ITEM 1.
BUSINESS
This Annual Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:
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statements of our goals, intentions and expectations;
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statements regarding our business plans, prospects, growth and operating strategies;
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statements regarding the asset quality of our loan and investment portfolios; and
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estimates of our risks and future costs and benefits.
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These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We do not undertake any obligation to update any forward-looking statements after the date of this Annual Report, except as required by law.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
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our ability to implement successfully our business strategy, which includes continued loan and deposit growth;
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our ability to increase our market share in our market areas, enter new markets and capitalize on growth opportunities;
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our ability to implement successfully our branch network expansion strategy;
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general economic conditions, either nationally or in our market areas, that are worse than expected;
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competition among depository and other financial institutions;
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inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;
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changes in monetary policy, changes in government support for housing;
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adverse changes in asset quality including an unanticipated credit deterioration in our loan portfolio;
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adverse changes in the securities markets which could cause a material decline in our reported equity and/or our net income if we must record impairment charges or a decline in the fair value of our securities;
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changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and the corporate tax rate;
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changes in consumer spending, borrowing and savings habits;
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changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, or the Securities and Exchange Commission;
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changes in our organization, compensation and benefit plans;
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changes in our financial condition or results of operations that reduce capital available to pay dividends;
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and
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cyber security attacks or intrusions that could adversely impact our businesses.
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Because of these and a wide variety of other risks and uncertainties, including those included in this annual report under “Item1A. Risk Factors,” our actual future results may be materially different from the results indicated by these forward-looking statements.
Blue Hills Bancorp, Inc.
Blue Hills Bancorp, Inc. (“Blue Hills Bancorp” or the “Company”) is a Maryland corporation that owns 100% of the common stock of Blue Hills Bank (the “Bank”) and Blue Hills Funding Corporation. Blue Hills Bancorp was incorporated in February 2014 to become the holding company of the Bank in connection with the mutual-to-stock conversion of Hyde Park Bancorp, MHC, the Bank’s former holding company. On July 21, 2014, we completed our initial public offering of common stock in connection with the conversion, selling 27,772,500 shares of common stock at $10.00 per share for approximately $277.7 million in gross proceeds, including 2,277,345 shares sold to the Bank’s employee stock ownership plan. In addition, in connection with the conversion, we issued 694,313 shares of our common stock and contributed $57,000 in cash to the Blue Hills Bank Foundation. As of
December 31, 2017
, we had consolidated assets of
$2.67 billion
, consolidated deposits of $
2.04 billion
and consolidated equity of $
397.8 million
. Other than holding the common stock of Blue Hills Bank, Blue Hills Bancorp has not engaged in any significant business to date. In the future, we may pursue other business activities, including mergers and acquisitions, investment alternatives and diversification of operations. There are, however, no current understandings or agreements for these activities.
The executive and administrative office of Blue Hills Bancorp, Inc. is located at 500 River Ridge Drive, Norwood, Massachusetts 02062, and its telephone number at this address is (617) 361-6900. Our website address is
www.bluehillsbancorp.com
. Information on our website is not and should not be considered to be a part of this annual report.
Blue Hills Bank
Blue Hills Bank was organized in 1871 and is a Massachusetts-chartered savings bank headquartered in Hyde Park, Massachusetts. We provide financial services to individuals, families, small to mid-size businesses and government and non-profit organizations online and through our eleven full-service branch offices located in Boston, Dedham, Hyde Park, Milton, Nantucket, Norwood, West Roxbury, and Westwood, Massachusetts. Our three branches in Nantucket were acquired in January 2014 (“Nantucket Bank Acquisition”), and operate under the name Nantucket Bank, a division of Blue Hills Bank. We also operate loan production offices in Boston, Cambridge, Concord, Dorchester, Franklin, Hingham, Lowell, Marblehead, Plymouth, and Winchester, Massachusetts. Our primary deposit-taking market includes Norfolk, Suffolk and Nantucket Counties in Massachusetts, and our lending market is primarily based in eastern Massachusetts, however, we actively pursue opportunities across New England.
Our business consists primarily of accepting deposits from the general public, commercial businesses and government and non-profit organizations, and investing those deposits, together with funds generated from operations and borrowings, in 1-4 family residential mortgage loans, commercial real estate loans, commercial business loans and investment securities. To a much lesser extent, we originate home equity loans and lines of credit, construction loans and consumer loans. We offer a full range of deposit accounts, including passbook and statement savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts and IRAs. Through our bundled products, we offer reduced fees and higher interest rates on relationship accounts.
Blue Hills Bank’s main banking office is located at 1196 River Street, Hyde Park, Massachusetts 02136. Our telephone number at this address is (617) 361-6900. Our website address is
www.bluehillsbank.com
. Information on our website is not and should not be considered part of this annual report.
Available Information
The Company is a public company and files interim, quarterly and annual reports with the Securities and Exchange Commission. These respective reports are on file and a matter of public record with the Securities and Exchange Commission and may be read and copied at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission 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
).
Market Area
We provide financial services to individuals, families, small to middle-market businesses and government and non-profit organizations online and through our eleven full-service branch offices and through our relationship managers. Our primary deposit taking market includes Norfolk, Suffolk and Nantucket Counties in Massachusetts. Our primary lending market encompasses a broader region of eastern Massachusetts. In addition, we also make loans secured by properties and the assets of businesses located outside of our primary lending market area. These loans are typically made to businesses headquartered or operating in New England.
Due to our proximity to Boston, our market area benefits from the presence of numerous institutions of higher learning, medical care and research centers and the corporate headquarters of several financial investment companies. Eastern Massachusetts also has many high technology companies employing personnel with specialized skills. As a result, healthcare, high-tech and financial services companies constitute major sources of employment in our regional market area, as well as the colleges and universities that populate the Boston Metropolitan Statistical Area (“MSA”). These factors affect the demand for residential homes, apartments, office buildings, shopping centers, industrial warehouses and other commercial properties. Tourism also is a prominent component of our market area’s economy, as Boston annually ranks as one of the nation’s top tourist destinations.
Population and household data indicate that the market surrounding our branches is a mix of urban, suburban and island markets. Suffolk County, where the city of Boston is located, and Norfolk County are two of the largest counties in Massachusetts, with populations of approximately 797,000 and 702,000, respectively. Suffolk County experienced relatively strong demographic growth from 2010 to 2017, at 10.40%, which exceeded both the national and state growth rates of 5.76% and 4.85%, respectively. Norfolk County, a suburban market with a large commuter population, experienced moderate population growth from 2010 to 2017 of 4.6%. Nantucket County is a popular tourist destination and summer colony and thus has seasonal fluctuations in population. Nantucket County has a full-time population of approximately 11,000 residents, which expands to a population of around 100,000 during the peak of the summer vacation season. From 2010 to 2017, Nantucket County experienced population growth of 10.45%. Recent population growth trends are generally projected to moderate slightly over the next five years.
Income measures show that Suffolk County is a relatively low-income market, characterized by its urban demographic in the city of Boston. Median household income for Suffolk County falls below the state measure but exceeds the national measure. Comparatively, income measures show that Norfolk and Nantucket counties are relatively affluent markets, as the wealthiest counties in Massachusetts. In particular, Norfolk County is characterized by a high concentration of white collar professionals who work in the Boston area. Nantucket County is a prestigious vacation destination targeted towards high-income visitors, with home values among the highest in the country. Median household and per capita income measures for Norfolk and Nantucket Counties are both well above the comparable U.S. and Massachusetts income measures. Projected income growth measures for Suffolk and Norfolk Counties are somewhat above the comparable projected growth rates for the U.S. and Massachusetts, whereas Nantucket County’s projected income growth rate is somewhat lower.
The December 2017 unemployment rates for Norfolk, Suffolk and Nantucket Counties were 2.7%, 2.7% and 5.8%, respectively. Norfolk, Suffolk and Nantucket Counties, along with the Commonwealth of Massachusetts, all reported higher unemployment rates for December 2017 compared to a year ago.
Competition
We face intense competition in our market area both in making loans and attracting deposits. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, 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 business, and offer certain services that we do not or cannot provide.
Our deposit sources are primarily concentrated in the communities surrounding our full-service branch offices. As of June 30, 2017 (the latest date for which information is publicly available from the Federal Deposit Insurance Corporation), we ranked sixteenth of 48 banks and thrift institutions with offices in Norfolk County, Massachusetts, with a 1.46% market share. As of that same date, we ranked tenth of 45 banks and thrift institutions with offices in Suffolk County, Massachusetts, with a 0.75% market share. Also, as of that same date, we ranked first of four banks and thrift institutions with offices in Nantucket County, Massachusetts, with a 42.10% market share.
Lending Activities
Our primary lending activities are the origination of 1-4 family residential mortgage loans, commercial real estate loans, commercial business loans, home equity loans and lines of credit, other consumer loans and construction loans. Most loans are to borrowers in our core market of New England but to diversify risk we also have loans to borrowers located outside of New England. We also sell in the secondary market the majority of the fixed-rate conforming 1-4 family residential mortgage loans that we originate, generally on a servicing-released, limited or no recourse basis, while retaining jumbo fixed-rate and adjustable-rate 1-4 family residential mortgage loans to manage the duration and time to re-pricing of our loan portfolio.
Loan Portfolio Composition.
The following table sets forth the composition of our loan portfolio at the dates indicated. Loans held for sale, which amounted to
$9.0 million
,
$2.8 million
, $12.9 million, $14.6 million, and $765,000 at December 31, 2017, 2016, 2015, 2014, and 2013, respectively, are not included below.
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2017
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2016
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2015
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2014
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2013
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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(Dollars in thousands)
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Real estate loans:
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1-4 family residential
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$
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922,627
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41.87
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%
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$
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851,154
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44.12
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%
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$
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599,938
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38.98
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%
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$
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460,273
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40.13
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%
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$
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364,942
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47.26
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%
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Home equity
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80,662
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3.66
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78,719
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4.08
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77,399
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5.03
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61,750
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5.38
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25,535
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3.31
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Commercial
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834,264
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37.86
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687,289
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35.63
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561,203
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36.46
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387,807
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33.81
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228,688
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29.61
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Construction
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91,050
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4.13
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76,351
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3.96
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79,773
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5.18
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53,606
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4.67
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16,559
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2.14
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Total real estate loans
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1,928,603
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87.52
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1,693,513
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87.79
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1,318,313
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85.65
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963,436
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83.99
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635,724
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82.32
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Commercial business loans
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253,509
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11.50
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206,234
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10.69
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182,677
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11.87
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151,823
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13.24
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111,154
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14.39
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Consumer loans
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21,698
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0.98
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29,281
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1.52
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38,186
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2.48
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31,778
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2.77
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25,372
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3.29
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Total loans
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2,203,810
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100.00
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%
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1,929,028
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100.00
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%
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1,539,176
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100.00
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%
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1,147,037
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100.00
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%
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772,250
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100.00
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%
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Other items:
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Allowance for loan losses
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(20,877
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)
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(18,750
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)
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(17,102
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)
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(12,973
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)
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(9,671
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)
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Deferred loan costs (fees) and discounts
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3,214
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2,593
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1,201
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(1,150
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)
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2,003
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Total loans, net
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$
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2,186,147
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$
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1,912,871
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$
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1,523,275
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$
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1,132,914
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$
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764,582
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Loan Portfolio Maturities and Yields.
The following table summarizes the dollar amount of loans maturing in our portfolio based on their contractual terms to maturity at
December 31, 2017
, but does not include scheduled payments, potential payments, or the impact of interest rate swaps. Demand loans, having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Balances noted below do not reflect fair value adjustments, discounts or deferred costs and fees.
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1-4 Family
Residential Loans
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Home Equity Loans
and Lines of Credit
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Commercial Real
Estate Loans
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Construction Loans
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Amount
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Yield
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Amount
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Yield
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Amount
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Yield
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Amount
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Yield
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(Dollars in thousands)
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Due During the Years
Ending December 31,
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2018
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$
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188
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5.15
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%
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$
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4
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4.75
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%
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$
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62,985
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4.16
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%
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$
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44,619
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4.18
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%
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2019
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195
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4.73
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10
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5.46
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63,207
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3.73
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19,780
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4.29
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2020
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498
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4.70
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93
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4.86
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54,148
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3.70
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—
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—
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2021 to 2022
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2,283
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3.49
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210
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5.42
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190,511
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3.85
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1,512
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|
6.25
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2023 to 2027
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12,009
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|
3.76
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1,563
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|
4.93
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445,876
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3.69
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14,699
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4.40
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2028 to 2032
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58,044
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3.33
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|
5,080
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|
4.83
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|
4,955
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|
4.13
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3,436
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|
3.13
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2033 and beyond
|
849,410
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|
3.70
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|
73,702
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|
4.07
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|
12,582
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|
3.90
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|
7,004
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|
3.86
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Total
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$
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922,627
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|
3.68
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%
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$
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80,662
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|
4.14
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%
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$
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834,264
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3.77
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%
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$
|
91,050
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|
4.21
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%
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Commercial Business
Loans
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Consumer Loans
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Total Loans
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Amount
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Yield
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Amount
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Yield
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|
Amount
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Yield
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(Dollars in thousands)
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Due During the Years
Ending December 31,
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2018
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$
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35,057
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5.03
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%
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$
|
244
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11.71
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%
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$
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143,097
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|
4.39
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%
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2019
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12,219
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|
4.41
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|
208
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|
7.44
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|
95,619
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|
|
3.94
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2020
|
32,581
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|
|
4.52
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|
557
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|
6.95
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|
87,877
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|
|
4.03
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2021 to 2022
|
105,377
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|
|
4.54
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|
|
4,175
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|
|
3.68
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|
|
304,068
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|
|
4.10
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2023 to 2027
|
40,242
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|
|
4.76
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|
|
16,490
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|
|
4.54
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|
|
530,879
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|
|
3.83
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2028 to 2032
|
—
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|
—
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|
—
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|
|
—
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|
|
71,515
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|
|
3.48
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2033 and beyond
|
28,033
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|
|
4.44
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|
|
24
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|
|
3.57
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|
|
970,755
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|
|
3.76
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Total
|
$
|
253,509
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|
|
4.62
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%
|
|
$
|
21,698
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|
|
4.54
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%
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$
|
2,203,810
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|
3.87
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%
|
The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at
December 31, 2017
that are contractually due after December 31, 2018.
