Company Quick10K Filing
Quick10K
BSB Bancorp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$35.40 10 $349
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-01 M&A, Shareholder Rights, Control, Officers, Amend Bylaw, Exhibits
8-K 2019-03-14 Other Events
8-K 2019-02-27 Shareholder Vote
8-K 2019-02-07 Earnings, Exhibits
8-K 2018-11-26 Enter Agreement, Exhibits
8-K 2018-10-18 Earnings, Exhibits
8-K 2018-07-19 Earnings, Exhibits
8-K 2018-05-23 Shareholder Vote
8-K 2018-04-19 Earnings, Exhibits
8-K 2018-02-14 Other Events
8-K 2018-02-08 Earnings, Exhibits
IBKC Iberiabank 3,778
FULT Fulton Financial 2,633
SFNC Simmons First National 2,307
HTH Hilltop Holdings 2,164
TCBK Trico Bancshares 1,066
LION Fidelity Southern 714
CTBI Community Trust Bancorp 687
TBBK The Bancorp 515
MRLN Marlin Business Services 287
FBIZ First Business Financial Services 197
BLMT 2018-12-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosure
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Note 1 - Summary of Significant Accounting Policies
Note 2 - Restrictions on Cash and Amounts Due From Banks
Note 3 - Investment Securities
Note 4 - Loans, Allowance for Loan Losses and Credit Quality
Note 5 - Transfers and Servicing
Note 6 - Premises and Equipment
Note 7 - Deposits
Note 8 - Short-Term Borrowings
Note 9 - Long-Term Borrowings
Note 10 - Income Taxes
Note 11 - Off-Balance Sheet Arrangements
Note 12 - Commitments and Contingent Liabilities
Note 13 - Legal Contingencies
Note 14 - Minimum Regulatory Capital Requirements
Note 15 - Employee Benefit Plans
Note 16 - Stock Based Compensation
Note 17 - Earnings per Share
Note 18 - Related Party Transactions
Note 19 - Restrictions on Dividends, Loans and Advances
Note 20 - Fair Values of Assets and Liabilities
Note 21 - Other Comprehensive (Loss) Income
Note 22 - Derivatives and Hedging
Note 23 - Balance Sheet Offsetting
Note 24 - Condensed Financial Statements of Parent Company
Note 25 - Quarterly Data (Unaudited)
Note 26 - Subsequent Events
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
EX-10.6 d694602dex106.htm
EX-23.1 d694602dex231.htm
EX-31.1 d694602dex311.htm
EX-31.2 d694602dex312.htm
EX-32 d694602dex32.htm

BSB Bancorp Earnings 2018-12-31

BLMT 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 d694602d10k.htm 10-K 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

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

For the fiscal year ended December 31, 2018

OR

 

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

For the transition period from                      to                     

Commission File Number: 001-35309

 

 

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 offices)   (Zip Code)

(617) 484-6700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share   Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      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 7(a)(2)(B) of the Securities Act.  ☐

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

The aggregate market value of the voting and non-voting common equity held by nonaffiliates as of June 30, 2018 was approximately $276,496,828.

The number of shares outstanding of the registrant’s common stock as of March 6, 2019 was 9,851,708.

 

 

 


Table of Contents

INDEX

 

         Page  

PART I

       2  

ITEM 1.

 

BUSINESS

     2  

ITEM 1A.

 

RISK FACTORS

     36  

ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

     51  

ITEM 2.

 

PROPERTIES

     51  

ITEM 3.

 

LEGAL PROCEEDINGS

     52  

ITEM 4.

 

MINE SAFETY DISCLOSURE

     53  

PART II

       53  

ITEM 5.

 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     53  

ITEM 6.

 

SELECTED FINANCIAL DATA

     56  

ITEM 7.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

     57  

ITEM 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     71  

ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     72  

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     129  

ITEM 9A.

 

CONTROLS AND PROCEDURES

     129  

ITEM 9B.

 

OTHER INFORMATION

     129  

PART III

       130  

ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     130  

ITEM 11.

 

EXECUTIVE COMPENSATION

     135  

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

     142  

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     144  

ITEM 14.

 

PRINCIPAL ACCOUNTING FEES AND SERVICES

     145  

PART IV

       146  

ITEM 15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     146  

ITEM 16.

 

FORM 10-K SUMMARY

     147  

SIGNATURES

       147  

This report contains certain “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts; rather, they are statements based on BSB Bancorp, Inc.’s current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include interest rate trends, the general economic climate in the market area in which BSB Bancorp, Inc. operates, as well as nationwide, BSB Bancorp, Inc.’s ability to control costs and expenses, competitive products and pricing, loan delinquency rates and changes in federal and state legislation and regulation. For further discussion of factors that may affect our results, see “Item 1A. Risk Factors” in this Annual Report on Form 10-K (“Form 10-K”). These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements after the date of this Form 10-K, whether as a result of new information, future events or otherwise.

 

1


Table of Contents

PART I

 

ITEM 1.

BUSINESS

General

BSB Bancorp, Inc. (“BSB Bancorp” or the “Company”) is a Maryland corporation that owns 100% of the common stock of Belmont Savings Bank (“Belmont Savings” or the “Bank”) and BSB Funding Corporation. BSB Bancorp was incorporated in June, 2011 to become the holding company of Belmont Savings in connection with the Bank’s conversion from the mutual holding company to stock holding company form of organization (the “conversion”). On October 4, 2011 we completed our initial public offering of common stock in connection with the conversion, selling 8,993,000 shares of common stock at $10.00 per share for approximately $89.9 million in gross proceeds, including 458,643 shares sold to the Bank’s employee stock ownership plan. In addition, in connection with the conversion, we issued 179,860 shares of our common stock and contributed $200,000 in cash to the Belmont Savings Bank Foundation. At December 31, 2018, we had consolidated assets of $3.03 billion, consolidated deposits of $1.96 billion and consolidated equity of $201.79 million. Other than holding the common stock of Belmont Savings, BSB Bancorp has not engaged in any significant business to date.

Belmont Savings is a Massachusetts-chartered savings bank headquartered in Belmont, Massachusetts. The Bank’s business consists primarily of accepting deposits from the general public, small businesses, nonprofit organizations and municipalities and investing those deposits, together with funds generated from operations and borrowings, in one-to-four family residential mortgage loans, commercial real estate loans, multi-family real estate loans, home equity lines of credit, indirect automobile loans (automobile loans assigned to us by automobile dealerships), commercial business loans, construction loans and investment securities. To a much lesser extent, the Bank also makes other consumer loans and second mortgage loans. We offer a variety of deposit accounts, including relationship checking accounts for consumers and businesses, passbook and statement savings accounts, certificates of deposit, money market accounts, Interest on Lawyer Trust Accounts (“IOLTA”), commercial, municipal and regular checking accounts and Individual Retirement Accounts (“IRAs”). The Bank offers a wide range of commercial and retail banking services which include a full suite of cash management services, lockbox, online and mobile banking and global payments.

Throughout its history, Belmont Savings has remained focused on providing a broad range of quality services within its market area as a community bank. In 2009, Belmont Savings reorganized into the mutual holding company structure. Further, following a comprehensive strategic review of the Bank’s management and operations, the board of directors of the Bank approved a new strategic plan designed to increase the growth and profitability of the Bank. The strategic plan was intended to take advantage of the sound Eastern Massachusetts economy, which was not as negatively affected by the recession that began in 2008 as other regions of the United States. The Bank’s current strategic plan contemplates continued growth in assets and liabilities over the next several years with the intent of building upon Belmont Savings’ leading market share in Belmont and growing share in the communities we serve, striving to be the “Bank of Choice” for deposit driven small businesses, nonprofit organizations and municipalities in its market area. Additionally, we are striving to be the lender of choice for one-to-four family residential real estate loans and the trusted lending partner for commercial real estate investors, developers and managers within our market area.

Available Information

BSB Bancorp is a public company, and files interim, quarterly and annual reports with the Securities and Exchange Commission, or “SEC”. These respective reports are on file and a matter of public record with the SEC. The public may obtain information regarding our filings with the SEC by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov).

BSB Bancorp’s executive offices are located at 2 Leonard Street, Belmont, Massachusetts 02478. Our telephone number at this address is (617) 484-6700, and our website address is www.belmontsavings.com. Information on our website should not be considered a part of this Form 10-K.

 

2


Table of Contents

Market Area

We conduct our operations from our six full service branch offices located in Belmont, Watertown, Waltham, Newton and Cambridge in Southeast Middlesex County, Massachusetts. Our primary lending market includes Middlesex, Norfolk and Suffolk Counties, Massachusetts. Due to its proximity to Boston, our primary market area benefits from the presence of numerous institutions of higher learning, medical care and research centers and the corporate headquarters of several significant financial service companies. Eastern Massachusetts also has many high technology companies employing personnel with specialized skills. These factors affect the demand for residential homes, multi-family apartments, office buildings, shopping centers, industrial warehouses and other commercial properties.

Our lending area is primarily an urban market area with a substantial number of one-to-four unit properties, some of which are non-owner occupied, as well as apartment buildings, condominiums, office buildings and retail space. As a result, compared to many thrift institutions, our loan portfolio contains a significantly greater number of multi-family and commercial real estate loans.

Our market area is located largely in the Boston-Cambridge-Quincy, Massachusetts/New Hampshire Metropolitan Statistical Area (“MSA”). The United States Census Bureau estimates that as of July 1, 2017, the Boston metropolitan area is the 10th largest metropolitan area in the United States. Located adjacent to major transportation corridors, the Boston metropolitan area provides a highly diversified economic base, with major employment sectors ranging from services, manufacturing and wholesale/retail trade, to finance, technology, education and medical care. According to the United States Department of Labor, in December 2018, the Boston-Cambridge-Quincy, Massachusetts/New Hampshire MSA had an unemployment rate of 2.4% compared to the national unemployment rate of 3.7%.

Competition

We face intense competition in our market area both for making loans and attracting deposits. We compete with commercial banks, credit unions, savings institutions, online banks, mortgage brokerage firms, finance companies, mutual funds, insurance companies and investment banking firms. Some of our competitors have greater name recognition and market presence that benefit them in attracting customers, and offer certain services that we do not or cannot provide.

Our deposit sources are primarily from customers in the communities in which our offices are located, as well as from small businesses, municipalities, nonprofit organizations and other customers from our lending areas. As of June 30, 2018 (the latest date for which information is publicly available from the Federal Deposit Insurance Corporation), we ranked first of eleven bank and thrift institutions with offices in the town of Belmont, Massachusetts, with a 50.4% market share. As of that same date, we ranked fourth of seven bank and thrift institutions with offices in the city of Watertown, Massachusetts, with a 5.3% market share, eighth of ten bank and thrift institutions with offices in the city of Waltham, Massachusetts, with a 2.9% market share, twelfth of fourteen bank and thrift institutions with offices in the city of Newton, Massachusetts, with a 1.1% market share, and thirteenth of sixteen bank and thrift institutions with offices in the city of Cambridge, with a 0.6% market share.

Lending Activities

Our primary lending activity is comprised of one-to-four family residential mortgage loans, multi-family real estate loans, commercial real estate loans, home equity lines of credit, indirect auto loans, commercial business loans and construction loans.

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio at the dates indicated, excluding loans held for sale of $2.9 million, $0, $0, $1.2 million, and $0 at December 31, 2018, 2017, 2016, 2015, and 2014, respectively.

 

3


Table of Contents
     At December 31,  
     2018     2017     2016  
     Amount     Percent     Amount     Percent     Amount     Percent  
     (Dollars in thousands)  

Mortgage loans:

            

Residential one to four family

   $ 1,583,000       60.20   $ 1,333,058       57.93   $ 997,336       53.34

Commercial real estate

     555,028       21.10       486,392       21.14       370,944       19.84  

Multi-family real estate

     203,657       7.74       155,680       6.76       120,894       6.47  

Home equity lines of credit

     163,199       6.20       178,624       7.76       167,465       8.96  

Construction

     50,480       1.92       53,045       2.31       89,003       4.76  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage loans

     2,555,364       97.16       2,206,799       95.90       1,745,642       93.37  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial loans

     62,462       2.37       63,722       2.77       63,404       3.39  

Consumer loans:

            

Indirect auto

     11,965       0.45       30,227       1.31       60,240       3.22  

Other consumer (1)

     418       0.02       435       0.02       439       0.02  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     74,845       2.84       94,384       4.10       124,083       6.63  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     2,630,209       100.00     2,301,183       100.00     1,869,725       100.00
    

 

 

     

 

 

     

 

 

 

Net deferred loan costs

     3,485         3,426         3,622    

Net unamortized mortgage premiums

     8,617         8,661         6,273    

Allowance for loan losses

     (17,939       (16,312       (13,585  
  

 

 

     

 

 

     

 

 

   

Total loans, net

   $ 2,624,372       $ 2,296,958       $ 1,866,035    
  

 

 

     

 

 

     

 

 

   

 

     At December 31,  
     2015     2014  
     Amount      Percent     Amount      Percent  
     (Dollars in thousands)  

Mortgage loans:

          

Residential one-to-four family

   $ 709,426        46.15   $ 450,572        38.16

Commercial real estate

     349,048        22.71       307,979        26.09  

Multi-family real estate

     100,343        6.53       87,199        7.38  

Home equity lines of credit

     160,040        10.41       131,628        11.15  

Construction

     60,722        3.95       31,389        2.66  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage loans

     1,379,579        89.75       1,008,767        85.44  
  

 

 

    

 

 

   

 

 

    

 

 

 

Commercial loans

     53,192        3.46       39,161        3.32  

Consumer loans:

          

Indirect auto

     103,965        6.76       131,961        11.17  

Other consumer (1)

     453        0.03       774        0.07  
  

 

 

    

 

 

   

 

 

    

 

 

 
     157,610        10.25       171,896        14.56  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

     1,537,189        100.00     1,180,663        100.00
     

 

 

      

 

 

 

Net deferred loan costs

     4,663          5,068     

Net unamortized mortgage premiums

     4,345          2,549     

Allowance for loan losses

     (11,240        (8,881   
  

 

 

      

 

 

    

Total loans, net

   $ 1,534,957        $ 1,179,399     
  

 

 

      

 

 

    

 

(1)

Other consumer loans consist primarily of passbook loans, overdraft protection, overdraft privilege and consumer unsecured loans.

 

4


Table of Contents

Loan Portfolio Maturities and Coupons. The following table summarizes the dollar amount of loans maturing in our portfolio based on their contractual terms to maturity at December 31, 2018. The table does not include any estimate of prepayments, which can significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

 

     Residential
One to Four Family
    Commercial Real Estate     Multi-Family Real Estate     Home
Equity Lines of Credit
    Construction  
     Amount      Coupon     Amount      Coupon     Amount      Coupon     Amount      Coupon     Amount      Coupon  
     (Dollars in thousands)  

Maturing During the Twelve

Months Ending

December 31,                        

                                                                 

2019

   $ 17        4.23   $ 11,694        4.68   $ —          —       $ —          —       $ 11,063        5.35

2020

     15        3.75     4,199        5.50     —          —         5        6.50     14,799        5.27

2021 to 2023

     326        4.09     90,208        4.49     42,917        4.28     137        7.54     6,071        5.27

2024 to 2028

     36,644        3.37     401,085        4.30     141,864        4.21     2,009        4.80     17,196        4.52

2029 to 2033

     60,309        3.51     26,270        4.20     9,050        3.82     1,188        5.18     —          —    

2034 and beyond

     1,485,689        3.68     21,572        4.77     9,826        3.50     159,860        4.32     1,351        4.88
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

Total

   $ 1,583,000        3.67   $ 555,028        4.36   $ 203,657        4.18   $ 163,199        4.34   $ 50,480        5.02
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

 

     Commercial     Indirect Auto     Other Consumer     Total  
     Amount      Coupon     Amount      Coupon     Amount      Coupon     Amount      Coupon  
     (Dollars in thousands)  

Maturing During the Twelve

Months Ending

December 31,                        

                                                    

2019

   $ 27,039        5.20   $ 2,063        2.91   $ 406        3.01   $ 52,282        5.00

2020

     13,434        5.11     6,534        3.11     9        14.00     38,995        4.88

2021 to 2023

     17,461        4.86     3,368        3.75     3        8.24     160,491        4.57

2024 to 2028

     4,241        4.87     —          —         —          —         603,039        4.24

2029 to 2033

     287        4.50     —          —         —          —         97,104        3.74

2034 and beyond

     —          —         —          —         —          —         1,678,298        3.76
  

 

 

      

 

 

      

 

 

      

 

 

    

Total

   $ 62,462        5.06   $ 11,965        3.26   $ 418        3.13   $ 2,630,209        3.93
  

 

 

      

 

 

      

 

 

      

 

 

    

The following table sets forth the scheduled repayments of fixed and adjustable-rate loans at December 31, 2018 that are contractually due after December 31, 2019.

 

     Due After December 31, 2019  
     Fixed      Adjustable      Total  
     (Dollars in thousands)  

Mortgage loans:

        

Residential one to four family

   $ 836,046      $ 746,937      $ 1,582,983  

Commercial real estate loans

     276,221        267,113        543,334  

Multi-family real estate loans

     94,221        109,436        203,657  

Equity lines of credit

     —          163,199        163,199  

Construction loans

     1,351        38,066        39,417  
  

 

 

    

 

 

    

 

 

 

Total mortgage loans

     1,207,839        1,324,751        2,532,590  

Commercial loans

     9,306        26,117        35,423  

Consumer loans:

        

Indirect auto loans

     9,902        —          9,902  

Other consumer loans

     12        —          12  
  

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,227,059      $ 1,350,868      $ 2,577,927  
  

 

 

    

 

 

    

 

 

 

One-to-Four Family Residential Mortgage Loans. At December 31, 2018, $1.58 billion, or 60.2%, of our total loan portfolio, consisted of one-to-four family residential mortgage loans. We offer fixed and adjustable rate residential mortgage loans with maturities up to 30 years.

 

5


Table of Contents

Much of the housing stock in our primary lending market area is comprised of one, two, three and four unit properties, all of which are classified as one-to-four family residential mortgage loans. At December 31, 2018, of the $1.58 billion of one-to-four family residential mortgage loans in our portfolio, $74.2 million, or 4.7%, were comprised of non-owner occupied properties.

Our one-to-four family residential mortgage loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate and purchase both fixed and adjustable rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which is generally between $453,100 and $679,650 (increased to between $484,350 and $726,525 in 2019) for one-unit properties. We also originate and purchase loans above this amount, which are referred to as “jumbo loans.” We generally underwrite jumbo loans in a manner similar to conforming loans, and in adherence to the Bank’s Credit Policy. Jumbo loans are common in our market area. During the year ended December 31, 2018, we originated $128.4 million and purchased $236.8 million of jumbo loans.

We generally originate and purchase our adjustable rate one-to-four family residential mortgage loans with initial interest rate adjustment periods of one, three, five, seven and ten years, based on adding a margin to a designated market index. We determine whether a borrower qualifies for an adjustable rate mortgage loan annually based on secondary market guidelines.

We will originate and purchase one-to-four family residential mortgage loans with loan-to-value ratios up to 80% without private mortgage insurance. We will originate loans with loan-to-value ratios of up to 95% with private mortgage insurance and where the borrower’s debt service does not exceed 43% of the borrower’s monthly cash flow.    

Occasionally, we sell into the secondary market both fixed and adjustable rate one-to-four family residential mortgage loans. We base the amount of loans that we sell into the secondary market on our liquidity needs, asset/liability mix, loan volume, portfolio size, interest rate environment and other factors. We sell loans both servicing released and servicing retained. During the year ended December 31, 2018, we sold $53.7 million of one-to-four family residential mortgage loans and recognized gains of $756,000 on the sales. For the year ended December 31, 2018, we received servicing fees of $332,000 on one-to-four family residential mortgage loans that were previously sold. At December 31, 2018, the principal balance of loans serviced for others totaled $142.8 million.

