Document
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018
 
Commission file number 0-23695

Brookline Bancorp, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
04-3402944
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
131 Clarendon Street, Boston, MA
 
02116
(Address of principal executive offices)
 
(Zip Code)
 
(617) 425-4600
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  YES  x  NO  o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  YES  x  NO  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12-b-2 of the Exchange Act.
Large accelerated filer
 
x
 
Accelerated filer
 
o
 
 
 
 
 
 
 
Non-accelerated filer
 
o (Do not check if a smaller reporting company)
 
Smaller Reporting Company
 
o
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES  o  NO  x
                                                                                                                                                                                
At November 7, 2018, the number of shares of common stock, par value $0.01 per share, outstanding was 80,489,094.
 


Table of Contents

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I — FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets
 
At September 30, 2018
 
At December 31, 2017
 
(In Thousands Except Share Data)
ASSETS
 
 
 
Cash and due from banks
$
30,762

 
$
25,622

Short-term investments
23,114

 
35,383

Total cash and cash equivalents
53,876

 
61,005

Investment securities available-for-sale
534,788

 
540,124

Investment securities held-to-maturity (fair value of $112,282 and $108,523, respectively)
115,684

 
109,730

Equity securities held for trading
4,169

 

Total investment securities
654,641

 
649,854

Loans held-for-sale
937

 
2,628

Loans and leases:
 
 
 
Commercial real estate loans
3,281,045

 
3,075,777

Commercial loans and leases
1,777,984

 
1,624,111

Consumer loans
1,168,678

 
1,030,791

Total loans and leases
6,227,707

 
5,730,679

Allowance for loan and lease losses
(59,997
)
 
(58,592
)
Net loans and leases
6,167,710

 
5,672,087

Restricted equity securities
63,963

 
59,369

Premises and equipment, net of accumulated depreciation of $68,771 and $63,423, respectively
77,886

 
80,283

Deferred tax asset
22,249

 
15,061

Goodwill
160,427

 
137,890

Identified intangible assets, net of accumulated amortization of $35,281 and $33,738, respectively
6,623

 
6,044

Other real estate owned ("OREO") and repossessed assets, net
3,934

 
4,419

Other assets
108,350

 
91,609

Total assets
$
7,320,596

 
$
6,780,249

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Deposits:
 
 
 
Demand checking accounts
$
1,017,234

 
$
942,583

Interest-bearing deposits:
 
 
 
NOW accounts
322,587

 
350,568

Savings accounts
612,210

 
646,359

Money market accounts
1,623,220

 
1,724,363

Certificate of deposit accounts
1,658,360

 
1,207,470

Total interest-bearing deposits
4,216,377

 
3,928,760

Total deposits
5,233,611

 
4,871,343

Borrowed funds:
 
 
 
Advances from the Federal Home Loan Bank of Boston ("FHLBB")
959,446

 
889,909

Subordinated debentures and notes
83,392

 
83,271

Other borrowed funds
40,048

 
47,639

Total borrowed funds
1,082,886

 
1,020,819

Mortgagors' escrow accounts
8,227

 
7,686

Accrued expenses and other liabilities
96,047

 
67,818

Total liabilities
6,420,771

 
5,967,666

 
 
 
 
Commitments and contingencies (Note 12)

 

Stockholders' Equity:
 
 
 
Brookline Bancorp, Inc. stockholders' equity:
 
 
 
Common stock, $0.01 par value; 200,000,000 shares authorized; 85,177,172 shares issued and 81,695,695 shares issued, respectively
852

 
817

Additional paid-in capital
753,941

 
699,976

Retained earnings, partially restricted
200,151

 
161,217

Accumulated other comprehensive loss
(15,599
)
 
(5,950
)
Treasury stock, at cost; 4,291,317 shares and 4,440,665 shares, respectively
(48,334
)
 
(51,454
)
Unallocated common stock held by Employee Stock Ownership Plan ("ESOP"); 118,050 shares and 142,332 shares, respectively
(643
)
 
(776
)
Total Brookline Bancorp, Inc. stockholders' equity
890,368

 
803,830

Noncontrolling interest in subsidiary
9,457

 
8,753

Total stockholders' equity
899,825

 
812,583

Total liabilities and stockholders' equity
$
7,320,596

 
$
6,780,249


See accompanying notes to unaudited consolidated financial statements.
1

Table of Contents

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Income
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In Thousands Except Share Data)
Interest and dividend income:
 
 
 
 
 
 
 
Loans and leases
$
75,877

 
$
63,054

 
$
216,478

 
$
182,750

Debt securities
3,585

 
3,154

 
10,471

 
9,310

Marketable and restricted equity securities
1,029

 
788

 
2,956

 
2,311

Short-term investments
145

 
180

 
444

 
342

Total interest and dividend income
80,636

 
67,176

 
230,349

 
194,713

Interest expense:
 
 
 
 
 
 
 
Deposits
11,916

 
5,984

 
28,234

 
16,607

Borrowed funds
6,388

 
4,349

 
17,575

 
12,582

Total interest expense
18,304

 
10,333

 
45,809

 
29,189

Net interest income
62,332

 
56,843

 
184,540

 
165,524

Provision for credit losses
2,717

 
2,911

 
4,828

 
17,186

Net interest income after provision for credit losses
59,615

 
53,932

 
179,712

 
148,338

Non-interest income:
 
 
 
 
 
 
 
Deposit fees
2,648

 
2,547

 
7,731

 
7,508

Loan fees
417

 
282

 
1,037

 
772

Loan level derivative income, net
2,192

 
844

 
3,629

 
1,432

Gain on sales of investment securities, net

 

 
1,162

 
11,393

Gain on sales of loans and leases held-for-sale
535

 
1,049

 
1,556

 
1,709

Other
1,277

 
1,251

 
3,648

 
3,544

Total non-interest income
7,069

 
5,973

 
18,763

 
26,358

Non-interest expense:
 
 
 
 
 
 
 
Compensation and employee benefits
22,338

 
21,067

 
67,217

 
61,761

Occupancy
3,913

 
3,650

 
11,751

 
10,952

Equipment and data processing
4,601

 
4,210

 
13,587

 
12,437

Professional services
1,075

 
973

 
3,274

 
3,115

FDIC insurance
846

 
842

 
1,995

 
2,648

Advertising and marketing
1,068

 
839

 
3,243

 
2,513

Amortization of identified intangible assets
537

 
519

 
1,543

 
1,570

Merger and acquisition expense
22

 
205

 
3,261

 
205

Other
2,910

 
3,103

 
9,079

 
8,758

Total non-interest expense
37,310

 
35,408

 
114,950

 
103,959

Income before provision for income taxes
29,374

 
24,497

 
83,525

 
70,737

Provision for income taxes
6,140

 
8,330

 
19,134

 
24,924

Net income before noncontrolling interest in subsidiary
23,234

 
16,167

 
64,391

 
45,813

Less: net income attributable to noncontrolling interest in subsidiary
774

 
801

 
2,467

 
2,122

Net income attributable to Brookline Bancorp, Inc.
$
22,460

 
$
15,366

 
$
61,924

 
$
43,691

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.28

 
$
0.20

 
$
0.78

 
$
0.59

Diluted
0.28

 
0.20

 
0.78

 
0.59

Weighted average common shares outstanding during the year:
 
 
 
 
 
 
 
Basic
80,315,050

 
76,452,539

 
79,471,238

 
73,743,658

Diluted
80,515,467

 
76,759,430

 
79,740,992

 
74,117,180

Dividends declared per common share
$
0.10

 
$
0.09

 
$
0.29

 
$
0.27



See accompanying notes to unaudited consolidated financial statements.
2

Table of Contents

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Comprehensive Income
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In Thousands)
Net income before noncontrolling interest in subsidiary
$
23,234

 
$
16,167

 
$
64,391

 
$
45,813

 
 
 
 
 
 
 
 
Investment securities available-for-sale:
 
 
 
 
 
 
 
Unrealized securities holding (losses) gains
(2,803
)
 
439

 
(12,449
)
 
3,002

Income tax expense (benefit)
619

 
(157
)
 
2,747

 
(1,077
)
Net unrealized securities holding (losses) gains before reclassification adjustments, net of taxes
(2,184
)
 
282

 
(9,702
)
 
1,925

Less reclassification adjustments for securities gains included in net income:
 
 
 
 
 
 
 
Loss on sales of securities, net

 

 
(68
)
 

Income tax benefit

 

 
15

 

Net reclassification adjustments for securities gains included in net income

 

 
(53
)
 

Net unrealized securities holding (losses) gains
(2,184
)
 
282

 
(9,649
)
 
1,925

 
 
 
 
 
 
 
 
Comprehensive income
21,050

 
16,449

 
54,742

 
47,738

Less: Net income attributable to noncontrolling interest in subsidiary
774

 
801

 
2,467

 
2,122

Comprehensive income attributable to Brookline Bancorp, Inc.
$
20,276

 
$
15,648

 
$
52,275

 
$
45,616




See accompanying notes to unaudited consolidated financial statements.
3

Table of Contents

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 2018 and 2017
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Treasury
Stock
 
Unallocated
Common Stock
Held by ESOP
 
Total Brookline
Bancorp, Inc.
Stockholders'
Equity
 
Noncontrolling
Interest in
Subsidiary
 
Total Stockholders'
Equity
 
(In Thousands)
Balance at December 31, 2017
$
817

 
$
699,976

 
$
161,217

 
$
(5,950
)
 
$
(51,454
)
 
$
(776
)
 
$
803,830

 
$
8,753

 
$
812,583

Net income attributable to Brookline Bancorp, Inc. 

 

 
61,924

 

 

 

 
61,924

 

 
61,924

Net income attributable to noncontrolling interest in subsidiary

 

 

 

 

 

 

 
2,467

 
2,467

Common stock issued for acquisition
35

 
55,148

 

 

 

 

 
55,183

 

 
55,183

Issuance of noncontrolling units

 

 

 

 

 

 

 
130

 
130

Other comprehensive income

 

 


 
(9,649
)
 

 

 
(9,649
)
 

 
(9,649
)
Common stock dividends of $0.29 per share

 

 
(22,990
)
 

 

 

 
(22,990
)
 

 
(22,990
)
Dividend distribution to owners of noncontrolling interest in subsidiary

 

 

 

 

 

 

 
(1,893
)
 
(1,893
)
Restricted stock awards, net of awards surrendered

 
(1,472
)
 

 

 
3,120

 

 
1,648

 

 
1,648

Common stock held by ESOP committed to be released (24,282 shares)

 
289

 

 

 

 
133

 
422

 

 
422

Balance at September 30, 2018
$
852

 
$
753,941

 
$
200,151

 
$
(15,599
)
 
$
(48,334
)
 
$
(643
)
 
$
890,368

 
$
9,457

 
$
899,825


 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Treasury
Stock
 
Unallocated
Common Stock
Held by ESOP
 
Total Brookline
Bancorp, Inc.
Stockholders'
Equity
 
Noncontrolling
Interest in
Subsidiary
 
Total Stockholders'
Equity
 
(In Thousands)
Balance at December 31, 2016
$
757

 
$
616,734

 
$
136,671

 
$
(3,818
)
 
$
(53,837
)
 
$
(963
)
 
$
695,544

 
$
7,205

 
$
702,749

Net income attributable to Brookline Bancorp, Inc. 

 

 
43,691

 

 

 

 
43,691

 

 
43,691

Net income attributable to noncontrolling interest in subsidiary

 

 

 

 

 

 

 
2,122

 
2,122

Issuance of common stock
60

 
81,943

 

 

 

 

 
82,003

 

 
82,003

Issuance of noncontrolling interest

 

 

 

 

 

 

 
118

 
118

Other comprehensive income

 

 


 
1,925

 

 

 
1,925

 

 
1,925

Common stock dividends of $0.27 per share

 

 
(20,137
)
 

 

 

 
(20,137
)
 

 
(20,137
)
Dividend distribution to owners of noncontrolling interest in subsidiary

 

 

 

 

 

 

 
(1,671
)
 
(1,671
)
Compensation under recognition and retention plans

 
(1,016
)
 

 

 
2,385

 

 
1,369

 

 
1,369

Common stock held by ESOP committed to be released (25,767 shares)

 
227

 

 

 

 
140

 
367

 

 
367

Balance at September 30, 2017
$
817

 
$
697,888

 
$
160,225

 
$
(1,893
)
 
$
(51,452
)
 
$
(823
)
 
$
804,762

 
$
7,774

 
$
812,536





See accompanying notes to unaudited consolidated financial statements.
4

Table of Contents

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
 
Nine Months Ended September 30,
 
2018
 
2017
 
(In Thousands)
Cash flows from operating activities:
 
 
 
Net income attributable to Brookline Bancorp, Inc.
$
61,924

 
$
43,691

Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
Net income attributable to noncontrolling interest in subsidiary
2,467

 
2,122

Provision for credit losses
4,828

 
17,186

Origination of loans and leases held-for-sale
(19,286
)
 
(20,231
)
Proceeds from sales of loans and leases held-for-sale, net
22,418

 
23,852

Deferred income tax benefit
(4,456
)
 
(3,923
)
Depreciation of premises and equipment
5,594

 
5,446

Amortization of investment securities premiums and discounts, net
1,546

 
1,320

Amortization of deferred loan and lease origination costs, net
5,187

 
4,909

Amortization of identified intangible assets
1,543

 
1,570

Amortization of debt issuance costs
75

 
75

Amortization (accretion) of acquisition fair value adjustments, net
191

 
(1,467
)
Gain on sales of investment securities, net
(1,162
)
 
(11,393
)
Gain on sales of loans and leases held-for-sale
(1,556
)
 
(1,709
)
Gain on sales of OREO and other repossessed assets, net

 
(79
)
Write-down of OREO and other repossessed assets
375

 
430

Compensation under recognition and retention plans
1,632

 
1,720

ESOP shares committed to be released
422

 
367

Net change in:
 