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Due After December 31, 2018
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|
Fixed
|
|
Adjustable
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Total
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(In thousands)
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Real estate loans and lines:
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1-4 family residential
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$
|
607,552
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$
|
314,887
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$
|
922,439
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Home equity
|
3,238
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|
77,420
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|
80,658
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Commercial real estate
|
41,718
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|
|
729,561
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|
|
771,279
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Construction
|
6,440
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|
|
39,991
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|
|
46,431
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|
Total real estate loans and lines
|
658,948
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|
|
1,161,859
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|
|
1,820,807
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Commercial business loans
|
48,134
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|
|
170,318
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|
|
218,452
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|
Consumer loans
|
21,454
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|
|
—
|
|
|
21,454
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|
Total loans
|
$
|
728,536
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|
|
$
|
1,332,177
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|
|
$
|
2,060,713
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|
1-4 Family Residential Mortgage Loans.
At
December 31, 2017
,
$922.6 million
, or
41.9%
, of our loan portfolio, consisted of 1-4 family residential mortgage loans with
$55.5 million
comprised of non-owner occupied properties. We offer fixed-rate and adjustable-rate residential mortgage loans with maturities up to 30 years.
Some of the housing stock in our primary lending market area comprises two-, three- and four-unit properties, all of which are classified as 1-4 family residential mortgage loans.
Our 1-4 family residential mortgage loans that we originate 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 both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency. We also originate loans above the conforming limits, referred to as “jumbo loans”, which are common in our market area. We generally underwrite jumbo loans in a manner similar to conforming loans. During the year ended
December 31, 2017
, we originated
$488.9 million
of 1-4 family residential loans. See “Lending Activities-Loan Originations, Sales, Participations and Servicing”.
We originate our adjustable-rate 1-4 family residential mortgage loans with initial interest rate adjustment periods of three, five, seven and ten years, based on changes in a designated market index. These loans are limited to a 500 basis point initial increase in their interest rate, a 200 basis point increase in their interest rate annually after the initial adjustment, and a maximum upward adjustment of 500 to 600 basis points over the life of the loan. We determine whether a borrower qualifies for an adjustable-rate mortgage loan in conformance with the underwriting guidelines set forth by Fannie Mae and Freddie Mac in the secondary mortgage market. In particular, we determine whether a borrower qualifies for an adjustable-rate mortgage loan with an initial fixed-rate period of five years or less based on the ability to repay both principal and interest using the higher of an interest rate which is 2.0% above the initial interest rate, or the fully indexed rate, including a reasonable estimate of real estate taxes and insurance, and taking into account the maximum debt-to-income ratio stipulated in the underwriting guidelines in the secondary mortgage market. The qualification for an adjustable-rate mortgage loan with an initial fixed-rate period exceeding five years is based on the borrower’s ability to repay at the higher of the initial fixed interest rate or the fully indexed rate.
We originate 1-4 family residential mortgage loans with loan-to-value ratios up to 80% without private mortgage insurance or a state guarantee program. We originate loans with loan-to-value ratios of up to 97% with private mortgage insurance and where the borrower’s debt does not exceed 43% of the borrower’s monthly cash flow. To encourage lending to low- and moderate-income home buyers, we participate in several publicly-sponsored loan programs, including: the Massachusetts Housing Finance Agency program, which provides competitive terms for loans with higher loan-to-value ratios than are available with conventional financing; the Federal Home Loan Banks Equity Builder Program, which provides closing cost and down payment assistance to income-eligible home buyers; and the Mass Housing Partnership’s One program that contains a number of attractive features for low- and moderate-income home buyers. Also, in 2016, we began participation in the governmentally sponsored Federal Housing Administration (FHA) program, which allows first-time home buyers to obtain competitive mortgage rates with low closing costs and minimal down payments.
The vast majority of the conforming fixed-rate 1-4 family residential mortgage loans we originate are sold into the secondary market to mortgage investors with servicing released and to the Federal Home Loan Bank of Boston with servicing retained. For the year ended
December 31, 2017
, we received servicing fees, including credit enhancement fees, of
$506,000
on mortgage loans that we serviced for third parties. At
December 31, 2017
, the unpaid principal balance of loans serviced for others totaled
$245.1 million
.
We do not 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 the loan, resulting in an increased principal balance during the life of the loan. Additionally, we generally 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).
Home Equity Loans and Lines of Credit.
In addition to traditional 1-4 family residential mortgage loans, we offer home equity lines of credit and, to a lesser extent, home equity loans, that are secured by the borrower’s primary residence or secondary residence. Home equity loans and lines of credit are generally underwritten with the same criteria that we use to underwrite 1-4 family residential mortgage loans. We offer these products online and through our branch office network.
At
December 31, 2017
, we had
$80.7 million
in home equity lines and loans outstanding, of which
98.3%
were performing in accordance with original terms. The home equity lines of credit that we originate are revolving lines of credit, which generally have a term of 25 years, with draws available for the first ten years. Our 25-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-value ratios are determined based on an applicant’s credit score, property value, loan amount and debt-to-income ratio. Lines of credit above $250,000 require a full appraisal. Rates are adjusted monthly based on changes in a designated market index. We also originate fixed-rate home equity loans with terms up to 15 years, although, in the current interest rate environment, fixed-rate loans with terms greater than five years are not a priority. While all home equity lines and loans outstanding at December 31, 2017 were originated by the Company, during the third quarter of 2017 we recorded a loss of $118,000 from the sale of the remaining $12.0 million of a home equity loan portfolio that had been purchased in 2012.
Commercial Real Estate.
At
December 31, 2017
,
$834.3 million
, or
37.9%
, of our loan portfolio consisted of commercial real estate loans. At
December 31, 2017
, the majority of our commercial real estate loans were secured by properties located in eastern Massachusetts. In addition, the vast majority of the commercial real estate loans in our portfolio were originated by us as lead lender, rather than loans that we have obtained through participations.
Our commercial real estate mortgage loans are primarily secured by office buildings, multi-family apartment buildings, owner-occupied businesses and industrial buildings. As of
December 31, 2017
, our two largest commercial real estate loans totaled
$27.0 million
and
$26.4 million
, which financed an office and retail property and an office and flex research and development property, respectively. These loans were performing in accordance with their terms at
December 31, 2017
. At that date, we had
22
other commercial real estate loans with outstanding principal balances exceeding $10.0 million.
Our commercial real estate loans generally have terms of three to ten years with adjustable, LIBOR-based, Federal Home Loan Bank Classic Advance or Wall Street Journal Prime rates of interest. These loans generally amortize on a 25 to 30-year basis, with a balloon payment due at maturity.
To facilitate qualified commercial customers’ access to fixed-rate financing, we enter into loan-level interest rate swaps through a third party advisor. These swap agreements enable the Bank to write LIBOR-based, adjustable-rate loans, whereas customers ultimately pay a fixed interest rate. Interest rate risk associated with these transactions is controlled by entering into offsetting positions with third parties. Credit risk is minimized by limiting transactions to highly-rated counterparties and through collateral agreements. Collateral is required to be exchanged when the valuation reaches agreed upon thresholds, for certain counterparties. We generally receive fees in offering these interest rate swap agreements. As of
December 31, 2017
, the notional value of interest rate swaps on loans with commercial real estate loan customers amounted to
$582.4 million
, and we earned net fee income of
$2.8 million
from customer swaps in
2017
.
In underwriting commercial real estate loans we consider a number of factors, which include the projected net cash flow to the loan’s debt service requirement (generally requiring a minimum of 125%), tenant rollover risk, vacancy, the age and condition of the collateral, a market analysis of particular assets by geographic location, the financial resources and income level of the sponsor and the sponsor’s experience in owning or managing similar properties. Commercial real estate and multi-family real estate loans are generally originated in amounts up to 75% of the appraised value or the purchase price of the property securing the loan, whichever is lower. When circumstances warrant, guarantees are obtained from commercial real estate and multi-family real estate sponsors. In addition, the sponsor’s and guarantor’s financial information on such loans is monitored on an ongoing basis by requiring periodic financial statement updates.
Commercial real estate loans generally entail greater credit risks compared to the 1-4 family residential mortgage loans we originate, 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 for the loan or the future cash flow of the property. Commercial real estate loans are closely underwritten and managed within approved guidelines. In addition, our Risk Management group provides regular follow up via portfolio and loan reviews.
Construction Loans.
We originate or participate in loans originated by others to established local developers to finance the construction of commercial and multi-family properties. To a lesser extent, we originate loans to local builders and individuals to finance the construction of 1-4 family residential properties. At
December 31, 2017
,
$91.1 million
, or
4.1%
of our loan portfolio consisted of construction loans. Commercial construction loans totaled
$81.6 million
. The two largest loans outstanding amounted to
$18.4 million
and
$14.6 million
, respectively, which are both secured by multi-family residential properties. As of
December 31, 2017
, our commitments to fund these two commercial construction projects totaled
$37.0 million
including the amount outstanding. These loans were performing in accordance with their terms at
December 31, 2017
.
Our commercial construction loans generally call for the payment of interest only with interest rates that are tied to LIBOR. Construction loans for commercial real estate are originated with principal balances of up to $20.0 million with a loan-to-completed value ratio of 65% to 80%, depending on the type of property. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction. Repayment of construction loans for income-producing properties usually is expected from permanent financing upon completion of construction. In the case of construction loans for 1-4 family residential properties, repayment normally is expected from the sale of units to individual purchasers, or in the case of individuals building their own homes, from a permanent mortgage.
Construction loans are closely underwritten within approved guidelines. Before making a commitment to fund a construction loan, we require an appraisal of the property by a licensed appraiser. The amount of funds disbursed per construction requisitions during the term of the construction loan is generally justified by a Bank-appointed construction engineer.
Construction financing generally involves greater credit risk than long-term financing on improved, tenanted investment 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. The Bank utilizes third party firms to monitor construction completion schedules and draw schedules. 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.
Commercial Business Loans
.
We originate commercial term loans and variable rate lines of credit to businesses in our primary market area. Our commercial loans are generally used for working capital purposes, funding business acquisitions, or for acquiring machinery and equipment. These loans are generally secured by all business assets including business equipment, inventory, accounts receivable, trademarks, and real estate, 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, 2017
, we had
$253.5 million
of commercial business loans, representing
11.5%
of our total loan portfolio outstanding.
We also participate in large loans originated by other banks with customers operating in sectors where our commercial lenders have substantial experience. As of
December 31, 2017
, our two largest commercial business loan relationships outstanding amounted to
$13.8 million
and
$13.3 million
, to a wholesale supplier of energy products and a technology consulting and staffing company, respectively. In each case, these were participation loans syndicated by other banks and our total commitments on these loans were
$30.0 million
and
$15.0 million
, respectively, including the amounts outstanding. These loans were performing in accordance with their terms at
December 31, 2017
. In addition to the total commitment of
$30.0 million
, noted above, at
December 31, 2017
, our second largest customer commitment was
$27.0 million
, to a steel and mining company, with no outstanding balance at December, 31, 2017. In each case, these were participation arrangements syndicated by other banks. These loans were performing in accordance with their terms at
December 31, 2017
.
When making commercial business loans, we consider the debt service capabilities of the borrower, the projected cash flows of the business and the value of the collateral. Many of our loans are guaranteed by the principals of the borrower.
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. In addition, at
December 31, 2017
, we had $10.0 million of unsecured, subordinated loans to financial institutions operating in New England, for which repayment is dependent on the ability of the financial institutions to generate income. We seek to minimize these risks through our underwriting standards and the experience of our lenders and credit department. The commercial lending and risk management units are responsible for the underwriting and documentation of new commercial loans, as well as the quarterly review of credit ratings of existing loans.
Consumer Loans.
We offer consumer loans on a limited and selective basis. At
December 31, 2017
,
$21.7 million
, or
1.0%
, of our loan portfolio, consisted of consumer loans, of which
$15.6 million
related to classic and collector automobile loans, and only
$6.1 million
related to other consumer loans.
Our portfolio of classic and collector automobile loans is the result of a 2011 initiative to increase our exposure to higher-yielding loan assets and diversify our credit portfolio, resulting in an agreement to purchase loans from a third-party originator. Pursuant to the terms of this agreement, we elected to purchase loans secured by classic and collector automobiles according to a defined price schedule, which varied according to the terms of the loans and the credit quality of the borrower. Our primary considerations, when we originated these loans, were the borrower’s ability to repay the loan and the value of the underlying collateral. The average FICO score of borrowers for these loans was 746 at origination. We financed up to the full sales price of the vehicle. In order to mitigate our risk of loss, we have a 50% loss sharing arrangement with the third-party originator of these loans. Since the commencement of the program, we have purchased approximately
$67.6 million
in classic and collector automobile loans and recorded
$124,000
of losses. We did not purchase any loans for this portfolio in 2016 or 2017, and do not anticipate any future purchases.
Loan Originations, Sales, Participations and Servicing.
Loans that we originate are generally underwritten pursuant to our policies and procedures, which incorporate standard underwriting guidelines, including those of Freddie Mac and Fannie Mae in the case of residential mortgages, 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 and lower pricing in secondary markets.