We generally do not offer reverse mortgages, “interest only” mortgage loans on one to four family residential properties nor do we offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on his loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that are made with low down payments to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (defined as loans having less than full documentation).    

Commercial Real Estate Loans. At December 31, 2018, $555.0 million, or 21.1%, of our loan portfolio consisted of commercial real estate loans. At December 31, 2018, substantially all of our commercial real estate loans were secured by properties located in Eastern Massachusetts.

Our commercial real estate mortgage loans are primarily secured by office buildings, owner-occupied commercial buildings, industrial buildings and strip mall centers. At December 31, 2018, loans secured by commercial real estate had an average loan balance of $2.8 million. Also included within our commercial real estate portfolio are certain industrial revenue bonds. The Bank owns certain bonds issued by state agencies that it categorizes as loans. This categorization is made on the basis that another entity (i.e. the Bank’s customer), not the issuing agency, is responsible for payment to the Bank of the principal and interest on the debt. Furthermore, credit underwriting is based solely on the credit of the customer (and guarantors, if any), the banking relationship is with the customer and not the agency, there is no active secondary market for the bonds, and the bonds are not available for sale, but are intended to be held by the Bank until maturity. At December 31, 2018, the balance of industrial development bonds was $13.6 million. These loans were secured by office property containing 60,250 feet of rentable area and fourteen one-to-four family residential properties.

 

6


Table of Contents

We offer commercial real estate loans at fixed and adjustable rates. Our commercial real estate loans with adjustable rates generally have terms of ten years with fixed rates for the first five or seven years and adjustable rates thereafter based on changes in a designated market index. These loans generally amortize on a twenty-five to thirty year basis, with a balloon payment due at maturity.

In underwriting commercial real estate loans, we consider a number of factors, which include the net cash flow to the loan’s debt service requirement (generally requiring a minimum of 125%), the age and condition of the collateral, the financial resources and income level of the borrower or guarantor and the borrower’s and guarantor’s experience in owning or managing similar properties. Commercial real estate loans are generally originated in amounts up to 80% of the appraised value or the purchase price of the property securing the loan, whichever is lower. Personal guarantees are typically obtained on these commercial real estate loans. In addition, the borrower’s and guarantor’s financial information on such loans is monitored on an ongoing basis through required periodic financial statement updates.

Commercial real estate loans generally carry higher interest rates and have shorter terms than one-to-four family residential mortgage loans. Commercial real estate loans, however, entail greater credit risks compared to the one-to-four family residential mortgage loans we hold as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income producing properties typically depends on the successful operation of the property as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate than for one-to-four family residential properties. All commercial real estate loans, regardless of size, are approved at a minimum by the Senior Vice President-Credit Manager of Commercial Real Estate Lending, the Executive Vice President and Division Executive of Commercial Real Estate Lending and the President and Chief Executive Officer of the Bank.

At December 31, 2018, our largest commercial real estate loan had an outstanding balance of $18.5 million and was secured by a 25.95 acre site that is improved with one retail multitenant building, a retail strip building, four outparcels, three additional buildings and a freestanding ATM kiosk totaling 284,104 square feet of retail space, and was performing in accordance with its original terms.    

Multi-family Real Estate Loans. At December 31, 2018, $203.7 million, or 7.74%, of our loan portfolio consisted of multi-family (which we consider to be five or more units) residential real estate loans. At December 31, 2018, substantially all of our multi-family real estate loans were secured by properties located in Eastern Massachusetts.

Our multi-family loans are primarily secured by five or more unit residential properties. At December 31, 2018, loans secured by multi-family real estate had an average loan balance of $3.8 million.

We offer multi-family real estate loans at fixed and adjustable rates. Our multi-family real estate loans with adjustable rates generally have terms of ten years with fixed rates for the first five or seven years and adjustable rates thereafter based on changes in a designated market index. These loans generally amortize on a twenty-five to thirty year basis, with a balloon payment due at maturity.

In underwriting multi-family real estate loans, we consider a number of factors, which include the net cash flow to the loan’s debt service requirement (generally requiring a minimum of 125%), the age and condition of the collateral, the financial resources and income level of the borrower or guarantor and the borrower’s and guarantor’s experience in owning or managing similar properties. Multi-family real estate loans are generally originated in amounts up to 80% of the appraised value or the purchase price of the property securing the loan, whichever is lower. Personal guarantees are typically obtained on these multi-family real estate loans. In addition, the borrower’s and guarantor’s financial information on such loans is monitored on an ongoing basis through required periodic financial statement updates.

 

7


Table of Contents

Multi-family real estate loans generally carry higher interest rates and have shorter terms than one-to-four family residential mortgage loans. Multi-family real estate loans, however, entail greater credit risks compared to the one-to-four family residential mortgage loans we hold as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income producing properties typically depends on the successful operation of the property as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for multi-family real estate than for one-to-four family residential properties. All multi-family real estate loans, regardless of size, are approved at a minimum by the Senior Vice President-Credit Manager of Commercial Real Estate Lending, the Executive Vice President and Division Executive of Commercial Real Estate Lending and the President and Chief Executive Officer of the Bank.

At December 31, 2018, our largest multi-family real estate loan had a balance of $25.0 million, was secured by a 6 story, 80 unit residential building and was performing in accordance with its original terms.

Home Equity Lines of Credit. At December 31, 2018, $163.2 million, or 6.2%, of our loan portfolio consisted of home equity lines of credit. In addition to traditional one-to-four family residential mortgage loans, we offer home equity lines of credit that are secured by the borrower’s primary residence, secondary residence or one-to-four family investment properties. Home equity lines of credit are generally underwritten with the same criteria that we use to underwrite one-to-four family residential mortgage loans. In addition, the borrower’s financial condition is monitored on an ongoing basis through required periodic credit score reviews. If the borrower has shown signs of credit deterioration, home equity lines of credit may be frozen.

Under the Tax Cuts and Jobs Act enacted on December 22, 2017, interest on home equity loans and lines of credit is only deductible if the proceeds are used to buy, build or substantially improve the taxpayer’s home that secures the loan or line of credit. This change could adversely impact the level of originations and outstanding volumes of home equity lines of credit in the future.

Our home equity lines of credit are revolving lines of credit which generally have a term of twenty five years, with draws available for the first ten years. Our twenty five year lines of credit are interest only during the first ten years, and amortize on a fifteen year basis thereafter. We generally originate home equity lines of credit with loan-to-value ratios of up to 80% when combined with the principal balance of the existing first mortgage loan, although loan-to-value ratios may occasionally exceed 80% on a case by case basis. Maximum loan-to-values are determined based on an applicant’s credit score, property value and debt-to-income ratio. Lines of credit above $1 million with loan-to-values greater than 60% require two full appraisals with the valuation being the average of the two. Rates are adjusted monthly based on changes in a designated market index. At December 31, 2018, our largest home equity line of credit was a $2.6 million line of credit and had a $359,000 outstanding balance. At December 31, 2018 this line of credit was performing in accordance with its original terms.

Commercial Loans. We originate commercial term loans and variable lines of credit to small- and medium-sized businesses in our primary market area. Our commercial loans are generally used for working capital purposes or for acquiring equipment or real estate. These loans are generally secured by real estate as well as business assets, such as business equipment and inventory or accounts receivable, and are generally originated with maximum loan-to-value ratios of up to 80%. The commercial business loans that we offer are generally adjustable-rate loans with terms ranging from three to five years. At December 31, 2018, we had $62.5 million of commercial business loans and lines of credit outstanding, representing 2.4% of our total loan portfolio. At December 31, 2018, the average outstanding loan balance of our commercial loans and lines of credit was $905,000.

When making commercial business loans, we consider the value of the collateral, the financial condition of the borrower, the payment history of the borrower, the debt service capabilities of the borrower and the projected cash flows of the business. Generally our loans are guaranteed by the principals of the borrower.

 

8


Table of Contents

Commercial business loans generally have a greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. We seek to minimize these risks through our underwriting standards and the experience of our commercial lenders and credit department. The commercial lenders and credit department are responsible for the underwriting and documentation of new commercial loans. The annual review of credit ratings of existing loans and special credit projects are also completed by members of the credit department. The credit department has no loan production goals and has annual performance objectives based on credit quality and credit risk management. All commercial loans, regardless of size, are approved at a minimum by the Senior Vice President-Credit Manager of Commercial Real Estate Lending, the Executive Vice President and Division Executive of Commercial Real Estate Lending and the President and Chief Executive Officer of the Bank.

At December 31, 2018, our largest commercial loan outstanding was a $15.9 million loan secured by five separate Class A suburban office properties with a combined total of 487,254 square feet of rentable space, on a combined 47 acres of property. At December 31, 2018, this loan was performing in accordance with its original terms.

Construction Loans. We originate loans to professional developers and investors to finance the construction of one-to-four family residential, multi-family and commercial properties. The majority of our construction loans are for commercial development projects, including residential properties. Most of our loans for the construction of one-to-four family residential properties are “on speculation,” meaning there is no buyer committed to purchase the completed residence.

At December 31, 2018, $50.5 million, or 1.9%, of our total loan portfolio, consisted of construction loans, $5.5 million of which were secured by one-to-four family residential real estate projects on speculation, $20.7 million of which were secured by multi-family residential real estate projects, and $24.3 million of which were secured by land and commercial real estate.

Our construction loans generally provide for the payment of interest only during the construction phase, which is usually 12 to 24 months. At the end of the construction phase, depending upon the initial purpose, the loan either converts to a permanent mortgage loan or the project is sold and the loan is paid off.

Loans generally are made with a maximum loan to cost ratio of 75%, or a maximum loan-to-as completed value ratio of 75%, whichever is lower. Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser. We also require satisfactory inspections of the property and a satisfactory title update before disbursements of funds during the term of the construction loan.

At December 31, 2018, our largest speculative construction loan had a principal balance of $8.9 million and was secured by a 59.85 acre tract of vacant land to be improved by 147 townhouse condominium units. At December 31, 2018, this loan was performing in accordance with its original terms.

Construction financing generally involves greater credit risk than the financing of improved cash flowing real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.

 

9


Table of Contents

Indirect Automobile Loans and Other Consumer Loans. In the fourth quarter of 2010, we began originating indirect automobile loans. These are automobile loans that franchised dealerships originate and assign to us, upon our approval, for a premium based on pre-established rates and terms.    During the year ended December 31, 2018, our portfolio of indirect auto loans decreased from $30.2 million to $12.0 million, a decrease of 60.4% as we decided to suspend new originations due to market conditions during the second quarter of 2015.     

To a lesser extent we also offer a variety of other consumer loans, primarily loans secured by savings deposits. At December 31, 2018, our portfolio of consumer loans other than indirect automobile loans totaled $418,000, or 0.02%, of our total loan portfolio.

Indirect automobile loans and other consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.

Consumer loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly consumer loans that are secured by rapidly depreciable assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan repayments are dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, our consumer loan portfolio contains a substantial number of indirect automobile loans where we assume the risk that the automobile dealership administering the lending process complies with federal, state and local consumer protection laws.

Loan Originations, Purchases, Sales, Participations and Servicing. One-to-four family residential mortgage loans that we originate are generally underwritten pursuant to our policies and procedures, which incorporate standard underwriting guidelines, including those of Fannie Mae, to the extent applicable.

We originate both adjustable-rate and fixed-rate loans. Our loan origination and sales activity may be adversely affected by a rising interest rate environment that typically results in decreased loan demand. Most of our one-to-four family residential mortgage loan originations are generated by our loan officers or referred by branch managers and employees located in our banking offices.

In recent years, in an effort to manage interest rate risk in what has been a relatively low interest rate environment, as well as generate non-interest income, we have sold a portion of fixed-rate one-to-four family residential mortgage loans that we have originated or purchased.

Some of these loans were sold with the servicing rights released. For loans sold with servicing rights retained, we provide the servicing for the loans on a per-loan fee basis.

For the year ended December 31, 2018, we recognized $177,000 in net servicing income on residential mortgage loans that we sold and retained the servicing rights. At December 31, 2018, the principal balance of residential mortgage loans serviced for others totaled $142.8 million. For the year ended December 31, 2018, we recognized $179,000 in net servicing income on indirect auto loans that we sold and retained the servicing rights. At December 31, 2018, the principal balance of indirect auto loans serviced for others totaled $2.9 million.

We generally sell our loans without recourse, except for customary representations and warranties provided in sales transactions. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. We retain a portion of the interest paid by the borrower on the loans we service as consideration for our servicing activities.

From time to time, we will participate in loans with other banks. Whether we are the lead lender or not, we follow our customary loan underwriting and approval policies.

 

10


Table of Contents

At December 31, 2018, we held $10.1 million of commercial real estate loans in our portfolio that were participation loans from other lenders and we are the lead bank on $261.8 million of commercial real estate and commercial construction loans of which $70.6 million has been participated out to other lenders.

We also purchase whole loans from other banks and mortgage companies. In these cases, we follow our customary loan underwriting and approval policies. During the year ended December 31, 2018, we purchased $274.7 million of whole one-to-four family residential mortgage loans with both fixed and adjustable rates, from other banks and mortgage companies.

Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by senior management and approved by our Board of Directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and the value of the collateral that will secure the loan. To assess the borrower’s ability to repay, we review the borrower’s employment and credit history and information on the historical and projected income and expenses of the borrower. We require “full documentation” on all of our loan applications.

Our policies and loan approval limits are approved by our Board of Directors. Aggregate commercial lending relationships in amounts up to $1.0 million can be approved by designated individual officers or officers acting together with specific lending approval authority. Individual commercial loans and commercial relationships of $1.0 million or greater require the approval of the Executive Committee of the Board of Directors (“Executive Committee”). All commercial real estate and commercial loans, regardless of size, are approved by the Senior Vice President-Credit Manager of Commercial Real Estate Lending, the Executive Vice President and Division Executive of Commercial Real Estate Lending and the President and Chief Executive Officer of the Bank.

In accordance with governing banking statutes, the Bank is permitted, with certain exceptions, to make loans and commitments to any one borrower, including related entities, in the aggregate amount of not more than 20% of the Bank’s Tier 1 capital, or $39.5 million, at December 31, 2018, which is the Bank’s legal lending limit. There were no borrowers whose total indebtedness in aggregate exceeded the Bank’s legal lending limit.

We seek to minimize credit risks through our underwriting standards and the experience of our credit department. The credit department is responsible for the underwriting and documentation of new commercial loans as well as the annual review of credit ratings of existing loans and special credit projects. We consider our credit department to be independent because it has no loan production goals and has annual performance objectives based on credit quality and credit risk management.

We require appraisals based on a comparison with current market sales for all real property securing one-to-four family residential mortgage loans, multi-family loans and commercial real estate loans, unless the Executive Committee approves an alternative means of valuation. All appraisers are independent, state-licensed or state-certified appraisers and are approved by the Board of Directors annually.

Non-Performing and Problem Assets

When a residential mortgage loan or home equity line of credit is 15 days past due, a late payment notice is generated and mailed to the borrower. We will attempt personal, direct contact with the borrower to determine when payment will be made. We will send a letter when a loan is 30 days or more past due and will attempt to contact the borrower by telephone. Thereafter, we will send an additional letter when a loan is 60 days or more past due, and we will attempt to contact the borrower by telephone. By the 90th day of delinquency, unless the borrower has made arrangements to bring the loan current on its payments, the loan will be placed on non-accrual. We refer loans to legal counsel to commence foreclosure proceedings according to Massachusetts law. In addition, a property appraisal is conducted to determine the current condition and market value of the property. The account will be monitored on a regular basis thereafter. In attempting to resolve a default on a residential mortgage loan, the Bank complies with all applicable Massachusetts laws regarding a borrower’s right to cure the default.

When indirect auto loans become 10 to 15 days past due, a late fee is charged according to applicable guidelines. When the loan is 11 days past due, the customer will receive a phone call from our servicer requesting a payment. Letters are generated at 20 and 25 days past due.

 

11


Table of Contents

A letter stating our intent to repossess the automobile goes to the customer 21 days prior to repossession, which is triggered at 45 days past due. Vehicles are assigned for repossession at 65 to 70 days past due. Once an automobile has been repossessed, the customer has 21 days for right of redemption until the vehicle is sold. Auto loans are placed on non-accrual status at 90 days past due and charged off at 120 days past due.

Commercial business loans, commercial real estate loans and consumer loans are generally handled in the same manner as residential mortgage loans or home equity lines of credit. All commercial business loans that are 30 days past due are immediately referred to a senior lending officer. Because of the nature of the collateral securing consumer loans, we may commence collection procedures faster for consumer loans than for residential mortgage loans or home equity lines of credit.

Loans are placed on non-accrual status when payment of principal or interest is more than 90 days delinquent. Loans are also placed on non-accrual status if collection of principal or interest in full and in a timely manner is in doubt. When loans are placed on non-accrual, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. In general, the loan may be returned to accrual status if both principal and interest payments are brought current and remain current for six consecutive months and full payment of principal and interest is expected. All non-performing loans and problem assets are reviewed by the Executive Committee on a regular basis.

 

12


Table of Contents

Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.

 

     At December 31,  
     2018     2017     2016     2015     2014  
     (Dollars in thousands)  

Non-accrual loans:

          

Mortgage loans:

          

One-to-four family

   $ 1,159     $ 1,372     $ 1,804     $ 1,192     $ 2,662  

Commercial real estate

     —         —         —         2,424       —    

Multi-family real estate

     —         —         —         —         —    

Equity lines of credit

     —         —         —         —         96  

Construction loans

     —         —         —         —         —    

Commercial loans

     —         —         —         —         —    

Consumer loans:

          

Indirect auto loans

     11       4       15       15       12  

Other consumer loans

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-accrual loans

   $ 1,170     $ 1,376     $ 1,819     $ 3,631     $ 2,770  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans delinquent 90 days or greater and still accruing:

          

Mortgage loans:

          

Residential one-to-four family

     —         —         —         —         —    

Commercial real estate

     —         —         —         —         —    

Multi-family real estate

     —         —         —         —         —    

Equity lines of credit

     —         —         —         —         —    

Construction loans

     —         —         —         —         —    

Commercial loans

     —         —         —         —         —    

Consumer loans:

          

Indirect auto loans

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other consumer loans

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans 90 days delinquent and still accruing

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing loans

   $ 1,170     $ 1,376     $ 1,819     $ 3,631     $ 2,770  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other real estate owned

   $ —       $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total repossessed vehicles

   $ —       $ —       $ 3     $ 8     $ 48  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing assets (NPAs)

   $ 1,170     $ 1,376     $ 1,822     $ 3,639     $ 2,818  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Troubled debt restructures included in NPAs

   $ —       $ 645     $ 1,442     $ 781     $ 1,551  

Troubled debt restructures not included in NPAs

     4,206       4,194       4,656       7,007       7,675  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total troubled debt restructures

   $ 4,206     $ 4,839     $ 6,098     $ 7,788     $ 9,226  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios:

          

Non-performing loans to total loans

     0.04     0.06     0.10     0.24     0.23

Non-performing assets to total assets

     0.04     0.05     0.08     0.20     0.20

For the years ended December 31, 2018 and 2017, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $46,000 and $56,000, respectively. Interest income recognized on such loans for the years ended December 31, 2018 and 2017, was $11,000 and $19,000, respectively. Loans remain on non-accrual until both principal and interest payments are brought current and remain current for six consecutive months and full payment of principal and interest is expected. As of December 31, 2018, there were no non-performing loans that were paid current.