 
 
Cash surrender value of bank-owned life insurance
(775
)
 
(780
)
Equity securities held for trading
(4,169
)
 

Other assets
(15,966
)
 
(6,117
)
Accrued expenses and other liabilities
28,223

 
1,301

Net cash provided from operating activities
89,055

 
58,290

 
 
 
 
Cash flows from investing activities:
 
 
 
Proceeds from sales of investment securities available-for-sale
1,470

 

Proceeds from maturities, calls, and principal repayments of investment securities available-for-sale
64,161

 
54,966

Purchases of investment securities available-for-sale
(73,852
)
 
(52,448
)
Proceeds from maturities, calls, and principal repayments of investment securities held to maturity
2,523

 
3,154

Purchases of investment securities held-to-maturity
(8,915
)
 
(23,884
)
Proceeds from redemption/sales of restricted equity securities
9,128

 
18,111

Purchase of restricted equity securities
(12,492
)
 
(4,342
)
Proceeds from sales of loans and leases held-for-investment, net
4,372

 
25,445

Net increase in loans and leases
(511,212
)
 
(273,700
)
Acquisitions, net of cash and cash equivalents acquired
(24,659
)
 

Purchase of premises and equipment, net
(3,320
)
 
(10,604
)
 
 
 
(Continued)


See accompanying notes to unaudited consolidated financial statements.
5

Table of Contents

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows (Continued)
 
Nine Months Ended September 30,
 
2018
 
2017
 
(In Thousands)
Proceeds from sales of OREO and other repossessed assets
2,001

 
2,873

Net cash used for investing activities
(550,795
)
 
(260,429
)
 
 
 
 
Cash flows from financing activities:
 
 
 
(Decrease) increase in demand checking, NOW, savings and money market accounts
(88,622
)
 
68,300

Increase in certificates of deposit
450,318

 
126,307

Proceeds from FHLBB advances
5,929,608

 
3,158,111

Repayment of FHLBB advances
(5,860,071
)
 
(3,195,278
)
(Decrease) in other borrowed funds, net
(7,591
)
 
(20,120
)
Increase in mortgagors' escrow accounts, net
541

 
506

Proceeds from issuance of common stock

 
82,003

Common stock issued for acquisition
55,181

 

Payment of dividends on common stock
(22,990
)
 
(20,137
)
Payment of income taxes for shares withheld in share based activity

 
(294
)
Proceeds from issuance of noncontrolling units
130

 
118

Payment of dividends to owners of noncontrolling interest in subsidiary
(1,893
)
 
(1,671
)
Net cash provided from financing activities
454,611

 
197,845

Net (decrease) in cash and cash equivalents
(7,129
)
 
(4,294
)
Cash and cash equivalents at beginning of period
61,005

 
67,657

Cash and cash equivalents at end of period
$
53,876

 
$
63,363

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest on deposits, borrowed funds and subordinated debt
$
46,133

 
$
31,411

Income taxes
15,098

 
26,141

Non-cash investing activities:
 
 
 
Transfer from loans and leases held-for-sale to loans and leases
$

 
$
7,500

Transfer from loans to other real estate owned
1,891

 
6,223

Acquisition of First Commons Bank, N.A.:
 
 
 
Fair value of assets acquired, net of cash and cash equivalents acquired
$
292,025

 
$

Fair value of liabilities assumed
278,988

 




See accompanying notes to unaudited consolidated financial statements.
6

Table of Contents

BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(1) Basis of Presentation
Overview
Brookline Bancorp, Inc. (the "Company") is a bank holding company (within the meaning of the Bank Holding Company Act of 1956, as amended) and the parent of Brookline Bank, a Massachusetts-chartered savings bank; Bank Rhode Island ("BankRI"), a Rhode Island-chartered financial institution; and First Ipswich Bank ("First Ipswich"), a Massachusetts-chartered trust company (collectively referred to as the "Banks"). The Banks are all members of the Federal Reserve System. The Company is also the parent of Brookline Securities Corp. ("BSC"). The Company's primary business is to provide commercial, business and retail banking services to its corporate, municipal and retail customers through the Banks and its non-bank subsidiaries.
Brookline Bank, which includes its wholly-owned subsidiaries BBS Investment Corp., Longwood Securities Corp. ("LSC") and its 84.1%-owned subsidiary, Eastern Funding LLC ("Eastern Funding"), operates 25 full-service banking offices in the greater Boston metropolitan area with two additional lending offices. BankRI, which includes its wholly-owned subsidiaries, Acorn Insurance Agency, BRI Realty Corp., Macrolease Corporation ("Macrolease"), BRI Investment Corp. and its wholly-owned subsidiary, BRI MSC Corp., operates 20 full-service banking offices in the greater Providence, Rhode Island area. First Ipswich, which includes its wholly-owned subsidiaries First Ipswich Insurance Agency and First Ipswich Securities II Corp., operates six full-service banking offices on the north shore of eastern Massachusetts.
The Company's activities include acceptance of commercial, municipal and retail deposits, origination of mortgage loans on commercial and residential real estate located principally in all New England states, origination of commercial loans and leases to small- and mid-sized businesses, investment in debt and equity securities, and the offering of cash management and investment advisory services. The Company also provides specialty equipment financing through its subsidiaries Eastern Funding, which is based in New York City, New York, and Macrolease, which is based in Plainview, New York.
The Company and the Banks are supervised, examined and regulated by the Board of Governors of the Federal Reserve System ("FRB"). As a Massachusetts-chartered savings bank and trust company respectively, Brookline Bank and First Ipswich are also subject to regulation under the laws of the Commonwealth of Massachusetts and the jurisdiction of the Massachusetts Division of Banks. As a Rhode Island-chartered financial institution, BankRI is subject to regulation under the laws of the State of Rhode Island and the jurisdiction of the Banking Division of the Rhode Island Department of Business Regulation.
The Federal Deposit Insurance Corporation ("FDIC") offers insurance coverage on all deposits up to $250,000 per depositor at each of the Banks. As FDIC-insured depository institutions, the Banks are also secondarily subject to supervision, examination and regulation by the FDIC. Additionally, as a Massachusetts-chartered savings bank, the deposits of Brookline Bank are insured by the Depositors Insurance Fund ("DIF"), a private industry-sponsored insurance company. The DIF insures savings bank deposits in excess of the FDIC insurance limits. As such, Brookline Bank offers 100% insurance on all deposits as a result of a combination of insurance from the FDIC and the DIF. Brookline Bank is required to file reports with the DIF.
Basis of Financial Statement Presentation
The unaudited consolidated financial statements of the Company presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by U.S. generally accepted accounting principles (“GAAP”). In the opinion of Management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying consolidated financial statements have been included. Interim results are not necessarily reflective of the results of the entire year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation.

In preparing these consolidated financial statements, Management is required to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, income, expenses and disclosure of contingent assets and liabilities. Actual results could differ from those estimates based upon changing conditions, including economic conditions and future events. Material estimates that are particularly susceptible to significant changes in the near-term include the determination of the allowance for loan and lease losses, the determination of fair market values of assets and liabilities,

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

including acquired loans and leases, the review of goodwill and intangibles for impairment and the review of deferred tax assets for valuation allowances.
 
The judgments used by Management in applying these critical accounting policies may be affected by a further and prolonged deterioration in the economic environment, which may result in changes to future financial results. For example, subsequent evaluations of the loan and lease portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan and lease losses in future periods, and the inability to collect outstanding principal may result in increased loan and lease losses.

Reclassification

Certain previously reported amounts have been reclassified to conform to the current year's presentation.

Recent Accounting Pronouncements
In August 2018, FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), to add additional guidance to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance for determining when the arrangement includes a software license. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption of the amendments in this update is permitted, including adoption in any interim period, for all entities. Management is still determining the impact of this ASU, if any, as of September 30, 2018.
In August 2018, FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20), to modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This ASU is effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. Early adoption is permitted. Management believes that this ASU does apply and has not determined the impact, if any, as of September 30, 2018.
In February 2016, FASB issued ASU 2016-02, Leases (“ASU 2016-02”). This ASU requires lessees to record most leases on their balance sheet but recognize expenses on their income statements in a manner similar to current accounting. This ASU also eliminates current real estate-specific provisions for all companies. For lessors, this ASU modifies the classification criteria and the accounting for sales-type and direct financing leases. Subsequently, in July 2018, FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases. This ASU was issued to clarify the Codification or to correct unintended application of guidance within ASU 2016-02. Also in July 2018, FASB issued ASU 2018-11, “Targeted Improvements” (“ASU 2018-11”), which allows for an optional transition method in which the provisions of Topic 842 would be applied upon the adoption date and would not have to be retroactively applied to the earliest reporting period presented in the consolidated financial statements. ASU 2016-02, 2018-10, and 2018-11 are all effective for fiscal years beginning after December 15, 2018, including interim periods therein. Early adoption is permitted. Management has determined that these ASUs do apply as of September 30, 2018. Management has assembled a project team that meets regularly to address the changes pursuant to Topic 842. The Company rents premises used in business operations under non-cancelable operating leases, which currently are not reflected in its Consolidated Balance Sheet. As disclosed in Note 12, the Company was committed to $29.4 million of future minimum lease payments under these non-cancelable operating leases. Upon adoption of ASU 2016-02 on January 1, 2019, the Company expects to report increased assets and liabilities as a result of recognizing right of-use assets and lease liabilities in its Consolidated Balance Sheets. The Company does not expect a material change to the timing of expense recognition in the Consolidated Statements of Income.
In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), to modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. Management believes that this ASU does apply and has not determined the impact, if any, as of September 30, 2018.
In February 2018, FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU was issued to add improvements to update ASU 2016-01 to increase stakeholders’ awareness of the amendments and to expedite the

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

improvements. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017 and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01. Management has determined that ASU 2018-03 does apply and has determined the impact to be immaterial as of September 30, 2018.
In February 2018, the FASB issued Accounting Standards Update (ASU) No. 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" was issued to address a narrow-scope financial reporting issue that arose as a consequence of the change in the tax law. On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (the “Tax Reform Act”). The ASU No. 2018-02 requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate. The amount of the reclassification would be the difference between the historical corporate income tax rate of 35 percent and the newly enacted 21 percent corporate income tax rate. The ASU No. 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted, including adoption in any interim period, for (i) public business entities for reporting periods for which financial statements have not yet been issued and (ii) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The changes are required to be applied retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 is recognized. Management early adopted this ASU as of December 31, 2017, which resulted in the reclassification from accumulated other comprehensive loss to retained earnings totaling $1.1 million, reflected in the Consolidated Statements of Changes in Stockholders' Equity.
In November 2017, the FASB issued ASU 2017-14, Income Statement-Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606): Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 116 and SEC Release No. 33-10403. This ASU was issued to amend certain SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No.116 and SEC Release No. 33-10403, which bring existing guidance into conformity with Topic 606, Revenue from Contract with Customers. The ASU was effective for annual periods beginning after December 15, 2017. Management has adopted this ASU as of January 1, 2018 and has determined the impact to be immaterial.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. FASB issued this Update to address the diversity in practice as well as the cost and complexity when applying the guidance in Topic 718, Compensation - Stock Compensation, to a change to the terms or conditions of a share-based payment award. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017. Management adopted this ASU as of January 1, 2018 and has determined the impact to be immaterial.
In March 2017, the FASB issued Accounting Standards Update ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715). This ASU was issued primarily to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. This ASU is effective for annual reporting periods beginning after December 15, 2017. Management adopted this ASU as of January 1, 2018 and has determined the impact to be immaterial.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This ASU was issued to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. For public entities, this ASU is effective for the fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted and application should be on a prospective basis. Management has evaluated this ASU and as of December 31, 2017, the Company has adopted the ASU and determined the impact to be immaterial.
In June 2016, the FASB issued ASU 2016-13, Financial instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The intent of this ASU is to replace the current GAAP method of calculating credit losses. Current GAAP uses a higher threshold at which likely losses can be calculated and recorded. The new process will require institutions to account for likely losses that originally would not have been part of the calculation. The calculation will incorporate future forecasting in addition to historical and current measures. For public entities that file with the SEC, this ASU is effective for the fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This ASU must be applied prospectively to debt securities marked as other than temporarily impaired. A retrospective approach will

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

be applied cumulatively to retained earnings. Early adoption is permitted as of the fiscal years beginning after December 15, 2018. Management has determined that ASU 2016-13 does apply, but has not determined the impact, if any, as of September 30, 2018. In preparation for the adoption in 2020 of this ASU, management formed a steering committee to oversee the adoption of ASU 2016-13. The steering committee, along with a project team, has developed an approach for implementation and has selected a third party software service provider. The project team is in the testing phase of the third party software.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments. This ASU significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods therein. Management adopted ASU 2016-01 as of January 1, 2018 and management has determined the impact to be immaterial.
Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), was issued in May 2014 and provides a revenue recognition framework for any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other accounting standards. As issued, ASU 2014-09 was effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period with early adoption not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, Accounting Standards Update No. 2015-14, “Deferral of the Effective Date” (“ASU 2015-14”) was issued and delayed the effective date of ASU 2014-09 to annual and interim periods in fiscal years beginning after December 15, 2017. In 2016, Accounting Standards Update No. 2016-08, “Principal versus Agent Considerations” (“ASU 2016-08”), Accounting Standards Update No. 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”) and Accounting Standards Update No. 2016-12, “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”) were issued. These ASUs did not change the core principle for revenue recognition in Topic 606; instead, the amendments provided more detailed guidance in a few areas and additional implementation guidance and examples to reduce the degree of judgment necessary to comply with Topic 606. The effective date and transition requirements for ASU 2016-08, ASU 2016-10 and ASU 2016-12 were the same as those provided by ASU 2015-14. Management assembled a project team to address the changes pursuant to Topic 606. The project team completed a scope assessment and contract review for in-scope revenue streams. Topic 606 did not apply to several income generating streams. Management excluded from their analysis, income associated with financial instruments, gains on sale of investment securities and loans, gains on Low Income Housing Tax Credits ("LIHTC") and loan level derivative income. Revenue streams that were included were service charges on deposit accounts, loan fees, and income received through a third party relationship. Management adopted the provisions of ASU 2014-09 effective January 1, 2018, using the modified retrospective transition method. The adoption did not have a material impact on the Company's consolidated financial statements. See Note 13, "Revenue from Contracts with Customers," for further details.
(2) Acquisitions
First Commons Bank, N.A.
On March 1, 2018, the Company completed the acquisition (the “Transaction”) of First Commons Bank. First Commons Bank was merged with and into the Company’s subsidiary bank, Brookline Bank. First Commons Bank had two branch locations in Newton Centre and Wellesley, Massachusetts. These branch locations were closed on June 1, 2018 and consolidated into Brookline Bank’s existing branch locations in Newton Centre and Wellesley, Massachusetts.
The Transaction qualified as a tax-free reorganization for federal income tax purposes. The total Transaction consideration was $56.0 million. First Commons Bank stockholders received, for each share of First Commons Bank common stock, the right to receive 1.089 shares of the Company’s common stock with cash in lieu of fractional shares, options, and warrants, resulting in a total cash consideration payment of $851 thousand and an increase to the Company’s outstanding shares of 3,481,477 shares.
The Company accounted for the Transaction using the estimated fair value of assets and liabilities assumed as of the acquisition date. The excess of consideration paid over the fair value of identifiable net assets was recorded as goodwill in the consolidated financial statements. Accordingly, the Company recorded merger and acquisition expenses of $22 thousand and $3.3 million during the three and nine months ended September 30, 2018, respectively.