In
2017
,
98.8%
, or
$488.9 million
, of our 1-4 family residential mortgage loan originations were generated by our loan officers or referred by branch managers and employees located in our banking offices. In addition to our in-house originations, we also source 1-4 family residential mortgages from a federally insured correspondent that adheres to the Bank’s underwriting practices and is in compliance with federal, state and local laws and regulations governing fair lending practices and mortgage origination.
In 2017, in an effort to manage interest rate risk in and generate non-interest income, we sold the majority of fixed-rate 1-4 family residential mortgage loans that we originated. In
2017
, we sold
$322.9 million
of conforming and non-conforming residential mortgage loans to other investors. Included in the
$322.9 million
of residential mortgage loans sold in
2017
, were
$51.6 million
of non-conforming portfolio loans. We intend to continue to explore the practice of selling some of our non-conforming residential mortgage loans in the future, subject to our interest rate risk appetite, mortgage loan pricing in the secondary market and the pricing of servicing rights.
We have sold mortgage loans to the Federal Home Loan Bank of Boston through the Mortgage Partnership Finance (“MPF”) program, which generally has required us to retain approximately 5% of credit risk, for which we were paid a credit enhancement fee. We have also sold loans to the Federal Home Loan Bank of Boston through a different program without retaining any credit risk. To date, we have sold
$230.8 million
of loans to the Federal Home Loan Bank of Boston through the MPF program with credit risk retention. At December 31,
2017
, the credit risk retained by us on loans sold through the MPF program amounted to
$7.6 million
, or
3.3%
of the volume of loans sold through the MPF program. Neither mortgage loans serviced for others nor the contingent liability associated with sold loans is recorded on the consolidated balance sheets. There have been no contingency losses recognized on these loans to date.
We have retained the servicing on all loans sold to the Federal Home Loan Bank of Boston, and we have released the servicing on loans sold to other mortgage investors and banks seeking exposure to non-conforming loans. 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, and 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.
In
2017
, we had
$242.8 million
in commercial business and commercial real estate originations. In order to have access to larger customers and diversify risk, from time to time we will participate in portions of commercial business and commercial real estate loans with other banks. Pursuant to these loan participations, the Bank and participating lenders share ratably in cash flows and any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. When we are not lead lender, we always follow our customary loan underwriting and approval policies. In cases where the Bank has transferred a portion of its originated commercial loan to participating lenders, the Bank continues to service the loan as agent of the participating lenders and, as such, collects cash payments from the borrowers, remits payments (net of servicing fees, if applicable) to participating lenders and disburses required escrow funds to relevant parties. At
December 31, 2017
, we held
$217.9 million
of commercial business, commercial real estate and construction loans in our portfolio that were participation loans obtained from other lenders, and we serviced
$88.8 million
in loans for other lenders participating in loans originated by us.
The following table shows the loan origination, acquisition, participation, sale and repayment activities for loans and loans held for sale, for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
(4)
|
|
2014
|
|
2013
|
|
(In thousands)
|
Originations by type
:
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
1-4 family residential
|
$
|
488,861
|
|
|
$
|
508,447
|
|
|
$
|
224,316
|
|
|
$
|
154,188
|
|
|
$
|
70,107
|
|
Commercial real estate
|
202,895
|
|
|
170,210
|
|
|
217,433
|
|
|
125,370
|
|
|
142,768
|
|
Construction
|
37,749
|
|
|
65,087
|
|
|
45,102
|
|
|
35,991
|
|
|
1,327
|
|
Home equity
|
21,324
|
|
|
15,769
|
|
|
24,721
|
|
|
7,988
|
|
|
3,235
|
|
Total real estate loans
|
750,829
|
|
|
759,513
|
|
|
511,572
|
|
|
323,537
|
|
|
217,437
|
|
Commercial business loans
|
39,882
|
|
|
55,297
|
|
|
56,066
|
|
|
31,627
|
|
|
50,177
|
|
Consumer loans
|
2,062
|
|
|
2,850
|
|
|
3,049
|
|
|
1,204
|
|
|
132
|
|
Total loans originated
|
792,773
|
|
|
817,660
|
|
|
570,687
|
|
|
356,368
|
|
|
267,746
|
|
|
|
|
|
|
|
|
|
|
|
Acquired: (1)
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
—
|
|
|
—
|
|
|
—
|
|
|
57,967
|
|
|
—
|
|
Home equity
|
—
|
|
|
—
|
|
|
—
|
|
|
39,996
|
|
|
—
|
|
Total real estate loans
|
—
|
|
|
—
|
|
|
—
|
|
|
97,963
|
|
|
—
|
|
Commercial business loans
|
—
|
|
|
—
|
|
|
—
|
|
|
3,862
|
|
|
—
|
|
Consumer loans
|
—
|
|
|
—
|
|
|
—
|
|
|
444
|
|
|
—
|
|
Total loans acquired
|
—
|
|
|
—
|
|
|
—
|
|
|
102,269
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Participations (2):
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
1-4 family
|
5,745
|
|
|
12,955
|
|
|
35,917
|
|
|
65,091
|
|
|
104,556
|
|
Commercial real estate
|
23,786
|
|
|
2,168
|
|
|
—
|
|
|
—
|
|
|
13,168
|
|
Construction
|
30,932
|
|
|
19,203
|
|
|
26,163
|
|
|
22,262
|
|
|
18,534
|
|
Total real estate loans
|
60,463
|
|
|
34,326
|
|
|
62,080
|
|
|
87,353
|
|
|
136,258
|
|
Commercial business loans
|
77,024
|
|
|
63,949
|
|
|
73,362
|
|
|
87,502
|
|
|
88,846
|
|
Consumer loans
|
—
|
|
|
—
|
|
|
14,803
|
|
|
15,654
|
|
|
17,367
|
|
Total loan participations
|
137,487
|
|
|
98,275
|
|
|
150,245
|
|
|
190,509
|
|
|
242,471
|
|
Sales
(3):
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
1-4 family
|
(322,911
|
)
|
|
(128,945
|
)
|
|
(39,080
|
)
|
|
(41,417
|
)
|
|
(51,022
|
)
|
Commercial real estate
|
(22,400
|
)
|
|
(13,807
|
)
|
|
—
|
|
|
—
|
|
|
(3,600
|
)
|
Construction
|
—
|
|
|
(15,830
|
)
|
|
(7,517
|
)
|
|
(95
|
)
|
|
—
|
|
Home equity
|
(12,218
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total real estate loans
|
(357,529
|
)
|
|
(158,582
|
)
|
|
(46,597
|
)
|
|
(41,512
|
)
|
|
(54,622
|
)
|
Commercial business loans
|
(661
|
)
|
|
(20,902
|
)
|
|
(796
|
)
|
|
(208
|
)
|
|
(11,868
|
)
|
Total loans sold
|
(358,190
|
)
|
|
(179,484
|
)
|
|
(47,393
|
)
|
|
(41,720
|
)
|
|
(66,490
|
)
|
Principal repayments
:
|
|
|
|
|
|
|
|
|
|
Total principal repayments
|
(291,122
|
)
|
|
(356,715
|
)
|
|
(283,114
|
)
|
|
(218,798
|
)
|
|
(163,394
|
)
|
Net increase
|
$
|
280,948
|
|
|
$
|
379,736
|
|
|
$
|
390,425
|
|
|
$
|
388,628
|
|
|
$
|
280,333
|
|
_______________________
|
|
(1)
|
Includes loans acquired in the Nantucket Bank Acquisition.
|
|
|
(2)
|
Includes loan purchases and participations by the Bank in loans originated or syndicated by other financial institutions.
|
|
|
(3)
|
Includes loan sales and participations by other financial institutions in loans originated or syndicated by the Bank.
|
|
|
(4)
|
Certain amounts in the 2015 presentation have been reclassified to conform to the current presentation.
|
Loan Approval Procedures and Authority
.
Our lending activities follow written policies 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, if any, that will secure the loan. To assess the borrower’s ability to repay, we review the borrower’s employment, where applicable, credit history, information on the historical and projected income and expenses, where applicable, balance sheet, profit and loss, and cash flow of the borrower. We require “full documentation” on all of our loan applications. We do not discriminate in our lending decisions based on a borrower’s race, religion, national origin, gender, marital status or age.
Our policies and loan approval limits are approved by our Board of Directors. Aggregate lending relationships in amounts up to $5.0 million can be approved by designated individual officers or officers acting together with specific lending approval authority. Relationships which meet or exceed underwriting standards (Risk Ratings 1-5) between $5.0 million and $30.0 million require the approval of the Management Credit Committee, and those greater than $30.0 million require the approval of the Board of Directors. Relationships above $20.0 million deemed “bankable with care” (Risk Rating 6) require the approval of the Board of Directors. Our Chief Risk Officer generally must approve loans in excess of $3.0 million.
Our Senior Credit Officer is responsible for the underwriting and documentation of new commercial loans to small business customers. Our Chief Risk Officer reviews the servicing and risk rating of all criticized loans and loans rated “bankable with care” on the watch list no less frequently than monthly. Our Senior Credit Officer reviews all construction loans and higher risk commercial business loans quarterly. We consider our Chief Risk Officer and Senior Credit Officer to be objective because they have no loan production goals and have annual performance objectives based on credit quality and credit risk management.
We require appraisals by a third party appraiser based on a comparison with current market sales for all real property securing 1-4 family residential mortgage loans, multi-family loans and commercial real estate loans, although home equity loans and lines of credit may be approved based on an Automated Valuation Model (AVM). 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 fee is generally assessed and a notice mailed to the borrower. We will attempt 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 borrowers by telephone. By the 36
th
day of delinquency, we will attempt to contact the borrowers and inform them of loss mitigation options that may be available, providing the borrowers with written notice containing information about those loss mitigation options by the 45
th
day of delinquency. By the 150
th
day of delinquency (regardless of accrual status), unless the borrower has made arrangements to bring the loan current on its payments, we will refer the loan to legal counsel to commence foreclosure proceedings. In addition, a property appraisal is made to determine the condition and market value. The account will be monitored on a regular basis thereafter. In attempting to resolve a default on a residential mortgage loan, Blue Hills Bank complies with all applicable Massachusetts laws regarding a borrower’s right to cure.
When automobile finance 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 15, 25 and 34 days past due. 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; the customer has 21 days for right of redemption until the vehicle is sold. Automobile loans are placed on non-accrual status at 90 days past due and charged off at 120 days past due.
Because of the nature of the collateral securing consumer loans, we may commence collection procedures sooner for consumer loans than for residential mortgage loans or home equity lines of credit.
Small business loans that are past due five days are referred to the responsible loan officer, who will after 10 days direct efforts to bring the loan current. After 30 days past due, the loan is reviewed for placement on the Watch List, and if the loan has been downgraded to Special Mention, the Chief Risk Officer will determine whether the Senior Credit Officer will assume day-to-day management of the credit or act in an advisory role with the goal of either bringing the loan current or maximizing recovery of principal and interest. All small business loans that are 30 days or more past due are regularly monitored by the lending unit and the Senior Credit Officer and reviewed monthly or more frequently as necessary by the Chief Risk Officer.
Commercial business loans that are past due are immediately referred to the EVP of Commercial Lending, who will direct efforts to bring the loan current. After 30 days past due the loan is placed on the Watch List, and, if the loan has been downgraded to Special Mention, the Chief Risk Officer determines whether the Senior Credit Officer will assume day-to-day management, with the oversight of the Chief Risk Officer, or act in an advisory role with the goal of either bringing the loan current or maximizing our recovery of principal and interest. All commercial loans that are 30 days or more past due, regardless of risk rating, are regularly monitored by the lending unit and the Senior Credit Officer and reviewed monthly or more frequently as necessary by the Chief Risk Officer.
It is the policy of the Company to discontinue the accrual of interest on loans past due in excess of 90 days, unless the loan is well-secured and in the process of collection, or when in the judgment of management, the ultimate collectability of the principal or interest becomes doubtful and to reverse all interest income previously accrued. Past due status is based on contractual terms of the loan. The interest on non-accrual loans is accounted for on the cash-basis until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due have been current for six consecutive months and future payments are reasonably assured.
Non-Performing Assets.
The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
(Dollars in thousands)
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
1-4 family residential
|
$
|
5,190
|
|
|
$
|
6,478
|
|
|
$
|
5,688
|
|
|
$
|
3,876
|
|
|
$
|
1,706
|
|
Home equity loans and lines
|
1,387
|
|
|
1,153
|
|
|
270
|
|
|
578
|
|
|
36
|
|
Commercial real estate
|
4,744
|
|
|
941
|
|
|
4,631
|
|
|
—
|
|
|
—
|
|
Commercial business
|
—
|
|
|
241
|
|
|
10
|
|
|
—
|
|
|
—
|
|
Consumer
|
202
|
|
|
170
|
|
|
145
|
|
|
27
|
|
|
—
|
|
Total non-accrual loans
|
11,523
|
|
|
8,983
|
|
|
10,744
|
|
|
4,481
|
|
|
1,742
|
|
|
|
|
|
|
|
|
|
|
|
Loans delinquent 90 days or greater and still accruing
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other real estate owned
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total non-performing assets
|
$
|
11,523
|
|
|
$
|
8,983
|
|
|
$
|
10,744
|
|
|
$
|
4,481
|
|
|
$
|
1,742
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
0.52
|
%
|
|
0.47
|
%
|
|
0.70
|
%
|
|
0.39
|
%
|
|
0.23
|
%
|
Non-performing assets to total assets
|
0.43
|
%
|
|
0.36
|
%
|
|
0.51
|
%
|
|
0.26
|
%
|
|
0.13
|
%
|
For the year ended
December 31, 2017
, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was
$605,000
, of which
$557,000
of interest income was recognized on such loans for the year ended
December 31, 2017
.