Troubled Debt Restructurings. We periodically modify loans to extend the term or make other concessions to help a borrower stay current on their loan and to avoid foreclosure. We generally do not forgive principal or interest on loans or modify the interest rates on loans to rates that are below market rates. At December 31, 2018 and 2017, we had $4.2 million and $4.8 million, respectively, of troubled debt restructurings. At December 31, 2018, $1.4 million was related to four residential one-to-four family loans and $2.8 million was related to two commercial real estate loans.

 

13


Table of Contents

At December 31, 2017, $2.0 million was related to five residential one to four family loans and $2.9 million was related to two commercial real estate loans. For the years ended December 31, 2018 and 2017, gross interest income that would have been recorded had our troubled debt restructurings been performing in accordance with their original terms was $69,000 and $98,000, respectively. Interest income recognized on such modified loans for the years ended December 31, 2018 and 2017 was $171,000 and $194,000, respectively.

 

14


Table of Contents

Delinquent Loans. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.

 

     Loans Delinquent For                
     60 to 89 Days      90 Days or Greater      Total  
     Number      Amount      Number      Amount      Number      Amount  
                   (Dollars in thousands)                

At December 31, 2018

              

Mortgage loans:

                 

Residential one to four family

     1      $ 239        2      $ 721        3      $ 960  

Commercial real estate loans

     —          —          —          —          —          —    

Multi-family real estate loans

     —          —          —          —          —          —    

Equity lines of credit

     —          —          —          —          —          —    

Construction loans

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     1        239        2        721        3        960  

Commercial loans

     —          —          —          —          —          —    

Consumer loans:

                 

Indirect auto loans

     6        33        4        11        10        44  

Other consumer loans

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     7      $ 272        6      $ 732        13      $ 1,004  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2017

                 

Mortgage loans:

                 

Residential one to four family

     —        $ —          1      $ 260        1      $ 260  

Commercial real estate loans

     —          —          —          —          —          —    

Multi-family real estate loans

     —          —          —          —          —          —    

Equity lines of credit

     —          —          —          —          —          —    

Construction loans

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     —          —          1        260        1        260  

Commercial loans

     —          —          —          —          —          —    

Consumer loans:

                 

Indirect auto loans

     4        30        1        4        5        34  

Other consumer loans

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     4      $ 30        2      $ 264        6      $ 294  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2016

                 

Mortgage loans:

                 

Residential one to four family

     —        $ —          1      $ 497        1      $ 497  

Commercial real estate loans

     —          —          —          —          —          —    

Multi-family real estate loans

     —          —          —          —          —          —    

Equity lines of credit

     1        486        —          —          1        486  

Construction loans

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     1        486        1        497        2        983  

Commercial loans

     —          —          —          —          —          —    

Consumer loans:

                 

Indirect auto loans

     7        106        1        15        8        121  

Other consumer loans

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     8      $ 592        2      $ 512        10      $ 1,104  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents
     Loans Delinquent For                
     60 to 89 Days      90 Days or Greater      Total  
     Number      Amount      Number      Amount      Number      Amount  

At December 31, 2015

                 

Mortgage loans:

                 

Residential one to four family

     2      $ 81        1      $ 411        3      $ 492  

Commercial real estate loans

     —          —          —          —          —          —    

Multi-family real estate loans

     —          —          —          —          —          —    

Equity lines of credit

     —          —          —          —          —          —    

Construction loans

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2        81        1        411        3        492  

Commercial loans

     —          —          —          —          —          —    

Consumer loans:

                 

Indirect auto loans

     4        47        1        15        5        62  

Other consumer loans

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     6      $ 128        2      $ 426        8      $ 554  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2014

                 

Mortgage loans:

                 

Residential one to four family

     1      $ 230        3      $ 2,432        4      $ 2,662  

Commercial real estate loans

     —          —          —          —          —          —    

Multi-family real estate loans

     —          —          —          —          —          —    

Equity lines of credit

     —          —          1        96        1        96  

Construction loans

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     1        230        4        2,528        5        2,758  

Commercial loans

     —          —          —          —          —          —    

Consumer loans:

                 

Indirect auto loans

     4        45        1        12        5        57  

Other consumer loans

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     5      $ 275        5      $ 2,540        10      $ 2,815  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Real Estate Owned. Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned. When property is acquired it is recorded at the estimated fair value at the date of foreclosure less the estimated costs to sell, establishing a new cost basis. Estimated fair value generally represents the sales price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial institutions. Holding costs and declines in estimated fair value result in charges to expense after acquisition. At December 31, 2018 and 2017 we did not have any property classified as other real estate owned.

Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are required to be designated as special mention.

We maintain an allowance for loan losses at an amount estimated to equal all credit losses incurred in our loan portfolio that are both probable and reasonable to estimate at the balance sheet measurement date. Our determination as to the classification of our assets and the amount of our loss allowances is subject to review by regulatory agencies, which may require that we establish additional loss allowances.

 

16


Table of Contents

We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

The following table sets forth our amounts of classified assets, assets designated as special mention and criticized assets (classified assets and loans designated as special mention) as of the dates indicated.

 

     At December 31,  
     2018      2017      2016      2015      2014  
     (Dollars in thousands)  

Classified loans:

              

Substandard

   $ 5,533      $ 6,650      $ 7,623      $ 9,786      $ 12,960  

Doubtful

     —          —          —          —          —    

Loss

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total classified loans

     5,533        6,650        7,623        9,786        12,960  

Special mention

     335        384        16,383        19,781        1,136  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total criticized loans

   $ 5,868      $ 7,034      $ 24,006      $ 29,567      $ 14,096  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2018, we had $5.5 million of substandard assets, of which $3.7 million were commercial real estate loans and$1.8 million were one-to-four family residential mortgage loans. At December 31, 2018, special mention assets consisted of a $335,000 one-to-four family residential mortgage loan. Other than disclosed in the above tables, there are no other loans at December 31, 2018 that management has serious doubts about the ability of the borrowers to comply with the present loan repayment terms.

Potential Problem Loans. Potential problem loans are loans that are currently performing and are not included in non-accrual loans above, but may be delinquent. These loans require an increased level of management attention, because we have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and as a result such loans may be included at a later date in non-accrual loans. At December 31, 2018, we had no potential problem loans that are not discussed above under “Classification of Assets.”

Allowance for Loan Losses

We provide for loan losses based upon the consistent application of our documented allowance for loan losses methodology. All loan losses are charged to the allowance for loan losses and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio, including a review of our classified assets, and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with Accounting Principles Generally Accepted in the United States of America (“GAAP”). The allowance for loan losses consists primarily of two components:

 

  (1)

specific allowances established for impaired loans (as defined by GAAP). The amount of impairment provided for as a specific allowance is measured based on the deficiency, if any, between the present value of expected future cash flows discounted at the loan’s effective interest rate at the time of impairment 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, and the carrying value of the loan; and

 

  (2)

general allowances established for loan losses on a portfolio basis for loans that do not meet the definition of impaired loans. The portfolio is grouped into homogenous pools by similar risk characteristics, primarily by loan type and regulatory classification. We apply an estimated incurred loss rate to each loan group. The loss rates applied are based upon our loss experience

 

17


Table of Contents
  adjusted, as appropriate, for the environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.

Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.

The adjustments to historical loss experience are based on our evaluation of several qualitative and environmental factors, including:

 

   

changes in any concentration of credit (including, but not limited to, concentrations by geography, industry or collateral type);

 

   

changes in the number and amount of non-accrual loans, watch list loans and past due loans;

 

   

changes in national, state and local economic trends;

 

   

changes in the types of loans in the loan portfolio;

 

   

changes in the experience and ability of personnel and management in the loan origination and loan servicing departments;

 

   

changes in the value of underlying collateral for collateral dependent loans;

 

   

changes in lending strategies; and

 

   

changes in lending policies and procedures.

In addition, we may establish an unallocated allowance to provide for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance.

We evaluate the allowance for loan losses based upon the combined total of the specific and general components. Generally when the loan portfolio increases, absent other factors, the allowance for loan losses methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally when the loan portfolio decreases, absent other factors, the allowance for loan losses methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.

We evaluate the loan portfolio on a quarterly basis and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, will periodically review the allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their analysis of information available to them at the time of their examination.

 

18


Table of Contents

The following table sets forth activity in our allowance for loan losses at and for the periods indicated.

 

     At or For the Years Ended December 31,  
     2018     2017     2016     2015     2014  
           (Dollars in thousands)  

Balance at the beginning of the period

   $ 16,312     $ 13,585     $ 11,240     $ 8,881     $ 7,958  

Charge-offs:

          

Residential one-to-four family

     —         —         —         (64     (375

Commercial real estate

     —         —         —         —         —    

Multi-family real estate

     —         —         —         —         —    

Construction

     —         —         —         —         —    

Commercial

     (4     —         —         —         (4

Home equity

     —         —         —         —         (199

Indirect auto

     (32     (45     (85     (139     (51

Other consumer

     (11     (14     (16     (16     (29
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     (47     (59     (101     (219     (658

Recoveries:

          

Residential one-to-four family

     —         —         —         —         —    

Commercial real estate

     —         —         —         —         —    

Multi-family real estate

     —         —         —         —         —    

Construction

     —         —         —         —         —    

Commercial

     —         —         —         24       —    

Home equity

     —         —         —         199       —    

Indirect auto

     13       22       56       32       15  

Other consumer

     4       2       5       6       14  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     17       24       61       261       29  

Net (charge-offs) recoveries

     (30     (35     (40     42       (629

Provision for loan losses

     1,657       2,762       2,385       2,317       1,552  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at the end of the period

   $ 17,939     $ 16,312     $ 13,585     $ 11,240     $ 8,881  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios:

          

Net (charge-offs) recoveries to average loans outstanding

     0.00     0.00     0.00     0.00     (0.06 )% 

Allowance for loan losses to non-performing loans at end of period

     1533.25     1185.47     746.84     309.56     320.59

Allowance for loan losses to total loans at end of period

     0.68     0.71     0.73     0.73     0.75

 

19


Table of Contents

Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

 

     At December 31,  
     2018     2017     2016  
                  (Dollars in thousands)               
     Allowance for
Loan Losses
     Percent of
Loans in Each
Category to
Total Loans
    Allowance for
Loan Losses
     Percent of
Loans in Each
Category to
Total Loans
    Allowance for
Loan Losses
     Percent of
Loans in Each
Category to
Total Loans
 

Mortgage loans:

               

Residential one-to-four family

   $ 7,434        60.20   $ 6,400        57.93   $ 4,828        53.34

Commercial real estate

     5,798        21.10       4,979        21.13       3,676        19.84  

Multi-family real estate

     1,711        7.74       1,604        6.77       1,209        6.47  

Home equity

     816        6.20       947        7.76       1,037        8.96  

Construction

     722        1.92       764        2.31       1,219        4.76  

Commercial

     679        2.37       758        2.77       728        3.39  

Consumer loans:

               

Indirect auto

     84        0.45       230        1.31       362        3.22  

Other consumer

     6        0.02       9        0.02       9        0.02  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total allocated allowance

     17,250        100.00       15,691        100.00       13,068        100.00  

Unallocated allowance

     689        —         621        —         517        —    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total allowance

   $ 17,939        100.00   $ 16,312        100.00   $ 13,585        100.00
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     At December 31,  
     2015     2014  
     (Dollars in thousands)  
     Allowance for
Loan Losses
     Percent of
Loans in Each
Category to
Total Loans
    Allowance for
Loan Losses
     Percent of
Loans in Each
Category to
Total Loans
 

Mortgage loans:

          

Residential one-to-four family

   $ 3,574        46.15   $ 2,364        38.16

Commercial real estate

     3,495        22.71       3,171        26.08  

Multi-family real estate

     983        6.53       872        7.39  

Home equity

     928        10.41       828        11.15  

Construction

     801        3.95       228        2.66  

Commercial

     613        3.46       458        3.32  

Consumer loans:

          

Indirect auto

     623        6.76       778        11.17  

Other consumer

     10        0.03       11        0.07  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total allocated allowance

     11,027        100.00       8,710        100.00  

Unallocated allowance

     213        —         171        —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total allowance

   $ 11,240        100.00   $ 8,881        100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Investments

The Board of Directors has the responsibility for approving our investment policy, and it is the responsibility of management to implement specific investment strategies. The Executive Committee has authorized our President and Chief Executive Officer, our Executive Vice President and Chief Financial Officer, and our Senior Vice President, Director of External Reporting & Accounting Policy to execute specific investment actions. The investment policy requires that single day transactions in excess of $15.0 million must contain the signature of two authorized officers and a member of the Executive Committee.

 

20


Table of Contents

The investment policy is reviewed and approved annually by the Board of Directors. The overall objectives of the investment policy are to: fully and efficiently employ funds not presently required for the Bank’s loan portfolio, cash requirements, or other assets essential to our operations; to provide for the safety of the funds invested while generating maximum income and capital appreciation in accordance with the objectives of liquidity and quality; to meet liquidity requirements projected by management; to meet regulatory and industry standards; to generate earnings which, after the impact of taxes, will provide added growth to surplus; and to employ a percentage of assets in a manner that will balance the market and credit risks of other assets, as well as our liquidity, capital, and reserve structure. All gains and losses on securities transactions are reported to the Executive Committee on a monthly basis.

Our current investment policy permits investments in securities issued by the U.S. government and U.S. government agencies, municipal bonds, corporate bonds, mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae, asset-backed securities (collateralized by assets other than conforming residential first mortgages), repurchase agreements, federal funds sold, certificates of deposit, money market funds, money market preferred securities, mutual funds, equity securities, daily overnight deposit funds, bankers acceptances, commercial paper, equity securities, structured notes, callable securities and any other investments that are deemed prudent and are approved by the Executive Committee and permitted by statute.

Accounting Standards Codification (“ASC”) 320, “Investments—Debt and Equity Securities” requires that, at the time of purchase, we designate a debt security as either held to maturity, available for sale, or trading, based upon our intent and ability to hold such security until maturity. Securities available for sale and trading securities are reported at fair value and securities held to maturity are reported at amortized cost. We currently do not maintain a trading portfolio. A periodic review and evaluation of the available-for-sale and held-to-maturity securities portfolios is conducted to determine if the fair value of any security has declined below its carrying value and whether such decline is other-than-temporary. For securities classified as available for sale, unrealized gains and losses are excluded from earnings and are reported as an increase or decrease to stockholders’ equity through other comprehensive income (loss). If such decline is deemed to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged against earnings or other comprehensive income (loss).

Generally, mortgage-backed securities are more liquid than individual mortgage loans since there is an active trading market for such securities. In addition, mortgage-backed securities may be used to collateralize our borrowings. Investments in mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.

Investment Securities. At December 31, 2018, our investment securities portfolio consisted entirely of corporate debt securities and mortgage-backed securities issued by Fannie Mae, Freddie Mac or Ginnie Mae. At December 31, 2018, our investment securities portfolio had a fair value of $149.4 million, an amortized cost of $152.2 million and a carrying value of $152.1 million, or 5.0% of total assets. At December 31, 2018, none of the underlying collateral consisted of subprime or Alt-A (traditionally defined as loans having less than full documentation) loans. We do not own any trust preferred securities or collateralized debt obligations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Average Balances and Yields” for a discussion of the recent performance of our securities portfolio.

At December 31, 2018, we had no investments in a single company or entity, other than U.S. government-sponsored enterprises, that had an aggregate book value in excess of 10% of our stockholders’ equity.

 

21


Table of Contents

Investment Securities Portfolio. The following tables set forth the composition of our investment securities portfolio at the dates indicated.

 

     At December 31,  
     2018      2017      2016  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (Dollars in thousands)  

Available-for-sale securities:

                 

Corporate debt securities

   $ 4,162      $ 4,040      $ 16,975      $ 16,921      $ 22,051      $ 22,048  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 4,162      $ 4,040      $ 16,975      $ 16,921      $ 22,051      $ 22,048  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     At December 31,  
     2018      2017      2016  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (Dollars in thousands)  

Held-to-maturity securities:

                 

U.S. government sponsored mortgage-backed securities

   $ 137,261      $ 134,625      $ 142,383      $ 140,439      $ 112,543      $ 111,560  

Corporate debt securities

     10,764        10,744        17,707        17,946        17,654        17,905  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held-to-maturity

   $ 148,025      $ 145,369      $ 160,090      $ 158,385      $ 130,197      $ 129,465  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2018 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of scheduled payments, prepayments or early redemptions that may occur.

 

     One Year or Less      More than One Year
through Five Years
    More than Five Years
through Ten Years
    More than Ten Years     Total Securities  
     Amortized
Cost
     Weighted
Average
Yield
     Amortized
Cost
     Weighted
Average
Yield
    Amortized
Cost
     Weighted
Average
Yield
    Amortized
Cost
     Weighted
Average
Yield
    Amortized
Cost
     Weighted
Average
Yield
 
     (Dollars in thousands)  

U.S. government sponsored mortgage-backed securities

   $ —          —        $ 12,309        1.30   $ 18,803        2.03   $ 106,149        2.53   $ 137,261        2.35

Corporate debt securities

     —          —          14,926        2.90     —          —         —          —         14,926        2.90
  

 

 

       

 

 

      

 

 

      

 

 

      

 

 

    

Total

   $ —          —        $ 27,235        2.18   $ 18,803        2.03   $ 106,149        2.53   $ 152,187        2.40
  

 

 

       

 

 

      

 

 

      

 

 

      

 

 

    

 

23


Table of Contents

Bank-Owned Life Insurance. We invest in bank-owned life insurance to help defray the cost of our benefit plan obligations. Bank-owned life insurance also provides us noninterest income that is generally non-taxable. Applicable regulations generally limit our investment in bank-owned life insurance to 25% of our tier one risk based capital. At December 31, 2018, we had $36.5 million in bank-owned life insurance.

Sources of Funds

General. Deposits traditionally have been our primary source of funds for our investment and lending activities. We also borrow from the Federal Home Loan Bank of Boston ( “FHLB”) to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management purposes and to manage our cost of funds. Our additional sources of funds are scheduled payments and prepayments of principal and interest on loans and investment securities, fee income and proceeds from the sales of loans and securities.

Deposits. We accept deposits primarily from customers in the communities in which our offices are located, as well as from small businesses, municipalities, nonprofit organizations and other customers throughout our lending area. We rely on our competitive pricing and products, convenient locations and quality customer service to attract and retain deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of relationship checking for consumers and businesses, passbook and statement savings accounts, certificates of deposit, money market accounts, IOLTA, commercial, municipal and regular checking accounts, and IRAs. Deposit rates and terms are based primarily on current business strategies and market interest rates, liquidity requirements and our deposit growth goals. We also access the brokered deposit market for funding.

At December 31, 2018, we had a total of $470.7 million in certificates of deposit, excluding brokered deposits, of which $357.9 million had remaining maturities of one year or less. Based on historical experience and our current pricing strategy, we believe we will retain a large portion of these accounts upon maturity. In addition, when rates and terms are competitive, and in keeping with the Bank’s interest rate risk and liquidity strategy, the Bank will supplement its customer deposit base with brokered deposits. As of December 31, 2018 and 2017, we had a total of $288.6 million and $247.2 million, respectively, of brokered certificates of deposit.

 

24


Table of Contents

The following tables set forth the distribution of our average total deposit accounts, by account type, for the periods indicated.