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of the date of the acquisition:
 
Net Assets Acquired at
Fair Value
 
(In Thousands)
ASSETS
 
Cash
$
42,995

Restricted stock
1,884

Loans
262,095

Premises and equipment
583

Goodwill
23,005

Core deposit and other intangibles
2,122

Other assets
2,336

Total assets acquired
335,020

LIABILITIES
 
Deposits
273,701

Borrowings
5,000

Other liabilities
287

Total liabilities assumed
278,988

Purchase price
$
56,032

Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:
Cash and Cash Equivalents
The fair values of cash and cash equivalents approximate the respective carrying amounts because the instruments are payable on demand or have short-term maturities.
Restricted Stock
The fair value of restricted stock approximate the respective carrying amount. The stock is comprised of $880 thousand of FHLBB stock and $1.0 million of FRB stock.
Loans
The loans acquired were recorded at fair value without a carryover of the allowance for loan losses. There were no credit related issues with the acquired portfolio. For the loan purchase accounting, management used the following assumptions: no specific credit mark valuations as determined by the Company's Credit Risk Management, segregation of portfolio into certain loan categories, loan level valuations versus a pooled approach, prepayment rate assumptions and market discount rates.
The Company recorded a $1.6 million discount from the results of the loan accounting valuation. There was $133 thousand and $311 thousand of accretion recorded during the three and nine months ended September 30, 2018.
Deposits - Core Deposit Intangible ("CDI")
Accounts included in the CDI include demand deposits, NOW accounts, money market accounts and savings accounts. The fair value of the CDI was derived from using the following assumptions: account retention rates, alternative cost of funds, effective cost of funds, cost savings, present value of annual net cost savings and market discount rate.
The Company recorded a $2.1 million CDI from the results of the deposit valuation. There was $123 thousand and $287 thousand of amortization recorded during the three and nine months ended September 30, 2018.

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

Certificates of Deposits
The certificates of deposits were recorded at fair value. The determination of the fair value was calculated using a discounted cash flow analysis, which involved present valuing the contractual payments over the remaining life of the certificate of deposit at market based-rates.
The Company recorded a $1.2 million premium from the results of the certificate of deposit valuation. There was $245 thousand and $572 thousand of amortization recorded during the three and nine months ended September 30, 2018.
Borrowings
The borrowings at acquisition typically require a fair market valuation performed as of the acquisition date. The difference between the current recorded balance and the fair market value will be reflected as a fair value mark. The Company’s Treasury team performed two valuations to review the fair value mark. After reviewing the results, the fair value mark was immaterial and management decided not to record any fair market value adjustment on the acquired borrowings.

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

(3) Investment Securities
The following tables set forth investment securities available-for-sale, held-to-maturity and equity securities held for trading at the dates indicated:
 
At September 30, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In Thousands)
Investment securities available-for-sale:
 
 
 
 
 
 
 
GSE debentures
$
184,118

 
$

 
$
5,802

 
$
178,316

GSE CMOs
112,325

 
11

 
6,395

 
105,941

GSE MBSs
177,324

 
139

 
6,681

 
170,782

SBA commercial loan asset-backed securities
53

 

 

 
53

Corporate debt obligations
46,657

 

 
1,023

 
45,634

U.S. Treasury bonds
33,569

 

 
467

 
33,102

Marketable equity securities
964

 

 
4

 
960

Total investment securities available-for-sale
$
555,010

 
$
150

 
$
20,372

 
$
534,788

Investment securities held-to-maturity:
 
 
 
 
 
 
 
GSE debentures
$
50,540

 
$

 
$
1,828

 
$
48,712

GSEs MBSs
11,924

 

 
417

 
11,507

Municipal obligations
52,720

 

 
1,156

 
51,564

Foreign government obligations
500

 

 
1

 
499

Total investment securities held-to-maturity
$
115,684


$


$
3,402


$
112,282

Equity securities held for trading
$
4,169

 
$

 
$

 
$
4,169

 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In Thousands)
Investment securities available-for-sale:
 
 
 
 
 
 
 
GSE debentures
$
151,483

 
$
70

 
$
1,629

 
$
149,924

GSE CMOs
131,082

 
27

 
4,087

 
127,022

GSE MBSs
191,281

 
354

 
2,322

 
189,313

SBA commercial loan asset-backed securities
73

 

 
1

 
72

Corporate debt obligations
62,811

 
110

 
238

 
62,683

U.S. Treasury bonds
8,785

 
7

 
62

 
8,730

Trust preferred securities
1,471

 

 
73

 
1,398

Marketable equity securities
978

 
13

 
9

 
982

Total investment securities available-for-sale
$
547,964

 
$
581

 
$
8,421

 
$
540,124

Investment securities held-to-maturity:
 
 
 
 
 
 
 
GSE debentures
$
41,612

 
$

 
$
811

 
$
40,801

GSEs MBSs
13,923

 

 
218

 
13,705

Municipal obligations
53,695

 
159

 
337

 
53,517

Foreign government obligations
500

 

 

 
500

Total investment securities held-to-maturity
$
109,730

 
$
159

 
$
1,366

 
$
108,523

As of September 30, 2018, the fair value of all investment securities available-for-sale was $534.8 million, with net unrealized losses of $20.2 million, compared to a fair value of $540.1 million and net unrealized losses of $7.8 million as of December 31, 2017. As of September 30, 2018, $528.1 million, or 98.7% of the portfolio, had gross unrealized losses of $20.4

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

million, compared to $469.2 million, or 86.9% of the portfolio, with gross unrealized losses of $8.4 million as of December 31, 2017.
As of September 30, 2018, the fair value of all investment securities held-to-maturity was $112.3 million, with net unrealized losses of $3.4 million, compared to a fair value of $108.5 million with net unrealized losses of $1.2 million as of December 31, 2017. As of September 30, 2018, $112.2 million, or 100.0% of the portfolio, had gross unrealized losses of $3.4 million. As of December 31, 2017, $92.9 million, or 85.6% of the portfolio had gross unrealized losses of $1.4 million.
In the third quarter of 2018, the company acquired $4.2 million of equity securities held for trading. As of December 31, 2017, there were no equity securities held for trading.
Investment Securities as Collateral
As of September 30, 2018 and December 31, 2017, respectively, $405.1 million and $431.2 million of investment securities were pledged as collateral for repurchase agreements; municipal deposits; treasury, tax and loan deposits; swap agreements; FRB borrowings; and FHLBB borrowings. The Banks did not have any outstanding FRB borrowings as of September 30, 2018 and December 31, 2017.
Other-Than-Temporary Impairment ("OTTI")
Investment securities as of September 30, 2018 and December 31, 2017 that have been in a continuous unrealized loss position for less than twelve months or twelve months or longer are as follows:
 
At September 30, 2018
 
Less than
Twelve Months
 
Twelve Months
or Longer
 
Total
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
(In Thousands)
Investment securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
$
97,352

 
$
2,448

 
$
80,964

 
$
3,354

 
$
178,316

 
$
5,802

GSE CMOs
31

 

 
105,427

 
6,395

 
105,458

 
6,395

GSE MBSs
56,271

 
1,567

 
108,812

 
5,114

 
165,083

 
6,681

SBA commercial loan asset-backed securities

 

 
53

 

 
53

 

Corporate debt obligations
33,398

 
485

 
12,236

 
538

 
45,634

 
1,023

U.S. Treasury bonds
28,461

 
258

 
4,641

 
209

 
33,102

 
467

Marketable equity securities
472

 
4

 

 

 
472

 
4

Temporarily impaired investment securities available-for-sale
215,985

 
4,762

 
312,133

 
15,610

 
528,118

 
20,372

Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
23,232

 
577

 
25,480

 
1,251

 
48,712

 
1,828

GSEs MBSs

 

 
11,460

 
417

 
11,460

 
417

Municipal obligations
38,354

 
616

 
13,210

 
540

 
51,564

 
1,156

Foreign government obligations

 

 
499

 
1

 
499

 
1

Temporarily impaired investment securities held-to-maturity
61,586


1,193


50,649


2,209


112,235


3,402

Total temporarily impaired investment securities
$
277,571


$
5,955


$
362,782


$
17,819


$
640,353


$
23,774


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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
December 31, 2017
 
Less than
Twelve Months
 
Twelve Months
or Longer
 
Total
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
(In Thousands)
Investment securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
$
120,409

 
$
1,263

 
$
12,481

 
$
366

 
$
132,890

 
$
1,629

GSE CMOs
2,862

 
34

 
123,548

 
4,053

 
126,410

 
4,087

GSE MBSs
94,985

 
753

 
74,782

 
1,569

 
169,767

 
2,322

SBA commercial loan asset-backed securities
34

 

 
33

 
1

 
67

 
1

Corporate debt obligations
30,978

 
154

 
2,423

 
84

 
33,401

 
238

U.S. Treasury bonds
4,767

 
62

 

 

 
4,767

 
62

Trust preferred securities

 

 
1,398

 
73

 
1,398

 
73

Marketable equity securities

 

 
503

 
9

 
503

 
9

Temporarily impaired investment securities available-for-sale
254,035

 
2,266

 
215,168

 
6,155

 
469,203

 
8,421

Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
GSE debentures
26,594

 
281

 
14,208

 
530

 
40,802

 
811

GSEs MBSs
1,996

 
15

 
11,674

 
203

 
13,670

 
218

Municipal obligations
30,542

 
235

 
7,408

 
102

 
37,950

 
337

Foreign government obligations

 

 
500

 

 
500

 

Temporarily impaired investment securities held-to-maturity
59,132

 
531

 
33,790

 
835

 
92,922

 
1,366

Total temporarily impaired investment securities
$
313,167

 
$
2,797

 
$
248,958

 
$
6,990

 
$
562,125

 
$
9,787

The Company performs regular analysis of the investment securities available-for-sale portfolio to determine whether a decline in fair value indicates that an investment security is OTTI. In making these OTTI determinations, management considers, among other factors, the length of time and extent to which the fair value has been less than amortized cost; projected future cash flows; credit subordination and the creditworthiness; capital adequacy and near-term prospects of the issuers.
Management also considers the Company's capital adequacy, interest-rate risk, liquidity and business plans in assessing whether it is more likely than not that the Company will sell or be required to sell the investment securities before recovery. If the Company determines that a decline in fair value is OTTI and that it is more likely than not that the Company will not sell or be required to sell the investment security before recovery of its amortized cost, the credit portion of the impairment loss is recognized in the Company's unaudited consolidated statement of income and the noncredit portion is recognized in accumulated other comprehensive income. The credit portion of the OTTI impairment represents the difference between the amortized cost and the present value of the expected future cash flows of the investment security. If the Company determines that a decline in fair value is OTTI and it is more likely than not that it will sell or be required to sell the investment security before recovery of its amortized cost, the entire difference between the amortized cost and the fair value of the security will be recognized in the Company's unaudited consolidated statement of income.
Investment Securities Available-For-Sale Impairment Analysis
The following discussion summarizes, by investment security type, the basis for evaluating if the applicable investment securities within the Company’s available-for-sale portfolio were OTTI as of September 30, 2018. Based on the analysis below and the determination that, it is more likely than not that the Company will not sell or be required to sell the investment securities before recovery of its amortized cost. The Company's ability and intent to hold these investment securities until recovery is supported by the Company's strong capital and liquidity positions as well as its historically low portfolio turnover. As such, management has determined that the investment securities are not OTTI as of September 30, 2018. If market

