

(1)

 

NII Change Year One

(% Change From Year One

Base)

Shock +300

  -19.9%

Ramp +200

  -6.2%

Ramp - 100

  1.2%

 

(1) The calculated change for a ramp -100 BPS and a ramp +200 BPS, assumes a gradual parallel shift across the yield curve over a one-year period. The calculated change for shock +300 BPS assumes that market rates experience an instantaneous and sustained increase of 300 BPS.

The table above indicates that at June 30, 2018, in the event of an instantaneous and sustained 300 basis point increase in interest rates the Bank would experience a 19.9% decrease in NII. At the same date, in the event of a 200 basis point increase in interest rates over a one-year period, assuming a gradual parallel shift across the yield curve over such period, the Bank would experience a 6.2% decrease in NII. At the same date, in the event of a 100 basis point decrease in interest rates over a one-year period, assuming a gradual parallel shift across the yield curve over such period, the Bank would experience a 1.2% increase in NII.

Economic Value of Equity Analysis. The Bank also analyzes the sensitivity of its financial condition to changes in interest rates through an economic value of equity model. This analysis measures the difference between predicted changes in the present value of its assets and predicted changes in the present value of its liabilities assuming various changes in current interest rates. The economic value of equity analysis as of June 30, 2018 estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Bank would experience a 23.2% decrease in the economic value of its equity. At the same date, the analysis estimated that, in the event of an instantaneous 100 basis point decrease in interest rates, the Bank would experience a 0.8% increase in the economic value of its equity. The estimates of changes in the economic value of the Bank’s equity require management to make certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, management cannot precisely predict the impact of changes in interest rates on the economic value of the Bank’s equity. Although the economic value of equity analysis provides an indication of the Bank’s interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on the economic value of the Bank’s equity and will differ from actual results.

 

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Liquidity and Capital Resources. Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the FHLB of Boston, security repayments and loan sales. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we had enough sources of liquidity at June 30, 2018 to satisfy our short and long-term liquidity needs as of that date.

We regularly monitor and adjust our investments in liquid assets based on our assessment of:

 

    Expected loan demand;

 

    Expected deposit flows and borrowing maturities;

 

    Yields available on interest-earning deposits and securities; and

 

    The objectives of our asset/liability management program.

Excess liquid assets are invested generally in interest-earning deposits and short-term securities and may also be used to pay off short-term borrowings.

Our most liquid assets are cash and cash equivalents. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2018 (unaudited), cash and cash equivalents totaled $103.7 million.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.

At June 30, 2018 (unaudited), we had $125.5 million in loan commitments outstanding. In addition to commitments to originate and purchase loans, we had $330.9 million in unused lines of credit to borrowers and $21.8 million in unadvanced funds on construction loans.

Certificates of deposit due within one year of June 30, 2018 (unaudited) totaled $216.0 million, or 11.8%, of total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds, including loan sales, brokered deposits, repurchase agreements and FHLB advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2019. We believe, however, based on historical experience and current market interest rates that we will retain upon maturity a large portion of our certificates of deposit with maturities of one year or less as of June 30, 2018 (unaudited).

Our primary investing activity is originating and purchasing loans. During the six months ended June 30, 2018 (unaudited) and the year ended December 31, 2017, we originated and purchased $492.0 million and $835.8 million of new loans, respectively.

Financing activities consist primarily of activity in deposit accounts, FHLB advances and, to a lesser extent, brokered deposits. We experienced net increases in deposits of $82.6 million and $281.8 million for the six months ended June 30, 2018 (unaudited) and for the year ended December 31, 2017, respectively. At June 30, 2018 (unaudited) and December 31, 2017, the levels of brokered deposits were $293.5 million and $247.2 million, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB of Boston, which provide an additional source of funds. At June 30, 2018 (unaudited), we had $855.3 million of FHLB advances outstanding. Based on available collateral at that date, we had the ability to borrow up to an additional $158.4 million from the FHLB of Boston.

We are obligated to make future payments according to various contracts. As of June 30,2018 (unaudited), our contractual obligations have not changed materially from those disclosed in our 2017 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 16, 2018.

BSB Bancorp, Inc. and Belmont Savings Bank are subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2018 (unaudited), BSB Bancorp, Inc. and Belmont Savings Bank exceeded all regulatory capital requirements and Belmont Savings Bank is considered “well capitalized” under the prompt corrective action regulatory guidelines.