 

     For the Year Ended     For the Year Ended  
     December 31, 2018     December 31, 2017  
                  Weighted                  Weighted  
     Average            Average     Average            Average  
     Balance      Percent     Rate     Balance      Percent     Rate  
     (Dollars in thousands)  

Deposit type:

              

Demand deposits

   $ 210,168        10.87     —     $ 204,264        12.64     —  

Interest-bearing checking accounts

     144,503        7.47       0.54       133,805        8.28       0.43  

Regular savings accounts

     915,039        47.31       1.10       856,142        52.98       0.72  

Money market deposits

     12,558        0.65       0.79       8,297        0.51       0.01  

Certificates of deposit

     651,673        33.70       1.97       413,599        25.59       1.49  
  

 

 

    

 

 

     

 

 

    

 

 

   

Total deposits

   $ 1,933,941        100.00     1.23   $ 1,616,107        100.00     0.80
  

 

 

    

 

 

     

 

 

    

 

 

   
     For the Year Ended  
     December 31, 2016  
                  Weighted  
     Average            Average  
     Balance      Percent     Rate  
     (Dollars in thousands)  

Deposit type:

       

Demand deposits

   $ 189,234        13.84     —  

Interest-bearing checking accounts

     135,387        9.90       0.40  

Regular savings accounts

     732,445        53.55       0.60  

Money market deposits

     8,337        0.61       0.01  

Certificates of deposit

     302,314        22.10       1.48  
  

 

 

    

 

 

   

Total deposits

   $ 1,367,717        100.00     0.69
  

 

 

    

 

 

   

 

25


Table of Contents

The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.

 

     At December 31,  
     2018      2017      2016  
     (Dollars in thousands)  

Interest Rate:

        

Less than 1.00%

   $ 18,081      $ 23,077      $ 73,780  

1.00% to 1.99%

     289,140        452,967        247,538  

2.00% to 2.99%

     431,228        28,641        —    

3.00% to 3.99%

     20,818        —          28  

4.00% to 4.99%

     —          29        14,255  
  

 

 

    

 

 

    

 

 

 

Total

   $ 759,267      $ 504,714      $ 335,601  
  

 

 

    

 

 

    

 

 

 

The following table sets forth, by interest rate ranges, information concerning our certificates of deposit.

 

     At December 31, 2018  
     Less Than or      More Than      More Than                       
     Equal to      One to      Two to      More Than             Percent of  
     One Year      Two Years      Three Years      Three Years      Total      Total  
     (Dollars in thousands)  

Interest Rate:

                 

Less than 1.00%

   $ 15,636      $ 1,493      $ 952      $ —        $ 18,081        2.38

1.00% to 1.99%

     135,527        128,189        21,547        3,877        289,140        38.08

2.00% to 2.99%

     266,872        35,440        36,568        92,348        431,228        56.80

3.00% to 3.99%

     —          365        4,664        15,789        20,818        2.74
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 418,035      $ 165,487      $ 63,731      $ 112,014      $ 759,267        100.00
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2018, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $385.2 million. The following table sets forth the maturity of those certificates of deposit as of December 31, 2018.

 

     At  
     December 31, 2018  
     (Dollars in thousands)  

Three months or less

   $ 122,358  

Over three months through six months

     94,139  

Over six months through one year

     76,654  

Over one year to three years

     71,690  

Over three years

     20,388  
  

 

 

 

Total

   $ 385,229  
  

 

 

 

 

26


Table of Contents

Borrowings. Our borrowings consist of advances from the FHLB and repurchase agreements.

At December 31, 2018, we had access to additional FHLB advances of up to $270.6 million. The following table sets forth information concerning balances and interest rates on our FHLB advances at the dates and for the periods indicated.

 

     At or For the Years Ended December 31,  
     2018     2017     2016  
     (Dollars in thousands)  

Balance at end of period

   $ 838,250     $ 723,150     $ 508,850  

Average balance during period

   $ 687,289     $ 571,431     $ 428,163  

Maximum outstanding at any month end

   $ 872,250     $ 723,150     $ 508,850  

Weighted average interest rate at end of period

     2.27     1.63     1.20

Average interest rate during period

     1.95     1.43     1.12

The following table sets forth information concerning balances and interest rates on our repurchase agreements at the dates and for the periods indicated.

 

     At or For the Years Ended December 31,  
     2018     2017     2016  
     (Dollars in thousands)  

Balance at end of period

   $ 2,883     $ 3,268     $ 1,985  

Average balance during period

   $ 3,449     $ 2,865     $ 2,419  

Maximum outstanding at any month end

   $ 4,919     $ 4,000     $ 3,772  

Weighted average interest rate at end of period

     0.15     0.15     0.15

Average interest rate during period

     0.15     0.15     0.15

Personnel

At December 31, 2018, the Bank had 133 full-time employees and 2 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.

Subsidiaries

BSB Bancorp conducts its principal business activities through its wholly-owned subsidiary, Belmont Savings Bank. BSB Bancorp has one other wholly-owned subsidiary, BSB Funding Corporation, the sole purpose of which is to hold the loan to Belmont Savings Bank’s employee stock ownership plan. Belmont Savings has one subsidiary, BSB Investment Corporation, a Massachusetts corporation, which is engaged in the buying, selling and holding of investment securities.

 

27


Table of Contents

REGULATION AND SUPERVISION

General

Belmont Savings Bank is a Massachusetts-chartered savings bank and the wholly-owned subsidiary of BSB Bancorp, a Maryland corporation. Belmont Savings Bank’s deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation, or “FDIC”, and by the Depositors Insurance Fund of Massachusetts, or “DIF”, for amounts in excess of the FDIC insurance limits. Belmont Savings Bank is subject to extensive regulation by the Massachusetts Commissioner of Banks, as its chartering agency, and by the FDIC, its primary federal regulator and deposit insurer. Belmont Savings Bank is required to file reports with, and is periodically examined by, the FDIC and the Massachusetts Commissioner of Banks concerning its activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions, including, but not limited to, mergers with or acquisitions of other financial institutions. As a registered bank holding company, BSB Bancorp is regulated by the Board of Governors of the Federal Reserve System, or the “Federal Reserve Board.”

The regulatory and supervisory structure establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of depositors and the deposit insurance funds, rather than for the protection of stockholders and creditors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies concerning the establishment of deposit insurance assessment fees, classification of assets and establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the Massachusetts legislature, the Massachusetts Commissioner of Banks, the FDIC, the Federal Reserve Board or Congress, could have a material adverse impact on the financial condition and results of operations of BSB Bancorp and Belmont Savings Bank.

Set forth below is a summary of certain material statutory and regulatory requirements that are applicable to Belmont Savings Bank and BSB Bancorp. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on Belmont Savings Bank and BSB Bancorp.

Massachusetts Banking Laws and Supervision

General. As a Massachusetts-chartered stock savings bank, Belmont Savings Bank is subject to supervision, regulation and examination by the Massachusetts Commissioner of Banks and to various Massachusetts statutes and regulations which govern, among other things, investment powers, lending and deposit-taking activities, borrowings, maintenance of surplus and reserve accounts, distribution of earnings and payment of dividends. In addition, Belmont Savings Bank is subject to Massachusetts consumer protection and civil rights laws and regulations. The approval of the Massachusetts Commissioner of Banks and/or the Massachusetts Board of Bank Incorporation is required for a Massachusetts-chartered bank to establish or close branches, merge with other financial institutions, issue stock and undertake certain other activities.

Massachusetts regulations generally allow Massachusetts banks, with appropriate regulatory approvals, to engage in activities permissible for federally chartered banks or banks chartered by another state. The Commissioner also has adopted procedures reducing regulatory burdens and expense and expediting branching by well-capitalized and well-managed banks.

The Commonwealth of Massachusetts adopted a law modernizing the Massachusetts banking law, effective in 2015. which affords Massachusetts chartered banks with greater flexibility compared to federally chartered and out-of-state banks.

 

28


Table of Contents

Dividends. A Massachusetts stock bank may declare cash dividends from net profits not more frequently than quarterly. Non-cash dividends may be declared at any time. No dividends may be declared, credited or paid if the bank’s capital stock is impaired. The approval of the Massachusetts Commissioner of Banks is required if the total of all dividends declared in any calendar year exceeds the total of its net profits for that year combined with its retained net profits of the preceding two years. Dividends from BSB Bancorp may depend, in part, upon receipt of dividends from Belmont Savings Bank. The payment of dividends from Belmont Savings Bank would be restricted by federal law if the payment of such dividends resulted in Belmont Savings Bank failing to meet regulatory capital requirements.

Lending Activities in General. A Massachusetts bank may, in accordance with Massachusetts law and regulations issued by the Massachusetts Commissioner of Banks, exercise any power and engage in any activity that has been authorized for national banks, federal thrifts or state banks in a state other than Massachusetts, provided that the activity is permissible under applicable federal and not specifically prohibited by Massachusetts law. Such powers and activities must be subject to the same limitations and restrictions imposed on the national bank, federal thrift or out-of-state bank that exercised the power or activity. In many cases, a Massachusetts Bank is required to submit advanced written notice to the Massachusetts Commissioner of Banks prior to engaging in certain activities authorized for national banks, federal thrifts, or out-of-state banks.

Loans to One Borrower Limitations. Massachusetts banking law grants broad lending authority. However, with certain limited exceptions, total obligations to one borrower may not exceed 20 percent of the bank’s capital, which is defined under Massachusetts law as the sum of the bank’s capital stock, surplus account and undivided profits.

Investment Activities. In general, Massachusetts-chartered savings banks may invest in preferred and common stock of any corporation organized under the laws of the United States or any state provided such investments do not involve control of any corporation and do not, in the aggregate, exceed 4% of the bank’s deposits. Massachusetts-chartered savings banks may in addition invest an amount equal to 1.0% of their deposits in stocks of Massachusetts corporations or companies with substantial employment in the Commonwealth which have pledged to the Massachusetts Commissioner of Banks that such monies will be used for further development within the Commonwealth. Federal law imposes additional restrictions on Belmont Savings Bank’s investment activities. See “—Federal Bank Regulations—Business and Investment Activities.”

Insurance Sales. Massachusetts banks may engage in insurance sales activities if the Massachusetts Commissioner of Banks has approved a plan of operation for insurance activities and the bank obtains a license from the Massachusetts Division of Insurance. A bank may be licensed directly or indirectly through an affiliate or a subsidiary corporation established for this purpose. The Bank has not sought approval for insurance sales activities.

Regulatory Enforcement Authority. Any Massachusetts savings bank that does not operate in accordance with the regulations, policies and directives of the Massachusetts Commissioner of Banks may be subject to sanctions for non-compliance, including revocation of its charter. The Massachusetts Commissioner of Banks may, under certain circumstances, suspend or remove officers or directors who have violated the law, conducted the bank’s business in an unsafe or unsound manner or contrary to the depositors interests or been negligent in the performance of their duties. Upon finding that a bank has engaged in an unfair or deceptive act or practice, the Massachusetts Commissioner of Banks may issue an order to cease and desist and impose a fine on the bank concerned. The Commissioner also has authority to take possession of a bank and appoint a liquidating agent under certain conditions such as an unsafe and unsound condition to transact business, the conduct of business in an unsafe or unauthorized manner, impaired capital, or violations of law or the bank’s charter. In addition, Massachusetts consumer protection and civil rights statutes applicable to Belmont Savings Bank permit private individual and class action law suits and provide for the rescission of consumer transactions, including loans, and the recovery of statutory and punitive damage and attorney’s fees in the case of certain violations of those statutes.

Depositors Insurance Fund. Massachusetts-chartered savings banks are required to be members of the DIF, a corporation that insures savings bank deposits in excess of federal deposit insurance coverage. However, if a savings bank has over $1 billion of deposits in excess of federal deposit insurance coverage, the bank must exit the DIF. The DIF is authorized to charge savings banks an annual assessment fee on deposit balances in excess of amounts insured by the FDIC.

 

29


Table of Contents

Assessment rates are based on the institution’s risk category, similar to the method currently used to determine assessments by the FDIC discussed below under “—Federal Bank Regulations—Insurance of Deposit Accounts.”

Protection of Personal Information. Massachusetts has adopted regulatory requirements intended to protect personal information. These requirements are similar to existing federal laws such as the Gramm-Leach-Bliley Act of 1999, discussed below under “—Federal Regulations—Privacy Regulations,” that require organizations to establish written information security programs to prevent identity theft. The Massachusetts regulation also contains technology system requirements, especially for the encryption of personal information sent over wireless or public networks or stored on portable devices.

Massachusetts has other statutes or regulations that are similar to certain of the federal provisions discussed below.

Federal Bank Regulations

Prompt Corrective Action Regulations. Federal law establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. The FDIC has adopted regulations to implement the prompt corrective action legislation. The regulations were amended to incorporate increased regulatory capital standards that were effective January 1, 2015 (discussed below). Banks are placed in one of the following five categories based on the bank’s capital:

 

   

well-capitalized (at least 5% leverage capital, 8% Tier 1 risk-based capital, 10% total risk-based capital and 6.5% common equity Tier 1 risk-based capital);

 

   

adequately capitalized (at least 4% leverage capital, 6% Tier 1 risk-based capital, 8% total risk-based capital and 4.5% common equity Tier 1 risk-based capital);

 

   

undercapitalized (less than 4% leverage capital, 6% Tier 1 risk-based capital, 8% total risk-based capital or 4.5% common equity Tier 1 risk-based capital);

 

   

significantly undercapitalized (less than 3% leverage capital, 4% Tier 1 risk-based capital, 6% total risk-based capital or 3% common equity Tier 1 risk-based capital); and

 

   

critically undercapitalized (less than 2% tangible capital).

“Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank’s compliance with such a plan must be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional measures, including, but not limited to, a required sale of sufficient voting stock to become adequately capitalized, a requirement to reduce total assets, cessation of taking deposits from correspondent banks, the dismissal of directors or officers and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.

At December 31, 2018, Belmont Savings Bank met the criteria for being considered “well-capitalized.”

Capital Requirements. Under the FDIC’s regulations, federally insured state-chartered banks that are not members of the Federal Reserve System (“state non-member banks”), such as Belmont Savings Bank, are required to comply with minimum leverage capital requirements.

 

30


Table of Contents

Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a Tier 1 capital to total assets leverage ratio of 4%. These capital requirements were effective January 1, 2015. In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement was being phased in beginning at 0.625% in 2015 and was fully implemented at 2.5% on January 1, 2019.

Legislation enacted in May 2018 requires the federal banking agencies, including the FDIC, to establish a “community bank leverage ratio” of between 8% and 10% of average total consolidated assets for qualifying institutions with total assets of less than $10 billion. Institutions with capital levels meeting the requirement and electing to follow the alternative framework would be deemed to comply with their regulatory capital requirements, including the risk-based requirements. The federal regulators have issued a proposed rule that would set the ratio at 9%.

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. In assessing an institution’s capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions if it deems necessary.

Standards for Safety and Soundness. As required by statute, the federal banking agencies adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness (the “guidelines”) to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings, compensation, fees and benefits and, more recently, safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.

Business and Investment Activities. Under federal law, all state-chartered FDIC-insured banks, including savings banks, have been limited in their activities as principal and in their equity investments to the type and the amount authorized for national banks, notwithstanding state law. Federal law permits exceptions to these limitations. For example, certain state-chartered savings banks may, with FDIC approval, continue to exercise state authority to invest in common or preferred stocks listed on a national securities exchange and in the shares of an investment company registered under the Investment Company Act of 1940, as amended. The maximum permissible investment is the lesser of 100.0% of Tier 1 capital or the maximum amount permitted by Massachusetts law. Belmont Savings Bank received approval from the FDIC to retain and acquire such equity instruments up to the specified limits. However, at December 31, 2018, Belmont Savings Bank held no such investments. Any such grandfathered authority may be terminated upon the FDIC’s determination that such investments pose a safety and soundness risk or upon the occurrence of certain events such as the savings bank’s conversion to a different charter.

The FDIC is also authorized to permit state banks to engage in state authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if they meet all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to the FDIC insurance fund. The FDIC has adopted regulations governing the procedures for institutions seeking approval to engage in such activities or investments. The Gramm-Leach-Bliley Act of 1999 specified that a state bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a “financial subsidiary,” if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes.

 

31


Table of Contents

Transactions with Affiliates. Transactions between a bank (and, generally, its subsidiaries) and its related parties or affiliates are limited by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank.

Generally, Sections 23A and 23B of the Federal Reserve Act limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to 10% of such institution’s capital stock and surplus and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such institution’s capital stock and surplus. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar transactions. In addition, loans or other extensions of credit by the institution to the affiliate are required to be collateralized in accordance with specified requirements. The law also requires that affiliate transactions be on terms and conditions that are substantially the same, or at least as favorable to the institution, as those provided to non-affiliates.

The Sarbanes-Oxley Act of 2002 generally prohibits loans by a company to its executive officers and directors. The law contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws, assuming such loans are also permitted under the law of the institution’s chartering state. Under such laws, a bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is restricted. The law limits both the individual and aggregate amount of loans that may be made to insiders based, in part, on the bank’s capital position and requires certain board approval procedures to be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Loans to executive officers are further limited to loans of specific types and amounts.

Interstate Banking and Branching. Federal law permits well capitalized and well managed bank holding companies to acquire banks in any state, subject to Federal Reserve Board approval, certain concentration limits and other specified conditions. Interstate mergers of banks are also authorized, subject to regulatory approval and other specified conditions. In addition, among other things, banks are permitted to establish de novo branches on an interstate basis provided to the extent that branching is authorized by the law of the host state for the banks chartered by that state.

Enforcement. The FDIC has extensive enforcement authority over insured state savings banks, including Belmont Savings Bank. That enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices. The FDIC also has authority under federal law to appoint a conservator or receiver for an insured bank under certain circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.”

Federal Insurance of Deposit Accounts. The FDIC imposes deposit insurance assessments. Assessments for most institutions are based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure within three years. In conjunction with the Deposit Insurance Fund reserve ratio achieving 1.15%, the assessment range (inclusive of possible adjustments) was reduced for institutions of less than $10 billion in total assets from between 5 basis points and 35 basis points to between 1.5 basis points and 30 basis points, with the specific rate depending on several factors including the institution’s CAMELS rating. The Dodd-Frank Act specifies that banks of greater than $10 billion in assets be required to bear the burden of raising the reserve ratio from 1.15% to 1.35%. Such institutions were subject to an annual surcharge of 4.5 basis points of total assets exceeding $10 billion. In September 2018, the FDIC announced that the reserve ratio exceeded 1.35%. As a result, surcharges on large banks were terminated and banks of less than $10 billion of assets will receive assessment credits for assessments paid that contributed to the growth in the reserve ratio from 1.15% to 1.35% to be applied when the reserve ratio reaches 1.38%. The FDIC, exercising discretion provided to it by the Dodd-Frank Act, has established a long-term goal of achieving a 2% reserve ratio for the Deposit Insurance Fund.

 

32


Table of Contents

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Future insurance assessment rates cannot be predicted.

In addition to FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, through the FDIC, assessments for costs related to bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation.

All bonds issued by the FICO are due to mature by September 2019. During the calendar year ended December 31, 2018, the Bank paid $77,000 in fees related to the FICO.

Belmont Savings Bank is a member of the DIF, a corporation that insures savings bank deposits in excess of federal deposit insurance coverage. See “—Massachusetts Banking Laws and Supervision—DIF,” above.

Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA does require the FDIC, in connection with its examination of a bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to establish or acquire branches and merge with other depository institutions. The CRA requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a five-tiered descriptive rating system. The Bank’s latest FDIC CRA rating, dated April 3, 2017, was “satisfactory.”