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

conditions for investment securities worsen or the creditworthiness of the underlying issuers deteriorates, it is possible that the Company may recognize additional OTTI in future periods.
U.S. Government-Sponsored Enterprises
The Company invests in securities issued by U.S. Government-sponsored enterprises ("GSEs"), including GSE debentures, mortgage-backed securities ("MBSs"), and collateralized mortgage obligations ("CMOs"). GSE securities include obligations issued by the Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage Association ("GNMA"), the FHLBB and the Federal Farm Credit Bank. As of September 30, 2018, only GNMA MBSs and CMOs, and Small Business Administration ("SBA") commercial loan asset-backed securities in our available-for-sale portfolio with an estimated fair value of $20.9 million were backed explicitly by the full faith and credit of the U.S. Government, compared to $23.7 million as of December 31, 2017.
As of September 30, 2018, the Company owned 60 GSE debentures with a total fair value of $178.3 million, and a net unrealized loss of $5.8 million. As of December 31, 2017, the Company held 48 GSE debentures with a total fair value of $149.9 million, with a net unrealized loss of $1.6 million. As of September 30, 2018, 60 of the 60 securities in this portfolio were in an unrealized loss position. As of December 31, 2017, 43 of the 48 securities in this portfolio were in an unrealized loss position. All securities are performing and backed by the implicit (FHLB/FNMA/FHLMC) or explicit (GNMA/SBA) guarantee of the U.S Government. During the nine months ended September 30, 2018, the Company purchased a total of $33.9 million GSE debentures. This compares to $42.1 million purchased during the same period in 2017.
As of September 30, 2018, the Company owned 62 GSE CMOs with a total fair value of $105.9 million and a net unrealized loss of $6.4 million. As of December 31, 2017, the Company held 62 GSE CMOs with a total fair value of $127.0 million with a net unrealized loss of $4.1 million. As of September 30, 2018, 50 of the 62 securities in this portfolio were in an unrealized loss position. As of December 31, 2017, 47 of the 62 securities in this portfolio were in an unrealized loss position. All securities are performing and backed by the implicit (FHLB/FNMA/FHLMC) or explicit (GNMA) guarantee of the U.S Government. During the nine months ended September 30, 2018 and 2017, the Company did not purchase any GSE CMOs.
As of September 30, 2018, the Company owned 172 GSE MBSs with a total fair value of $170.8 million and a net unrealized loss of $6.5 million. As of December 31, 2017, the Company held 194 GSE MBSs with a total fair value of $189.3 million with a net unrealized loss of $2.0 million. As of September 30, 2018, 96 of the 172 securities in this portfolio were in an unrealized loss position. As of December 31, 2017, 82 of the 194 securities in this portfolio were in an unrealized loss position. All securities are performing and backed by the implicit (FHLB/FNMA/FHLMC) or explicit (GNMA) guarantee of the U.S Government. During the nine months ended September 30, 2018, the Company purchased a total of $15.2 million GSE MBSs, as compared to the same period in 2017, when the Company did not purchase any GSE MBSs.
SBA Commercial Loan Asset-Backed
As of September 30, 2018, the Company owned four SBA securities with a total fair value of $0.1 million, which approximated amortized cost. As of December 31, 2017, the Company owned five SBA securities with a total fair value of $0.1 million, which approximated amortized cost. As of September 30, 2018, four of the four securities in this portfolio were in an unrealized loss position. As of December 31, 2017, four of the five securities in this portfolio were in an unrealized loss position. All securities are performing and backed by the explicit guarantee of the U.S Government. During the nine months ended September 30, 2018 and 2017, the Company did not purchase any SBA securities.
Corporate Obligations
The Company may invest in high-quality corporate obligations to provide portfolio diversification and improve the overall yield on the portfolio. As of September 30, 2018, the Company held 13 corporate obligation securities with a total fair value of $45.6 million and a net unrealized loss of $1.0 million. As of December 31, 2017, the Company held 19 corporate obligation securities with a total fair value of $62.7 million and a net unrealized loss of $0.1 million. As of September 30, 2018, 13 of the 13 securities in this portfolio were in an unrealized loss position. As of December 31, 2017, nine of the nineteen securities in this portfolio were in an unrealized loss position. Full collection of the obligations is expected because the financial condition of the issuers is sound, they have not defaulted on scheduled payments, the obligations are rated investment grade, and the Company has the ability and intent to hold the obligations for a period of time to recover the amortized cost. During the nine months ended September 30, 2018 the Company did not purchase any corporate obligations, as compared to the same period in 2017, when the Company purchased a total of $10.3 million corporate obligations.

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

U.S. Treasury Bonds
The Company invests in securities issued by the U.S. government. As of September 30, 2018, the Company owned seven U.S. Treasury bonds with a total fair value of $33.1 million and an unrealized loss of $0.5 million. This compares to two U.S. Treasury bonds with a total fair value of $8.7 million and an unrealized loss of $0.1 million as of December 31, 2017. During the nine months ended September 30, 2018, the Company purchased a total of $24.7 million U.S. Treasury bonds, as compared to the same period in 2017, when the Company did not purchase any U.S. Treasury bonds.
Trust Preferred Securities
Trust preferred securities represent subordinated debt issued by financial institutions. As of September 30, 2018, the Company did not own any trust preferred securities. This compares to three trust preferred securities with a total fair value of $1.4 million and an unrealized loss of $0.1 million as of December 31, 2017.
Marketable Equity Securities
From time to time, the Company will invest in mutual funds for community reinvestment purposes. As of September 30, 2018 and December 31, 2017, the Company owned two marketable equity securities with a fair value of $1.0 million, which approximated amortized cost. As of September 30, 2018 and December 31, 2017, one of the two securities in this portfolio was in an unrealized loss position. During the nine months ended September 30, 2018 and 2017, the Company did not purchase any marketable equity securities.
Equity Securities Held for Trading
From time to time, the Company will invest in equity securities held for trading. As of September 30, 2018 and December 31, 2017, the Company owned one equity security held for trading with a fair value of $4.2 million. As of September 30, 2018 the equity security held for trading was in a net loss position. There were no equity securities held for trading as of December 31, 2017.
Investment Securities Held-to-Maturity Impairment Analysis
The following discussion summarizes by investment security type, the basis for evaluating if the applicable investment securities within the Company's held-to-maturity portfolio were OTTI at September 30, 2018. Management has the ability and the intent to hold the securities until maturity.
U.S. Government-Sponsored Enterprises
As of September 30, 2018, the Company owned 17 GSE debentures with a total fair value of $48.7 million and a net unrealized loss of $1.8 million. As of December 31, 2017, the Company owned 14 GSE debentures with a total fair value of $40.8 million and an unrealized loss of $0.8 million. As of September 30, 2018, all 17 securities in this portfolio were in an unrealized loss position. At December 31, 2017, all 14 of the securities in this portfolio were in unrealized loss positions. All securities are performing and backed by the implicit (FHLB/FNMA/FHLMC) or explicit (GNMA) guarantee of the U.S Government. During the nine months ended September 30, 2018 and 2017, the Company purchased a total of $8.9 million and $23.9 million in GSE debentures, respectively.
As of September 30, 2018, the Company owned 11 GSE MBSs with a total fair value of $11.5 million and an unrealized loss of $0.4 million. As of December 31, 2017, the Company owned 11 GSE MBSs with a total fair value of $13.7 million and an unrealized loss of $0.2 million. As of September 30, 2018 and December 31, 2017, eight of the eleven securities in this portfolio were in an unrealized loss position. All securities are performing and backed by the implicit (FHLB/FNMA/FHLMC) or explicit (GNMA) guarantee of the U.S Government. During the nine months ended September 30, 2018 and 2017, the Company did not purchase any GSE MBSs.
Municipal Obligations
The Company invests in certain state and municipal securities with high credit ratings for portfolio diversification and tax planning purposes. As of September 30, 2018, the Company owned 99 municipal obligation securities with a total fair value of $51.6 million and and a net unrealized loss of $1.2 million. As of December 31, 2017, the Company owned 100 municipal obligation securities with a total fair value of $53.5 million and an unrealized loss of $0.2 million. As of September 30, 2018, 99 of the 99 securities in this portfolio were in an unrealized loss position as compared to December 31, 2017, when 69 of the

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

100 securities were in an unrealized loss position. During the nine months ended September 30, 2018 and 2017, the Company did not purchase any municipal obligations.
Foreign Government Obligations
As of September 30, 2018 and December 31, 2017, the Company owned one foreign government obligation security with a fair value of $0.5 million, which approximated cost. As of September 30, 2018 and December 31, 2017 respectively, the security was in an unrealized loss position. During the nine months ended September 30, 2018 and 2017, the Company did not purchase any foreign government obligations.
Portfolio Maturities
The final stated maturities of the debt securities are as follows for the periods indicated:
 
At September 30, 2018
 
At December 31, 2017
 
Amortized
Cost
 
Estimated
Fair Value
 
Weighted
Average
Rate
 
Amortized
Cost
 
Estimated
Fair Value
 
Weighted
Average
Rate
 
(Dollars in Thousands)
Investment securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Within 1 year
$
14,384

 
$
14,368

 
2.04
%
 
$
23,612

 
$
23,652

 
2.27
%
After 1 year through 5 years
200,192

 
194,748

 
2.14
%
 
142,772

 
142,029

 
2.05
%
After 5 years through 10 years
139,966

 
134,979

 
2.26
%
 
136,746

 
134,978

 
2.06
%
Over 10 years
199,504

 
189,733

 
2.18
%
 
243,856

 
238,483

 
2.06
%
 
$
554,046

 
$
533,828

 
2.18
%
 
$
546,986

 
$
539,142

 
2.07
%
Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
Within 1 year
$
6,689

 
$
6,658

 
1.00
%
 
$
918

 
$
916

 
0.78
%
After 1 year through 5 years
67,905

 
65,992

 
1.84
%
 
58,335

 
57,939

 
1.74
%
After 5 years through 10 years
29,212

 
28,172

 
2.10
%
 
36,589

 
35,998

 
1.79
%
Over 10 years
11,878

 
11,460

 
2.36
%
 
13,888

 
13,670

 
1.98
%
 
$
115,684

 
$
112,282

 
1.91
%
 
$
109,730

 
$
108,523

 
1.78
%
Actual maturities of debt securities will differ from those presented above since certain obligations amortize and may also provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty. MBSs and CMOs are included above based on their final stated maturities; the actual maturities, however, may occur earlier due to anticipated prepayments and stated amortization of cash flows.
As of September 30, 2018, issuers of debt securities with an estimated fair value of $21.8 million had the right to call or prepay the obligations. Of the $21.8 million, approximately $11.2 million matures in 1 - 5 years, $10.6 million matures in 6 - 10 years, and none mature after ten years. As of December 31, 2017, issuers of debt securities with an estimated fair value of approximately $58.8 million had the right to call or prepay the obligations. Of the $58.8 million, $32.7 million matures in 1-5 years, $25.2 million matures in 6-10 years, and $0.9 million matures after ten years.
Security Sales
On February 3, 2017, the Company, through BSC, received $319 in cash and 14.876 shares of Community Bank Systems, Inc. (“CBU”) common stock in exchange for each of the 9,721 shares of Northeast Retirement Services, Inc. (“NRS”) stock held by BSC. The exchange was completed in accordance with the merger agreement entered into between NRS and CBU. As part of the merger agreement, the Company was restricted to selling 5,071 shares of CBU per day in the open market. During the quarter ended March 31, 2017, the Company completed the sale of all the CBU shares acquired in the merger. When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. The table below includes the activity with respect to the sale of the CBU shares.
On March 6, 2018, the Company, through its wholly owned subsidiary, BSC, received $0.6 million in cash and 11,303 shares of CBU common stock as settlement for the indemnification escrow on the 12 month anniversary date of the merger

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

between NRS and CBU. The Company subsequently sold all 11,303 shares of the CBU stock and recognized a gain on the sale of $0.6 million.
During the month of March 2018, the Company, through Brookline Bank’s wholly owned subsidiary, LSC, sold three trust preferred securities with a book value of $1.5 million for a loss of $0.1 million. The table below includes the activity with respect to the sale of the trust preferred securities and restricted equity securities.
Sales of investment and restricted equity securities are summarized as follows:
 
Nine Months Ended September 30, 2018

Nine Months Ended September 30, 2017
 
(In Thousands)
Sales of marketable and restricted equity securities
$
2,700

 
$
11,393

 
 
 
 
Gross gains from sales
1,230

 
11,612

Gross losses from sales
(68
)
 
(219
)
Gain on sales of securities, net
$
1,162

 
$
11,393

(4) Loans and Leases
The following tables present loan and lease balances and weighted average coupon rates for the originated and acquired loan and lease portfolios at the dates indicated:
 
At September 30, 2018
 
Originated
 
Acquired
 
Total
 
Balance
 
Weighted
Average
Coupon
 
Balance
 
Weighted
Average
Coupon
 
Balance
 
Weighted
Average
Coupon
 
(Dollars In Thousands)
Commercial real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
2,156,671

 
4.49
%
 
$
131,308

 
4.58
%
 
$
2,287,979

 
4.50
%
Multi-family mortgage
777,505

 
4.38
%
 
51,344

 
4.48
%
 
828,849

 
4.39
%
Construction
139,021

 
5.24
%
 
25,196

 
6.74
%
 
164,217

 
5.47
%
Total commercial real estate loans
3,073,197

 
4.50
%
 
207,848

 
4.82
%
 
3,281,045

 
4.52
%
Commercial loans and leases:
 
 
 
 
 
 
 
 
 
 
 

Commercial
745,587

 
4.80
%
 
25,613

 
5.36
%
 
771,200

 
4.82
%
Equipment financing
951,230

 
7.52
%
 
3,349

 
5.97
%
 
954,579

 
7.51
%
Condominium association
52,205

 
4.60
%
 

 
%
 
52,205

 
4.60
%
Total commercial loans and leases
1,749,022

 
6.27
%
 
28,962

 
5.43
%
 
1,777,984

 
6.26
%
Consumer loans:
 
 
 
 
 
 
 
 
 
 
 