 

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The net proceeds from our stock offering completed in October 2011 had significantly increased our liquidity and capital resources. However, over time, the level of liquidity has been reduced as net proceeds from the stock offering and additions to capital from income generated are used for general corporate purposes, including the funding of loans. We have seen our financial condition and results of operations enhanced by the continued investment of the net proceeds from the stock offering, resulting in increased net interest-earning assets and net interest and dividend income.

At the time of conversion from a mutual holding company to a stock holding company, BSB Bancorp, Inc. substantially restricted retained earnings by establishing a liquidation account and the Bank established a parallel liquidation account. The liquidation account will be maintained for the benefit of eligible holders who continue to maintain their accounts at the Bank after conversion. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

The Company’s total stockholders’ equity increased to $191.2 million at June 30, 2018 (unaudited) from $178.0 million at December 31, 2017. This increase is primarily the result of earnings of $12.1 million and a $1.2 million increase in additional paid-in capital related to stock-based compensation.

Basel III Capital Rules. In July 2013, the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule became effective for the Company and the Bank on January 1, 2015. The capital conservation buffer requirement started being phased in on January 1, 2016, is currently at 1.875% and will be fully phased in on January 1, 2019 at 2.5%.

The following table presents actual and required capital ratios as of June 30, 2018 (unaudited) and December 31, 2017 for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of June 30, 2018 (unaudited) and December 31, 2017 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

 

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                            Minimum Capital Required     Minimum Capital Required     Minimum To Be Well  
                Minimum Capital     For Capital Adequacy Plus     For Capital Adequacy Plus     Capitalized Under  
                Required For     Capital Conservation Buffer     Capital Conservation Buffer     Prompt Corrective  
    Actual     Capital Adequacy     Basel III Phase-In Schedule     Basel III Fully Phased In     Action Provisions  
    Amount     Ratio     Amount     Ratio     Amount     Ratio     Amount     Ratio     Amount     Ratio  

As of June 30, 2018:

                   

Total Capital (to Risk Weighted Assets)

                   

Consolidated

  $ 208,545       11.46   $ 145,619       8.00   $ 179,749       9.875   $ 191,125       10.50     N/A       N/A  

Belmont Savings Bank

    203,047       11.16     145,618       8.00     179,747       9.875     191,164       10.50   $ 182,023       10.00

Tier 1 Capital (to Risk Weighted Assets)

                   

Consolidated

  $ 191,225       10.51   $ 109,214       6.00   $ 143,344       7.875   $ 154,720       8.50     N/A       N/A  

Belmont Savings Bank

    185,727       10.20     109,214       6.00     143,343       7.875     154,719       8.50   $ 145,618       8.00

Common Equity Tier 1 Capital (to Risk Weighted Assets)

                   

Consolidated

  $ 191,225       10.51   $ 81,911       4.50   $ 116,040       6.375   $ 127,417       7.00     N/A       N/A  

Belmont Savings Bank

    185,727       10.20     81,910       4.50     116,039       6.375     127,416       7.00   $ 118,315       6.50

Tier 1 Capital (to Average Assets)

                   

Consolidated

  $ 191,225       6.82   $ 112,153       4.00   $ 112,153       4.00   $ 112,153       4.00     N/A       N/A  

Belmont Savings Bank

    185,727       6.63     112,072       4.00     112,072       4.00     112,072       4.00   $ 140,089       5.00
                            Minimum Capital Required     Minimum Capital Required     Minimum To Be Well  
                Minimum Capital     For Capital Adequacy Plus     For Capital Adequacy Plus     Capitalized Under  
                Required For     Capital Conservation Buffer     Capital Conservation Buffer     Prompt Corrective  
    Actual     Capital Adequacy     Basel III Phase-In Schedule     Basel III Fully Phased In     Action Provisions  
    Amount     Ratio     Amount     Ratio     Amount     Ratio     Amount     Ratio     Amount     Ratio  

As of December 31, 2017:

                   

Total Capital (to Risk Weighted Assets)

                   

Consolidated

  $ 194,287       11.30   $ 137,498       8.00   $ 158,982       9.25   $ 180,466       10.50     N/A       N/A  

Belmont Savings Bank

    189,311       11.01     137,497       8.00     158,981       9.25     180,465       10.50   $ 171,871       10.00

Tier 1 Capital (to Risk Weighted Assets)

                   

Consolidated

  $ 177,939       10.35   $ 103,123       6.00   $ 124,607       7.25   $ 146,092       8.50     N/A       N/A  

Belmont Savings Bank

    172,963       10.06     103,123       6.00     124,607       7.25     146,091       8.50   $ 137,497       8.00