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. The table below sets forth the amounts for our residential troubled debt restructurings at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Performing troubled debt restructurings
|
$
|
653
|
|
|
$
|
138
|
|
|
$
|
148
|
|
|
$
|
255
|
|
|
$
|
279
|
|
Non-accrual troubled debt restructurings
|
1,533
|
|
|
1,274
|
|
|
1,183
|
|
|
467
|
|
|
260
|
|
Total
|
$
|
2,186
|
|
|
$
|
1,412
|
|
|
$
|
1,331
|
|
|
$
|
722
|
|
|
$
|
539
|
|
|
|
|
|
|
|
|
|
|
|
Performing troubled debt restructurings as a % of total loans
|
0.03
|
%
|
|
0.01
|
%
|
|
0.01
|
%
|
|
0.02
|
%
|
|
0.04
|
%
|
Non-accrual troubled debt restructurings as a % of total loans
|
0.07
|
%
|
|
0.07
|
%
|
|
0.08
|
%
|
|
0.04
|
%
|
|
0.03
|
%
|
Total troubled debt restructurings as a % of total loans
|
0.10
|
%
|
|
0.08
|
%
|
|
0.09
|
%
|
|
0.06
|
%
|
|
0.07
|
%
|
At
December 31, 2017
, we had
$2.2 million
of troubled debt restructurings, all of which related to residential mortgage loans, of which
$653,000
were performing in accordance with their restructured terms. For the year ended
December 31, 2017
, gross interest income that would have been recorded had our troubled debt restructurings been performing in accordance with their original terms was
$138,000
. Interest income recognized on such modified loans for the year ended
December 31, 2017
was
$120,000
.
The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Delinquent For
|
|
Total
|
|
60-89 Days
|
|
90 Days and Over
|
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
(Dollars in thousands)
|
At December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential
|
2
|
|
|
$
|
348
|
|
|
7
|
|
|
$
|
2,184
|
|
|
9
|
|
|
$
|
2,532
|
|
Home equity
|
1
|
|
|
13
|
|
|
5
|
|
|
656
|
|
|
6
|
|
|
669
|
|
Commercial real estate
|
—
|
|
|
—
|
|
|
2
|
|
|
3,893
|
|
|
2
|
|
|
3,893
|
|
Consumer loans
|
1
|
|
|
7
|
|
|
1
|
|
|
92
|
|
|
2
|
|
|
99
|
|
Total loans
|
4
|
|
|
$
|
368
|
|
|
15
|
|
|
$
|
6,825
|
|
|
19
|
|
|
$
|
7,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential
|
2
|
|
|
$
|
373
|
|
|
14
|
|
|
$
|
2,322
|
|
|
16
|
|
|
$
|
2,695
|
|
Home equity
|
4
|
|
|
496
|
|
|
6
|
|
|
775
|
|
|
10
|
|
|
1,271
|
|
Commercial business
|
1
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
13
|
|
Consumer loans
|
2
|
|
|
5
|
|
|
1
|
|
|
7
|
|
|
3
|
|
|
12
|
|
Total loans
|
9
|
|
|
$
|
887
|
|
|
21
|
|
|
$
|
3,104
|
|
|
30
|
|
|
$
|
3,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential
|
—
|
|
|
$
|
—
|
|
|
5
|
|
|
$
|
990
|
|
|
5
|
|
|
$
|
990
|
|
Home equity
|
1
|
|
|
19
|
|
|
2
|
|
|
176
|
|
|
3
|
|
|
195
|
|
Commercial real estate (1)
|
1
|
|
|
1,249
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1,249
|
|
Consumer loans
|
1
|
|
|
80
|
|
|
2
|
|
|
120
|
|
|
3
|
|
|
200
|
|
Total loans
|
3
|
|
|
$
|
1,348
|
|
|
9
|
|
|
$
|
1,286
|
|
|
12
|
|
|
$
|
2,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential
|
3
|
|
|
$
|
522
|
|
|
8
|
|
|
$
|
1,370
|
|
|
11
|
|
|
$
|
1,892
|
|
Home equity
|
—
|
|
|
—
|
|
|
1
|
|
|
475
|
|
|
1
|
|
|
475
|
|
Consumer loans
|
—
|
|
|
—
|
|
|
1
|
|
|
5
|
|
|
1
|
|
|
5
|
|
Total loans
|
3
|
|
|
$
|
522
|
|
|
10
|
|
|
$
|
1,850
|
|
|
13
|
|
|
$
|
2,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential
|
2
|
|
|
$
|
196
|
|
|
6
|
|
|
$
|
828
|
|
|
8
|
|
|
$
|
1,024
|
|
Home equity
|
—
|
|
|
—
|
|
|
1
|
|
|
36
|
|
|
1
|
|
|
36
|
|
Total loans
|
2
|
|
|
$
|
196
|
|
|
7
|
|
|
$
|
864
|
|
|
9
|
|
|
$
|
1,060
|
|
(1) The commercial real estate loan included in the 60-89 days delinquent buckets above is also included in the non-accrual total.
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 estimated fair market value at the date of foreclosure less the cost 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 market value result in charges to expense after acquisition. At
December 31, 2017
, we had no 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 net worth and 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 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 a balance sheet 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. 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 loans, loans designated as special mention and criticized loans (classified loans and loans designated as special mention) as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
Classified loans:
|
|
|
|
|
|
Substandard
|
$
|
10,355
|
|
|
$
|
8,452
|
|
|
$
|
6,963
|
|
Doubtful
|
250
|
|
|
645
|
|
|
712
|
|
Loss
|
—
|
|
|
—
|
|
|
—
|
|
Total classified loans
|
10,605
|
|
|
9,097
|
|
|
7,675
|
|
Special mention
|
9,896
|
|
|
31,857
|
|
|
13,421
|
|
Total criticized loans
|
$
|
20,501
|
|
|
$
|
40,954
|
|
|
$
|
21,096
|
|
At
December 31, 2017
, we had
$10.4 million
of substandard loans, of which
$2.6 million
were 1-4 family residential mortgage loans, and
$7.8 million
were commercial real estate loans. At
December 31, 2017
, special mention loans amounted to
$9.9 million
, of which
$2.8 million
were 1-4 family residential mortgage loans,
$1.5 million
were home equity,
$4.7 million
were commercial real estate loans,
$744,000
were commercial business loans and
$121,000
were consumer loans. Special mention loans decreased from December 31, 2016 due to upgrades and payoffs. Loans classified as doubtful at
December 31, 2017
, 2016, and 2015 consist primarily of 1-4 family residential mortgages.
Potential problem loans are loans that are currently performing and are not included in classified 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, 2017
, 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 loss methodology. All loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. 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 U.S. GAAP.
The allowance for loan losses is based on the size and composition of the loan portfolio, delinquency levels, loss experience, economic conditions and other factors related to the collectability of the loan portfolio. Prior to the second quarter of 2016, for portfolios for which the Company had insufficient loss experience, losses from a national peer group of depository institutions with assets between one and five billion dollars for relevant portfolios dating back to 2009 were used. Commencing in the second quarter of 2016, the Company began to phase in its own loss history by loan type based upon the age and loss experience of the loan portfolio.
The allowance for loan losses is evaluated regularly by management and reflects consideration of all significant factors that affect the collectability of the loan portfolio. Management's evaluation is submitted on a quarterly basis to the Board for approval of the methodology and any changes in qualitative factors described below. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. It is the intention of management to maintain an allowance that is prudently commensurate with the growth in the loan portfolio.
The allowance consists of general, allocated and unallocated components, as further described below.
General component.
The general component of the allowance for loan losses is based on a combination of our own loss history and an extrapolated historical loss experience based on FDIC data for depository institutions with assets of one billion to five billion dollars for periods ranging from 2009-2017, adjusted for qualitative and environmental factors including changes to lending policies and procedures, economic and business conditions, portfolio characteristics, staff experience, problem loan trends, collateral values, concentrations and the competitive, legal and regulatory environment.
The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:
Residential real estate - We do not generally originate loans with a loan-to-value ratio greater than 80 percent and do not generally grant loans that would be classified as subprime upon origination. When we do extend credit either on a first- or second-lien basis at a loan-to-value ratio greater than 80 percent, such loans are supported by either mortgage insurance or state guarantee programs. All loans in this segment are collateralized by owner-occupied 1-4 family residential real estate and repayment is dependent on the credit quality of the individual borrower. The health of the regional economy, including unemployment rates and housing prices, will have an effect on the credit quality of loans in this segment.
Home equity - Loans in this segment are generally secured by first or second liens on residential real estate. Repayment is dependent on the credit quality of the individual borrower. Management evaluates each loan application based on factors including the borrower’s credit score, income, length of employment, and other factors to establish the creditworthiness of the borrower.
Commercial real estate - Loans in this segment include investment real estate and are generally secured by assignments of leases, and real estate collateral. In cases where there is a concentration of exposure to a single large tenant, underwriting standards include analysis of the tenant's ability to support lease payments over the duration of the loan. The underlying cash flows generated by the properties can be adversely impacted by a downturn in the economy due to increased vacancy rates, which in turn can have an effect on credit quality in this segment. Payments on loans secured by income-producing properties often depend on the successful operation and management of properties. Management continually monitors cash flows on these loans.
Construction - Loans in this segment primarily include speculative real estate development loans for which payment is derived from sale of the property or permanent financing. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.
Commercial business - Loans in this segment are generally secured by business assets, including accounts receivable, inventory, real estate and intangible assets. Strict underwriting standards include considerations of the borrower’s ability to support the debt service requirements from the underlying historical and projected cash flows of the business, collateral values, the borrower’s credit history and the ultimate collectability of the debt. Economic conditions, real estate values, commodity prices, unemployment trends and other factors will affect the credit quality of loans in these segments.
Consumer - Loans in this segment primarily include classic and collector automobile loans. The classic and collector automobile loan portfolio is primarily comprised of geographically diverse loans originated by and purchased from a third party, who also provides collection services. While this portfolio generated minimal charge-offs during
2017
and
2016
, the provisions during the year are based on management’s estimate of inherent losses.
Allocated component.
The allocated component relates to loans that are on the watch list (non-accruing loans, partially charged off non-accruing loans and accruing adversely-rated loans) and considered impaired. Impairment is measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan.
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
We periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). All TDRs are initially classified as impaired.
Unallocated component.
Through the third quarter of 2016, the Company maintained an unallocated component to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflected the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. As a large portion of the Company's loan portfolio had seasoned, the unallocated component of the allowance for loan losses was eliminated during the fourth quarter of 2016.
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.
The following table sets forth activity in our allowance for loan losses for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
(In thousands)
|
Balance at beginning of year
|
$
|
18,750
|
|
|
$
|
17,102
|
|
|
$
|
12,973
|
|
|
$
|
9,671
|
|
|
$
|
5,550
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
1-4 family residential
|
(52
|
)
|
|
—
|
|
|
—
|
|
|
(18
|
)
|
|
(165
|
)
|
Commercial real estate
|
(73
|
)
|
|
(321
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial business
|
—
|
|
|
(3,098
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer loans
|
(134
|
)
|
|
(56
|
)
|
|
(43
|
)
|
|
(61
|
)
|
|
(44
|
)
|
Total charge-offs
|
(259
|
)
|
|
(3,475
|
)
|
|
(43
|
)
|
|
(79
|
)
|
|
(209
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
1-4 family residential
|
199
|
|
|
100
|
|
|
82
|
|
|
—
|
|
|
236
|
|
Commercial real estate
|
—
|
|
|
101
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial business
|
74
|
|
|
37
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer loans
|
15
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total recoveries
|
288
|
|
|
238
|
|
|
82
|
|
|
—
|
|
|
236
|
|
Net (charge-offs) recoveries
|
29
|
|
|
(3,237
|
)
|
|
39
|
|
|
(79
|
)
|
|
27
|
|
Provision for loan losses
|
2,098
|
|
|
4,885
|
|
|
4,090
|
|
|
3,381
|
|
|
4,094
|
|
Balance at end of year
|
$
|
20,877
|
|
|
$
|
18,750
|
|
|
$
|
17,102
|
|
|
$
|
12,973
|
|
|
$
|
9,671
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries to average loans outstanding
|
—
|
%
|
|
(0.19
|
)%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Allowance for loan losses to non-performing loans at end of year
|
181
|
%
|
|
209
|
%
|
|
159
|
%
|
|
290
|
%
|
|
555
|
%
|
Allowance for loan losses to total loans at end of year (1)
|
0.95
|
%
|
|
0.97
|
%
|
|
1.11
|
%
|
|
1.13
|
%
|
|
1.25
|
%
|
_______________________
|
|
(1)
|
Total loans do not include deferred costs and discounts.
|
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,
|
|
2017
|
|
2016
|
|
2015
|
|
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
|
|
(Dollars in thousands)
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential
|
$
|
5,076
|
|
|
41.87
|
%
|
|
$
|
4,846
|
|
|
44.12
|
%
|
|
$
|
3,916
|
|
|
38.98
|
%
|
Home equity
|
699
|
|
|
3.66
|
|
|
537
|
|
|
4.08
|
|
|
636
|
|
|
5.03
|
|
Commercial
|
9,584
|
|
|
37.86
|
|
|
8,374
|
|
|
35.63
|
|
|
7,147
|
|
|
36.46
|
|
Construction
|
1,708
|
|
|
4.13
|
|
|
1,353
|
|
|
3.96
|
|
|
1,364
|
|
|
5.18
|
|
Commercial business loans
|
3,473
|
|
|
11.50
|
|
|
3,206
|
|
|
10.69
|
|
|
2,839
|
|
|
11.87
|
|
Consumer loans
|
337
|
|
|
0.98
|
|
|
434
|
|
|
1.52
|
|
|
772
|
|
|
2.48
|
|
Total allocated allowance
|
$
|
20,877
|
|
|
100.00
|
%
|
|
$
|
18,750
|
|
|
100.00
|
%
|
|
$
|
16,674
|
|
|
100.00
|
%
|
Unallocated
|
—
|
|
|
|
|
—
|
|
|
|
|
428
|
|
|
|
Total
|
$
|
20,877
|
|
|
|
|
$
|
18,750
|
|
|
|
|
$
|
17,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2014
|
|
2013
|
|
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
|
|
(Dollars in thousands)
|
Real Estate:
|
|
|
|
|
|
|
|
1-4 family residential
|
$
|
3,222
|
|
|
40.13
|
%
|
|
$
|
2,835
|
|
|
47.26
|
%
|
Home equity
|
340
|
|
|
5.38
|
|
|
247
|
|
|
3.31
|
|
Commercial
|
3,551
|
|
|
33.81
|
|
|
2,608
|
|
|
29.61
|
|
Construction
|
1,056
|
|
|
4.67
|
|
|
303
|
|
|
2.14
|
|
Commercial business loans
|
3,410
|
|
|
13.24
|
|
|
2,416
|
|
|
14.39
|
|
Consumer loans
|
736
|
|
|
2.77
|
|
|
574
|
|
|
3.29
|
|
Total allocated allowance
|
$
|
12,315
|
|
|
100.00
|
%
|
|
$
|
8,983
|
|
|
100.00
|
%
|
Unallocated
|
658
|
|
|
|
|
688
|
|
|
|
Total
|
$
|
12,973
|
|
|
|
|
$
|
9,671
|
|
|
|
Investments
The objectives of the investment portfolio are: to invest funds not currently required for the Bank’s loan portfolio, cash requirements or other assets essential to our operations; to provide for capital preservation of the funds invested while generating maximum income and capital appreciation in accordance with the objectives of liquidity, quality and diversification; and to employ a percentage of assets in a manner that will balance the market, credit and duration risks of other assets.