Residential mortgage
619,133

 
3.99
%
 
140,034

 
4.37
%
 
759,167

 
4.06
%
Home equity
330,387

 
4.83
%
 
49,916

 
5.24
%
 
380,303

 
4.88
%
Other consumer
29,103

 
5.17
%
 
105

 
17.79
%
 
29,208

 
5.22
%
Total consumer loans
978,623

 
4.31
%
 
190,055

 
4.61
%
 
1,168,678

 
4.36
%
Total loans and leases
$
5,800,842

 
5.00
%
 
$
426,865

 
4.77
%
 
$
6,227,707

 
4.98
%

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
At December 31, 2017
 
Originated
 
Acquired
 
Total
 
Balance
 
Weighted
Average
Coupon
 
Balance
 
Weighted
Average
Coupon
 
Balance
 
Weighted
Average
Coupon
 
(Dollars In Thousands)
Commercial real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
2,069,392

 
4.17
%
 
$
105,577

 
4.37
%
 
$
2,174,969

 
4.18
%
Multi-family mortgage
735,921

 
4.09
%
 
24,749

 
4.48
%
 
760,670

 
4.10
%
Construction
140,138

 
4.58
%
 

 
%
 
140,138

 
4.58
%
Total commercial real estate loans
2,945,451

 
4.17
%
 
130,326

 
4.39
%
 
3,075,777

 
4.18
%
Commercial loans and leases:
 
 
 
 
 
 
 
 
 
 
 

Commercial
696,825

 
4.35
%
 
8,179

 
5.77
%
 
705,004

 
4.37
%
Equipment financing
861,974

 
7.28
%
 
4,514

 
5.92
%
 
866,488

 
7.27
%
Condominium association
52,619

 
4.49
%
 

 
%
 
52,619

 
4.49
%
Total commercial loans and leases
1,611,418

 
5.92
%
 
12,693

 
5.82
%
 
1,624,111

 
5.92
%
Consumer loans:
 
 
 
 
 
 
 
 
 
 
 

Residential mortgage
604,897

 
3.81
%
 
55,168

 
4.28
%
 
660,065

 
3.85
%
Home equity
314,189

 
4.16
%
 
41,765

 
4.62
%
 
355,954

 
4.21
%
Other consumer
14,667

 
5.51
%
 
105

 
18.00
%
 
14,772

 
5.60
%
Total consumer loans
933,753

 
3.95
%
 
97,038

 
4.44
%
 
1,030,791

 
4.00
%
Total loans and leases
$
5,490,622

 
4.65
%
 
$
240,057

 
4.49
%
 
$
5,730,679

 
4.64
%
The net unamortized deferred loan origination fees and costs included in total loans and leases were $16.0 million and $15.5 million as of September 30, 2018 and December 31, 2017, respectively.
The Banks and subsidiaries lend primarily in all New England states, with the exception of equipment financing, 15.0% of which is in the greater New York and New Jersey metropolitan area and 85.0% of which is in other areas in the United States of America as of September 30, 2018.
Accretable Yield for the Acquired Loan Portfolio
The following table summarizes activity in the accretable yield for the acquired loan portfolio for the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018

2017
 
2018
 
2017
 
(In Thousands)
Balance at beginning of period
$
8,813

 
$
13,702

 
$
10,522

 
$
14,353

Accretion
(890
)
 
(2,872
)
 
(3,223
)
 
(6,604
)
Reclassification from nonaccretable difference as a result of changes in expected cash flows
224

 
871

 
848

 
3,952

Balance at end of period
$
8,147

 
$
11,701

 
$
8,147

 
$
11,701

On a quarterly basis, subsequent to acquisition, management reforecasts the expected cash flows for acquired ASC 310-30 loans, taking into account prepayment speeds, probability of default and loss given defaults. Management compares cash flow projections per the reforecast to the original cash flow projections and determines whether any reduction in cash flow expectations are due to deterioration, or if the change in cash flow expectation is related to noncredit events. This cash flow analysis is used to evaluate the need for a provision for loan and lease losses and/or prospective yield adjustments. During the three months ended September 30, 2018 and 2017, accretable yield adjustments totaling $0.2 million and $0.9 million, respectively, were made for certain loan pools. During the nine months ended September 30, 2018 and 2017, accretable yield adjustments totaling $0.8 million and $4.0 million, respectively, were made for certain loan pools. The decrease in accretable

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

yield adjustments was due to the continued pay down in the acquired loan portfolio. These accretable yield adjustments, which are subject to continued re-assessment, will be recognized over the remaining lives of those pools.
Loans and Leases Pledged as Collateral
As of September 30, 2018 and December 31, 2017, there were $2.6 billion and $2.3 billion, respectively, of loans and leases pledged as collateral for repurchase agreements; municipal deposits; treasury, tax and loan deposits; swap agreements; FRB borrowings; and FHLBB borrowings. The Banks did not have any outstanding FRB borrowings as of September 30, 2018 and December 31, 2017.
(5) Allowance for Loan and Lease Losses
The following tables present the changes in the allowance for loan and lease losses and the recorded investment in loans and leases by portfolio segment for the periods indicated:
 
Three Months Ended September 30, 2018
 
Commercial
Real Estate
 
Commercial
 
Consumer
 
Total
 
(In Thousands)
Balance at June 30, 2018
$
27,045

 
$
26,120

 
$
4,816

 
$
57,981

Charge-offs

 
(1,198
)
 
(29
)
 
(1,227
)
Recoveries

 
619

 
44

 
663

Provision for loan and lease losses
319

 
2,217

 
44

 
2,580

Balance at September 30, 2018
$
27,364

 
$
27,758

 
$
4,875

 
$
59,997

 
Three Months Ended September 30, 2017
 
Commercial
Real Estate
 
Commercial
 
Consumer
 
Total
 
(In Thousands)
Balance at June 30, 2017
$
27,954

 
$
31,099

 
$
5,468

 
$
64,521

Charge-offs
(65
)
 
(1,965
)
 
(113
)
 
(2,143
)
Recoveries

 
109

 
80

 
189

Provision for loan and lease losses
979

 
1,832

 
35

 
2,846

Balance at September 30, 2017
$
28,868

 
$
31,075

 
$
5,470

 
$
65,413

 
Nine Months Ended September 30, 2018
 
Commercial
Real Estate
 
Commercial
 
Consumer
 
Total
 
(In Thousands)
Balance at December 31, 2017
$
27,112

 
$
26,333

 
$
5,147

 
$
58,592

Charge-offs
(103
)
 
(5,387
)
 
(134
)
 
(5,624
)
Recoveries

 
1,972

 
253

 
2,225

Provision for loan and lease losses
355

 
4,840

 
(391
)
 
4,804

Balance at September 30, 2018
$
27,364

 
$
27,758

 
$
4,875

 
$
59,997


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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
Nine Months Ended September 30, 2017
 
Commercial
Real Estate
 
Commercial
 
Consumer
 
Total
 
(In Thousands)
Balance at December 31, 2016
$
27,645

 
$
20,906

 
$
5,115

 
$
53,666

Charge-offs
(294
)
 
(6,267
)
 
(329
)
 
(6,890
)
Recoveries
476

 
800

 
263

 
1,539

Provision for loan and lease losses
1,041

 
15,636

 
421

 
17,098

Balance at September 30, 2017
$
28,868

 
$
31,075

 
$
5,470

 
$
65,413

The liability for unfunded credit commitments, which is included in other liabilities, was $1.7 million at September 30, 2018 and December 31, 2017. No credit commitments were charged off against the liability account in the nine-month periods ended September 30, 2018 and 2017.
Provision for Credit Losses
The provisions for credit losses are set forth below for the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In Thousands)
Provision for loan and lease losses:
 
 
 
 
 
 
 
Commercial real estate
$
319

 
$
979

 
$
355

 
$
1,041

Commercial
2,217

 
1,832

 
4,840

 
15,636

Consumer
44

 
35

 
(391
)
 
421

Total provision for loan and lease losses
2,580

 
2,846

 
4,804

 
17,098

Unfunded credit commitments
137

 
65

 
24

 
88

Total provision for credit losses
$
2,717

 
$
2,911

 
$
4,828

 
$
17,186

Allowance for Loan and Lease Losses Methodology
Management has established a methodology to determine the adequacy of the allowance for loan and lease losses that assesses the risks and losses inherent in the loan and lease portfolio. Additions to the allowance for loan and lease losses are made by charges to the provision for credit losses. Losses on loans and leases are charged off against the allowance when all or a portion of a loan or lease is considered uncollectible. Subsequent recoveries on loans previously charged off, if any, are credited to the allowance when realized.

Management uses a consistent and systematic process and methodology to evaluate the adequacy of the allowance for loan and lease losses on a quarterly basis. For purposes of determining the allowance for loan and lease losses, the Company has segmented certain loans and leases in the portfolio by product type into the following segments: (1) commercial real estate loans, (2) commercial loans and leases, and (3) consumer loans. Portfolio segments are further disaggregated into classes based on the associated risks within the segments. Commercial real estate loans are divided into three classes: commercial real estate loans, multi-family mortgage loans, and construction loans. Commercial loans and leases are divided into three classes: commercial loans which include taxi medallion loans, equipment financing, and loans to condominium associations. Consumer loans are divided into three classes: residential mortgage loans, home equity loans, and other consumer loans. A formula-based credit evaluation approach is applied to each group, coupled with an analysis of certain loans for impairment. For each class of loan, management makes significant judgments in selecting the estimation method that fits the credit characteristics of its class and portfolio segment as set forth below.

The general allowance related to loans collectively evaluated for impairment is determined using a formula-based approach utilizing the risk ratings of individual credits and loss factors derived from historic portfolio loss rates, which include estimates of incurred losses over an estimated loss emergence period (“LEP”). The LEP was generated utilizing a charge-off look-back analysis which studied the time from the first indication of elevated risk of repayment (or other early event indicating

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

a problem) to eventual charge-off to support the LEP considered in the allowance calculation. This reserving methodology established the approximate number of months of LEP that represents incurred losses for each portfolio. In addition to quantitative measures, relevant qualitative factors include, but are not limited to: (1) levels and trends in past due and impaired loans, (2) levels and trends in charge-offs, (3) changes in underwriting standards, policy exceptions, and credit policy, (4) experience of lending management and staff, (5) economic trends, (6) industry conditions, (7) effects of changes in credit concentrations, (8) interest rate environment, and (9) regulatory and other changes. The general allowance related to the acquired loans collectively evaluated for impairment is determined based upon the degree, if any, of deterioration in the pooled loans subsequent to acquisition. The qualitative factors used in the determination are the same as those used for originated loans.

Specific valuation allowances are established for impaired originated loans with book values greater than the discounted present value of expected future cash flows or, in the case of collateral-dependent impaired loans, for any excess of a loan's book balance over the fair value of its underlying collateral. Specific valuation allowances are established for acquired loans with deterioration in the discounted present value of expected future cash flows since acquisitions or, in the case of collateral dependent impaired loans, for any increase in the excess of a loan's book balance greater than the fair value of its underlying collateral. A specific valuation allowance for losses on troubled debt restructured ("TDR") loans is determined by comparing the net carrying amount of the TDR loan with the restructured loan's cash flows discounted at the original effective rate. Impaired loans are reviewed quarterly with adjustments made to the calculated reserve as necessary.

As of September 30, 2018, management believes that the methodology for calculating the allowance is sound and that the allowance provides a reasonable basis for determining and reporting on probable losses incurred in the Company’s loan portfolios.

As of September 30, 2018, the Company had a portfolio of approximately $14.5 million in loans secured by taxi medallions issued by the cities of Boston and Cambridge, Massachusetts. As of December 31, 2017, this portfolio was approximately $19.7 million. For collateral valuation purposes, taxi medallions are currently estimated at $35 thousand for Boston and $20 thousand for Cambridge. The Company has no taxi medallion exposure outside Massachusetts and the risk of loss is minimal. Application-based mobile ride services, such as Uber and Lyft, have generated increased competition in the transportation sector, resulting in a reduction in taxi utilization and, as a result, a reduction in the collateral value and credit quality of taxi medallion loans. This has increased the likelihood that loans secured by taxi medallions may default, or that the borrowers may be unable to repay these loans at maturity, potentially resulting in an increase in past due loans, TDRs, and charge-offs. The Company’s allowance calculation included a further segmentation of the commercial loans and leases to reflect the increased risk in the Company’s taxi medallion portfolio. This allowance calculation segmentation represents management’s estimations of the current risks associated with the portfolio.

As of September 30, 2018, the Company had an allowance for loan and lease losses associated with taxi medallion loans of $2.9 million of which $2.3 million were specific reserves and $0.6 million was a general reserve. As of December 31, 2017, the Company had an allowance for loan and lease losses associated with taxi medallion loans of $3.8 million of which $2.7 million were specific reserves and $1.1 million was a general reserve. The decrease in the allowance for loan and leases associated with taxi medallion loans was primarily driven by the decrease in specific reserves due to charge-offs in the taxi medallion portfolio. The total TDRs secured by taxi medallions decreased by $0.1 million from $3.7 million at December 31, 2017 to $3.6 million at September 30, 2018. The total loans and leases secured by taxi medallions that were placed on nonaccrual decreased by $3.5 million to $4.3 million at September 30, 2018 from $7.8 million at December 31, 2017 due to the charge-offs of non-accruing taxi medallion relationships. Further declines in demand for taxi services or further deterioration in the value of taxi medallions may result in higher delinquencies and losses beyond that provided for in the allowance for loan and lease losses.

The general allowance for loan and lease losses was $56.4 million and $55.5 million as of September 30, 2018 and December 31, 2017, respectively. The specific allowance for loan and lease losses was $3.6 million as of September 30, 2018, compared to $3.1 million as of December 31, 2017. The specific allowance increased by $0.5 million during the nine months ended September 30, 2018, primarily due to changes in the underlying collateral value of taxi medallions and charge-offs taken during the nine months ended September 30, 2018.