Massachusetts has its own statutory counterpart to the CRA which is also applicable to the Bank. The Massachusetts version is generally similar to the CRA and utilizes a five-tiered descriptive rating system. The Massachusetts Commissioner of Banks is required to consider a bank’s record of performance under the Massachusetts law in considering any application by the bank to establish a branch or other deposit-taking facility, relocate an office or to merge or consolidate with or acquire the assets and assume the liabilities of any other banking institution. The Bank’s most recent rating under Massachusetts law, dated April 3, 2017, was “satisfactory.”

Federal Reserve System. The Federal Reserve Board regulations require savings institutions to maintain reserves against their transaction accounts (primarily Negotiable Order of Withdrawal and regular checking accounts). The regulations currently provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $124.2 million; a 10% reserve ratio is applied above $124.2 million. The first $16.3 million of otherwise reservable balances are exempted from the reserve requirements. The amounts are adjusted annually. The Bank complies with the foregoing requirements.

Federal Home Loan Bank System. The Bank is a member of the FHLB System, which consists of twelve regional Federal Home Loan Banks. The FHLB System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the FHLB, the Bank is required to acquire and hold a specified amount of shares of capital stock in the FHLB. As of December 31, 2018, the Bank was in compliance with this requirement.

Other Regulations

Some interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s operations are also subject to state and federal laws applicable to credit transactions and other operations, including but not limited to, the:

 

   

Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

 

33


Table of Contents
   

Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one to four family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;

 

   

Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

 

   

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed, or other prohibited factors in extending credit;

 

   

Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; and

 

   

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies.

The operations of the Bank also are subject to the:

 

   

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

 

   

Electronic Funds Transfer Act and Regulation E promulgated thereunder, that govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

 

   

Gramm-Leach-Bliley Act privacy statute which requires each depository institution to disclose its privacy policy, identify parties with whom certain nonpublic customer information is shared and provide customers with certain rights to “opt out” of disclosure to certain third parties; and

 

   

Title III of The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT Act”), which significantly expanded the responsibilities of financial institutions, in preventing the use of the United States financial system to fund terrorist activities. Among other things, the USA PATRIOT Act and the related regulations required banks operating in the United States to develop anti-money laundering compliance programs, due diligence policies and controls to facilitate the detection and reporting of money laundering.

Holding Company Regulation

BSB Bancorp, as a bank holding company, is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as amended, as administered by the Federal Reserve Board. BSB Bancorp is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval would be required for BSB Bancorp to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if it would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding company.

A bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities.

 

34


Table of Contents

One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing securities brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property under certain conditions; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings association.

The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including depository institution subsidiaries that are “well capitalized” and “well managed,” to opt to become a “financial holding company.” A “financial holding company” may engage in a broader array of financial activities than permitted a typical bank holding company. Such activities can include insurance underwriting and investment banking. BSB Bancorp has not opted for “financial holding company” status at this time.

BSB Bancorp is subject to the Federal Reserve Board’s capital requirements for bank holding companies. The Dodd-Frank Act directed the Federal Reserve Board to issue consolidated capital requirements for depository institution holding companies that are not less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. Consolidated regulatory capital requirements identical to those applicable to banks were applied to bank holding companies with greater than $1.0 billion of assets as of January 1, 2015. However, legislation enacted in May 2018 required the Federal Reserve Board to raise the threshold of its “small bank holding company” exception to the applicability of consolidated capital requirements to $3 billion of assets. That change was effective in August 2018. Consequently, holding companies with less than $3 billion of assets are not subject to consolidated holding company capital requirements unless otherwise advised by the Federal Reserve Board.

A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. The Federal Reserve Board has adopted an exception to that approval requirement for well-capitalized bank holding companies that meet certain other conditions.

The Dodd-Frank Act codified the “source of strength” doctrine. That longstanding policy of the Federal Reserve Board requires bank holding companies to serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The policy statement also provides for regulatory consultation prior to a holding company paying dividends or redeeming or repurchasing regulatory capital instruments under certain circumstances.

The Federal Deposit Insurance Act, makes depository institutions liable to the FDIC for losses suffered or anticipated by the insurance fund in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. That law would have potential applicability if BSB Bancorp ever held as a separate subsidiary a depository institution in addition to Belmont Savings Bank.

The status of BSB Bancorp as a registered bank holding company under the Bank Holding Company Act will not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.

 

35


Table of Contents

Change in Control Regulations. Under the Change in Bank Control Act, no person may acquire control of a bank holding company such as BSB Bancorp, Inc. unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquirer has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as will be the case with BSB Bancorp, Inc., the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.

Massachusetts Holding Company Regulation. Under Massachusetts banking laws, a company owning or controlling two or more banking institutions, including a savings bank, is regulated as a bank holding company. Each Massachusetts bank holding company: (i) must obtain the approval of the Massachusetts Board of Bank Incorporation before engaging in certain transactions, such as the acquisition of more than 5% of the voting stock of another banking institution; (ii) must register, and file reports, with the Massachusetts Division of Banks; and (iii) is subject to examination by the Division of Banks. BSB Bancorp would become a Massachusetts bank holding company if it acquires a second banking institution and holds and operates it separately from Belmont Savings Bank.

Federal Securities Laws

BSB Bancorp’s common stock is registered with the Securities and Exchange Commission. BSB Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

 

ITEM 1A.

RISK FACTORS

The material risks and uncertainties that Management believes affect the Company are described below. These risks and uncertainties are not the only ones affecting the Company. Additional risks and uncertainties that Management is not aware of or focused on or that Management currently deems immaterial may also impair the Company’s business operations. This report is qualified in its entirety by these risk factors. If any one or more of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected.

Risks Related to the Merger

Because the market price of People’s United Financial, Inc. common stock will fluctuate, the Company’s stockholders cannot be certain of the market value of the merger consideration they will receive.

Upon completion of the merger, each outstanding share of the Company’s common stock held immediately prior to the effective time of the merger, except for specified shares of the Company’s common stock owned by the Company or People’s United (which will be cancelled), will be converted into the right to receive 2.0 shares of People’s United common stock. The market value of the People’s United common stock to be issued in the merger will depend upon the market price of People’s United common stock and of the Company’s common stock. The market value of People’s United common stock and the Company’s common stock at the effective time of the merger may vary significantly from their respective values on the date the merger was announced or at other dates, including on the date that the proxy statement/prospectus was mailed to the Company’s stockholders and on the date of the Company’s special meeting. There will be no adjustment to the merger consideration for changes in the market price of either shares of People’s United common stock or the Company’s common stock.

 

36


Table of Contents

The market price of People’s United common stock and the Company’s common stock may result from a variety of factors, including, but not limited to, changes in sentiment in the market regarding People’s United’s and the Company’s operations or business prospects, including market sentiment regarding People’s United’s and/or the Company’s entry into the merger agreement. These risks may also be affected by:

 

   

Operating results that vary from the expectations of People’s United’s and/or the Company’s management or of securities analysts and investors;

 

   

Developments in People’s United’s and/or the Company’s business or in the financial services sector generally;

 

   

Regulatory or legislative changes affecting the banking industry generally or People’s United’s and/or the Company’s business and operations;

 

   

Operating and securities price performance of companies that investors consider to be comparable to People’s United and/or the Company;

 

   

Changes in estimates or recommendations by securities analysts or rating agencies;

 

   

Announcements of strategic developments, acquisitions, dispositions, financings and other material events by People’s United or its competitors; and

 

   

Changes in global financial markets and economies and general market conditions, such as interest or foreign exchange rates, stock, commodity, credit or asset valuations or volatility.

Many of these factors are outside the control of People’s United and the Company. Accordingly, at the time of the Company’s special meeting, the Company’s stockholders will not necessarily know or be able to calculate the value of the merger consideration they would be entitled to receive upon completion of the merger. You should obtain current market quotations for both People’s United common stock and the Company’s common stock.

The market price of People’s United common stock after the merger may be affected by factors different from those affecting the shares of People’s United or the Company currently.

The businesses of People’s United and the Company’s differ, and accordingly, the results of operations of the combined company and the market price of the shares of People’s United’s common stock after the completion of the merger may be affected by factors different from those currently affecting the independent results of operations and market prices of common stock of each of People’s United and the Company. For a discussion of the businesses of People’s United and of certain factors to consider in connection with those businesses, see the documents filed by People’s United with the SEC.

The success of the merger and integration of People’s United and the Company will depend on a number of uncertain factors.

The success of the merger will depend on a number of factors, including:

 

   

People’s United’s ability to integrate the branches acquired from the Company in the merger (which we refer to as the “acquired branches”) into People’s United’s current operations;

 

   

People’s United’s ability to limit the outflow of deposits held by its new customers in the acquired branches and to successfully retain and manage interest-earning assets (i.e. loans) acquired in the merger;

 

37


Table of Contents
   

People’s United’s ability to control the incremental non-interest expense from the acquired branches in a manner that enables it to maintain a favorable overall efficiency ratio;

 

   

People’s United’s ability to retain and attract the appropriate personnel to staff the acquired branches; and

 

   

People’s United’s ability to earn acceptable levels of interest and non-interest income, including fee income, from the acquired branches.

Integrating the acquired branches will be an operation of substantial size and expense and may be affected by general market and economic conditions or government actions affecting the financial industry generally. Integration efforts will also likely divert People’s United’s management’s attention and resources. No assurance can be given that People’s United will be able to integrate the acquired branches successfully. Additionally, no assurance can be given that the operation of the acquired branches will not adversely affect People’s United’s existing profitability, that People’s United will be able to achieve results in the future similar to those achieved by its existing banking business or that People’s United will be able to manage any growth resulting from the merger effectively.

 

38


Table of Contents

Combining People’s United and the Company may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of the merger may not be realized.

People’s United and the Company have operated and, until the completion of the merger, will continue to operate, independently. The success of the merger, including anticipated benefits and cost savings, will depend, in part, on People’s United’s ability to successfully combine and integrate the businesses of People’s United and the Company in a manner that permits growth opportunities and does not materially disrupt existing customer relations nor result in decreased revenues due to loss of customers. It is possible that the integration process could result in the loss of key employees, the disruption of either company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the merger. The loss of key employees could adversely affect People’s United’s ability to successfully conduct its business, which could have an adverse effect on People’s United’s financial results and the value of its common stock. People’s United may also encounter unexpected difficulties or costs during the integration that could adversely affect its earnings and financial condition, perhaps materially. If People’s United experiences difficulties with the integration process and attendant systems conversion, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause People’s United and/or the Company to lose customers or cause customers to remove their accounts from People’s United and/or the Company and move their business to competing financial institutions. Integration efforts between the two companies may also divert management’s attention and resources. These integration matters could have an adverse effect on each of People’s United and the Company during this transition period and for an undetermined period after completion of the merger on the combined company. In addition, the actual cost savings of the merger could be less than anticipated or could take longer to anticipate than expected.

The combined company may be unable to retain People’s United and/or the Company’s personnel successfully after the merger is completed.

The success of the merger will depend in part on the combined company’s ability to retain the talents and dedication of key employees currently employed by People’s United and the Company. It is possible that these employees may decide not to remain with People’s United or the Company, as applicable, while the merger is pending or with the combined company after the merger is consummated. If key employees terminate their employment or if an insufficient number of employees is retained to maintain effective operations, the combined company’s business activities may be adversely affected, and management’s attention may be diverted from successfully integrating the Company to hiring suitable replacements, all of which may cause the combined company’s business to suffer. In addition, People’s United and the Company may not be able to locate suitable replacements for any key employees who leave either company or to offer employment to potential replacements on reasonable terms.

The merger agreement limits the Company’s ability to pursue alternatives to the merger.

The merger agreement contains provisions that make it more difficult for the Company to sell its business to a party other than People’s United. These provisions include a general prohibition on the Company’s solicitation of, or, subject to certain exceptions relating to the exercise of fiduciary duties by the Company’s board of directors, entering into discussions with any third party regarding any acquisition proposal or offer for a competing transaction, the requirement that the Company pay the $12.5 million termination fee if the merger agreement is terminated in certain circumstances and the requirement that the Company submit the merger proposal to a vote of the Company’s stockholders even if the Company’s board of directors changes its recommendation in favor of the merger proposal in a manner adverse to People’s United.

 

39


Table of Contents

These provisions might discourage a third party that might have an interest in acquiring all or a significant part of the Company from considering or proposing that acquisition, even if that party were prepared to pay consideration with a higher per share value than the proposed merger consideration. Furthermore, a potential competing acquirer may propose to pay a lower per share price to the Company’s stockholders than it might otherwise have proposed to pay because of the Company’s obligation, in connection with termination of the merger agreement under certain circumstances, to pay People’s United the termination fee.

An adverse judgment in any lawsuit filed against the Company and People’s United may prevent the merger from becoming effective or from becoming effective within the expected timeframe.

Stockholders often file lawsuits against companies and/or the directors and officers of companies in connection with a merger. One of the conditions to the closing of the merger is that no order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition that prevents the consummation of the merger or any of the other transactions contemplated by the merger agreement be in effect. If any plaintiff were successful in obtaining an injunction prohibiting the Company or People’s United defendants from completing the merger on the agreed upon terms, then such injunction may prevent the merger from becoming effective or from becoming effective within the expected timeframe and could result in significant costs to the Company and/or People’s United, including any cost associated with the indemnification of directors and officers. The defense or settlement of any lawsuit or claim that remains unresolved at the time the merger is completed may adversely affect People’s United’s business, financial condition, results of operations and cash flow.

The Company’s stockholders will not have dissenters’ or appraisal rights in the merger.

Dissenters’ and appraisal rights are statutory rights that, if applicable under law, enable stockholders to dissent from an extraordinary transaction, such as a merger, and to demand that the corporation pay the fair value for their shares as determined by a court in a judicial proceeding instead of receiving the consideration offered to stockholders in connection with the extraordinary transaction. Stockholders of a Maryland corporation are not entitled to exercise any rights of an objecting stockholder under the Maryland General Corporation Law (“MGCL”) if the corporation’s stock is listed on a national securities exchange. The Company’s stock is listed on NASDAQ. Furthermore, under the Company’s articles of incorporation, the Company’s stockholders are not entitled to exercise any rights of an objecting stockholder provided under MGCL, unless the Company’s board of directors determines that such rights apply with respect to a transaction. The board of directors has not made such a determination with respect to the merger. Accordingly, the Company’s stockholders will not be entitled to assert any appraisal or dissenters’ rights with respect to their shares of the Company’s common stock in connection with the merger.

The fairness opinion delivered by the Company’s financial advisor to the Company’s board of directors prior to the execution of the merger agreement will not reflect changes in circumstances subsequent to the date of the fairness opinion.

J.P. Morgan, the Company’s financial advisor in connection with the merger, delivered its fairness opinion to the Company’s board of directors on November 26, 2018. The opinion of J.P. Morgan speaks only as of such date and does not reflect changes that may occur or may have occurred after the date of the opinion, including changes to the operations and prospects of People’s United or the Company, changes in general market and economic conditions or regulatory or other factors. Any such changes may materially alter or affect the relative values of People’s United and the Company.

The Company and People’s United are subject to business uncertainties and contractual restrictions while the merger is pending.

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on the Company or People’s United. These uncertainties may impair the Company’s or People’s United’s ability to attract, retain and motivate key personnel until the merger is completed and could cause customers and others that deal with the Company or People’s United to seek to change existing business relationships with the Company or People’s United.

 

40


Table of Contents

Retention of certain employees by the Company or People’s United may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with the combined company. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the Company or People’s United, the Company’s business or People’s United’s business could be harmed. In addition, subject to certain exceptions, the Company has agreed to operate its business in the ordinary course prior to closing, and People’s United is also subject to certain restrictions on the conduct of its business prior to closing.

Failure to complete the merger could negatively impact the stock prices, future businesses and financial results of People’s United and the Company.

If the merger is not completed, the ongoing businesses of People’s United and the Company may be adversely affected, and People’s United and the Company will be subject to several risks, including the following:

 

   

The Company may be required, under certain circumstances, to pay People’s United a termination fee of $12.5 million under the merger agreement;

 

   

People’s United and the Company will be required to pay certain costs relating to the merger, whether or not the merger is completed, such as legal, accounting, financial advisor and printing fees;

 

   

Under the merger agreement, People’s United and the Company are subject to certain restrictions on the conduct of their business prior to completing the merger, which may adversely affect their ability to execute certain of their business strategies; and

 

   

Matters relating to the merger may require substantial commitments of time and resources by People’s United and the Company’s management, which could otherwise have been devoted to other opportunities that may have been beneficial to People’s United and the Company as independent companies, as the case may be.

In addition, if the merger is not completed, People’s United and/or the Company may experience negative reactions from the financial markets and from their respective customers and employees. For example, People’s United’s and the Company’s businesses may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. The market price of People’s United’s or the Company’s common stock could decline to the extent that the current market prices reflect a market assumption that the merger will be completed. People’s United and/or the Company also could be subject to litigation related to any failure to complete the merger or to proceedings commenced against People’s United or the Company to perform their respective obligations under the merger agreement. If the merger is not completed, People’s United and the Company cannot assure their respective stockholders that the risks described above will not materialize and will not materially affect the business, financial results and stock prices of People’s United and/or the Company.

If the merger is not completed, People’s United and the Company will have incurred substantial expenses without realizing the expected benefits of the merger.

Each of People’s United and the Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement, as well as the costs and expenses of filing, printing and mailing the proxy statement/prospectus and all filing and other fees paid to the SEC in connection with the merger. If the merger is not completed, People’s United and the Company would have to recognize these expenses without realizing the expected benefits of the merger.

 

41


Table of Contents

The shares of People’s United common stock to be received by the Company’s stockholders as a result of the merger will have different rights from shares of the Company’s common stock.

Following completion of the merger, the Company’s stockholders will become stockholders of People’s United, and their rights as stockholders will be governed by the Delaware General Corporation Law (which we refer to as the “DGCL”) and People’s United’s certificate of incorporation and bylaws. There will be important differences between your current rights as a stockholder of the Company and the rights to which you will be entitled as a stockholder of People’s United. A discussion of the different rights associated with People’s United common stock and the Company’s common stock is included in the proxy statement/prospectus for the merger.

Risks Related to People’s United’s Business

You should read and consider risk factors specific to People’s United’s business that will also affect the combined company after the merger. These risks are described in the reports filed by People’s United with the SEC, including the sections in such reports entitled “Risk Factors.”

Risks Related to the Company’s Business

Our business strategy has included significant asset and liability growth. If we fail to manage our growth effectively, our financial condition and results of operations could be negatively affected.

In 2010, the Board of Directors of the Bank approved a strategic plan that has resulted in significant growth in assets and liabilities. We have to increase our commercial real estate loans, multi-family real estate loans, one-to-four family residential real estate loans and home equity lines of credit, while attracting favorably priced deposits. During 2012 we added our Shaw’s Supermarket in-store branch in Waltham. In 2013 we opened two new in-store branches in Newton and Cambridge, and in 2014 we closed one of our existing branches due to its proximity to another branch. We have incurred substantial additional expenses due to the execution of our strategic plan, including salaries and occupancy expense related to new lending officers and related support staff, as well as marketing and infrastructure expenses. Many of these increased expenses are considered fixed expenses. Unless we can continue to successfully execute our strategic plan, results of operations will be negatively affected by these increased costs.

The successful continuation of our strategic plan will require, among other things, that we increase our market share by attracting new customers that currently bank at other financial institutions in our market area. In addition, our ability to continue to successfully manage our growth will depend on several factors, including continued favorable market conditions, the competitive responses from other financial institutions in our market area, and our ability to maintain high asset quality as we increase our commercial real estate loans, multi-family real estate loans, one-to-four family residential real estate loans, home equity lines of credit and commercial business loans. While we believe we have the management resources in place to successfully manage our growth, we may not be successful in achieving our business strategy goals.

Our branch network strategy may negatively affect our financial performance.

