3.

LOANS

A summary of loans follows:

 

		December 31,
		2013				2012
		(Dollars in thousands)
Real estate loans:
Residential real estate:
One- to four-family		$	454,148			$	443,228
Multi-family			288,172				178,948
Home equity lines of credit			54,499				60,907
Commercial real estate			1,032,408				795,642
Construction			208,799				173,255
Total real estate loans			2,038,026				1,651,980
Commercial business loans			247,005				147,814
Consumer			7,225				7,143
Total loans			2,292,256				1,806,937
Allowance for loan losses			(25,335	)			(20,504	)
Net deferred loan origination fees			(1,521	)			(94	)
Loans, net		$	2,265,400			$	1,786,339

The Company has transferred a portion of its originated commercial real estate loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying balance sheets. The Company and participating lenders share ratably in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments to participating lenders and disburses required escrow funds to relevant parties. At December 31, 2013 and 2012, the Company was servicing loans for participants aggregating $62.8 million and $41.1 million, respectively.

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

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

 

		December 31,
		2013				2012
		(In thousands)
Real estate loans:
Residential real estate:
One- to four-family		$	6,494			$	7,581
Multi-family			846				1,280
Home equity lines of credit			509				568
Commercial real estate			720				1,646
Total real estate loans			8,569				11,075
Commercial business loans			78				78
Consumer			4				4
Outstanding principal balance			8,651				11,157
Discount			(2,215	)			(2,595	)
Carrying amount		$	6,436			$	8,562

 

A rollforward of accretable yield follows:

 

		Years Ended December 31,
		2013				2012				2011
		(In thousands)
Beginning balance		$	1,047			$	1,181			$	—
Reclassification from nonaccretable discount			332				—				1,188
Accretion			(37	)			(44	)			(7	)
Disposals			(161	)			(90	)			—
Ending balance		$	1,181			$	1,047			$	1,181

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

 

										Home
		One- to				Multi-				equity lines				Commercial								Commercial
		four-family				family				of credit				real estate				Construction				business				Consumer				Unallocated				Total
		(In thousands)
Allowance for loan losses:
Balance at December 31, 2010		$	1,130			$	1,038			$	227			$	5,238			$	2,042			$	448			$	32			$	—			$	10,155
Provision (credit) for loan losses			795				280				136				1,875				(240	)			685				132				—				3,663
Charge-offs			(192	)			—				(123	)			(150	)			(869	)			(72	)			(96	)			—				(1,502	)
Recoveries			128				43				5				17				497				—				47				—				737
Balance at December 31, 2011			1,861				1,361				245				6,980				1,430				1,061				115				—				13,053
Provision for loan losses			919				114				33				3,917				2,382				1,102				114				—				8,581
Charge-offs			(599	)			(72	)			(52	)			(719	)			(398	)			—				(164	)			—				(2,004	)
Recoveries			326				28				—				227				242				11				40				—				874
Balance at December 31, 2012			2,507				1,431				226				10,405				3,656				2,174				105				—				20,504
Provision (credit) for loan losses			(217	)			1,084				(71	)			2,426				1,525				1,523				200				—				6,470
Charge-offs			(531	)			(96	)			—				—				(1,362	)			(288	)			(283	)			—				(2,560	)
Recoveries			232				—				—				—				555				24				110				—				921
Balance at December 31, 2013		$	1,991			$	2,419			$	155			$	12,831			$	4,374			$	3,433			$	132			$	—			$	25,335
December 31, 2013
Amount of allowance for loan losses for loans deemed to be impaired		$	132			$	—			$	—			$	190			$	54			$	—			$	—			$	—			$	376
Amount of allowance for loan losses for loans not deemed to be impaired			1,859				2,419				155				12,641				4,320				3,433				132				—				24,959
		$	1,991			$	2,419			$	155			$	12,831			$	4,374			$	3,433			$	132			$	—			$	25,335
Amount of allowance for loan losses for loans acquired with deteriorated credit quality included above		$	44			$	—			$	—			$	12			$	—			$	—			$	—			$	—			$	56
Loans deemed to be impaired		$	4,089			$	4,002			$	21			$	10,820			$	13,308			$	1,232			$	—							$	33,472
Loans not deemed to be impaired			450,059				284,170				54,478				1,021,588				195,491				245,773				7,225								2,258,784
		$	454,148			$	288,172			$	54,499			$	1,032,408			$	208,799			$	247,005			$	7,225							$	2,292,256

 