23

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

Credit Quality Assessment
At the time of loan origination, a rating is assigned based on the capacity to pay and general financial strength of the borrower, the value of assets pledged as collateral, and the evaluation of third party support such as a guarantor. The Company continually monitors the quality of the loan portfolio using all available information. The officer responsible for handling each loan is required to initiate changes to risk ratings when changes in facts and circumstances occur that warrant an upgrade or downgrade in a loan rating. Based on this information, loans demonstrating certain payment issues or other weaknesses may be categorized as delinquent, impaired, nonperforming and/or put on nonaccrual status. Additionally, in the course of resolving such loans, the Company may choose to restructure the contractual terms of certain loans to match the borrower's ability to repay the loan based on their current financial condition. If a restructured loan meets certain criteria, it may be categorized as a TDR loan.
The Company reviews numerous credit quality indicators when assessing the risk in its loan portfolio. For all loans, the Company utilizes an eight-grade loan rating system, which assigns a risk rating to each borrower based on a number of quantitative and qualitative factors associated with a loan transaction. Factors considered include industry and market conditions; position within the industry; earnings trends; operating cash flow; asset/liability values; debt capacity; guarantor strength; management and controls; financial reporting; collateral; and other considerations. In addition, the Company's independent loan review group evaluates the credit quality and related risk ratings in all loan portfolios. The results of these reviews are reported to the Risk Committee of the Board of Directors on a periodic basis and annually to the Board of Directors. For the consumer loans, the Company heavily relies on payment status for calibrating credit risk.
The ratings categories used for assessing credit risk in the commercial real estate, multi-family mortgage, construction, commercial, equipment financing, condominium association and other consumer loan and lease classes are defined as follows:
1 -4 Rating—Pass
Loan rating grades "1" through "4" are classified as "Pass," which indicates borrowers are performing in accordance with the terms of the loan and are less likely to result in loss due to the capacity of the borrower to pay and the adequacy of the value of assets pledged as collateral.
5 Rating—Other Assets Especially Mentioned ("OAEM")
Borrowers exhibit potential credit weaknesses or downward trends deserving management's attention. If not checked or corrected, these trends will weaken the Company's asset and position. While potentially weak, currently these borrowers are marginally acceptable; no loss of principal or interest is envisioned.
6 Rating—Substandard
Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. Substandard loans may be inadequately protected by the current net worth and paying capacity of the obligors or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy. Although no loss of principal is envisioned, there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Collateral coverage may be inadequate to cover the principal obligation.
7 Rating—Doubtful
Borrowers exhibit well-defined weaknesses that jeopardize the orderly liquidation of debt with the added provision that the weaknesses make collection of the debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely.
8 Rating—Definite Loss
Borrowers deemed incapable of repayment. Loans to such borrowers are considered uncollectible and of such little value that continuation as active assets of the Company is not warranted.
Assets rated as "OAEM," "substandard" or "doubtful" based on criteria established under banking regulations are collectively referred to as "criticized" assets.

24

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

Credit Quality Information
The following tables present the recorded investment in loans in each class as of September 30, 2018, by credit quality indicator.
 
At September 30, 2018
 
 
Commercial
Real Estate
 
Multi-
Family
Mortgage
 
Construction
 
Commercial
 
Equipment
Financing
 
Condominium
Association
 
Other
Consumer
Total
 
(In Thousands)
 
Originated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
2,147,248

 
$
777,148

 
$
138,381

 
$
720,096

 
$
940,847

 
$
51,910

 
$
29,098

$
4,804,728

OAEM
5,542

 

 

 
12,125

 
548

 

 

18,215

Substandard
3,881

 
357

 
640

 
12,864

 
6,346

 
295

 
5

24,388

Doubtful

 

 

 
502

 
3,489

 

 

3,991

Total originated
2,156,671

 
777,505

 
139,021

 
745,587

 
951,230

 
52,205

 
29,103

4,851,322

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
121,401

 
51,156

 
25,196

 
24,693

 
3,339

 

 
105

225,890

OAEM
772

 

 

 
241

 

 

 

1,013

Substandard
9,135

 
188

 

 
679

 
10

 

 

10,012

Doubtful

 

 

 

 

 

 


Total acquired
131,308

 
51,344

 
25,196

 
25,613

 
3,349

 

 
105

236,915

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
2,287,979

 
$
828,849

 
$
164,217

 
$
771,200

 
$
954,579

 
$
52,205

 
$
29,208

$
5,088,237

As of September 30, 2018, there were no loans categorized as definite loss.




25

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
 
At September 30, 2018
 
 
Residential Mortgage
 
Home Equity
 
 
(Dollars In Thousands)
Originated:
 
 
 
 
 
 
 
 
Loan-to-value ratio:
 
 

 
 
 
 

 
 
Less than 50%
 
$
165,108

 
21.7
%
 
$
144,071

 
37.8
%
50% - 69%
 
264,847

 
34.9
%
 
84,719

 
22.3
%
70% - 79%
 
171,190

 
22.5
%
 
71,715

 
18.9
%
80% and over
 
17,241

 
2.3
%
 
29,867

 
7.9
%
Data not available*
 
747

 
0.1
%
 
15

 
%
Total originated
 
619,133

 
81.5
%
 
330,387

 
86.9
%
 
 
 
 
 
 
 
 
 
Acquired:
 
 

 
 
 
 

 
 
Loan-to-value ratio:
 
 

 
 
 
 

 
 
Less than 50%
 
37,653

 
5.0
%
 
27,482

 
7.2
%
50%—69%
 
56,358

 
7.4
%
 
11,870

 
3.1
%
70%—79%
 
31,439

 
4.1
%
 
1,476

 
0.4
%
80% and over
 
6,924

 
0.9
%
 
3,840

 
1.0
%
Data not available*
 
7,660

 
1.1
%
 
5,248

 
1.4
%
Total acquired
 
140,034

 
18.5
%
 
49,916

 
13.1
%
 
 
 
 
 
 
 
 
 
Total loans
 
$
759,167

 
100.0
%
 
$
380,303

 
100.0
%
 
 
 
 
 
 
 
 
 
_______________________________________________________________________________
* Represents in process general ledger accounts for which data are not available.


26

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

The following tables present the recorded investment in loans in each class as of December 31, 2017, by credit quality indicator.
 
At December 31, 2017
 
 
Commercial
Real Estate
 
Multi-
Family
Mortgage
 
Construction
 
Commercial
 
Equipment
Financing
 
Condominium
Association
 
Other
Consumer
Total
 
(In Thousands)
 
Originated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
2,054,376

 
$
735,313

 
$
139,278

 
$
670,265

 
$
850,006

 
$
52,619

 
$
14,628

$
4,516,485

OAEM
8,889

 

 

 
7,691

 
3,630

 

 

20,210

Substandard
5,926

 
608

 
860

 
17,681

 
5,012

 

 
39

30,126

Doubtful
201

 

 

 
1,188

 
3,326

 

 

4,715

Total originated
2,069,392

 
735,921

 
140,138

 
696,825

 
861,974

 
52,619

 
14,667

4,571,536

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
94,244

 
24,459

 

 
6,643

 
4,501

 

 
104

129,951

OAEM
9,839

 

 

 
265

 

 

 
1

10,105

Substandard
1,494

 
290

 

 
1,271

 
13

 

 

3,068

Doubtful

 

 

 

 

 

 


Total acquired
105,577

 
24,749

 

 
8,179

 
4,514

 

 
105

143,124

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
2,174,969

 
$
760,670

 
$
140,138

 
$
705,004

 
$
866,488

 
$
52,619

 
$
14,772

$
4,714,660

As of December 31, 2017, there were no loans categorized as definite loss.




27

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
At December 31, 2017
 
Residential Mortgage
 
Home Equity
 
(Dollars In Thousands)
Originated:
 
 
 
 
 
 
 
Loan-to-value ratio:
 

 
 
 
 

 
 
Less than 50%
$
153,373

 
23.2
%
 
$
148,137

 
41.6
%
50%—69%
265,328

 
40.2
%
 
75,099

 
21.1
%
70%—79%
168,272

 
25.5
%
 
63,742

 
17.9
%
80% and over
16,547

 
2.5
%
 
27,122

 
7.6
%
Data not available*
1,377

 
0.2
%
 
89

 
%
Total originated
604,897

 
91.6
%
 
314,189

 
88.2
%
 
 
 
 
 
 
 
 
Acquired:
 

 
 
 
 

 
 
Loan-to-value ratio:
 

 
 
 
 

 
 
Less than 50%
16,521

 
2.5
%
 
25,312

 
7.1
%
50%—69%
19,182

 
2.9
%
 
13,883

 
3.9
%
70%—79%
10,507

 
1.6
%
 
943

 
0.3
%
80% and over
7,893

 
1.2
%
 
582

 
0.2
%
Data not available*
1,065

 
0.2
%
 
1,045

 
0.3
%
Total acquired
55,168

 
8.4
%
 
41,765

 
11.8
%
 
 
 
 
 
 
 
 
Total loans
$
660,065

 
100.0
%
 
$
355,954

 
100.0
%
 
 
 
 
 
 
 
 
_______________________________________________________________________________
* Represents in process general ledger accounts for which data are not available.


The following table presents information regarding foreclosed residential real estate property for the periods indicated:
 
At September 30, 2018
 
At December 31,
2017
 
(In Thousands)
Recorded investment in mortgage loans collateralized by residential real estate property that are in the process of foreclosure
$
1,171

 
$
633

There were no foreclosed residential real estate property held by the Company at September 30, 2018 or December 31, 2017.







28

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

Age Analysis of Past Due Loans and Leases
The following tables present an age analysis of the recorded investment in total loans and leases as of September 30, 2018 and December 31, 2017.
 
At September 30, 2018
 
Past Due
 
 
 
 
 
Loans and
Leases Past
Due Greater
Than 90 Days
and Accruing
 
 
 
31-60
Days
 
61-90
Days
 
Greater
Than
90 Days
 
Total
 
Current
 
Total Loans
and Leases
 
 
Nonaccrual
Loans and
Leases
 
(In Thousands)
Originated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
11,059

 
$
1,306

 
$
801

 
$
13,166

 
$
2,143,505

 
$
2,156,671

 
$

 
$
3,252

Multi-family mortgage
1,723

 
166

 

 
1,889

 
775,616

 
777,505

 

 
357

Construction
1,676

 

 
1,328

 
3,004

 
136,017

 
139,021

 
688

 
640

Total commercial real estate loans
14,458

 
1,472

 
2,129

 
18,059

 
3,055,138

 
3,073,197

 
688

 
4,249

Commercial loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
903

 
3,063

 
6,221

 
10,187

 
735,400

 
745,587

 
1,972

 
7,286

Equipment financing
3,511

 
1,349

 
6,302

 
11,162

 
940,068

 
951,230

 
89

 
9,659

Condominium association
1,038

 
26

 

 
1,064

 
51,141

 
52,205

 

 
295

Total commercial loans and leases
5,452

 
4,438

 
12,523

 
22,413

 
1,726,609

 
1,749,022

 
2,061

 
17,240

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
416

 
949

 
1,857

 
3,222

 
615,911

 
619,133

 
400

 
2,538

Home equity
134

 

 
103

 
237

 
330,150

 
330,387

 
1

 
194

Other consumer
51

 
8

 
21

 
80

 
29,023

 
29,103

 
11

 
11

Total consumer loans
601

 
957

 
1,981

 
3,539

 
975,084

 
978,623

 
412


2,743

Total originated loans and leases
$
20,511

 
$
6,867

 
$
16,633

 
$
44,011

 
$
5,756,831

 
$
5,800,842

 
$
3,161

 
$
24,232

 
 
 
 
 
 
 
 
 
 
 
 
 
 

29

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
At September 30, 2018
 
Past Due
 
 
 
 
 
Loans and
Leases Past
Due Greater
Than 90 Days
and Accruing
 
 
 
31-60
Days
 
61-90
Days
 
Greater
Than
90 Days
 
Total
 
Current
 
Total Loans
and Leases
 
 
Nonaccrual
Loans and
Leases
 
(In Thousands)
Acquired:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$

 
$
102

 
$
9,088

 
$
9,190

 
$
122,118

 
$
131,308

 
$
9,018

 
$
117

Multi-family mortgage

 

 

 

 
51,344

 
51,344

 

 

Construction

 

 

 

 
25,196

 
25,196

 

 

Total commercial real estate loans

 
102

 
9,088

 
9,190

 
198,658

 
207,848

 
9,018

 
117

Commercial loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial

 

 
427

 
427

 
25,186

 
25,613

 
90

 
576

Equipment financing

 

 
10

 
10

 
3,339

 
3,349

 
10

 

Total commercial loans and leases

 

 
437

 
437

 
28,525

 
28,962

 
100

 
576

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
39

 
347

 
2,537

 
2,923

 
137,111

 
140,034

 
2,536

 

Home equity
352

 
92

 
340

 
784

 
49,132

 
49,916

 
139

 
859

Other consumer

 

 

 

 
105

 
105

 

 

Total consumer loans
391

 
439

 
2,877

 
3,707

 
186,348

 
190,055

 
2,675

 
859

Total acquired loans and leases
$
391

 
$
541

 
$
12,402

 
$
13,334

 
$
413,531

 
$
426,865

 
$
11,793

 
$
1,552

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
20,902

 
$
7,408

 
$
29,035

 
$
57,345

 
$
6,170,362

 
$
6,227,707

 
$
14,954

 
$
25,784



30

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
At December 31, 2017
 
Past Due
 
 
 
 
 
Loans and
Leases Past
Due Greater
Than 90 Days
and Accruing
 
 
 
31-60
Days
 
61-90
Days
 
Greater
Than
90 Days
 
Total
 
Current
 
Total Loans
and Leases
 
 
Nonaccrual
Loans and
Leases
 
(In Thousands)
Originated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
3,294