During 2012 we added our Shaw’s Supermarket in-store branch in Waltham. In 2013 we opened two new in-store branches in Newton and Cambridge, and in 2014 we closed one of our existing branches due to its proximity to another branch. We have three of our branches located within supermarkets and changes in the supermarkets’ business could impact our branch operations within those supermarkets.

This strategy of opening new branches may not generate earnings, or may not generate earnings within a reasonable period of time. Numerous factors contribute to the performance of a new branch, such as a suitable location, qualified personnel, and an effective marketing strategy. Additionally, it takes time for a new branch to originate sufficient loans and generate sufficient deposits to produce enough income to offset expenses, some of which, like salaries and occupancy expense, are considered fixed costs.

 

42


Table of Contents

Because we intend to continue to emphasize our commercial real estate and multi-family loan originations, our credit risk will increase, and downturns in the local real estate market or economy could adversely affect our earnings.

We intend to continue originating commercial real estate and multi-family loans. At December 31, 2018, $758.7 million, or 28.8% of our total loan portfolio, consisted of multi-family loans and commercial real estate loans. Commercial real estate and multi-family loans generally have more risk than the one-to-four family residential real estate loans that we originate. Because the repayment of commercial real estate loans and multi-family loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Commercial real estate loans and multi-family loans may also involve relatively large loan balances to individual borrowers or groups of related borrowers.

A downturn in the real estate market or the local economy could adversely affect the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of nonperforming loans. As our commercial real estate loan and multi-family loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase.

Our information systems may experience an interruption or breach in security.

We rely heavily on communications and information systems operated by us and third party service providers to conduct our business. Any failure, interruption, or breach in security or operational integrity of these systems, whether it is caused intentionally or unintentionally, could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of our information systems, we cannot assure you that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

We are exposed to cyber-security risks, including denial of service, hacking, ransomware attacks and identity theft.

The potential need to adapt to changes in information technology could adversely impact our operations and require increased capital spending. The risk of electronic fraudulent activity within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting bank accounts and other customer information, could adversely impact our operations, damage our reputation and require increased capital spending. Our information technology infrastructure and systems may be vulnerable to cyber terrorism, computer viruses, system failures and other intentional or unintentional interference, negligence, fraud and other unauthorized attempts to access or interfere with these systems and proprietary information. Although we believe we have implemented and maintain reasonable security controls over proprietary information as well as information of our customers, stockholders and employees, a breach of these security controls may have a material adverse effect on our business, financial condition and results of operations and could subject us to significant regulatory actions and fines, litigation, loss, third-party damages and other liabilities.

A portion of our one-to-four family residential mortgage loan portfolio is comprised of non-owner occupied properties, which increases the credit risk on this portion of our loan portfolio.

A significant portion of the housing stock in our primary lending market area is comprised of two-, three- and four-unit properties. At December 31, 2018, of the $1.58 billion of one-to-four family residential mortgage loans in our portfolio, $74.2 million, or 4.69% of this amount, were comprised of non-owner occupied properties. There is greater credit risk inherent in two-, three- and four-unit properties and especially in non-owner occupied properties, than in owner-occupied one-unit properties. These loans are similar to commercial real estate loans and multi-family loans, as the repayment of these loans may depend, in part, on the successful management of the property and/or the borrower’s ability to lease the units of the property.

 

43


Table of Contents

A downturn in the real estate market or the local economy could adversely affect the value of properties securing these loans or the revenues derived from these properties, which could affect the borrower’s ability to repay the loan.

Our home equity line of credit strategy exposes us to a risk of loss due to a decline in property values.

At December 31, 2018, $163.2 million, or 6.2%, of our total loan portfolio consisted of home equity lines of credit. As part of our strategic business plan, we intend to increase our home equity lines of credit over the next several years. We generally originate home equity lines of credit with loan-to-value ratios of up to 80% when combined with the principal balance of an existing first mortgage loan, although loan-to-value ratios may exceed 80% on a case-by-case basis.

Declines in real estate values in our market area could cause some of our home equity lines of credit to be inadequately collateralized, which would expose us to a greater risk of loss in the event that we seek to recover on defaulted loans by selling the real estate collateral. In addition, under the Tax Cuts and Jobs Act enacted on December 22, 2017, interest on home equity loans and lines of credit is only deductible if the proceeds are used to buy, build or substantially improve the taxpayer’s home that secures the loan or line of credit. This change could adversely impact the level of originations and outstanding volumes of home equity lines of credit in the future.

Future changes in interest rates could reduce our profits.

Our ability to make a profit largely depends on our net interest and dividend income, which could be negatively affected by changes in interest rates. Net interest and dividend income is the difference between:

 

   

the interest and dividend income we earn on our interest-earning assets, such as loans and investment securities; and

 

   

the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.

A significant portion of our loans are fixed-rate, one-to-four family residential mortgage loans with terms of up to 30 years, 3/1, 5/1, 7/1 and 10/1 adjustable rate mortgage loans and 5/5 adjustable rate—10 year maturity commercial real estate loans, and like many savings institutions, our focus on deposit accounts as a source of funds, which have no stated maturity date or shorter contractual maturities, results in our liabilities having a shorter duration than our assets. This imbalance can create significant earnings volatility, because market interest rates change over time. In a period of rising interest rates, the interest income earned on our assets, such as loans and investment securities, may not increase as rapidly as the interest paid on our liabilities, such as deposits. In a period of declining interest rates, the interest income earned on our assets may decrease more rapidly than the interest paid on our liabilities, as borrowers prepay mortgage loans, and mortgage-backed securities and callable investment securities are called or prepaid, thereby requiring us to reinvest these funds at lower interest rates. At December 31, 2018 our interest rate risk analysis indicated that our base forecasted net interest income would decrease by 14.8% over the next twelve months if there was an instantaneous 200 basis point increase in market interest rates. For additional discussion of how changes in current interest rates could impact our financial condition and results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”

Changes in interest rates also create reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or investment securities in a declining interest rate environment.

Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans. At December 31, 2018, $746.9 million, or 47.2% of our $1.58 billion total one-to-four family residential mortgage loans due after December 31, 2019 had adjustable rates of interest. If interest rates increase, the rates on these loans will, in turn, increase, thereby increasing the risk that borrowers will not be able to repay these loans.

 

44


Table of Contents

Changes in interest rates also affect the current fair value of our interest-earning investment securities portfolio. Generally, the value of investment securities moves inversely with changes in interest rates. Because a portion of the investment securities in our portfolio are classified as available for sale, a decline in the fair value of our investment securities could cause a decline in our reported equity and/or net income.

Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial condition and results of operations.

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the money supply and credit conditions.

Among the instruments used by the Federal Reserve Board to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount window rate, the interest rate paid on reserves and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.

We are subject to liquidity risk. A failure to maintain adequate liquidity could have a material adverse effect on our business, financial condition and results of operations.

We require liquidity to meet our deposit and debt obligations as they come due. Our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy generally.

Factors that could reduce our access to liquidity sources include a downturn in the Massachusetts economy, difficult credit markets or adverse regulatory actions against us. Our access to deposits may also be affected by the liquidity needs of our depositors. In particular, a substantial majority of our liabilities are demand deposits, savings and interest bearing checking, which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of our assets are loans, which cannot be called or sold in the same time frame. We may not be able to replace maturing deposits and FHLB advances as necessary in the future, especially if a large number of our depositors sought to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could have a material adverse effect on our business, financial condition and results of operations.

We may lose lower-cost funding sources.

Checking, savings, and money market deposit account balances and other forms of client deposits can decrease when clients perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If clients move money out of bank deposits and into other investments, we could lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income.

Changes in law, regulation or oversight may adversely affect our operations.

We are subject to extensive regulation under federal and state laws, as well as supervision and examination by the Massachusetts Commissioner of Banks, FDIC, Federal Reserve, SEC, the Consumer Financial Protection Bureau (“CFPB”), and other regulatory bodies. Congress and federal agencies have significantly increased their focus on the regulation of the financial services industry. The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes, many parts of which are now in effect. The Federal Reserve has adopted regulations implementing the Basel III framework on bank capital adequacy, stress testing, and market liquidity risk in the U.S. These regulations affect our lending practices, deposits, capital structure, investment practices, operating activities and growth, among other things. Regulation of the financial services industry continues to undergo major changes.

 

45


Table of Contents

Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies could affect us in substantial and unpredictable ways. In addition, such changes could also subject us to additional costs and limit the types of financial services and products we may offer. Failure to comply with laws, regulations or policies could result in civil or criminal sanctions by state and federal agencies, the loss of FDIC insurance, the revocation of our banking charter, civil money penalties and/or reputation damage, which could have a material adverse impact on our businesses, results of operations and financial condition. The effects of such legislation and regulatory actions on us cannot be reliably determined at this time. See Item 1. Business — Supervision and Regulation for more information about the regulations to which we are subject.

In addition to new rules promulgated under the Dodd-Frank Act, bank regulatory agencies have been responding aggressively to concerns and adverse trends identified in examinations. These measures are likely to increase our costs of doing business and may have a significant adverse effect on our lending activities, financial performance and operating flexibility. In addition, these risks could affect the performance and value of our loan and investment securities portfolios, which also would negatively affect our financial performance.

We may be adversely affected by recent changes in U.S. tax laws.

The Tax Cuts and Jobs Act, which was enacted in December 2017, is likely to have both positive and negative effects on our financial performance. For example, the new legislation will result in a reduction in our federal corporate tax rate from 35% to 21% beginning in 2018, which will have a favorable impact on our earnings and capital generation abilities. However, the new legislation also enacted limitations on certain deductions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate. These limitations include (1) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (2) the elimination of interest deductions for certain home equity loans and lines of credit, (3) a limitation on the deductibility of business interest expense and (4) a limitation on the deductibility of property taxes and state and local income taxes.

The recent changes in the tax laws may have an adverse effect on the market for, and the valuation of, residential properties, and on the demand for such loans in the future, and could make it harder for borrowers to make their loan payments.

In addition, these recent changes may also have a disproportionate effect on taxpayers in states with higher than average residential home prices and high state and local taxes, like Massachusetts. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.

Our ability to originate and sell loans could be restricted by recently adopted federal regulations.

The CFPB has issued a rule intended to clarify how lenders can avoid legal liability under the Dodd-Frank Act, which holds lenders accountable for ensuring a borrower’s ability to repay a mortgage loan. Under the rule, loans that meet the “qualified mortgage” definition will be presumed to have complied with the new ability-to-repay standard. Under the rule, a “qualified mortgage” loan must not contain certain specified features, including:

 

   

Excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);

 

   

Interest-only payments;

 

   

Negative amortization; and

 

   

Terms of longer than 30 years.

 

46


Table of Contents

Also, to qualify as a “qualified mortgage,” a loan must generally be made to a borrower whose total monthly debt-to-income ratio does not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify a borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments.

In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizers of loans to retain “not less than 5% of the credit risk for any asset that is not a qualified residential mortgage.” The regulatory agencies have issued a final rule to implement this requirement. The final rule provides that the definition of “qualified residential mortgage” includes loans that meet the definition of qualified mortgage issued by the CFPB.

These rules could have a significant effect on the secondary market for loans and the types of loans we originate, and restrict our ability to make loans, any of which could limit our growth or profitability.

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network (“FinCEN”). The FinCEN has delegated examination authority for compliance by banks with the Bank Secrecy Act to the federal bank regulators. The rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches. The policies and procedures we have adopted that are designed to assist in compliance with these laws and regulations may not be effective in preventing violations of these laws and regulations.

The CFPB is in the process of reshaping the consumer financial laws through rulemaking and enforcement of such laws against unfair, deceptive and abusive acts or practices.

Compliance with consumer financial laws may impact the business operations of depository institutions offering consumer financial products or services, including the Bank. The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers.

The CFPB has also been directed to write rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The prohibition on “abusive” acts or practices was created by the Dodd-Frank Act and did not previously exist in federal law. The meaning of the prohibition is being clarified each year by CFPB enforcement actions and opinions from courts and administrative proceedings. The CFPB has further issued a series of final rules to implement provisions in the Dodd-Frank Act related to mortgage origination and servicing that may increase the cost of originating and servicing residential mortgage loans, which went into effect in January 2014. While it is difficult to quantify the increase in our regulatory compliance burden, we do believe that costs associated with regulatory compliance, including the need to hire additional compliance personnel, may continue to increase.

A worsening of economic conditions could adversely affect our financial condition and results of operations.

Although the U.S. economy has emerged from the severe recession that occurred in 2008 and 2009, economic growth has been slow despite the Federal Reserve Board’s unprecedented efforts to maintain low market interest rates and encourage economic growth. A return to prolonged deteriorating economic conditions could significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate values and sales volumes or an increase in unemployment levels may result in greater loan delinquencies, increases in our nonperforming, criticized and classified assets and a decline in demand for our products and services.

 

47


Table of Contents

These events may cause us to incur losses and may adversely affect our financial condition and results of operations.

If our risk management framework does not effectively identify or mitigate our risks, we could suffer unexpected losses and could be materially adversely affected.

Our risk management process aims to mitigate risk and appropriately balance risk and return. We have established processes and procedures intended to identify, measure, monitor and report the types of risk to which we are subject, including credit risk, operations risk, compliance risk, reputation risk, strategic risk, market risk and liquidity risk. We aim to monitor and control our risk exposure through a framework of policies, procedures and reporting mechanisms. Management of our risks in some cases depends upon the use of analytical and/or forecasting models. If the models used to mitigate these risks are inadequate, we may incur losses. In addition, there may be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated. If our risk management framework does not effectively identify or mitigate our risks, we could suffer unexpected losses and could be materially adversely affected.

The recent change in regulatory capital requirements may have an adverse impact on our future financial results.

In 2013, the FDIC and FRB approved new rules that substantially amended the regulatory risk-based capital rules applicable to the Company and the Bank. The final rule implemented the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The new rules went into effect on January 1, 2015, although certain portions of the rule, including the capital conservation buffer, are being phased in over a period of several years. The application of more stringent capital requirements, including the phase in of the capital conservation buffer, could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions such as a prohibition on the payment of dividends or on the repurchase of shares if we were unable to comply with such requirements.

We may need to raise additional capital in the future, and such capital may not be available when needed or at all.

We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, particularly if our asset quality or earnings were to deteriorate significantly. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial condition.

Economic conditions and the loss of confidence in financial institutions may increase our cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from the FHLB and discount window of the Federal Reserve.

We cannot assure that such capital will be available on acceptable terms or at all. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of investors, debt purchasers, depositors of the Bank or counterparties participating in the capital markets, may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. Moreover, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on our business, financial condition and results of operations.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio, resulting in additions to our allowance. Material additions to our allowance could materially decrease our net income.

 

48


Table of Contents

In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.

Changes in accounting standards could adversely affect us.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 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” 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. The adoption of this ASU may materially reduce retained earnings in the period of adoption.

Because most of our borrowers are located in Eastern Massachusetts, a downturn in the local economy, or a decline in local real estate values, could cause an increase in nonperforming loans or a decrease in loan demand, which would reduce our profits.

Our success depends primarily on general economic conditions in our market area in Eastern Massachusetts. Nearly all of our loans are to customers in this market. Continued weakness in our local economy and our local real estate markets could adversely affect the ability of our borrowers to repay their loans and the value of the collateral securing our loans, which could adversely affect our results of operations.

Real estate values are affected by various factors, including supply and demand, changes in general or regional economic conditions, interest rates, governmental rules or policies and natural disasters. Continued weakness in economic conditions also could result in reduced loan demand and a decline in loan originations, which could negatively affect our financial results.

Loss of key personnel could adversely impact results.

Our success has been and will continue to be greatly influenced by our ability to retain the services of our existing senior management. The unexpected loss of the services of any of the key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse impact on our business and financial results.

Strong competition for deposits and lending opportunities within our market areas, as well as competition from non-depository investment alternatives, may limit our growth and profitability.

Competition in the banking and financial services industry is intense. In our market areas, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, financial technology companies and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which could affect our ability to grow and to be profitable on a long-term basis. Our profitability depends upon our ability to successfully compete in our market areas. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected.

In addition, checking and savings account balances and other forms of deposits can decrease when our deposit customers perceive alternative investments, such as the stock market or other non-depository investments, as

 

49


Table of Contents

providing superior expected returns, or if our customers seek to spread their deposits over several banks to maximize FDIC insurance coverage. Furthermore, technology and other changes have made it more convenient for bank customers to transfer funds into alternative investments, including products offered by other financial institutions or non-bank service providers. Additional increases in short-term interest rates could increase transfers of deposits to higher yielding deposits. Efforts and initiatives we undertake to retain and increase deposits, including deposit pricing, can increase our costs. When bank customers move money out of bank deposits in favor of alternative investments or into higher yielding deposits, or spread their accounts over several banks, we can lose a relatively inexpensive source of funds, thus increasing our funding costs and reducing our profitability.

Changes in the programs offered by secondary market purchasers or our ability to qualify for their programs, or the loss of our ability to purchase mortgage loans through our correspondent bank relationships, may reduce our mortgage banking revenues, which would negatively impact our non-interest income.

We generate mortgage revenues from gains on the sale of single-family mortgage loans pursuant to programs currently offered by Fannie Mae and non-GSE investors. These entities account for a substantial portion of the secondary market in residential mortgage loans. Any future changes in these programs, our eligibility to participate in such programs, the criteria for loans to be accepted or laws that significantly affect the activity of such entities could, in turn, materially adversely affect our results of operations.

Technological advances impact our business.

The banking industry is undergoing technological changes with frequent introductions of new technology-driven products and services. In addition to improving customer services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in operations. Many competitors have substantially greater resources to invest in technological improvements.

We may not be able to effectively implement new technology-driven products and services or successfully market such products and services to our customers.

Negative publicity could damage our reputation and our business.

Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct. Negative public opinion could also result from adverse news or publicity that impairs the reputation of the financial services industry generally.

Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business.

Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. In addition, such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. The occurrence of any such event in the future could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

A protracted government shutdown may result in reduced loan originations and related gains on sale and could negatively affect our financial condition and results of operations.

 

50


Table of Contents

Our mortgage banking operations provide a significant portion of our non-interest income. During any protracted federal government shutdown, we may not be able to close certain loans and we may not be able to recognize non-interest income on the sale of loans. Some of the loans we originate are sold directly to government agencies, and some of these sales may be unable to be consummated during the shutdown. In addition, we believe that some borrowers may determine not to proceed with their home purchase and not close on their loans, which would result in a permanent loss of the related non-interest income. A federal government shutdown could also result in reduced income for government employees or employees of companies that engage in business with the federal government, which could result in greater loan delinquencies, increases in our nonperforming, criticized and classified assets and a decline in demand for our products and services.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2.

PROPERTIES

We operated from our six full-service banking offices at December 31, 2018, including our main office and five branch offices located in Belmont, Watertown, Waltham, Cambridge and Newton, Massachusetts. The net book value of our premises, land and equipment was $2.2 million at December 31, 2018. The following table sets forth information with respect to our offices, including the expiration date of leases with respect to leased facilities.