Investment management practices are governed by our investment policy, which outlines internal guidelines and parameters. The investment policy is reviewed and approved by the Board of Directors at least annually. Compliance with the investment policy is monitored on a regular basis. The Bank’s Management Investment Committee, consisting of the Chief Executive Officer, Chief Financial Officer and Treasurer, oversees investment portfolio management with day-to-day management responsibility assigned to the Treasurer. Additionally the Bank’s Asset/Liability Management Committee, evaluates portfolio performance from the standpoint of meeting overall income and capital appreciation targets in accordance with the objectives of liquidity, quality and diversification.
At
December 31, 2017
, our securities portfolio consisted of U.S. government agency obligations, U.S. government-sponsored enterprise obligations including mortgage-backed securities and collateralized mortgage obligations, and equity securities, including CRA-related mutual funds. We only purchase investment grade debt securities. We do not own any trust preferred securities. During 2017, we exited a third party investment advisory arrangement that had been responsible for managing an allocation of corporate debt securities pursuant to particular investment objectives established by the Bank.
At
December 31, 2017
, we had no investments in a single company or entity that had an aggregate book value in excess of 10% of our equity, except for U.S. government-sponsored enterprise obligations including mortgage-backed securities. Generally, mortgage-backed securities are more liquid than individual mortgage loans, since there is an active trading market for such securities; their cashflow profiles make them attractive investments for liquidity management purposes. 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. Prepayment speeds determine whether prepayment estimates require modifications that could cause amortization or accretion adjustments.
At the time of purchase, we designate a security as either held to maturity or available for sale, based upon our intent and ability to hold such security until maturity. Securities available for sale are reported at market value. A periodic review and evaluation of the 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 through other comprehensive income (loss). Commencing on January 1, 2018, with the adoption of ASU 2016-01,
Financial Instruments – Overall, (Subtopic 825-10)
equity investments are required to be measured at fair value with changes in fair value recognized in net income. See Note 2 to the consolidated financial statements. If a security is reclassified from available for sale to held to maturity, the fair value at the time of transfer becomes the security's new cost basis for which it is reported. The unrealized holding gain or loss at the transfer date continues to be reported in other comprehensive income and is amortized over the security's remaining life as an adjustment of yield in a manner similar to a premium or discount. At December 31, 2017, all debt securities are classified as held to maturity.
Investment Securities Portfolio.
The following tables set forth the composition of our investment securities portfolio at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
|
(In thousands)
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
Privately issued commercial mortgage-backed securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,530
|
|
|
$
|
10,489
|
|
|
$
|
13,126
|
|
|
$
|
12,931
|
|
Other asset-backed securities
|
—
|
|
|
—
|
|
|
9,174
|
|
|
8,985
|
|
|
11,395
|
|
|
11,253
|
|
Total mortgage and other asset-backed
|
—
|
|
|
—
|
|
|
19,704
|
|
|
19,474
|
|
|
24,521
|
|
|
24,184
|
|
Other bonds and obligations:
|
|
|
|
|
|
|
|
|
|
|
|
State and political
|
—
|
|
|
—
|
|
|
12,730
|
|
|
12,693
|
|
|
16,016
|
|
|
16,315
|
|
Financial services:
|
|
|
|
|
|
|
|
|
|
|
|
Banks
|
—
|
|
|
—
|
|
|
20,263
|
|
|
20,022
|
|
|
18,813
|
|
|
18,861
|
|
Diversified financial entities
|
—
|
|
|
—
|
|
|
17,198
|
|
|
17,190
|
|
|
23,124
|
|
|
23,300
|
|
Insurance and REITs
|
—
|
|
|
—
|
|
|
18,304
|
|
|
18,238
|
|
|
16,883
|
|
|
16,602
|
|
Total financial services
|
—
|
|
|
—
|
|
|
55,765
|
|
|
55,450
|
|
|
58,820
|
|
|
58,763
|
|
Other corporate:
|
|
|
|
|
|
|
|
|
|
|
|
Industrials
|
—
|
|
|
—
|
|
|
49,217
|
|
|
48,964
|
|
|
55,470
|
|
|
54,532
|
|
Utilities
|
—
|
|
|
—
|
|
|
24,895
|
|
|
25,087
|
|
|
31,952
|
|
|
30,320
|
|
Total other corporate
|
—
|
|
|
—
|
|
|
74,112
|
|
|
74,051
|
|
|
87,422
|
|
|
84,852
|
|
Total debt securities
|
—
|
|
|
—
|
|
|
162,311
|
|
|
161,668
|
|
|
186,779
|
|
|
184,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities:
|
9,437
|
|
|
9,720
|
|
|
45,612
|
|
|
43,168
|
|
|
50,612
|
|
|
47,576
|
|
Total securities available for sale
|
$
|
9,437
|
|
|
$
|
9,720
|
|
|
$
|
207,923
|
|
|
$
|
204,836
|
|
|
$
|
237,391
|
|
|
$
|
231,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
636
|
|
|
$
|
634
|
|
Government-sponsored enterprises
|
30,673
|
|
|
29,779
|
|
|
32,667
|
|
|
31,737
|
|
|
28,256
|
|
|
28,224
|
|
Government-sponsored mortgage-backed and collateralized mortgage obligations
|
244,668
|
|
|
241,261
|
|
|
153,938
|
|
|
152,146
|
|
|
155,232
|
|
|
154,410
|
|
SBA asset-backed securities
|
28,375
|
|
|
28,074
|
|
|
14,422
|
|
|
14,210
|
|
|
16,017
|
|
|
15,958
|
|
Total securities held to maturity
|
$
|
303,716
|
|
|
$
|
299,114
|
|
|
$
|
201,027
|
|
|
$
|
198,093
|
|
|
$
|
200,141
|
|
|
$
|
199,226
|
|
Portfolio Maturities and Yields.
The composition and maturities of the portion of the investment securities portfolio relating to debt securities at December 31,
2017
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
|
|
Amortized
Cost
|
|
Weighted
Average
Yield
|
|
Amortized
Cost
|
|
Weighted
Average
Yield
|
|
Amortized
Cost
|
|
Weighted
Average
Yield
|
|
(Dollars in thousands)
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises
|
$
|
—
|
|
|
—
|
%
|
|
$
|
15,626
|
|
|
1.68
|
%
|
|
$
|
15,047
|
|
|
1.81
|
%
|
Government-sponsored mortgage-backed and collateralized mortgage obligations
|
4
|
|
|
5.40
|
|
|
14
|
|
|
1.47
|
|
|
24,828
|
|
|
1.98
|
|
SBA asset-backed securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,854
|
|
|
2.39
|
|
Total debt securities held to maturity
|
$
|
4
|
|
|
|
|
$
|
15,640
|
|
|
|
|
$
|
53,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than Ten Years
|
|
Total Securities
|
|
Amortized
Cost
|
|
Weighted
Average
Yield
|
|
Amortized
Cost
|
|
Fair Value
|
|
Weighted
Average
Yield
|
|
(Dollars in thousands)
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises
|
$
|
—
|
|
|
—
|
%
|
|
$
|
30,673
|
|
|
$
|
29,779
|
|
|
1.74
|
%
|
Government-sponsored mortgage-backed and collateralized mortgage obligations
|
219,822
|
|
|
2.38
|
|
|
244,668
|
|
|
241,261
|
|
|
2.34
|
|
SBA asset-backed securities
|
14,521
|
|
|
2.33
|
|
|
28,375
|
|
|
28,074
|
|
|
2.36
|
|
Total debt securities held to maturity
|
$
|
234,343
|
|
|
|
|
$
|
303,716
|
|
|
$
|
299,114
|
|
|
2.28
|
%
|
Bank-Owned Life Insurance.
Bank-owned life insurance provides us noninterest income that is non-taxable. Applicable regulations generally limit our investment in bank-owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses. At
December 31, 2017
, we had
$33.1 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 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 customers outside our office locations using online channels and from small businesses, other commercial customers and municipalities throughout our lending area. We rely on our competitive pricing and products, convenient locations, mobile and online capabilities 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 passbook and statement savings accounts, certificates of deposit, money market accounts, commercial 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 utilize brokered deposits and other listed deposit products as part of our funding sources to fund loan growth.
The following tables set forth the distribution of our average total deposit accounts, by account type, for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
Average
Balance
|
|
Percent
|
|
Weighted
Average
Rate (1)
|
|
Average
Balance
|
|
Percent
|
|
Weighted
Average
Rate (1)
|
|
Average
Balance
|
|
Percent
|
|
Weighted
Average
Rate (1)
|
|
(Dollars in thousands)
|
Deposit type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
$
|
201,715
|
|
|
10.57
|
%
|
|
—
|
%
|
|
$
|
163,403
|
|
|
10.41
|
%
|
|
—
|
%
|
|
$
|
138,438
|
|
|
10.87
|
%
|
|
—
|
%
|
Interest bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
|
152,469
|
|
|
7.99
|
|
|
0.04
|
|
|
139,829
|
|
|
8.91
|
|
|
0.05
|
|
|
127,183
|
|
|
9.98
|
|
|
0.05
|
|
Regular savings
|
249,256
|
|
|
13.06
|
|
|
0.32
|
|
|
275,347
|
|
|
17.55
|
|
|
0.34
|
|
|
294,004
|
|
|
23.08
|
|
|
0.36
|
|
Money market
|
643,433
|
|
|
33.72
|
|
|
0.96
|
|
|
470,403
|
|
|
29.98
|
|
|
0.86
|
|
|
307,661
|
|
|
24.15
|
|
|
0.72
|
|
Brokered money market
|
49,041
|
|
|
2.57
|
|
|
1.22
|
|
|
47,071
|
|
|
3.00
|
|
|
0.61
|
|
|
28,130
|
|
|
2.21
|
|
|
0.52
|
|
Certificates of deposit
|
382,157
|
|
|
20.02
|
|
|
1.39
|
|
|
333,857
|
|
|
21.28
|
|
|
1.29
|
|
|
310,249
|
|
|
24.35
|
|
|
1.26
|
|
Brokered certificates of deposit
|
230,329
|
|
|
12.07
|
|
|
0.97
|
|
|
139,128
|
|
|
8.87
|
|
|
0.62
|
|
|
68,245
|
|
|
5.36
|
|
|
0.45
|
|
Total interest bearing deposits
|
1,706,685
|
|
|
89.43
|
|
|
0.89
|
%
|
|
1,405,635
|
|
|
89.59
|
|
|
0.75
|
%
|
|
1,135,472
|
|
|
89.13
|
|
|
0.68
|
%
|
Total deposits
|
$
|
1,908,400
|
|
|
100.00
|
%
|
|
0.80
|
%
|
|
$
|
1,569,038
|
|
|
100.00
|
%
|
|
0.67
|
%
|
|
$
|
1,273,910
|
|
|
100.00
|
%
|
|
0.60
|
%
|
_________________________
(1) The weighted average rate is calculated using stated rate of each deposit account within the given categories as of December 31, 2017, 2016 and 2015.
|
The following table sets forth certificates of deposit classified by interest rate as of the dates indicated, including brokered deposits. At
December 31, 2017
, we had a total of
$698.1 million
in certificates of deposit, of which
$406.4 million
had remaining maturities of one year or less.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(Dollars in thousands)
|
Interest rate range:
|
|
|
|
|
|
Less than 0.50%
|
$
|
28,812
|
|
|
$
|
76,658
|
|
|
$
|
123,629
|
|
0.50% to 0.99%
|
38,944
|
|
|
252,662
|
|
|
122,370
|
|
1.00% to 1.49%
|
375,271
|
|
|
138,502
|
|
|
94,031
|
|
1.50% to 1.99%
|
184,129
|
|
|
71,687
|
|
|
45,285
|
|
2.00% to 2.99%
|
70,992
|
|
|
48,125
|
|
|
63,190
|
|
Total
|
$
|
698,148
|
|
|
$
|
587,634
|
|
|
$
|
448,505
|
|
The following table sets forth, by interest rate ranges, the maturities of our certificates of deposit, including brokered deposits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017
|
|
Period to Maturity
|
|
Less Than
or Equal to
One Year
|
|
More Than
One to
Two Years
|
|
More Than
Two to
Three Years
|
|
More Than
Three Years
|
|
Total
|
|
Percent of
Total
|
|
(Dollars in thousands)
|
Interest rate range:
|
|
|
|
|
|
|
|
|
|
|
|
Less than 0.50%
|
$
|
28,812
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28,812
|
|
|
4.13
|
%
|
0.50% to 0.99%
|
27,534
|
|
|
11,410
|
|
|
—
|
|
|
—
|
|
|
38,944
|
|
|
5.58
|
|
1.00% to 1.49%
|
321,061
|
|
|
42,452
|
|
|
11,396
|
|
|
362
|
|
|
375,271
|
|
|
53.75
|
|
1.50% to 1.99%
|
28,905
|
|
|
91,084
|
|
|
34,765
|
|
|
29,375
|
|
|
184,129
|
|
|
26.37
|
|
2.00% to 2.99%
|
50
|
|
|
35,726
|
|
|
16,572
|
|
|
18,644
|
|
|
70,992
|
|
|
10.17
|
|
Total
|
$
|
406,362
|
|
|
$
|
180,672
|
|
|
$
|
62,733
|
|
|
$
|
48,381
|
|
|
$
|
698,148
|
|
|
100.00
|
%
|
As of
December 31, 2017
, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000, excluding brokered deposits, was
$302.9 million
. The following table sets forth the maturity of those certificates as of
December 31, 2017
.
|
|
|
|
|
|
At December 31, 2017
|
|
(In thousands)
|
Maturing in:
|
|
Three months or less
|
$
|
14,707
|
|
Over three months through six months
|
33,320
|
|
Over six months through one year
|
51,955
|
|
Over one year to three years
|
173,577
|
|
Over three years
|
29,335
|
|
Total
|
$
|
302,894
|
|
Borrowings.