Common Equity Tier 1 Capital (to Risk Weighted Assets)

                   

Consolidated

  $ 177,939       10.35   $ 77,343       4.50   $ 98,827       5.75   $ 120,311       7.00     N/A       N/A  

Belmont Savings Bank

    172,963       10.06     77,342       4.50     98,826       5.75     120,310       7.00   $ 111,716       6.50

Tier 1 Capital (to Average Assets)

                   

Consolidated

  $ 177,939       6.97   $ 102,148       4.00   $ 102,148       4.00   $ 102,148       4.00     N/A       N/A  

Belmont Savings Bank

    172,963       6.77     102,147       4.00     102,147       4.00     102,147       4.00   $ 127,683       5.00

 

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As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”), banking regulatory agencies must adopt a revised definition of “well capitalized” for financial institutions and holding companies with assets of less than $10 billion and that are not determined to be ineligible by their primary federal regulator due to their risk profile (a “qualifying community bank”). The new definition will expand the ways that a qualifying community bank may meet its capital requirements and be deemed “well qualified.” The new rule will establish a “community bank leverage ratio” equal to the tangible equity capital divided by the average total consolidated assets. A qualifying community bank that exceeds a to-be-determined threshold for this new leverage ratio, which regulators must set at between 8% and 10%, will be considered to be well capitalized and to have met generally applicable leverage capital requirements, generally applicable risk-based capital requirements, and any other capital or leverage requirements to which such financial institution or holding company is subject.

In addition, as a result of the Act, the Federal Reserve Board is required to amend its small bank holding company and savings and loan holding company policy statement to provide that holding companies with consolidated assets of less than $3 billion that are (i) not engaged in significant nonbanking activities, (ii) do not conduct significant off-balance sheet activities, and (3) do not have a material amount of SEC-registered debt or equity securities, other than trust preferred securities, that contribute to an organization’s complexity, will no longer be subject to regulatory capital requirements, effective no later than November 2018.

Off-Balance Sheet Arrangements

As a financial services provider, we routinely are a party to various financial instruments with off-balance sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. In addition, from time to time we enter into commitments to sell mortgage loans that we originate. For the six months ended June 30, 2018 (unaudited), we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is included in Item 2 of this report under “Management of Market Risk.”

 

Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, (1) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to our management, including our Principal Executive and Principal Financial officers as appropriate to allow timely discussions regarding required disclosures.

The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud, or in making all material information known in a timely manner to the appropriate levels of management.

There were no changes in the Company’s internal control over financial reporting during the three months ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

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

 

Item 1A. Risk Factors.

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 16, 2018. As of June 30, 2018, the risk factors of the Company have not changed materially from those disclosed in the 2017 Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a) Unregistered Sales of Equity Securities. None

 

(b) Use of Proceeds. None

 

(c) Repurchase of Equity Securities.

The following table provides certain information with regard to shares repurchased by the Company in the second quarter of 2018.

 

Period

  (a) Total
Number of
Shares
Purchased
    (b)
Average Price Paid
per Share
    (c)
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs(1)
    (d)
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs(1)
 

April 1 - April 30

    —       $ —         —         500,000  

May 1 - May 31

    —         —         —         500,000  

June 1 - June 30

    —         —         —         500,000  
 

 

 

     

 

 

   

Total

    —       $ —         —      
 

 

 

     

 

 

   

 

(1) On June 22, 2013, the Company’s Board of Directors authorized a stock repurchase program to acquire up to 500,000 shares, or 5.5% of the Company’s then outstanding common stock. Repurchases may be made from time to time depending on market conditions and other factors, and will be conducted through open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. There is no guarantee as to the exact number of shares to be repurchased by the Company.

 

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Item 3.

Defaults Upon Senior Securities

None

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

Item 5.

Other Information

None

 

Item 6.

Exhibits

 

  31.1    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
  31.2    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
  32.0    Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.*
101.0    The following data from the BSB Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive (Loss) Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) the related notes.

 

*

This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    BSB BANCORP, INC.
Date: August 3, 2018     By:  

/s/ Robert M. Mahoney

      Robert M. Mahoney
      President, Chief Executive Officer and Director (Principal Executive Officer)
Date: August 3, 2018     By:  

/s/ John A. Citrano

      John A. Citrano
      Executive Vice President and Chief Financial Officer
      (Principal Financial Officer)

 

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