 

Location

   Year
Opened
   Owned/
Leased
Full Service Banking Offices:      

Main Office

2 Leonard Street

Belmont, Massachusetts 02478

   1969    Owned

Trapelo Road

277 Trapelo Road

Belmont, Massachusetts 02478

   1992    Owned

Watertown Square

53 Mount Auburn Street

Watertown, Massachusetts 02472

   2001    Leased(1)

Shaws Supermarket In-Store Branch

1070 Lexington Street

Waltham, Massachusetts 02452

   2012    Leased(2)

Shaws Supermarket In-Store Branch

33 Austin Street

Newton, Massachusetts 02460

   2013    Leased(3)

Star Market Supermarket In-Store Branch

699 Mount Auburn Street

Cambridge, Massachusetts 02138

   2013    Leased(4)

 

51


Table of Contents
Administrative Offices      

Leonard Street

2 Leonard Street

Belmont, Massachusetts 02478

   1969    Owned

Concord Avenue – Suite 3

385 Concord Avenue

Belmont, Massachusetts 02478

   2010    Leased(5)

Concord Avenue – Suite 105

385 Concord Avenue

Belmont, Massachusetts 02478

   2014    Leased(5)

Concord Avenue – Suite 205

385 Concord Avenue

Belmont, Massachusetts 02478

   2012    Leased(5)

Concord Avenue – Suite 203A

385 Concord Avenue

Belmont, Massachusetts 02478

   2012    Leased(5)

 

(1)

Lease expires in March 2020.

(2)

Lease expires in March 2025.

(3)

Lease expires in July 2023.

(4)

Lease expires in May 2023.

(5)

Lease expires in September 2020.

 

ITEM 3.

LEGAL PROCEEDINGS

Periodically, there have been various claims and lawsuits against the Company or the Bank, 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. The Company is 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.

It has come to the Company’s attention that two complaints, further described below, have been filed with respect to the proposed merger (the “Proposed Merger”) of the Company with and into People’s United Financial, Inc. (“People’s United”). However, while these complaints have been filed with the courts identified below, as of the time of filing of this Annual Report on Form 10-K none of the defendants named in the complaints, including the Company, has been served with either complaint.

On January 31, 2019, Paul Parshall, a purported individual stockholder of the Company, filed, on behalf of himself and all of the Company’s stockholders other than the named defendants and their affiliates (the “Purported Class”), a derivative and putative class action complaint in the Circuit Court for Baltimore City, Maryland, captioned Paul Parshall v. Robert J. Morrissey et. al., naming each Company director, People’s United and the Company as defendants. The complaint alleged that the Company’s directors breached their fiduciary duties to the Purported Class in connection with the Proposed Merger. The complaint also alleged that the January 23, 2019 proxy statement/prospectus (“Proxy Statement/Prospectus”) included in People’s United’s Registration Statement on Form S-4 filed with the Securities and Exchange Commission omitted certain information regarding the Proposed Merger. The Proxy Statement/Prospectus was the proxy statement for the Company’s special meeting of stockholders to

 

52


Table of Contents

approve the Proposed Merger, and People’s United’s prospectus with respect to the shares of People’s United’s common stock to be issued to Company stockholders in the Proposed Merger. The relief sought by the complaint included preliminary and permanent injunction from proceeding with, consummating, or closing the Proposed Merger, damages, including attorneys’ and experts’ fees, and rescission and rescissory damages if the proposed merger is completed. On March 6, 2019 the Mr. Parshall filed a notice of voluntary dismissal without prejudice, which was entered on the docket on March 11, 2019.

On January 30, 2019, Michael Rubin, a purported individual stockholder of the Company, filed a complaint in the United States District Court for the District of Maryland, Rubin v. BSB Bancorp, Inc. et. al., Case No. 1:19-cv-00280, naming the Company and each Company director as defendants and alleging violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 in connection with claimed omissions and misstatements contained in the Proxy Statement/Prospectus. The complaint seeks preliminary and permanent injunction from proceeding with, consummating, voting on or closing the Proposed Merger unless the defective disclosures in the Proxy Statement/Prospectus are cured. The complaint also seeks rescission in the event the Proposed Merger is consummated, as well as damages and attorneys’ and experts’ fees and costs.

The Company’s stockholders approved the Proposed Merger at the February 27, 2019 special meeting.

The Company believes that the allegations in the complaints described above are without merit and, if served, intends to defend against them vigorously. Currently, however, it is not possible to predict the outcome of the litigation, if any, or the impact the litigation may have on the Company, People’s United, or the Proposed Merger.

 

ITEM 4.

MINE SAFETY DISCLOSURE

Not applicable.

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information.

The Company’s common stock is listed on the Nasdaq Capital Market (“NASDAQ”) under the trading symbol “BLMT.” The Company completed its initial public offering on October 4, 2011 and commenced trading on October 5, 2011.

Stock Performance Graph.

The following graph compares the cumulative total shareholder return on BSB Bancorp common stock with the cumulative total return on the Russell 2000 Index and with the SNL Thrift Industry Index. The graph assumes $100 was invested at the close of business on December 31, 2013 and utilizes closing market price.

 

53


Table of Contents

LOGO

 

     Period Ending  

Index

   12/31/13      12/31/14      12/31/15      12/31/16      12/31/17      12/31/18  

BSB Bancorp, Inc.

     100.00        123.46        155.00        191.85        193.84        185.95  

Russell 2000

     100.00        104.89        100.26        121.63        139.44        124.09  

SNL Thrift NASDAQ

     100.00        110.75        126.56        160.91        159.37        139.09  

Holders.

As of March 6, 2019, there were 266 holders of record of the Company’s common stock.

Dividends.

The Company has not paid any dividends to its stockholders to date. The payment of dividends in the future will depend upon a number of factors, including capital requirements, the Company’s financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. In addition, the Company’s ability to pay dividends is dependent on dividends received from Belmont Savings. For more information regarding restrictions on the payment of cash dividends by the Company and by Belmont Savings, see “Business—Regulation and Supervision—Holding Company Regulation—Dividends” and “—Regulation and Supervision—Massachusetts Banking Laws and Supervision—Dividends.” No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in the future.

Securities Authorized for Issuance under Equity Compensation Plans.

Stock-Based Compensation Plan

Information regarding stock-based compensation awards outstanding and available for future grants as of December 31, 2018, segregated between stock-based compensation plans approved by shareholders and stock-based compensation plans not approved by shareholders, is presented in the table below.

 

54


Table of Contents

Additional information regarding stock-based compensation plans is presented in Note 16 – Stock Based Compensation in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data located elsewhere in this report.

 

Plan category

   Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
     Weighted-average
exercise price of
outstanding
options, warrants
and rights
     Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))
 
     (a)      (b)      (c)  

Equity compensation plans approved by security holders

     491,323      $ 13.02        —    

Equity compensation plans not approved by security holders

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

     491,323        13.02        —    
  

 

 

    

 

 

    

 

 

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

The following table provides certain information with regard to shares repurchased by the Company in the fourth 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)
 

October 1 - October 31

     —        $ —          —          500,000  

November 1 - November 30

     —          —          —          500,000  

December 1 - December 31

     —          —          —          500,000  
  

 

 

       

 

 

    

Total

     —        $ —          —       
  

 

 

       

 

 

    

 

(1)

The Company completed its first stock repurchase program during the second quarter of 2013. On August 5, 2013, the Company announced the commencement of a second stock repurchase program to acquire up to 500,000 shares, or 5.5% of the Company’s then outstanding common stock. Repurchases will 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.

 

55


Table of Contents
ITEM 6.

SELECTED FINANCIAL DATA

 

     At December 31,  
     2018      2017      2016      2015      2014  
     (Dollars in thousands)  

Selected Financial Condition Data:

              

Total assets

   $ 3,030,101      $ 2,676,565      $ 2,158,704      $ 1,812,916      $ 1,425,550  

Cash and cash equivalents

     143,378        110,888        58,876        51,261        51,767  

Investment securities - available for sale

     4,040        16,921        22,048        21,876        22,079  

Investment securities - held to maturity

     148,025        160,090        130,197        137,119        118,528  

Loans receivable, net

     2,624,372        2,296,958        1,866,035        1,534,957        1,179,399  

Federal Home Loan Bank stock

     38,658        32,382        25,071        18,309        13,712  

Bank-owned life insurance

     36,540        36,967        35,842        29,787        23,888  

Deposits

     1,960,912        1,751,251        1,469,422        1,269,519        984,562  

Federal Home Loan Bank advances

     838,250        723,150        508,850        374,000        285,100  

Securities sold under agreements to repurchase

     2,883        3,268        1,985        3,695        1,392  

Other borrowed funds

     —          —          —          1,020        1,067  

Total stockholders’ equity

     201,794        178,029        160,921        146,203        137,010  
     For the Fiscal Year Ended December 31,  
     2018      2017      2016      2015      2014  
     (Dollars in thousands)  

Selected Operating Data:

              

Interest and dividend income

   $ 98,251      $ 77,143      $ 61,621      $ 48,406      $ 38,652  

Interest expense

     37,157        21,054        14,231        10,194        7,051  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest and dividend income

     61,094        56,089        47,390        38,212        31,601  

Provision for loan losses

     1,657        2,762        2,385        2,317        1,552  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest and dividend income after provision for loan losses

     59,437        53,327        45,005        35,895        30,049  

Noninterest income

     5,020        3,627        2,750        3,165        3,294  

Noninterest expense

     33,016        30,686        28,349        27,824        26,490  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax expense

     31,441        26,268        19,406        11,236        6,853  

Income tax expense

     8,532        11,882        7,425        4,322        2,562  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 22,909      $ 14,386      $ 11,981      $ 6,914      $ 4,291  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

56


Table of Contents
     At or for the fiscal years ended December 31,  
     2018     2017     2016     2015     2014  

Selected Financial Ratios and Other Data:

          

Performance Ratios:

          

Return on average assets

     0.81     0.61     0.61     0.44     0.35

Return on average stockholders’ equity

     11.92     8.40     7.78     4.87     3.20

Interest rate spread (1)

     1.96     2.24     2.32     2.33     2.47

Net interest margin (2)

     2.15     2.38     2.45     2.48     2.64

Efficiency ratio (3)

     49.94     51.39     56.54     67.25     75.91

Noninterest expense to average total assets

     1.16     1.29     1.44     1.77     2.16

Average interest-earning assets to average interest-bearing liabilities

     114.17     115.96     118.26     122.46     128.79

Average stockholders’ equity to average total assets

     6.78     7.21     7.83     9.01     10.91

Asset Quality Ratios:

          

Non-performing assets to total assets

     0.04     0.05     0.08     0.20     0.20

Non-performing loans to total loans

     0.04     0.06     0.10     0.24     0.23

Allowance for loan losses to non-performing loans

     1533.25     1185.47     746.84     309.56     320.59

Allowance for loan losses to total loans

     0.68     0.71     0.73     0.73     0.75

Capital Ratios (4):

          

Total capital to risk-weighted assets

     11.75     11.30     11.72     12.22     12.99

Tier 1 capital to risk-weighted assets

     10.80     10.35     10.80     11.34     12.19

Common Equity Tier 1 Capital to risk-weighted assets

     10.80     10.35     10.80     11.34     N/A  

Tier 1 capital to average assets

     6.97     6.97     7.63     8.37     10.05

Other Data:

          

Number of full service offices

     6       6       6       6       6  

Full time equivalent employees

     134       123       122       129       126  

 

(1)

The interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period.

(2)

The net interest margin represents net interest income as a percent of average interest-earning assets for the period.

(3)

The efficiency ratio represents noninterest expense as a percentage of the sum of net interest income and noninterest income.

(4)

Capital ratios are for BSB Bancorp, Inc.

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

On November 26, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with People’s United Financial, Inc. (“People’s United”). The Merger Agreement provides that upon the terms and subject to the conditions set forth therein, the Company will merge with and into People’s United, with People’s United as the surviving corporation (the “Merger”). At the effective time of the Merger, each outstanding share of BSB Bancorp common stock, par value $0.01 per share, will be converted into the right to receive 2.0 shares of People’s United common stock, par value $0.01 per share. The merger was approved by the Company’s shareholders on February 27, 2019. Completion of the Merger remains subject to certain customary closing conditions. The Merger is expected to close early in the second quarter of 2019.

Overview

Our results of operations depend primarily on our net interest and dividend income. Net interest and dividend income is the difference between the income we earn on our interest and dividend earning assets and the amount we pay on our interest bearing liabilities. Interest and dividend earning assets consist primarily of loans, investment securities (including corporate bonds and mortgage-backed securities guaranteed or issued by U.S. government-sponsored enterprises), Federal Home Loan Bank stock and interest-earning deposits at other financial institutions. Interest bearing liabilities consist primarily of our depositors’ money market, savings, checking, and certificates of deposit accounts and to a lesser extent FHLB advances and brokered certificates of deposit. Our results of operations also are affected by our provision for loan losses, non-interest income and non-interest expense. Non-interest income

 

57


Table of Contents

consists primarily of service charges on deposit accounts, income derived from bank owned life insurance, loan servicing fees, gains or losses on the sale of loans, gains or losses on the sale of available-for-sale investment securities, loan level derivative income and other income. Non-interest expense consists primarily of salaries and employee benefits, director compensation, occupancy and equipment expenses, data processing expenses, legal expenses, accounting and exam fees, FDIC insurance premiums and other operating expenses. Our results of operations may also be significantly affected by competitive conditions, changes in market interest rates, governmental policies, general and local economic conditions, and actions of regulatory authorities.

Management evaluates the Company’s operating results and financial condition using measures that include net income, earnings per share, return on assets and equity, efficiency ratio, net interest margin, tangible book value per share, asset quality indicators, and many others.

These metrics help management make key decisions regarding the Bank’s balance sheet, liquidity, interest rate risk position, and capital resources and assist with identifying areas to improve.

In 2009, the Bank reorganized into the mutual holding company structure. In 2010, the Board of Directors approved a new strategic plan designed to increase growth and long-term profitability of the Bank. On October 4, 2011, we completed our initial public offering of common stock in connection with BSB Bancorp, MHC’s mutual-to-stock conversion, selling 8,993,000 shares of common stock at $10.00 per share, including 458,643 shares sold to Belmont Savings Bank’s employee stock ownership plan, and raising approximately $89.9 million of gross proceeds. In addition, we issued 179,860 shares of our common stock and contributed $200,000 in cash to the Belmont Savings Bank Foundation.

Further, following a comprehensive strategic review of the Bank’s management and operations, the Board of Directors of the Bank approved a new strategic plan designed to increase the growth and profitability of the Bank. The strategic plan contemplated significant growth in assets and liabilities over the next several years with the intent of building upon the Bank’s leading market share in Belmont and the surrounding communities, striving to be the “Bank of Choice” for small businesses in its market area and the trusted lending partner for area commercial real estate investors, developers and managers. The strategic plan was intended to take advantage of the sound eastern Massachusetts economy, which had not been as negatively affected by the recent recession as other regions of the United States. Our current strategy also includes striving to be the “Bank of Choice” for cash driven small businesses, municipalities and nonprofit organizations in the Bank’s market area.

The current strategic plan includes growth in one-to-four family residential real estate loans, increased home equity lending and increased commercial real estate and multi-family real estate lending. Our portfolios of commercial real estate loans, multi-family real estate loans and one-to-four family residential real estate loans have increased in accordance with the strategic plan, and we intend to continue this strategy of growing these asset classes, while selling a portion of the loans that we originate from time to time as conditions warrant. We have also suspended originations of indirect auto loans due to the current market conditions and low interest rate environment.

Our emphasis on conservative loan underwriting has resulted in relatively low levels of delinquency and non-performing assets. Our non-performing assets totaled $1.2 million, or 0.04% of total assets, at December 31, 2018, compared to $1.4 million, or 0.05% of total assets, at December 31, 2017, and $1.8 million, or 0.08% of total assets, at December 31, 2016. Total loan delinquencies of 60 days or more as of December 31, 2018, 2017 and 2016 were $1.0 million, $294,000 and $1.1 million, respectively. Our provision for loan losses was $1.7 million, $2.8 million and $2.4 million for the years ended December 31, 2018, 2017 and 2016, respectively. For the years ending December 31, 2018, 2017 and 2016 we experienced net charge offs of $30,000, $35,000 and $40,000, respectively.

Management pays close attention to the ongoing operating expenses incurred by the Company while making needed capital expenditures and prudently investing in our infrastructure. The Company’s primary expenses are related to salaries and employee benefits, data processing costs, deposit insurance costs and expenses associated with buildings and equipment. During the year ended December 31, 2018, noninterest expense was managed well and we continued to make improvements in our efficiency ratio.

Critical Accounting Policies

Critical accounting policies are defined as those that involve significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that

 

58


Table of Contents

the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are the following:

Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover probable and reasonably estimable credit losses inherent in the loan portfolio at the consolidated balance sheet date. The allowance for loan losses is established through the provision for loan losses that is charged against income.

The determination of the allowance for loan losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.

The allowance for loan losses has been determined in accordance with GAAP. We are responsible for the timely and periodic determination of the amount of the allowance for loan losses required. We believe the allowance for loan losses is an appropriate estimate of the inherent probable losses within our loan portfolio.

The estimate of our credit losses is applied to two general categories of loans:

 

   

Loans that we evaluate individually for impairment under ASC 310-10, “Receivables;” and

 

   

Groups of loans with similar risk characteristics that we evaluate collectively for impairment under ASC 450-20, “Loss Contingencies.”

The allowance for loan losses is evaluated on a regular basis by management and reflects consideration of all significant factors that affect the collectability of the loan portfolio. The factors used to evaluate the collectability of the loan portfolio include, but are not limited to, current economic conditions, our historical loss experience, the nature and volume of the loan portfolio, the financial strength of the borrower, and the estimated value of any underlying collateral. This evaluation is inherently subjective as it requires estimates that are subject to significant revision as more information becomes available. Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results.

Securities Valuation and Impairment. Our available-for-sale securities portfolio consists of corporate bonds. Our available-for-sale securities portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders’ equity. Our held-to-maturity securities portfolio, which consists of corporate bonds and U.S. government agency sponsored mortgage-backed securities for which we have the positive intent and ability to hold to maturity, is carried at amortized cost. We conduct a quarterly review and evaluation of the available-for-sale and held-to-maturity securities portfolios to determine if the fair value of any security has declined below its amortized cost, and whether such decline is other-than-temporary. If the amortized cost basis of a security exceeds its fair value, we evaluate, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, the probability of a near-term recovery in value and our intent to sell the security and whether it is more likely than not that we will be required to sell the security before full recovery of our investment or maturity. If such a decline is deemed other-than-temporary for equity securities, an impairment charge is recorded through current earnings based upon the estimated fair value of the security at the time of impairment and a new cost basis in the investment is established. For any debt security with a fair value less than its amortized cost basis, we will determine whether we have the intent to sell the debt security or whether it is more likely than not we will be required to sell the debt security before the recovery of its amortized cost basis. If either condition is met, we will recognize the full impairment charge to earnings. For all other debt securities that are considered other-than-temporarily impaired and do not meet either condition, the credit loss portion of impairment will be recognized in earnings as realized losses. The other-than-temporary impairment related to all other factors will be recorded in other comprehensive income or loss.

Determining if a security’s decline in estimated fair value is other-than-temporary is inherently subjective. In performing our evaluation of securities in an unrealized loss position, we consider among other things, the severity, and duration of time that the security has been in an unrealized loss position and the credit quality of the issuer. This evaluation is inherently subjective as it requires estimates of future events, many of which are difficult to predict. Actual results could be significantly different than our estimates and could have a material effect on our financial results.

 

59


Table of Contents

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If it is determined that it is more likely than not that the deferred tax assets will not be realized, a valuation allowance is established.

We consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed quarterly as regulatory and business factors change. A valuation allowance for deferred tax assets may be required if the amounts of taxes recoverable through loss carrybacks decline, or if we project lower levels of future taxable income. Such a valuation allowance would be established and any subsequent changes to such allowance would require an adjustment to income tax expense that could adversely affect our operating results.

Comparison of Financial Condition at December 31, 2018 and December 31, 2017

Total Assets. Total assets increased $353.5 million, or 13.2% to $3.03 billion at December 31, 2018, from $2.68 billion at December 31, 2017. The increase was primarily the result of a $327.4 million or 14.3% increase in net loans and a $32.5 million or 29.3% increase in cash and cash equivalents, partially offset by a $24.9 million or 14.1% decrease in investment securities.