Our borrowings consist of advances from the Federal Home Loan Bank of Boston. At
December 31, 2017
, we had access to additional Federal Home Loan Bank advances of up to
$594.1 million
. The following table sets forth information concerning balances and interest rates on our Federal Home Loan Bank advances at the dates and for the years indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
Balance at end of year
|
$
|
205,000
|
|
|
$
|
251,000
|
|
|
$
|
75,000
|
|
Average balance during year
|
199,004
|
|
|
249,226
|
|
|
146,720
|
|
Maximum outstanding at any month end
|
280,000
|
|
|
325,000
|
|
|
260,000
|
|
Weighted average interest rate at end of year
|
1.54
|
%
|
|
0.97
|
%
|
|
0.76
|
%
|
Average interest rate during year
|
1.27
|
%
|
|
0.84
|
%
|
|
0.83
|
%
|
Expense and Tax Allocation
Blue Hills Bank has entered into an agreement with Blue Hills Bancorp, Inc. to provide it with certain administrative support services, whereby Blue Hills Bank is compensated at not less than the fair market value of the services provided. In addition, Blue Hills Bank and Blue Hills Bancorp, Inc. have entered into an agreement establishing a method for allocating and for reimbursing the payment of their consolidated tax liability.
Personnel
On a full time equivalent basis, we had
237
employees at
December 31, 2017
. Our employees are not represented by any collective bargaining group.
Subsidiary Activity
Blue Hills Bancorp, Inc. owns 100% of Blue Hills Bank and Blue Hills Funding Corporation, the company that financed the loan to the ESOP. Blue Hills Bank has three subsidiaries, B.H. Security Corporation ("B.H. Security"), HP Security Corporation (“HP Security”) and 1196 Corporation (“1196 Corporation”). B.H. Security, HP Security and 1196 Corporation buy, sell and hold securities on their own behalf as wholly-owned subsidiaries of Blue Hills Bank, and this activity results in tax advantages in Massachusetts. At
December 31, 2017
, B.H. Security, HP Security and 1196 Corporation had total assets of
$274.2 million
,
$253,000
, and
$5.5 million
respectively.
REGULATION AND SUPERVISION
General
Blue Hills Bank is a Massachusetts-chartered stock savings bank and is the wholly-owned subsidiary of Blue Hills Bancorp, Inc., a Maryland corporation and a registered bank holding company. Blue Hills 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 for amounts in excess of the FDIC insurance limits. Blue Hills 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. Blue Hills 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. Blue Hills Bank is also a member of and owns stock in the Federal Home Loan Bank of Boston, which is one of the twelve regional banks in the Federal Home Loan Bank System.
As a registered bank holding company, Blue Hills Bancorp, Inc. is regulated by the Board of Governors of the Federal Reserve System, or the “Federal Reserve Board.” Blue Hills Bancorp, Inc. is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
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 Blue Hills Bancorp, Inc. and Blue Hills Bank.
Set forth below are certain material statutory and regulatory requirements applicable to Blue Hills Bancorp, Inc. and Blue Hills Bank. The summary is not intended to be a complete description of such statutes and regulations and their effects on Blue Hills Bancorp, Inc. and Blue Hills Bank.
Massachusetts Banking Laws and Supervision
General.
As a Massachusetts-chartered stock savings bank, Blue Hills 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, Blue Hills 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 to, with appropriate regulatory approvals, 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 recently adopted a law modernizing the Massachusetts banking law, which affords Massachusetts chartered banks with greater flexibility compared to federally chartered and out-of-state banks.
Recent Massachusetts banking legislation, “An Act Modernizing the Banking Laws and Enhancing the Competitiveness of State-Chartered Banks,” became effective April 2015. Among other things, the legislation attempts to better synchronize Massachusetts laws with federal requirements in the same areas, streamlines the process for an institution to engage in activities permissible for federally chartered and out of state institutions, consolidates corporate governance statutes and provides authority for the Commissioner to establish a tiered supervisory system for Massachusetts-chartered institutions based on factors such as asset size, capital level, balance sheet composition, examination rating, compliance and other factors deemed appropriate.
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 Blue Hills Bancorp, Inc. may depend, in part, upon receipt of dividends from Blue Hills Bank. The payment of dividends from Blue Hills Bank would be restricted by federal law if the payment of such dividends resulted in Blue Hills Bank failing to meet regulatory capital requirements.
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 total of the bank’s capital, surplus 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 Blue Hills Bank’s investment activities. See “-Federal Bank Regulations-Business and Investment Activities” for such federal restrictions.
Parity Regulation.
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.
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 including 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 Blue Hills 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, below a certain level of deposits, are required to be members of the Depositors Insurance Fund, a corporation that insures savings bank deposits in excess of federal deposit insurance coverage. The Depositors Insurance Fund is authorized to charge savings banks an annual assessment fee on deposit balances in excess of amounts insured by the FDIC. 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 Regulations-Insurance of Deposit Accounts.”
Protection of Personal Information.
Massachusetts has adopted regulatory requirements intended to protect personal information. The requirements are similar to existing federal laws such as the Gramm-Leach-Bliley Act, discussed below under “
-
Federal Bank 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
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 Blue Hills Bank, are required to comply with minimum leverage capital requirements. 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%. 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 assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in. It is currently at 1.875%, and will be fully phased in at 2.5% on January 1, 2019.
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 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, the internal audit system, 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% of Tier 1 capital or the maximum amount permitted by Massachusetts law. Blue Hills Bank received approval from the FDIC to retain and acquire such equity instruments up to the specified limits. 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.
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, banks are permitted to establish de novo branches on an interstate basis to the extent that branching is authorized by the law of the host state for the banks chartered by that state.
Prompt Corrective Regulatory Action.
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. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
“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.
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.
Enforcement.
The FDIC has extensive enforcement authority over insured state savings banks, including Blue Hills 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. With certain exceptions, a receiver or conservator must be appointed 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 Federal Deposit Insurance Corporation imposes deposit insurance assessments. Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions were initially assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depended upon the category to which it is assigned and certain adjustments specified by Federal Deposit Insurance Corporation regulations, with less risky institutions paying lower rates. Assessment rates (inclusive of possible adjustments) ranged from 2 1/2 to 45 basis points of each institution’s total assets less tangible capital. The Federal Deposit Insurance Corporation’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s volume of deposits.
Effective July 1, 2016, the FDIC adopted changes that eliminated the risk categories. Assessments for most institutions are now 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 to 1.5 basis points to 30 basis points, also effective July 1, 2016. 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 are subject to an annual surcharge of 4.5 basis points of total assets exceeding $10 billion. This surcharge will remain in place until the earlier of the Deposit Insurance Fund reaching the 1.35% ratio or December 31, 2018, at which point a shortfall assessment would be applied. The FDIC, exercising discretion provided to it by the Dodd-Frank Act, has established a long-term goal of achieving a 2% reverse ratio for the Deposit Insurance Fund.
The Federal Deposit Insurance Corporation 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. The bonds issued by the FICO are due to mature in 2017 through 2019. During the calendar year ended December 31, 2017, Blue Hills Bank paid $
113,000
in fees related to the FICO.
Blue Hills Bank is a member of the Depositors Insurance Fund, a corporation that insures savings bank deposits in excess of federal deposit insurance coverage. See “-Massachusetts Banking Laws and Supervision-Depositors Insurance Fund,” 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 merger with other depository institutions. The CRA requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. Blue Hills Bank’s latest FDIC CRA rating, dated September 28, 2015, was “Satisfactory.”
Massachusetts has its own statutory counterpart to the CRA which is also applicable to Blue Hills Bank. The Massachusetts version is generally similar to the CRA but 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. Blue Hills Bank’s most recent rating under Massachusetts law, dated September 28, 2015, was “Satisfactory.”
Federal Reserve System.
The Federal Reserve Board regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) 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 $122.3 million; a 10% reserve ratio is applied above $122.3 million. The first $16.0 million of otherwise reservable balances are exempted from the reserve requirements. The amounts are adjusted annually. Blue Hills Bank complies with the foregoing requirements.
Federal Home Loan Bank System.
Blue Hills Bank is a member of the Federal Home Loan Bank System, which consists of eleven regional Federal Home Loan Banks. The Federal Home Loan Bank 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 Federal Home Loan Bank of Boston, Blue Hills Bank is required to acquire and hold a specified amount of shares of capital stock in the Federal Home Loan Bank of Boston. As of December 31, 2017, Blue Hills Bank was in compliance with this requirement.
Other Regulations
Some interest and other charges collected or contracted by Blue Hills Bank are subject to state usury laws and federal laws concerning interest rates and charges. Blue Hills Bank’s operations also are subject to state and federal laws applicable to credit transactions and other operations, including, but not limited to, the:
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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
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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;
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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;
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed, or other prohibited factors in extending credit;
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Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; and
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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies.
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The operations of Blue Hills Bank also are subject to the:
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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;
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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;
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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
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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.
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Holding Company Regulation
Blue Hills Bancorp, Inc., 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. Blue Hills Bancorp, Inc. 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 Blue Hills Bancorp, Inc. 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. 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 institutions 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. Blue Hills Bancorp, Inc. has not opted for “financial holding company” status up to this time.
Blue Hills Bancorp, Inc. is subject to the Federal Reserve Board’s 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 the subsidiary banks applied to bank holding companies (with greater than $1.0 billion of assets) as of January 1, 2015.
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 Blue Hills Bancorp, Inc. ever held as a separate subsidiary a depository institution in addition to Blue Hills Bank.
The status of Blue Hills Bancorp, Inc. 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.
Change in Control Regulations.
Under the Change in Bank Control Act, no person, or group of persons acting in concert, may acquire control of a bank holding company such as the Company unless the Federal Reserve Board has been given 60 days’ prior written notice and not disapproved the proposed acquisition. The Federal Reserve Board considers several factors in evaluating a notice, including the financial and managerial resources of the acquirer and competitive effects. Control, as defined under the applicable regulations, means the power, directly or indirectly, to direct the management or policies of the company or to vote 25% or more of any class of voting securities of the company. Acquisition of more than 10% of any class of a bank holding company’s voting securities constitutes a rebuttable presumption of control under certain circumstances, including where the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
In addition, federal regulations provide that no company may acquire control (as defined in the Bank Holding Company Act) of a bank holding company without the prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “bank holding company” subject to registration, examination and regulation by the Federal Reserve Board.
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. Blue Hills Bancorp, Inc. would become a Massachusetts bank holding company if it acquires a second banking institution and holds and operates it separately from Blue Hills Bank.
Federal Securities Laws
Our common stock is registered with the Securities and Exchange Commission under Section 12(b) of the Securities Exchange Act of 1934, as amended. We are subject to information, proxy solicitation, insider trading restrictions, and other requirements under the Exchange Act.
Emerging Growth Company Status
We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012. For as long as we are an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, reduced disclosure obligations regarding executive compensation, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved, and an exemption from having outside auditors attest as to our internal control over financial reporting. In addition, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to adopt new or revised accounting standards on a delayed basis, and will be required to adopt new or revised accounting standards in the same manner as other public companies that are not emerging growth companies.
We will be an emerging growth company until the earlier of: (i) December 31, 2019, (ii) the first fiscal year after our annual gross revenues are $1.0 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.
TAXATION
Federal Taxation
General.
Blue Hills Bank and Blue Hills Bancorp, Inc. are subject to federal and state income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to Blue Hills Bancorp, Inc. and Blue Hills Bank.
Tax Reform.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the "Act"), which took effect on January 1, 2018. Some notable provisions of the Act include a reduction of the corporate income tax rate from 35% to 21%, 100% bonus depreciation for certain capital expenditures, and a change from a worldwide system with deferral to a territorial tax system, which includes a one-time toll charge on certain undistributed earnings of non-U.S. subsidiaries. The Company is currently evaluating the prospective impact of this new legislation on its consolidated financial statements. The 2017 tax provision included a charge of $2.5 million related to the Act which was enacted on December 22, 2017.