 
$
391

 
$
1,843

 
$
5,528

 
$
2,063,864

 
$
2,069,392

 
$

 
$
3,182

Multi-family mortgage
6,141

 
2,590

 

 
8,731

 
727,190

 
735,921

 

 
608

Construction
6,537

 
330

 
860

 
7,727

 
132,411

 
140,138

 

 
860

Total commercial real estate loans
15,972

 
3,311

 
2,703

 
21,986

 
2,923,465

 
2,945,451

 

 
4,650

Commercial loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
1,344

 
597

 
7,724

 
9,665

 
687,160

 
696,825

 

 
10,365

Equipment financing
3,214

 
2,494

 
3,203

 
8,911

 
853,063

 
861,974

 
224

 
8,106

Condominium association
857

 
262

 

 
1,119

 
51,500

 
52,619

 

 

Total commercial loans and leases
5,415

 
3,353

 
10,927

 
19,695

 
1,591,723

 
1,611,418

 
224

 
18,471

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
1,256

 
166

 
728

 
2,150

 
602,747

 
604,897

 

 
1,979

Home equity
643

 
19

 
32

 
694

 
313,495

 
314,189

 
1

 
132

Other consumer
238

 
20

 
28

 
286

 
14,381

 
14,667

 

 
43

Total consumer loans
2,137

 
205

 
788

 
3,130

 
930,623

 
933,753

 
1

 
2,154

Total originated loans and leases
$
23,524

 
$
6,869

 
$
14,418

 
$
44,811

 
$
5,445,811

 
$
5,490,622

 
$
225

 
$
25,275

 
 
 
 
 
 
 
 
 
 
 
 
 
 

31

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
At December 31, 2017
 
Past Due
 
 
 
 
 
Loans and
Leases Past
Due Greater
Than 90 Days
and Accruing
 
 
 
31-60
Days
 
61-90
Days
 
Greater
Than
90 Days
 
Total
 
Current
 
Total Loans
and Leases
 
 
Nonaccrual
Loans and
Leases
 
(In Thousands)
Acquired:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
1,008

 
$

 
$
656

 
$
1,664

 
$
103,913

 
$
105,577

 
$
586

 
$
131

Multi-family mortgage

 

 
3

 
3

 
24,746

 
24,749

 
3

 

Total commercial real estate loans
1,008

 

 
659

 
1,667

 
128,659

 
130,326

 
589

 
131

Commercial loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial

 
44

 
1,022

 
1,066

 
7,113

 
8,179

 
17

 
1,254

Equipment financing

 

 
13

 
13

 
4,501

 
4,514

 
13

 

Total commercial loans and leases

 
44

 
1,035

 
1,079

 
11,614

 
12,693

 
30

 
1,254

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage

 
463

 
1,990

 
2,453

 
52,715

 
55,168

 
1,990

 

Home equity
508

 

 
186

 
694

 
41,071

 
41,765

 
186

 
612

Other consumer

 

 

 

 
105

 
105

 

 

Total consumer loans
508

 
463

 
2,176

 
3,147

 
93,891

 
97,038

 
2,176

 
612

Total acquired loans and leases
$
1,516

 
$
507

 
$
3,870

 
$
5,893

 
$
234,164

 
$
240,057

 
$
2,795

 
$
1,997

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
25,040

 
$
7,376

 
$
18,288

 
$
50,704

 
$
5,679,975

 
$
5,730,679

 
$
3,020

 
$
27,272


32

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

Commercial Real Estate Loans—As of September 30, 2018, loans outstanding in the three classes within this segment expressed as a percentage of total loans and leases outstanding were as follows: commercial real estate loans -- 36.7%; multi-family mortgage loans -- 13.3%; and construction loans -- 2.7%.
Loans in this portfolio that are on nonaccrual status and/or risk-rated "substandard" or worse are evaluated on an individual loan basis for impairment. For non-impaired commercial real estate loans, loss factors are applied to outstanding loans by risk rating for each of the three classes in the portfolio. The factors applied are based primarily on historic loan loss experience and an assessment of internal and external factors and other relevant information.
Commercial Loans and Leases—As of September 30, 2018, loans and leases outstanding in the three classes within this segment expressed as a percent of total loans and leases outstanding were as follows: commercial loans and leases -- 12.4%; equipment financing loans -- 15.3%; and loans to condominium associations -- 0.8%.
Loans and leases in this portfolio that are on nonaccrual status and/or risk-rated "substandard" or worse are evaluated on an individual basis for impairment. For non-impaired commercial loans and leases, loss factors are applied to outstanding loans by risk rating for each of the three classes in the portfolio.
Consumer Loans—As of September 30, 2018, loans outstanding within the three classes within this segment expressed as a percent of total loans and leases outstanding were as follows: residential mortgage loans -- 12.2%, home equity loans -- 6.1%, and other consumer loans -- 0.5%.
Significant risk characteristics related to the residential mortgage and home equity loan portfolios are the geographic concentration of the properties financed within selected communities in the greater Boston and Providence metropolitan areas. The payment status and loan-to-value ratio are the primary credit quality indicators used for residential mortgage loans and home equity loans. Generally, loans are not made when the loan-to-value ratio exceeds 80% unless private mortgage insurance is obtained and/or there is a financially strong guarantor. Consumer loans that become 90 or more days past due, or are placed on nonaccrual.
Impaired Loans and Leases
A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. The Company has defined the population of impaired loans to include nonaccrual loans and TDR loans.
When the ultimate collectability of the total principal of an impaired loan or lease is in doubt and the loan is on nonaccrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan or lease is not in doubt and the loan or lease is on nonaccrual status, contractual interest is credited to interest income when received, under the cash basis method.
The following tables include the recorded investment and unpaid principal balances of impaired loans and leases with the related allowance amount, if applicable, for the originated and acquired loan and lease portfolios at the dates indicated. Also presented are the average recorded investments in the impaired loans and leases and the related amount of interest recognized during the period that the impaired loans were impaired.

33

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
At September 30, 2018
 
At December 31, 2017
 
Recorded
Investment
(1)
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment (2)
 
Unpaid
Principal
Balance
 
Related
Allowance
 
(In Thousands)
Originated:
 
 
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
5,695

 
$
5,666

 
$

 
$
9,978

 
$
9,962

 
$

Commercial
21,139

 
21,280

 

 
24,906

 
25,040

 

Consumer
2,696

 
2,681

 

 
3,508

 
3,500

 

Total originated with no related allowance recorded
29,530

 
29,627

 

 
38,392

 
38,502

 

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate

 

 

 
3,056

 
3,056

 

Commercial
8,869

 
8,850

 
3,514

 
8,912

 
8,862

 
3,105

Consumer
1,375

 
1,374

 
85

 

 

 

Total originated with an allowance recorded
10,244

 
10,224

 
3,599

 
11,968

 
11,918

 
3,105

Total originated impaired loans and leases
39,774

 
39,851

 
3,599

 
50,360

 
50,420

 
3,105

 
 
 
 
 
 
 
 
 
 
 
 
Acquired:
 
 
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
9,219

 
9,219

 

 
1,880

 
1,880

 

Commercial
1,112

 
1,112

 

 
1,594

 
1,594

 

Consumer
5,406

 
5,406

 

 
4,736

 
4,736

 

Total acquired with no related allowance recorded
15,737

 
15,737

 

 
8,210

 
8,210

 

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Consumer
157

 
157

 
27

 
115

 
115

 
22

 Total acquired with an allowance recorded
157

 
157

 
27

 
115

 
115

 
22

Total acquired impaired loans and leases
15,894

 
15,894

 
27

 
8,325

 
8,325

 
22

 
 
 
 
 
 
 
 
 
 
 
 
Total impaired loans and leases
$
55,668

 
$
55,745

 
$
3,626

 
$
58,685

 
$
58,745

 
$
3,127

___________________________________________________________________________
(1) Includes originated and acquired nonaccrual loans of $23.8 million and $1.8 million, respectively as of September 30, 2018.

(2) Includes originated and acquired nonaccrual loans of $24.9 million and $2.0 million, respectively as of December 31, 2017.

34

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
Three Months Ended
 
September 30, 2018
 
September 30, 2017
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(In Thousands)
Originated:
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
Commercial real estate
$
5,717

 
$
19

 
$
9,841

 
$
83

Commercial
22,938

 
195

 
26,329

 
173

Consumer
2,711

 
15

 
3,559

 
14

Total originated with no related allowance recorded
31,366

 
229

 
39,729

 
270

With an allowance recorded:
 
 
 
 
 
 
 
Commercial real estate

 

 
3,061

 
38

Commercial
9,052

 
29

 
18,210

 

Consumer
1,375

 
3

 

 

Total originated with an allowance recorded
10,427

 
32

 
21,271

 
38

Total originated impaired loans and leases
41,793

 
261

 
61,000

 
308

 
 
 
 
 
 
 
 
Acquired:
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
Commercial real estate
9,222

 
1

 
2,116

 
8

Commercial
1,118

 
4

 
2,218

 
8

Consumer
5,430

 
15

 
4,837

 
18

Total acquired with no related allowance recorded
15,770

 
20

 
9,171

 
34

With an allowance recorded:
 
 
 
 
 
 
 
Consumer
158

 
1

 
171

 
1

  Total acquired with an allowance recorded
158

 
1

 
171

 
1

Total acquired impaired loans and leases
15,928

 
21

 
9,342

 
35

 
 
 
 
 
 
 
 
Total impaired loans and leases
$
57,721

 
$
282

 
$
70,342

 
$
343


35

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(In Thousands)
Originated:
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
Commercial real estate
$
6,756

 
$
68

 
$
10,200

 
$
205

Commercial
24,641

 
682

 
24,206

 
522

Consumer
2,692

 
42

 
4,712

 
44

Total originated with no related allowance recorded
34,089

 
792

 
39,118

 
771

With an allowance recorded:
 
 
 
 
 
 
 
Commercial real estate

 

 
3,377

 
124

Commercial
9,261

 
73

 
20,771

 
1

Consumer
892

 
5

 

 

Total originated with an allowance recorded
10,153

 
78

 
24,148

 
125

Total originated impaired loans and leases
44,242

 
870

 
63,266

 
896

 
 
 
 
 
 
 
 
Acquired:
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
Commercial real estate
9,975

 
3

 
5,009

 
54

Commercial
1,438

 
12

 
2,615

 
26

Consumer
5,133

 
45

 
5,551

 
52

Total acquired with no related allowance recorded
16,546

 
60

 
13,175

 
132

With an allowance recorded:
 
 
 
 
 
 
 
Consumer
128

 
3

 
169

 
3

  Total acquired with an allowance recorded
128

 
3

 
169

 
3

Total acquired impaired loans and leases
16,674

 
63

 
13,344

 
135

 
 
 
 
 
 
 
 
Total impaired loans and leases
$
60,916

 
$
933

 
$
76,610

 
$
1,031



36

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

The following tables present information regarding impaired and non-impaired loans and leases at the dates indicated:
 
At September 30, 2018
 
Commercial Real Estate
 
Commercial
 
Consumer
 
Total
 
(In Thousands)
Allowance for Loan and Lease Losses:
 
 
 
 
 
 
 
Originated:
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
$
3,514

 
$
85

 
$
3,599

Collectively evaluated for impairment
25,729

 
24,127

 
4,725

 
54,581

Total originated loans and leases
25,729

 
27,641

 
4,810

 
58,180

 
 
 
 
 
 
 
 
Acquired:
 
 
 
 
 
 
 
Individually evaluated for impairment

 

 
27

 
27

Collectively evaluated for impairment
48

 
9

 
22

 
79

Acquired with deteriorated credit quality
1,587

 
108

 
16

 
1,711

Total acquired loans and leases
1,635

 
117

 
65

 
1,817

 
 
 
 
 
 
 
 
Total allowance for loan and lease losses
$
27,364

 
$
27,758

 
$
4,875

 
$
59,997

 
 
 
 
 
 
 
 
Loans and Leases:
 
 
 
 
 
 
 
Originated:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
5,124

 
$
22,473

 
$
3,951

 
$
31,548

Collectively evaluated for impairment
3,068,073

 
1,726,549

 
974,672

 
5,769,294

Total originated loans and leases
3,073,197

 
1,749,022

 
978,623

 
5,800,842

 
 
 
 
 
 
 
 
Acquired:
 
 
 
 
 
 
 
Individually evaluated for impairment

 
785

 
2,208

 
2,993

Collectively evaluated for impairment
129,532

 
25,606

 
154,729

 
309,867

Acquired with deteriorated credit quality
78,316

 
2,571

 
33,118

 
114,005

Total acquired loans and leases
207,848

 
28,962

 
190,055

 
426,865

 
 
 
 
 
 
 
 
Total loans and leases
$
3,281,045

 
$
1,777,984

 
$
1,168,678

 
$
6,227,707




37

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
At December 31, 2017
 
Commercial Real Estate
 
Commercial
 
Consumer
 
Total
 
(In Thousands)
Allowance for Loan and Lease Losses:
 
 
 
 
 
 
 
Originated:
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
$
3,105

 
$

 
$
3,105

Collectively evaluated for impairment
26,366

 
23,078

 
5,003

 
54,447

Total originated loans and leases
26,366

 
26,183

 
5,003

 
57,552

 
 
 
 
 
 
 
 
Acquired:
 
 
 
 
 
 
 
Individually evaluated for impairment

 

 
22

 
22

Collectively evaluated for impairment
145

 
13

 
17

 
175

Acquired with deteriorated credit quality
601

 
137

 
105

 
843

Total acquired loans and leases
746

 
150

 
144

 
1,040

 
 
 
 
 
 
 
 
Total allowance for loan and lease losses
$
27,112

 
$
26,333

 
$
5,147

 
$
58,592

 
 
 
 
 
 
 
 
Loans and Leases:
 
 
 
 
 
 
 
Originated:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
13,031

 
$
29,386

 
$
3,070

 
$
45,487

Collectively evaluated for impairment
2,932,420

 
1,582,032

 
930,683

 
5,445,135

Total originated loans and leases
2,945,451

 
1,611,418

 
933,753

 
5,490,622

 
 
 
 
 
 
 
 
Acquired:
 
 
 
 
 
 
 
Individually evaluated for impairment

 
1,487

 
1,867

 
3,354

Collectively evaluated for impairment
34,244

 
6,399

 
55,921

 
96,564

Acquired with deteriorated credit quality
96,082

 
4,807

 
39,250

 
140,139

Total acquired loans and leases
130,326

 
12,693

 
97,038

 
240,057

 
 
 
 
 
 
 
 
Total loans and leases
$
3,075,777

 
$
1,624,111

 
$
1,030,791

 
$
5,730,679



38

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

Troubled Debt Restructured Loans and Leases
A specific valuation allowance for losses on TDR loans is determined by comparing the net carrying amount of the TDR loan with the restructured loan's cash flows discounted at the original effective rate.
The following table sets forth information regarding TDR loans and leases at the dates indicated:
 
At September 30, 2018

At December 31, 2017
 
(In Thousands)
Troubled debt restructurings:
 
 
 
On accrual
$
12,657

 
$
16,241

On nonaccrual
8,779

 
9,770

Total troubled debt restructurings
$
21,436

 
$
26,011


Total TDR loans and leases decreased by $4.6 million to $21.4 million at September 30, 2018 from $26.0 million at December 31, 2017, primarily driven primarily by charge-offs on TDR taxi medallion loans and payoffs on TDR loans.
The recorded investment in TDR loans and the associated specific allowances for loan and lease losses, in the originated and acquired loan and lease portfolios, that were modified during the periods indicated, are as follows.
 