										Home
		One- to				Multi-				equity lines				Commercial								Commercial
		four-family				family				of credit				real estate				Construction				business				Consumer				Unallocated				Total
		(In thousands)
December 31, 2012
Amount of allowance for loan losses for loans deemed to be impaired		$	128			$	90			$	—			$	204			$	227			$	—			$	—			$	—			$	649
Amount of allowance for loan losses for loans not deemed to be impaired			2,379				1,341				226				10,201				3,429				2,174				105								19,855
		$	2,507			$	1,431			$	226			$	10,405			$	3,656			$	2,174			$	105			$	—			$	20,504
Amount of allowance for loan losses for loans acquired with deteriorated credit quality included above		$	31			$	90			$	—			$	9			$	—			$	—			$	—			$	—			$	130
Loans deemed to be impaired		$	4,486			$	5,784			$	22			$	12,146			$	18,319			$	424			$	—							$	41,181
Loans not deemed to be impaired			438,742				173,164				60,885				783,496				154,936				147,390				7,143								1,765,756
		$	443,228			$	178,948			$	60,907			$	795,642			$	173,255			$	147,814			$	7,143							$	1,806,937

The following table provides information about the Company’s past due and non-accrual loans:

 

		30-59				60-89				90 Days
		Days				Days				or Greater				Total				Loans on
		Past Due				Past Due				Past Due				Past Due				Non-accrual
		(In thousands)
December 31, 2013
Real estate loans:
Residential real estate:
One- to four-family		$	6,203			$	1,185			$	6,714			$	14,102			$	17,622
Multi-family			75				—				85				160				—
Home equity lines of credit			2,504				178				744				3,426				2,689
Commercial real estate			314				—				2,742				3,056				8,972
Construction			497				—				11,297				11,794				11,298
Total real estate loans			9,593				1,363				21,582				32,538				40,581
Commercial business loans			284				50				852				1,186				949
Consumer			461				282				—				743				—
Total		$	10,338			$	1,695			$	22,434			$	34,467			$	41,530
December 31, 2012
Real estate loans:
Residential real estate:
One- to four-family		$	3,996			$	2,476			$	8,990			$	15,462			$	18,870
Multi-family			—				—				364				364				976
Home equity lines of credit			767				674				754				2,195				2,674
Commercial real estate			1,722				379				3,671				5,772				8,844
Construction			496				—				6,553				7,049				7,785
Total real estate loans			6,981				3,529				20,332				30,842				39,149
Commercial business loans			201				—				318				519				424
Consumer			479				132				—				611				—
Total		$	7,661			$	3,661			$	20,650			$	31,972			$	39,573

 

 

At December 31, 2013 and 2012, the Company did not have any accruing loans past due 90 days or more. Delinquent loans at December 31, 2013 and 2012 included $1.3 million and $2.3 million of loans acquired with evidence of credit deterioration. At December 31, 2013 and 2012, non-accrual loans included $1.2 million and $3.9 million of loans acquired with evidence of credit deterioration.

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

 

		December 31,
		2013												2012
						Unpaid												Unpaid
		Recorded				Principal				Related				Recorded				Principal				Related
		Investment				Balance				Allowance				Investment				Balance				Allowance
		(In thousands)
Impaired loans without a valuation allowance:
One- to four-family		$	2,399			$	2,699							$	2,157			$	2,465
Multi-family			4,002				4,002								5,419				5,893
Home equity lines of credit			21				21								22				22
Commercial real estate			9,327				10,014								9,752				10,054
Construction			12,930				15,926								16,726				17,818
Commercial business loans			1,232				1,635								424				502
Total			29,911				34,297								34,500				36,754
Impaired loans with a valuation allowance:
One- to four-family			1,690				1,806			$	132				2,329				2,330			$	128
Multi-family			—				—				—				365				482				90
Commercial real estate			1,493				1,493				190				2,394				2,394				204
Construction			378				389				54				1,593				1,787				227
Total			3,561				3,688				376				6,681				6,993				649
Total impaired loans		$	33,472			$	37,985			$	376			$	41,181			$	43,747			$	649

At December 31, 2013, additional funds of $2.9 million are committed to be advanced in connection with impaired construction loans.

 

		Years Ended December 31,
		2013												2012												2011
										Interest												Interest												Interest
		Average				Interest				Income				Average				Interest				Income				Average				Interest				Income
		Recorded				Income				Recognized				Recorded				Income				Recognized				Recorded				Income				Recognized
		Investment				Recognized				on Cash Basis				Investment				Recognized				on Cash Basis				Investment				Recognized				on Cash Basis
		(In thousands)
One- to four-family		$	4,627			$	219			$	192			$	4,510			$	245			$	196			$	5,285			$	344			$	288
Multi-family			5,694				300				292				8,959				752				717				4,346				428				415
Home equity lines of credit			22				1				1				23				1				1				124				8				8
Commercial real estate			13,010				654				314				14,479				857				498				12,383				959				710
Construction			16,452				1,076				359				23,027				1,428				706				26,849				2,572				1,750
Commercial business loans			958				62				32				674				54				54				690				123				115
Total impaired loans		$	40,763			$	2,312			$	1,190			$	51,672			$	3,337			$	2,172			$	49,677			$	4,434			$	3,286