Method of Accounting.
For federal income tax purposes, Blue Hills Bank files a consolidated tax return with Blue Hills Bancorp, Inc. and reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31st for filing their consolidated federal income tax returns.
Minimum Tax.
The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, referred to as “alternative minimum taxable income.” Alternative minimum tax is payable to the extent 20 percent of alternative minimum taxable income is in excess of the regular corporate tax. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. The Act repeals the alternative tax regime for taxable years after December 31, 2017. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years or is otherwise refundable. Blue Hills Bancorp, Inc. and Blue Hills Bank have not been subject to the alternative minimum tax and have no such amounts available for credits against regular future tax liabilities.
Net Operating Loss Carryovers.
A financial institution may carry back net operating losses incurred prior to January 1, 2018 to the preceding two taxable years and forward to the succeeding 20 taxable years. For losses incurred after December 31, 2018, the Act limits the net operating loss deduction to 80% of taxable income. In addition, the Act eliminates carry back of net operating losses, yet allows unused net operating losses to be carried forward indefinitely. At
December 31, 2017
, Blue Hills Bancorp, Inc. and Blue Hills Bank had no net operating loss carryforward for federal income tax purposes.
Corporate Dividends.
Blue Hills Bancorp, Inc. will be able to exclude from its income 100% of dividends received from Blue Hills Bank as a member of the same affiliated group of corporations.
Audit of Tax Returns.
Blue Hills Bancorp, Inc. and Blue Hills Bank’s federal income tax returns, as applicable, have not been audited in the most recent three-year period.
State Taxation
For tax years beginning on or after January 1, 2009, Massachusetts generally requires corporations engaged in a unitary business to calculate their income on a combined basis with corporations which are under common control. Accordingly, Blue Hills Bancorp, Inc. and Blue Hills Bank currently file combined annual income tax returns. A corporation that qualifies, and elects to be treated for purposes of Massachusetts taxation, as a Massachusetts Security Corporation will be excluded from such a combined group.
Blue Hills Bank, under current law, files a Massachusetts combined excise tax return with its affiliates who do not qualify as security corporations. During the 2017 tax year, Blue Hills Bank was subject to an annual Massachusetts tax at a rate of 9.0% of its net income, adjusted for certain items. Massachusetts net income is defined as gross income, other than 95% of dividends received in any taxable year beginning on or after January 1, 1999 from or on account of the ownership of any class of stock if the institution owns 15% or more of the voting stock of the institution paying the dividend, less the deductions, but not the credits allowable under the provisions of the Internal Revenue Code, as amended and in effect for the taxable year. The dividends must meet the qualifications under Massachusetts law. Dividends paid to affiliates participating in a combined return will be 100% excluded to the extent paid from earnings and profits of a unitary business included in the Massachusetts combined return. Deductions with respect to the following items, however, shall not be allowed except as otherwise provided: (a) dividends received, except as otherwise provided; (b) losses sustained in other taxable years; (c) taxes on or measured by income, franchise taxes measured by net income, franchise taxes for the privilege of doing business and capital stock taxes imposed by any state; or (d) the deduction allowed by section 168(k) of the Code.
A financial institution or business corporation is generally entitled to special tax treatment as a “security corporation” under Massachusetts law provided that: (a) its activities are limited to buying, selling, dealing in or holding securities on its own behalf and not as a broker; and (b) it has applied for, and received, classification as a “security corporation” by the Commissioner of the Massachusetts Department of Revenue. A security corporation that is also a bank holding company under the Internal Revenue Code must pay a tax equal to 0.33% of its gross income. A security corporation that is not a bank holding company under the Internal Revenue Code must pay a tax equal to 1.32% of its gross income. HP Security Corporation, BH Security Corporation and 1196 Corporation, wholly owned subsidiaries of Blue Hills Bank, are all qualified as a security corporation. As such, they have received security corporation classification by the Massachusetts Department of Revenue; and do not conduct any activities deemed impermissible under the governing statutes and the various regulations, directives, letter rulings and administrative pronouncements issued by the Massachusetts Department of Revenue.
None of the state tax returns of Blue Hills Bank are currently under audit, nor have any of these tax returns been audited during the past five years.
As a Maryland business corporation, Blue Hills Bancorp, Inc. is required to file annual returns and pay annual fees to the State of Maryland.
Executive Officers of the Registrant
The executive officers of Blue Hills Bancorp, Inc. are elected annually by the Board of Directors and serve at the Board’s discretion. The following table sets forth the name and position of the executive officers of Blue Hills Bancorp, and their ages as of
December 31, 2017
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Name
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Age
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Positions Held
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William M. Parent
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56
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President and Chief Executive Officer of Blue Hills Bank and Blue Hills Bancorp
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James E. Kivlehan
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57
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Executive Vice President, Consumer and Business Banking
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Lauren B. Messmore
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47
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Executive Vice President, Chief Financial Officer of Blue Hills Bank and Blue Hills Bancorp
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Kevin F. Malone
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58
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Executive Vice President, Commercial Banking
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Robert M. Driscoll
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43
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Executive Vice President, Home Lending
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Thomas R. Sommerfield
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62
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Senior Vice President, Chief Risk Officer
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Below is additional information regarding the executive officers who are not also directors. Unless otherwise stated, each executive officer has held his current position for at least the last three years.
Executive Officers Who Are Not Also Directors:
James E. Kivlehan
has been an been an Executive Vice President for Blue Hills Bank since September of 2013. Prior to September of 2017, Mr. Kivlehan was also the Chief Financial Officer of the Bank, in addition to his overall responsibility for the Consumer and Business Banking business. Prior to joining Blue Hills Bank, Mr. Kivlehan was an Executive Vice President, with more than a decade of service, at Citizens Financial Group, Inc. At Citizens he held multiple executive leadership roles spanning Consumer Banking, Strategy, Business Analytics, M&A and Finance. Mr. Kivlehan is an experienced banking executive with an extensive finance background. A graduate of Babson College, he is a non-practicing CPA, the treasurer of the Neponset Valley chamber of commerce, a member of Financial Executives International, and a past president of the Treasurer’s Club of Boston.
Lauren B. Messmore
has been Executive Vice President and Chief Financial Officer for Blue Hills Bank since September of 2017. Ms. Messmore has extensive experience in investment banking, including work at a top-tier global investment bank, Citigroup, as well as co-founding and managing an investment banking boutique. She has a proven track record in strategy development and transaction execution across a wide range of industries. A graduate of Harvard College, Ms. Messmore joined Blue Hills Bank in 2012 as Senior Vice President, Corporate Strategy.
Kevin F. Malone
has been Executive Vice President of Commercial Banking at Blue Hills Bank since February 27, 2017. He has more than 30 years of banking experience serving different types of customers ranging from New England based middle market and family-owned businesses to national customers in specialized industries. Prior to joining Blue Hills Bank, Mr. Malone served as Market President, Greater Boston and Rhode Island for TD Bank, where he held various leadership positions for 14 years. Mr. Malone served on the board of the Greater Boston YMCA. Mr. Malone is a graduate of the University of Massachusetts.
Robert M. Driscoll
has been Executive Vice President of Home Lending at Blue Hills Bank since January of 2017. Mr. Driscoll has been with Blue Hills Bank since 1996 and oversees all home lending department functions including originations, sales and servicing activities at the Bank. He serves on the board of directors for the Massachusetts Community & Banking Council and is a member of the MBA Real Estate Finance Committee. Mr. Driscoll is a graduate of Northeastern University.
Thomas R. Sommerfield
has been Senior Vice President, Chief Risk Officer at Blue Hills Bank since 2011. Mr. Sommerfield is responsible for the overall risk management of the Bank, including credit, compliance and enterprise risk. Mr. Sommerfield has more than 36 years of experience in the financial services industry, was previously a Director at Spring Street Capital and has held numerous senior lending, credit and risk management roles at CIT, GE Capital, FleetBoston and its predecessors, and HSBC. Mr. Sommerfield is a graduate of Columbia College. He is the leader of the Bank’s Pan-Mass Challenge team and has served on advisory boards of educational institutions and outreach programs and is currently on the board of VETRN, a charity that funds education and provides mentoring for military veterans who are starting new local businesses.
ITEM 1A.
RISK FACTORS
Our business strategy includes the continuation of significant growth plans. If we fail to grow or fail to manage our growth effectively, our financial condition and results of operations could be negatively affected.
Our strategic plan includes continued asset and deposit growth and increasing the scale of our operations. Specifically, we intend to: increase our residential, commercial business and commercial real estate loans using the lending origination and servicing platform we have built; add origination capacity in our market area and adjacent market areas; expand our branch network through select de novo and acquisition opportunities; and increase fee income, including through the opportunistic acquisition of fee income businesses that complement our current product capabilities while improving the revenue contribution of fee income from existing customers and income from mortgage banking. In addition, we may expand through acquisitions, should appropriate opportunities arise.
The success of our strategic plan will require, among other things, that we continue to leverage our operating costs through increased loan and deposit market share within our current markets and through expansion into new markets, continue to increase our core funding and decrease our reliance on acquisition based pricing, and increase our fee income through increased deposit services, cash management services and mortgage banking. Our ability to continue to grow successfully will depend on several other factors that may not be within our control, including continued favorable market conditions in the communities we serve, the competitive responses from other financial institutions in our market area, and our ability to maintain high asset quality as we increase our portfolio of commercial real estate loans and commercial business loans.
While we believe we have the management resources, operating platform and internal systems in place to successfully manage our growth, growth opportunities and lower cost deposit sources may not be available and we may not be successful in implementing our business strategy. Furthermore, we are a regulated entity and our regulators periodically review and oversee the pace and quality of our growth in assets, liabilities and liquidity. Regulatory authorities may encourage or require faster growing banks to slow the pace of growth and expansion if regulatory concerns develop.
Because we intend to continue to emphasize our commercial real estate and commercial business loan originations, our overall credit risk will increase.
We intend to continue to grow our commercial real estate and commercial business loan portfolio. At
December 31, 2017
,
$1.2 billion
or
53.5%
of our total loan portfolio consisted of commercial real estate loans (including commercial construction loans) and commercial business loans, compared to $9.2 million, or 3.4% of our total loan portfolio, at December 31, 2011, the time when we commenced our diversification strategy towards commercial lending. Commercial real estate and commercial business loans generally have more risk than the 1-4 family residential real estate loans that we originate. Because the repayment of commercial real estate and commercial business loans depends on the successful management and operation of the borrower’s properties or businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Commercial real estate and commercial business loans may also involve relatively large loan balances to individual borrowers or groups of related borrowers.
Further, if we foreclose on a commercial real estate or construction loan, our holding period for the collateral may be longer than for 1-4 family residential mortgage loans because there are fewer potential purchasers of the collateral. Accordingly, if we make any errors in judgment in the collectability of our commercial real estate loans, any resulting charge-offs may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.
Downturns in the local real estate market or economy could adversely affect our earnings.
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. If the Company is required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, its earnings and shareholders’ equity could be adversely affected. The declines in real estate prices in the Company’s markets also may result in increases in delinquencies and losses in its loan portfolios. Unexpected decreases in real estate prices coupled with a prolonged economic recovery and elevated levels of unemployment could drive losses beyond that which is provided for in the Company’s allowance for loan losses. In that event, the Company’s earnings could be adversely affected.
Reduced residential mortgage activity in our market would slow our growth and negatively impact our net income.
We have experienced residential mortgage loan growth during recent years and we have increased our residential mortgage loan infrastructure, including hiring lending officers, underwriting and support personnel and opening loan production offices. Our residential mortgage operations provide a material portion of our income and are significantly affected by market interest rates. Additionally, our mortgage lending activity is affected by home purchase and refinance activity. A reduction in mortgage refinance activity and a rising or higher interest rate environment may result in a decrease in residential mortgage loan originations, resulting in slower growth of our residential lending activity and, possibly, a decrease in the size of our residential loan portfolio. Income from secondary market mortgage operations is volatile, and we may incur losses with respect to our secondary mortgage market operations that could negatively affect our earnings. This could result in a decrease in interest income and a decrease in revenues from loan sales. In addition, our results of operations are affected by the amount of noninterest expenses associated with our expanded residential lending platform, such as salaries and commissions, employee benefits, occupancy, equipment, data processing and other operating costs. During periods of reduced residential mortgage loan demand, our results of operations would be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in mortgage loan origination activity.
Income from secondary mortgage operations is volatile, and we may incur losses with respect to our secondary mortgage market operations.
A key component of our strategy is to increase the extent to which we sell in the secondary market the longer term, conforming fixed-rate 1-4 family residential mortgage loans that we originate, earning non-interest income in the form of gains on sale. Although to date we have generally originated loans for sale on a “best efforts” basis, and we intend to continue selling most loans in the secondary market with limited or no recourse, we are required, and will continue to be required, to give customary representations and warranties to the buyers relating to compliance with applicable law. If we breach those representations and warranties, the buyers will be able to require us to repurchase the loans and we may incur a loss on the repurchase.
In the future, we expect to continue to utilize “best efforts” forward loan sale commitments and begin utilizing mandatory delivery forward loan sale commitments and To Be Announced (“TBA”) Securities, which are sold from approved counterparties to mitigate the risk of potential changes in the values of derivative loan commitments. For TBAs, we intend to sell a security in the open market with a promise to deliver a pool of loans with an aggregate specified principal amount and quality to the investor at a specified point in the future. If we fail to deliver the pool of loans, we will repurchase the security at the market price on the date of repurchase, which could negatively impact our earnings.