Loans. Net loans increased by $327.4 million or 14.3% to $2.62 billion at December 31, 2018 from $2.30 billion at December 31, 2017. The increase in net loans was primarily due to increases of $250.0 million or 18.7% in one-to-four family residential loans, $68.6 million or 14.1% in commercial real estate loans and $48.0 million or 30.8% in multi-family real estate loans. Partially offsetting these increases were decreases of $18.3 million or 60.4% in indirect automobile loans as we have suspended originations due to current market conditions and $15.4 million or 8.6% in home equity lines of credit due to both payoffs and paydowns of lines.. Our plan to prudently build our commercial and consumer loan portfolios continues as significant growth was achieved in each of our strategic business lines while credit losses remained low.

Investment Securities. The carrying value of total investment securities decreased by $24.9 million or 14.1% to $152.1 million at December 31, 2018, from $177.0 million at December 31, 2017. The decrease in investment securities was driven by decreases of $12.9 million or 76.1% in securities classified as available for sale and $12.1 million or 7.5% in securities classified as held to maturity. The decrease in securities was driven by the maturity of securities with a par value of $19.8 million and paydowns on mortgage backed securities.

Cash and Cash Equivalents. Cash and cash equivalents increased by $32.5 million or 29.3% to $143.4 million at December 31, 2018, from $110.9 million at December 31, 2017.

Bank-Owned Life Insurance. We invest in bank-owned life insurance to help defray the costs of our employee benefit plan obligations. Additionally, bank-owned life insurance generally provides nontaxable, noninterest income. At December 31, 2018, our investment in bank-owned life insurance was $36.5 million, a decrease of $427,000 or 1.2% from $37.0 million at December 31, 2017. The decrease in the cash surrender value was driven by payments received resulting from death benefits.

Deposits. Deposits increased $209.7 million or 12.0%, to $1.96 billion at December 31, 2018 from $1.75 billion at December 31, 2017. The increase in deposits was primarily driven by a $254.6 million or 50.4% increase in certificate of deposit accounts and a $24.2 million or 306.9% increase in money market deposits,, partially offset by a $40.4 million or 24.6% decrease in interest-bearing checking accounts, an $18.1 million or 8.2% decrease in demand deposits and a $10.6 million or 1.2% decrease in savings accounts.

 

60


Table of Contents

Borrowings. At December 31, 2018, borrowings consisted of advances from the FHLB and securities sold to customers under agreements to repurchase, or “repurchase agreements.” Total borrowings increased $114.7 million or 15.8%, to $841.1 million at December 31, 2018, from $726.4 million at December 31, 2017. This increase was driven by an increase in advances from the FHLB of $115.1 million or 15.9%.

Stockholders’ Equity. Total stockholders’ equity increased $23.8 million or 13.3% to $201.8 million at December 31, 2018, from $178.0 million at December 31, 2017. This increase is primarily the result of earnings of $22.9 million and a $2.0 million increase in additional paid-in capital related to stock-based compensation.

Comparison of Operating Results for the Years Ended December 31, 2018 and 2017

General. For the year ended December 31, 2018, net income was $22.9 million or $2.44 per diluted share as compared to net income of $14.4 million or $1.55 per diluted share for the year ended December 31, 2017. This represented an increase in net income of $8.5 million or 59.2%. The increase was primarily due to a $6.1 million or 11.5% increase in net interest and dividend income after the provision for loan losses, a $3.4 million or 28.2% decrease in income tax expense and a $1.4 million or 38.4% increase in noninterest income, partially offset by a $2.3 million or 7.6% increase in noninterest expense.

Net Interest and Dividend Income. Net interest and dividend income increased by $5.0 million to $61.1 million for the year ended December 31, 2018, from $56.1 million for the year ended December 31, 2017. The increase in net interest and dividend income was primarily due to an increase in our net interest-earning assets, partially offset by net interest margin and spread compression. Net average interest-earning assets increased $25.2 million or 7.9% to $342.2 million for the year ended December 31, 2018 from $317.0 million for the year ended December 31, 2017. Our net interest margin decreased 23 basis points to 2.15% for the year ended December 31, 2018, compared to 2.38% for the year ended December 31, 2017 and our net interest rate spread decreased 28 basis points to 1.96% for the year ended December 31, 2018, compared to 2.24% for the year ended December 31, 2017.

Interest and Dividend Income. Total interest and dividend income increased $21.1 million or 27.4% to $98.3 million for the year ended December 31, 2018 from $77.1 million for the year ended December 31, 2017. The increase in interest and dividend income was primarily due to a $19.3 million or 26.8% increase in interest income on loans. The increase in interest income on loans resulted from a $428.1 million increase in the average balance of loans as well as an increase in the yield of 18 basis points from 3.46% for the year ended December 31, 2017 to 3.64% for the year ended December 31, 2018.

Interest Expense. Interest expense increased $16.1 million or 76.5% to $37.2 million for the year ended December 31, 2018 from $21.1 million for the year ended December 31, 2017. The increase was driven by an increase in the average cost of funds of 48 basis points to 1.54% for the year ended December 31, 2018 from 1.06% for the year ended December 31, 2017 as well as a $428.4 million increase in the average balance of interest-bearing liabilities.

Interest expense on interest-bearing deposits increased by $10.9 million to $23.8 million for the year ended December 31, 2018 from $12.9 million for the year ended December 31, 2017. This increase was primarily due to an increase in the average cost of interest-bearing deposits of 47 basis points to 1.38% for the year ended December 31, 2018, compared to 0.91% for the year ended December 31, 2017 as well as an increase of $311.9 million in the average balance of interest-bearing deposits to $1.72 billion for the year ended December 31, 2018 from $1.41 billion for the year ended December 31, 2017. The average cost of all deposit categories increased year over year primarily due to rising short term interest rates.

Interest expense on FHLB advances increased $5.2 million to $13.4 million for the year ended December 31, 2018 from $8.2 million for the year ended December 31, 2017. This increase was primarily due to an increase in the average cost of FHLB advances to 1.95% for the year ended December 31, 2018 from 1.43% for the year ended December 31, 2017 as well as an increase of $115.9 million in the average balance of FHLB advances to $687.3 million for the year ended December 31, 2018 from $571.4 million for the year ended December 31, 2017. The increase in the average cost of FHLB advances was driven by increases in short term interest rates.

Provision for Loan Losses. We recorded a provision for loan losses of $1.7 million for the year ended December 31, 2018 compared to a provision for loan losses of $2.8 million for the year ended December 31, 2017. The reduction in the provision for loan losses was driven by lower loan growth, improvements in the factors used to

 

61


Table of Contents

estimate the allowance for loan losses as well as the elimination of the specific reserve tied to an impaired loan that was sold. We recorded net charge offs of $30,000 for the year ended December 31, 2018 compared to net charge offs of $35,000 during the year ended December 31, 2017. The allowance for loan losses was $17.9 million or 0.68% of total loans at December 31, 2018 compared to $16.3 million or 0.71% of total loans at December 31, 2017.

Noninterest Income. Noninterest income for the year ended December 31, 2018 was $5.0 million as compared to $3.6 million for the year ended December 31, 2017 or an increase of $1.4 million or 38.4%.

 

   

Loan-level derivative income increased from zero to $1.4 million as we began entering into customer related interest rate swap agreements during the year ended December 31, 2018.

 

   

Income from bank-owned life insurance increased $358,000 or 32.0% driven by death benefits received of $405,000, partially offset by lower increases in the cash surrender value of the policies.

 

   

Customer service fees increased $111,000 or 14.1% driven by increased interchange fee income.

 

   

Investments held in the Rabbi Trust had a loss of $65,000 during the year ended December 31, 2018 as compared to a gain of $158,000 during the year ended December 31, 2017.

 

   

Net gains on sales of loans decreased by $180,000 or 19.2% due to lower sales volume.

Noninterest Expense. Noninterest expense for the year ended December 31, 2018 was $33.0 million as compared to $30.7 million for the year ended December 31, 2017 or an increase of $2.3 million or 7.6%.

 

   

Merger expenses amounted to $1.7 million related to the pending merger with People’s United.

 

   

Salaries and employee benefits increased $794,000 or 4.1% driven by an increase in the number of employees, an increase in cash-based incentive compensation and an increase in health care costs.

 

   

Deposit insurance expense increased by $239,000 or 13.8% driven by asset growth.

 

   

Director compensation decreased $580,000 or 42.8% driven by reduced compensation costs related to the decrease in value of the investments held in the Rabbi Trust as well as reduced stock-based compensation expense.

Income Tax Expense. We recorded income tax expense of $8.5 million for the year ended December 31, 2018, compared to income tax expense of $11.9 million for the year ended December 31, 2017, reflecting effective tax rates of 27.1% and 45.2%, respectively.

The effective tax rate for the year ended December 31, 2018 decreased as a result of the reduction in the U.S. federal statutory income tax rate from 35% to 21% under the Tax Reform Act enacted on December 22, 2017. The effective tax rate for 2017 was impacted by the adjustment of our deferred tax assets and liabilities related to the reduction in the U.S. federal statutory income tax rate from 35% to 21% under the Tax Reform Act enacted on December 22, 2017. Under ASC 740, Income Taxes, the effect of income tax law changes on deferred taxes should be recognized as a component of income tax expense related to continuing operations in the period in which the law is enacted. This requirement applies not only to items initially recognized in continuing operations, but also to items initially recognized in other comprehensive income or loss. As a result of the reduction in the U.S. federal statutory income tax rate, we recognized a write down of our deferred tax asset of $2.6 million through income tax expense during the year ended December 31, 2017, determined as follows (in thousands):

 

     Tax Benefit/(Expense)  

Deferred taxes related to items recognized in continuing operations

   $ (2,645

Deferred taxes related to items recognized in other comprehensive income:

  

Deferred taxes on net actuarial gain on defined benefit post-retirement benefit plans

     26  

Deferred taxes on net unrealized loss on securities available-for-sale

     (7
  

 

 

 

Net adjustment to deferred taxes recognized as income tax expense

   $ (2,626
  

 

 

 

 

62


Table of Contents

Because ASC 740 requires the effect of income tax law changes on deferred taxes to be recognized as a component of income tax expense related to continuing operations rather than merely backward tracing the adjustment through the accumulated other comprehensive income component of stockholders’ equity, the net adjustment to deferred taxes detailed above included a net benefit totaling $19,000 related to items recognized in other comprehensive income. The amounts included in the table above are included as separate components of accumulated other comprehensive income at December 31, 2017. In February 2018, the Financial Accounting Standards Board issued Accounting Standards Update 2018-02, that allows companies to elect to reclassify the tax effects stranded in accumulated other comprehensive income to retained earnings rather than income tax benefit or expense.

Comparison of Operating Results for the Years Ended December 31, 2017 and 2016

General. For the year ended December 31, 2017, net income was $14.4 million or $1.55 per diluted share as compared to net income of $12.0 million or $1.33 per diluted share for the year ended December 31, 2016 or an increase in net income of $2.4 million or 20.1%. The increase was primarily due to an $8.3 million or 18.5% increase in net interest and dividend income after the provision for loan losses and an $877,000 or 31.9% increase in noninterest income, partially offset by a $2.3 million or 8.2% increase in noninterest expense and a $4.5 million or 60.0% increase in income tax expense. The fourth quarter of 2017 included a one-time charge of $2.6 million, recorded within income tax expense, related to the enactment of the Tax Cuts and Jobs Act (“Tax Reform Act”). This charge resulted from the re-measurement of the Bank’s deferred tax assets due to a lower future U.S corporate income tax rate. The reduction in the corporate tax rate due to the Tax Reform Act is expected to benefit future earnings as the statutory federal income tax rate is lower beginning in 2018.

Net Interest and Dividend Income. Net interest and dividend income increased by $8.7 million to $56.1 million for the year ended December 31, 2017, from $47.4 million for the year ended December 31, 2016. The increase in net interest and dividend income was primarily due to an increase in our net interest-earning assets and the ability to effectively manage our cost of funds. Net average interest-earning assets increased $23.1 million or 7.9% to $317.0 million for the year ended December 31, 2017 from $293.9 million for the year ended December 31, 2016. Our net interest margin decreased 7 basis points to 2.38% for the year ended December 31, 2017, compared to 2.45% for the year ended December 31, 2016, and our net interest rate spread decreased 8 basis points to 2.24% for the year ended December 31, 2017, compared to 2.32% for the year ended December 31, 2016.

Interest and Dividend Income. Total interest and dividend income increased $15.5 million or 25.2% to $77.1 million for the year ended December 31, 2017 from $61.6 million for the year ended December 31, 2016. The increase in interest and dividend income was primarily due to a $14.5 million increase in interest income on loans. The increase in interest income on loans resulted from a $378.7 million increase in the average balance of loans.

Interest Expense. Interest expense increased $6.8 million or 47.9% to $21.1 million for the year ended December 31, 2017 from $14.2 million for the year ended December 31, 2016. The increase was driven by a $376.8 million increase in the average balance of interest-bearing liabilities as well as an increase in the average cost of funds of 18 basis points to 1.06% at December 31, 2017 from 0.88% at December 31, 2016.

Interest expense on interest-bearing deposits increased by $3.5 million to $12.9 million for the year ended December 31, 2017 from $9.4 million for the year ended December 31, 2016. This increase was primarily due to an increase of $233.4 million in the average balance of interest-bearing deposits to $1.41 billion at December 31, 2017 from $1.18 billion at December 31, 2016. The average cost of interest-bearing deposits increased 11 basis points to 0.91% for the year ended December 31, 2017, compared to 0.80% for the year ended December 31, 2016.

The average cost of savings accounts increased by 12 basis points during the year ended December 31, 2017 as compared to the year ended December 31, 2016 as we have focused on growing these products and attracting new relationships.

Interest expense on Federal Home Loan Bank advances increased $3.4 million to $8.2 million for the year ended December 31, 2017 from $4.8 million for the year ended December 31, 2016. This increase was primarily due to an increase of $143.3 million in the average balance of Federal Home Loan Bank advances to $571.4 million for the year ended December 31, 2017 from $428.2 million for the year ended December 31, 2016. Also driving this additional interest expense was an increase in the average cost of advances to 1.43% for the year ended December 31, 2017 from 1.12% for the year ended December 31, 2016. The increase in the cost is due to both increases in short term rates and increased balances of our long term advances.

 

63


Table of Contents

Provision for Loan Losses. We recorded a provision for loan losses of $2.8 million for the year ended December 31, 2017 compared to a provision for loan losses of $2.4 million for the year ended December 31, 2016. We recorded net charge offs of $35,000 for the year ended December 31, 2017 compared to net charge offs of $40,000 during the year ended December 31, 2016. The allowance for loan losses was $16.3 million or 0.71% of total loans at December 31, 2017 compared to $13.6 million or 0.73% of total loans at December 31, 2016.

Noninterest Income. Noninterest income for the year ended December 31, 2017 was $3.6 million as compared to $2.8 million for the year ended December 31, 2016 or an increase of 31.9%.

 

   

Customer service fees decreased $118,000 or 13.1% primarily due to declines in NSF and other fees.

 

   

Income from bank-owned life insurance increased $70,000 or 6.7% primarily due to a purchase of $5.0 million in additional bank-owned life insurance policies at the end of the second quarter of 2016.

 

   

Net gains on sales of securities increased $38,000 from zero as we sold one security classified as available for sale.

 

   

Net gains on sales of loans increased $665,000 or 245.4% due to an increase in the number of loans sold.

 

   

Loan servicing fee income increased $48,000 or 13.7% due to an improvement in the value of our mortgage servicing right asset.

 

   

Other income increased by $174,000 or 98.9% primarily due to vendor loss experience refunds and increases in the values of investments held in a Rabbi Trust.

Noninterest Expense. Noninterest expense for the year ended December 31, 2017 was $30.7 million as compared to $28.4 million for the year ended December 31, 2016 or an increase of 8.2%.

 

   

Salaries and employee benefits increased $1.8 million or 9.9% driven by stock-based compensation related to grants of restricted stock made during the first quarter of 2017, an increase in the number of employees, an increase in cash-based incentive compensation and an increase in health care costs.

 

   

Director compensation increased $384,000 or 39.5% driven by stock-based compensation related to grants of restricted stock made during the first quarter of 2017 and increased deferred compensation costs related to the increase in value of the investments held in the Rabbi Trust.

 

   

Deposit insurance expense increased by $448,000 or 34.9% driven by asset growth.

 

   

Data processing fees decreased by $327,000 or 10.5% as we renegotiated certain contracts with service providers in late 2016.

Income Tax Expense. We recorded income tax expense of $11.9 million for the year ended December 31, 2017, compared to income tax expense of $7.4 million for the year ended December 31, 2016, reflecting effective tax rates of 45.2% and 38.3%, respectively.

The effective tax rate for 2017 was impacted by the adjustment of our deferred tax assets and liabilities related to the reduction in the U.S. federal statutory income tax rate from 35% to 21% under the Tax Reform Act enacted on December 22, 2017.

Under ASC 740, Income Taxes, the effect of income tax law changes on deferred taxes should be recognized as a component of income tax expense related to continuing operations in the period in which the law is enacted. This requirement applies not only to items initially recognized in continuing operations, but also to items

 

64


Table of Contents

initially recognized in other comprehensive income. As a result of the reduction in the U.S. federal statutory income tax rate, we recognized a write down of our deferred tax asset of $2.6 million through income tax expense, determined as follows (in thousands):

 

     Tax Benefit/(Expense)  

Deferred taxes related to items recognized in continuing operations

   $ (2,645

Deferred taxes related to items recognized in other comprehensive income:

  

Deferred taxes on net actuarial gain on defined benefit post-retirement benefit plans

     26  

Deferred taxes on net unrealized loss on securities available-for-sale

     (7
  

 

 

 

Net adjustment to deferred taxes recognized as income tax expense

   $ (2,626
  

 

 

 

Because ASC 740 requires the effect of income tax law changes on deferred taxes to be recognized as a component of income tax expense related to continuing operations rather than merely backward tracing the adjustment through the accumulated other comprehensive income component of stockholders’ equity, the net adjustment to deferred taxes detailed above included a net benefit totaling $19,000 related to items recognized in other comprehensive income. The amounts included in the table above are included as separate components of accumulated other comprehensive income at December 31, 2017. In February 2018, the Financial Accounting Standards Board issued Accounting Standards Update 2018-02, that allows companies to elect to reclassify the tax effects stranded in accumulated other comprehensive income to retained earnings rather than income tax benefit or expense.

Average Balances and Yields

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. 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.

 

65


Table of Contents
    For the Year Ended December 31,  
    2018     2017     2016  
    Average
Outstanding
Balance
    Interest     Yield/ Rate     Average
Outstanding
Balance
    Interest     Yield/ Rate     Average
Outstanding
Balance
    Interest     Yield/ Rate  
    (Dollars in thousands)  

Interest-earning assets:

                 

Total loans

  $ 2,508,664     $ 91,337       3.64   $ 2,080,571     $ 72,011       3.46   $ 1,701,909     $ 57,513       3.38

Securities

    161,209       3,494       2.17     161,866       3,356       2.07     156,526       3,159       2.02

Other

    86,824       1,497       1.72     60,717       583       0.96     44,774       189       0.42
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets (4)

    2,756,697       96,328       3.49     2,303,154       75,950       3.30     1,903,209       60,861       3.20

Non-interest-earning assets

    78,931           73,472           63,317      
 

 

 

       

 

 

       

 

 

     

Total assets

  $ 2,835,628         $ 2,376,626         $ 1,966,526