 

The following table summarizes the TDRs at the dates indicated:

 

		December 31,
		2013				2012
		(In thousands)
TDRs on accrual status:
One- to four-family		$	2,588			$	1,992
Multi-family			109				110
Home equity lines of credit			21				22
Commercial real estate			1,368				1,393
Construction			—				3,319
Total TDRs on accrual status			4,086				6,836
TDRs on non-accrual status:
One- to four-family			1,500				2,493
Commercial real estate			4,309				4,466
Construction			9,489				3,838
Commercial business loans			192				—
Total TDRs on non-accrual status			15,490				10,797
Total TDRs		$	19,576			$	17,633

The following is a summary of TDRs modified during the periods indicated:

 

		Years Ended December 31,
		2013												2012												2011
		Number of				Pre- Modification				Post- Modification				Number of				Pre- Modification				Post- Modification				Number of				Pre- Modification				Post- Modification
		Loans				Balance				Balance				Loans				Balance				Balance				Loans				Balance				Balance
		(Dollars In thousands)
Real estate loans:
One- to four-family			2			$	391			$	391				6			$	1,433			$	1,433				9			$	2,185			$	2,185
Multi-family			—				—				—				1				110				110				—				—				—
Commercial real estate			1				207				207				1				1,395				1,395				1				3,450				3,450
Construction			2				2,946				2,946				—				—				—				2				2,237				2,237
Total			5			$	3,544			$	3,544				8			$	2,938			$	2,938				12			$	7,872			$	7,872

The following provides information on how loans were modified as TDRs during the periods indicated:

 

		Years Ended December 31,
		2013				2012				2011
		(In thousands)
Adjusted interest rates		$	391			$	1,433			$	5,635
Extended maturity dates			2,946				—				—
Combination of rate and maturity			207				1,505				2,237
Total		$	3,544			$	2,938			$	7,872

For loans modified as TDRs during the year ended December 31, 2013, the Company adjusted the interest rates on two loans with rate adjustments ranging from 1.50% to 2.63% and extended the maturity dates for three loans with extended periods ranging from nine months to 10 years. The loans modified as TDRs during 2012 primarily consisted of a loan with a rate reduction of 4.50% and a maturity extension of 30 years. For the year ended December 31, 2011, loans modified as TDRs included five loans with maturity extensions ranging from 2 years to 16 years and five loans with rate adjustments ranging from 0.46% to 2.46%.

The Company generally places loans modified as TDRs on non-accrual status for a minimum period of six months. Loans modified as TDRs qualify for return to accrual status once they have demonstrated performance with the modified terms of the loan agreement for a minimum of six months and future payments are reasonably assured. TDRs are reported as impaired loans with an allowance established as part of the allocated component of the allowance for loan losses when the discounted cash flows of the impaired loan is lower than the carrying value of that loan. TDRs may be removed from impairment disclosures in the year following the restructure if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring. At December 31, 2013 and 2012, the allowance for loan losses included an allocated component of $12,000 and $226,000, respectively, with $996,000 and $0 in charge-offs related to the TDRs modified during the years ended December 31, 2013 and 2012, respectively.

 

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

 

		Years Ended December 31,
		2013								2012								2011
		Number of				Recorded				Number of				Recorded				Number of				Recorded
		Loans				Investment				Loans				Investment				Loans				Investment
		(Dollars In thousands)
Real estate loans:
One- to four-family			—			$	—				5			$	908				3			$	812
Construction			1				207				—				—				2				6,031
Total			1			$	207				5			$	908				5			$	6,843

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

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

The following tables provide information with respect to the Company’s risk rating:

 

		December 31,
		2013																2012
		Multi-family																Multi-family
		residential				Commercial								Commercial				residential				Commercial								Commercial
		real estate				real estate				Construction				business				real estate				real estate				Construction				business
		(In thousands)
Loans rated 1 - 3A		$	275,711			$	1,015,172			$	178,980			$	245,646			$	164,370			$	773,844			$	125,418			$	145,676
Loans rated 4 - 4A			1,665				4,315				—				4				8,455				10,216				29,551				1,582
Loans rated 5			10,796				12,921				29,819				1,355				6,123				11,582				18,286				556
Loans rated 6			—				—				—				—				—				—				—				—
Loans rated 7			—				—				—				—				—				—				—				—
Total		$	288,172			$	1,032,408			$	208,799			$	247,005			$	178,948			$	795,642			$	173,255			$	147,814

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