Fair value changes in mortgage banking derivatives and commitments to sell fixed-rate 1-4 family residential mortgages subsequent to inception are estimated using anticipated market prices based on pricing indications provided from syndicate banks and consideration of pull-through and fallout rates derived from our internal data and adjusted using management judgment. Fluctuations in interest rates may impact estimated pull-through rates on mortgage originations, which in turn may affect the valuation of forward loan sale commitments, and could negatively affect our earnings.
Changes in the programs offered by secondary market purchasers or our ability to qualify for their programs may reduce our mortgage banking revenues, which would negatively impact our non-interest income.
We generate mortgage revenues primarily from gains on the sale of single-family mortgage loans pursuant to programs currently offered by Fannie Mae, Freddie Mac, Ginnie 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.
The Company's wholesale funding sources may prove insufficient to replace deposits at maturity and support operations and future growth.
The Company must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of its liquidity management, the Company uses a number of funding sources in addition to deposit growth and cash flows from loans and investments. These sources include Federal Home Loan Bank advances, brokered deposits, proceeds from the sale of loans, and liquidity resources at the holding company. The Company uses brokered deposits both to support ongoing growth and to provide enhanced deposit insurance to support large dollar commercial relationships. The Company's financial flexibility will be severely constrained if the Company is unable to maintain access to wholesale funding or if adequate financing is not available to accommodate future growth at acceptable costs. Finally, if the Company is required to rely more heavily on more expensive funding sources to support future growth, revenues may not increase proportionately to cover costs. In this case, operating margins and profitability would be adversely affected. Turbulence in the capital and credit markets may adversely affect liquidity and financial condition and the willingness of certain counterparties and customers to do business with the Company.
Our branch network expansion strategy may negatively affect our financial performance.
On January 18, 2014, we completed the acquisition of three branches in Nantucket. We also opened
de novo
branch offices in Milton, Massachusetts in 2014, in University Station in Westwood, Massachusetts in 2015, and in the Boston Seaport District in October 2016. The costs to open the Westwood, Milton and Boston Seaport District
de novo
branches was $2.2 million, $1.4 million and $1.9 million, respectively, including the costs of construction, equipment, furnishings and technology as well as marketing and promotional expenses associated with the grand opening of the branches. Any future branch expansion strategy may not generate earnings within a reasonable period of time. Numerous factors contribute to the performance of a new or acquired branch, such as a suitable location, qualified personnel, and an effective marketing strategy. Additionally, it takes time for a new branch to generate sufficient favorably priced deposits to produce enough income, including funding loan growth generated by our organization, to offset expenses related to the branch, some of which, like salaries and occupancy expense, are considered fixed costs. At this time we have no immediate plans to open any additional
de novo
branches although we may continue to expand through acquisition or opening
de novo
branches in the future.
Changing interest rates may have a negative effect on our results of operations.
Our earnings and cash flows are dependent on our net interest income and income from our mortgage banking operations. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in market interest rates could have an adverse effect on our financial condition and results of operations. If interest rates increase rapidly, we may have to increase the rates we pay on our deposits, particularly our higher-cost money market and time deposits, and the cost of our borrowed funds may increase, more quickly than any changes in interest rates will take effect on our loans and investments, resulting in a negative effect on interest spreads and net interest income. Furthermore, our mortgage banking income varies directly with movements in interest rates, and increases in interest rates could negatively affect our ability to originate loans in the same volumes, and sell loans with attractive pricing, as we have in recent years. Increases in interest rates may also make it more difficult for borrowers to repay adjustable rate loans.
Conversely, should market interest rates fall below current levels, our net interest margin could also be negatively affected if competitive pressures keep us from further reducing rates on our deposits, while the yields on our assets decrease more rapidly through loan prepayments and interest rate adjustments. Decreases in interest rates often result in increased prepayments of loans and mortgage-related securities, as borrowers refinance their loans to reduce borrowings costs. Under these circumstances, we are subject to reinvestment risk to the extent we are unable to reinvest the cash received from such prepayments in loans or other investments that have interest rates that are comparable to the interest rates on existing loans and securities.
Changes in interest rates may also decrease fee income generated from our commercial lending operations. We enter into interest rate swap agreements with some of our commercial borrowers (and mirror swap agreements with a third party) that allow the borrower to pay a fixed interest rate on loans that are originated and carried in our loan portfolio as adjustable rate loans. We receive fee income from borrowers for providing this service. Under certain interest rate scenarios, borrowers may choose not to use this service, and our related fee income will decrease. U.S. GAAP also dictates that the Company must mark these contracts to fair value over the life of each swap. As interest rates change, positive and negative credit valuation marks on these contracts are also recorded in the income statement.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Management of Market Risk.”
A worsening of economic conditions could adversely affect our financial condition and results of operations.
During the financial crisis, there were dramatic declines in the housing market, where falling real estate values and increasing foreclosures, unemployment, and under-employment negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions. Our lending business is tied, in large part, to the housing market and real estate markets in general. A return to these conditions or a general decline in economic conditions could result in more limited demand for the construction of new housing, and weakness in home pricing, and could ultimately result in increased delinquencies on our residential real estate loans, commercial real estate loans, commercial business loans, home equity loans and lines of credit and consumer loans. These conditions may also cause a further reduction in loan demand, and increases in our non-performing assets, net charge-offs and provisions for loan losses, as well as adversely affect our liquidity and the willingness of certain counterparties and customers to do business with us. Negative developments in the financial services industry and the domestic and international credit markets may significantly affect the markets in which we do business, the market for and value of our loans and investments, and our ongoing operations, costs and profitability. Moreover, declines in the stock market in general, or stock values of financial institutions and their holding companies specifically, could adversely affect our stock performance.
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, 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 compete successfully 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 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.
Financial reform legislation has increased our costs of operations.
The Dodd-Frank Act has significantly changed the regulation of banks and savings institutions and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The current administration in Washington indicated they have plans for Dodd-Frank reform, however, we cannot predict the extent to how those changes will impact our business, operations or financial condition. However, compliance with the Dodd-Frank Act and its implementing regulations and policies has already resulted in changes to our business and operations, as well as additional costs, and diverted management’s time from other business activities, which adversely affects our financial condition and results of operations.
The short-term and long-term impact of the changing regulatory capital requirements and new capital rules may adversely affect our returns on equity and our ability to pay dividends or repurchase stock.
In July 2013, the FDIC and the other federal bank regulatory agencies revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), set the leverage ratio at a uniform 4% of total assets, increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigned a higher risk weight (150%) to certain exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a “capital conservation buffer” consisting of 2.50% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule became effective January 1, 2015. The “capital conservation buffer” has been phased in beginning on January 1, 2016. It is currently 1.875% and will be fully phased in at 2.50% on January 1, 2019.
The application of these more stringent capital requirements could, among other things, result in lower returns on equity, and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets.
Government responses to economic conditions may adversely affect our operations, financial condition and earnings.
We are subject to extensive regulation, supervision and examination by the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation and the Federal Reserve Board. Such regulation and supervision governs the activities in which an institution and its holding company may engage and are intended primarily for the protection of the insurance fund and the depositors and borrowers of Blue Hills Bank rather than for holders of our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.
Financial reform legislation has changed the bank regulatory framework, created an independent consumer protection bureau that has assumed the consumer protection responsibilities of the various federal banking agencies, and established more stringent capital standards for banks and bank holding companies. The legislation has also resulted in new regulations affecting the lending, funding, trading and investment activities of banks and bank holding companies. Bank regulatory agencies also have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty regarding the effect of new legislation and regulatory actions may adversely affect our operations by restricting our business activities, including our ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. 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.
In addition, there have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. Were proposals such as these, or other proposals limiting our rights as a creditor, to be implemented, we could experience increased credit losses or increased expense in pursuing our remedies as a creditor.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions and restrictions on conducting acquisitions or establishing new branches.
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. These 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, and restrictions on conducting acquisitions or establishing new branches. During the last year, several banking institutions have received large fines for non-compliance with these laws and regulations. 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.
for purposes of its regulations.
Changes in the valuation of our securities portfolio could adversely affect us.
As of December 31, 2017, our investment securities portfolio, which includes government agency, mortgage-backed
securities, and marketable equity securities totaled $313.4 million, or 11.7% of our total assets.
O
ur securities portfolio may be impacted by fluctuations in market value, potentially reducing earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Management evaluates securities for other-than-temporary impairment on a quarterly basis, with more frequent evaluation for selected issues. In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, industry analysts’ reports and, to a lesser extent given the relatively insignificant levels of depreciation in our debt portfolio, spread differentials between the effective rates on instruments in the portfolio compared to risk-free rates. Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. The declines in fair value could result charges to earnings that could have a material adverse effect on our net income and capital levels.
We may be adversely affected by recent changes in U.S. tax laws.
Changes in tax laws contained in the Tax Cuts and Jobs Act, which was enacted in December 2017, include a number of provisions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate. Changes include (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (ii) the elimination of interest deductions for certain home equity loans, (iii) a limitation on the deductibility of business interest expense and (iv) 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 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 high residential home prices and high state and local taxes. 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.
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. Furthermore, our strategic plan envisages significant growth in lending, which will require additional provisions for loan losses and reduce our earnings in the short term. 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.
The Financial Accounting Standards Board ("FASB") has adopted Accounting Standard Update ("ASU") 2016-13, which will be effective in the first quarter of 2020. This standard, often referred to as “CECL” (reflecting a current expected credit loss model), will require companies to recognize an allowance for credit losses based on estimates of losses expected to be realized over the contractual lives of the loans. Under current U.S. GAAP, companies generally recognize credit losses only when it is probable that a loss has been incurred as of the balance sheet date. This new standard will require us to collect and review increased types and amounts of data for us to determine the appropriate level of the allowance for loan losses, and may require us to increase our allowance for loan losses. Any increase in our allowance for loan losses or expenses may have a material adverse effect on our financial condition and results of operations. We are actively working through the provisions of the Update. Management has established a steering committee which has identified the methodologies and the additional data requirements necessary to implement the Update and has engaged a third-party software service provider to assist in the Company's implementation.
Changes in our accounting policies or in accounting standards could materially affect how we report our financial condition and results of operations.
Our accounting policies are essential to understanding our financial condition and results of operations. Some of these policies require the use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain, and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions underlying our financial statements are incorrect, we may experience material losses.
From time to time, the Financial Accounting Standards Board and the Securities and Exchange Commission change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our financial statements. These changes are beyond our control, can be hard to predict and could materially affect how we report our financial condition and results of operations. We could also be required to apply a new or revised standard retroactively, which may result in our restating our prior period financial statements.
In January 2016, FASB issued ASU 2016-01,
Financial Instruments – Overall, (Subtopic 825-10).
The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Targeted improvements to generally accepted accounting principles include the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income and the elimination of the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The impact of the change, if applied, to the Company's equity investments for the year ended December 31, 2017, would have resulted in a gain of
$1.7 million
(pre-tax) being recognized in net income, after reclassification for the realized loss on mutual funds.
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 provided that they produce economies of scale and deploy technology in a safe and sound manner. 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 and greater scale of operations to spread the costs of improvement over, creating a competitive advantage. We may not be able to effectively implement new technology-driven products and services or successfully market such products and services to a large enough number of customers to cover the up-front costs of implementation and ongoing costs to operate.
Our information systems may experience an interruption or breach in security.
We rely heavily on communications and information systems to conduct our business including systems operated by third party vendors. For example, we rely extensively on our core processing vendor for our informational management systems. Any failure, interruption, or breach in security or operational integrity of these systems 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 rectified. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a loss of customer business, cause us to incur costs of rectification, 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.
Evolving information technologies, the need to mitigate against and react to cyber-security risks and electronic fraud risks require significant resources and notwithstanding our investment in resources, we remain subject to cyber security risks and electronic fraud.
The Company needs to invest in information technology to keep pace with technology changes, and while the Company invests amounts it believes will be adequate, it may fail to invest adequate amounts such that the efficiency of information technology systems fails to meet operational needs. The risk of electronic fraudulent activity within the financial services industry, especially in the commercial banking sector due to cyber attacks (crime committed through or involving the internet (phishing, hacking, denial of service attacks, stealing information, unauthorized intrusions into internal systems or the systems of the Company's third party vendors)) could adversely impact the Company’s operations or damage its reputation. The Company's information technology infrastructure and systems may be vulnerable to cyber terrorism, computer viruses, system failures and other intentional or unintentional interference, fraud and other unauthorized attempts to access or interfere with the systems. A breach of our security controls and the occurrence of one or more of these incidents could have a material adverse effect on the Company's reputation, business, financial condition or results of operations. Further, any such occurrences could result in regulatory actions (including fines), litigation, unexpected costs and expenses, third-party damages or other loss or liabilities, any of which could have a material adverse effect on the results of operations or financial condition.
Our performance depends on key personnel.
Our performance depends largely on the efforts and abilities of our senior officers. Our business model depends on the experience and expertise of our senior management team and lending staff. Several of these individuals have been involved in the banking business for much of their professional careers. Our performance will also depend upon our ability to attract and retain additional qualified management and banking personnel. There can be no assurances that our management team will be able to manage our operations or our expected growth or that we will be able to attract and retain additional qualified personnel as needed in the future. The loss of any officer could adversely affect us. We do not currently maintain “key man” life insurance on any of our officers.
Impairment of goodwill could require charges to earnings, which could result in a negative impact on our results of operations.
Goodwill arises when a business is purchased for an amount greater than the fair market value of its net assets. We recognized goodwill as an asset on our balance sheet in connection with our acquisition of three branches in Nantucket in January 2014. We evaluate goodwill for impairment at least annually. A significant decline in our expected future cash flows, a significant adverse change in the business climate, slower growth rates or other factors could result in impairment of goodwill. If we were to conclude that a future write-down of goodwill was necessary, then we would record the appropriate charge to earnings, which could be materially adverse to our results of operations and financial position.