At and for the Three Months Ended September 30, 2018
 
 
 
Recorded Investment
 
Specific
Allowance for
Loan and
Lease Losses
 
 
 
 
 
Defaulted (1)
 
Number of
Loans/
Leases
 
At
Modification
 
At End of
Period
 
 
Nonaccrual
Loans and
Leases
 
Additional
Commitment
 
Number of
Loans/
Leases
 
Recorded
Investment
 
(Dollars in Thousands)
Originated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
1

 
$
137

 
$
136

 
$
102

 
$
136

 
$

 
2

 
$
1,086

Residential mortgage
1

 
209

 
209

 
12

 

 

 

 

Total originated
2

 
$
346

 
$
345

 
$
114

 
$
136

 
$

 
2

 
$
1,086

______________________________________________________________________
(1) Includes loans and leases that have been modified within the past twelve months and subsequently had payment defaults during the period indicated.
 
At and for the Three Months Ended September 30, 2017
 
 
 
Recorded Investment
 
Specific
Allowance for
Loan and
Lease Losses
 
 
 
 
 
Defaulted (1)
 
Number of
Loans/
Leases
 
At
Modification
 
At End of
Period
 
 
Nonaccrual
Loans and
Leases
 
Additional
Commitment
 
Number of
Loans/
Leases
 
Recorded
Investment
 
(Dollars in Thousands)
Originated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
1

 
$
350

 
$
350

 
$
152

 
$
350

 
$

 

 
$

Equipment financing
5

 
817

 
804

 

 
804

 

 

 

Total originated
6

 
$
1,167

 
$
1,154

 
$
152

 
$
1,154

 
$

 

 
$

______________________________________________________________________
(1) Includes loans and leases that have been modified within the past twelve months and subsequently had payment defaults during the period indicated.


39

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
At and for the Nine Months Ended September 30, 2018
 
 
 
Recorded Investment
 
Specific
Allowance for
Loan and
Lease Losses
 
 
 
 
 
Defaulted (1)
 
Number of
Loans/
Leases
 
At
Modification
 
At End of
Period
 
 
Nonaccrual
Loans and
Leases
 
Additional
Commitment
 
Number of
Loans/
Leases
 
Recorded
Investment
 
(Dollars in Thousands)
Originated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
1

 
$
673

 
$
653

 
$

 
$
653

 
$

 

 
$

Commercial
10

 
1,911

 
1,867

 
856

 
1,867

 

 
2

 
1,086

Equipment financing
11

 
2,271

 
2,021

 
29

 
199

 

 

 

Residential mortgage
1

 
209

 
209

 
12

 

 

 

 

Home equity
1

 
86

 
84

 

 

 

 

 

Total originated
24

 
5,150

 
4,834

 
897

 
2,719

 

 
2

 
1,086

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
1

 
125

 
123

 

 
123

 

 

 

Total acquired
1

 
125

 
123

 

 
123

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
25

 
$
5,275

 
$
4,957

 
$
897

 
$
2,842

 
$

 
2

 
$
1,086

______________________________________________________________________
(1) Includes loans and leases that have been modified within the past twelve months and subsequently had payment defaults during the period indicated.
 
At and for the Nine Months Ended September 30, 2017
 
 
 
Recorded Investment
 
Specific
Allowance for
Loan and
Lease Losses
 
 
 
 
 
Defaulted (1)
 
Number of
Loans/
Leases
 
At
Modification
 
At End of
Period
 
 
Nonaccrual
Loans and
Leases
 
Additional
Commitment
 
Number of
Loans/
Leases
 
Recorded
Investment
 
(Dollars in Thousands)
Originated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
1

 
$
190

 
$
189

 
$

 
$

 
$

 

 
$

Commercial
10

 
7,861

 
6,793

 
2,520

 
5,111

 

 
2

 
3,431

Equipment financing
14

 
2,401

 
2,321

 

 
2,136

 

 

 

Total originated
25

 
$
10,452

 
$
9,303

 
$
2,520

 
$
7,247

 
$

 
2

 
$
3,431

______________________________________________________________________
(1) Includes loans and leases that have been modified within the past twelve months and subsequently had payment defaults during the period indicated.


40

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

The following table sets forth the Company's end-of-period balances for TDRs that were modified during the periods indicated, by type of modification.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In Thousands)
Loans with one modification:
 
 
 
 
 
 
 
Extended maturity
$

 
$

 
$
1,419

 
$
4,463

Adjusted principal

 

 

 
19

Interest only

 
350

 

 
350

Combination maturity, principal, interest rate
345

 
804

 
3,454

 
2,253

Total loans with one modification
345

 
1,154

 
4,873

 
7,085

 
 
 
 
 
 
 
 
Loans with more than one modification:
 
 
 
 
 
 
 
Extended maturity

 

 

 
1,870

Combination maturity, principal, interest rate

 

 
84

 
348

Total loans with more than one modification

 

 
84

 
2,218

 
 
 
 
 
 
 
 
Total loans with modifications
$
345

 
$
1,154

 
$
4,957

 
$
9,303

The TDR loans and leases that were modified for the three months ended September 30, 2018 and 2017 were $0.3 million and $1.2 million, respectively. The decrease in TDR loans and leases that were modified for the three months ended September 30, 2018 was primarily due to decreases in the number and size of interest only modifications and a combination of maturity, principal, and interest rate modifications.
The TDR loans and leases that were modified for the nine months ended September 30, 2018 and 2017 were $5.0 million and $9.3 million, respectively. The decrease in TDR loans and leases that were modified for the nine months ended September 30, 2018 was primarily due to a decrease in the number and magnitude of interest only and maturity-extending modifications, offset by an increase in the combination of maturity, principal, and interest rate modifications .
There were no TDR loans and leases with more than one modification during the three months ended September 30, 2018 and 2017. There was one and four TDR loans and leases with more than one modification during the nine months ended September 30, 2018 and 2017, respectively.
The net charge-offs for performing and nonperforming TDR loans and leases for the three months ended September 30, 2018 and 2017 were $35 thousand and $0.6 million, respectively. The net charge-offs for performing and nonperforming TDR loans and leases for the nine months ended September 30, 2018 and 2017 were $0.7 million and $2.6 million, respectively.
As of September 30, 2018 and 2017, there were no commitments to lend funds to debtors owing receivables whose terms had been modified in TDRs.

41

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

(6) Goodwill and Other Intangible Assets
The following table sets forth the carrying value of goodwill and other intangible assets at the dates indicated:
 
At September 30, 2018
 
At December 31, 2017
 
(In Thousands)
Goodwill
$
137,890

 
$
137,890

Additions
22,537

 

Balance at end of period
160,427

 
137,890

Other intangible assets:
 
 
 
Core deposits
5,534

 
4,955

Trade name
1,089

 
1,089

Total other intangible assets
6,623

 
6,044

Total goodwill and other intangible assets
$
167,050

 
$
143,934

At December 31, 2013, the Company concluded that the BankRI name would continue to be utilized in its marketing strategies; therefore, the trade name with carrying value of $1.1 million, has an indefinite life and ceased to amortize.
The weighted-average amortization period for the CDI is 8.5 years.
The estimated aggregate future amortization expense (in thousands) for other intangible assets for each of the next five years and thereafter is as follows:
Remainder of 2018
$
619

Year ending:
 
2019
1,681

2020
1,247

2021
839

2022
486

2023
256

Thereafter
406

Total
$
5,534

(7) Accumulated Other Comprehensive Income (Loss)
For the three and nine months ended September 30, 2018 and 2017, the Company’s accumulated other comprehensive income (loss) includes the following two components: (i) unrealized holding gains (losses) on investment securities available-for-sale; and (ii) adjustment of accumulated obligation for postretirement benefits.
 
Changes in accumulated other comprehensive income (loss) by component, net of tax, were as follows for the periods indicated:
 
Three Months Ended September 30, 2018
 
Investment
Securities
 Available-for-Sale
 
Postretirement
Benefits
 
Accumulated Other
Comprehensive
Loss
 
(In Thousands)
Balance at June 30, 2018
$
(13,578
)
 
$
163

 
$
(13,415
)
Other comprehensive income (loss)
(2,184
)
 

 
(2,184
)
Balance at September 30, 2018
$
(15,762
)
 
$
163

 
$
(15,599
)

42

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
Three Months Ended September 30, 2017
 
Investment
Securities
 Available-for-Sale
 
Postretirement
Benefits
 
Accumulated Other
Comprehensive
Loss
 
(In Thousands)
Balance at June 30, 2017
$
(2,570
)
 
$
395

 
$
(2,175
)
Other comprehensive income (loss)
282

 

 
282

Balance at September 30, 2017
$
(2,288
)
 
$
395

 
$
(1,893
)
 
Nine Months Ended September 30, 2018
 
Investment
Securities
 Available-for-Sale
 
Postretirement
Benefits
 
Accumulated Other
Comprehensive
Loss
 
(In Thousands)
Balance at December 31, 2017
$
(6,113
)
 
$
163

 
$
(5,950
)
Other comprehensive income (loss)
 before reclassifications
(9,702
)
 

 
(9,702
)
Less: amounts reclassified from accumulated other comprehensive loss
(53
)
 

 
(53
)
Balance at September 30, 2018
$
(15,762
)
 
$
163

 
$
(15,599
)
 
Nine Months Ended September 30, 2017
 
Investment
Securities
 Available-for-Sale
 
Postretirement
Benefits
 
Accumulated Other
Comprehensive
Loss
 
(In Thousands)
Balance at December 31, 2016
$
(4,213
)
 
$
395

 
$
(3,818
)
Other comprehensive income (loss)
1,925

 

 
1,925

Balance at September 30, 2017
$
(2,288
)
 
$
395

 
$
(1,893
)

The Company did not reclassify any amounts out of accumulated other comprehensive income (loss) for the three months ended September 30, 2018 as compared to $53 thousand during the nine months ended September 30, 2018. The Company did not reclassify any amounts out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2017.
(8) Derivatives and Hedging Activities
The Company utilizes loan level derivatives which consist of interest-rate contracts (swaps, caps and floors), and risk participation agreements as part of the Company's interest-rate risk management strategy for certain assets and liabilities and not for speculative purposes. Based on the Company's intended use for the loan level derivatives at inception, the Company designates the derivative as either an economic hedge of an asset or liability, or a hedging instrument subject to the hedge accounting provisions of FASB ASC Topic 815, "Derivatives and Hedging".
Interest-rate swap, cap and floor agreements are entered into as hedges against future interest-rate fluctuations on specifically identified assets or liabilities. The Company did not have derivative fair value hedges or derivative cash flow hedges as of September 30, 2018 or December 31, 2017.
Derivatives not designated as hedges are not speculative but rather result from a service the Company provides to certain customers for a fee. The Company executes loan level derivative products such as interest-rate swap agreements with commercial banking customers to aid them in managing their interest-rate risk. The interest-rate swap contracts allow the commercial banking customers to convert floating-rate loan payments to fixed-rate loan payments. The Company concurrently enters into offsetting swaps with a third party financial institution, effectively minimizing its net risk exposure resulting from such transactions. The third-party financial institution exchanges the customer's fixed-rate loan payments for floating-rate loan payments. As the interest-rate swap agreements associated with this program do not meet hedge accounting requirements, changes in the fair value are recognized directly in earnings.

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Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

The Company utilizes risk participation agreements with other banks participating in commercial loan arrangements. Participating banks guarantee the performance on borrower-related interest rate swap contracts. Risk participation agreements are derivative financial instruments and are recorded at fair value. These derivatives are not designated as hedges and therefore, changes in fair value are recorded directly through earnings at each reporting period.
Under a risk participation-out agreement, a derivative asset, the Company participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower, for a fee paid to the participating bank. Under a risk participation-in agreement, a derivative liability, the Company assumes, or participates in, a portion of the credit risk associated with the interest rate swap position with the commercial borrower, for a fee received from the other bank.
The Company offers foreign exchange contracts to commercial borrowers to accommodate their business needs. These foreign exchange contracts do not qualify as hedges for accounting purposes. To mitigate the market and liquidity risk associated with these foreign exchange contracts, the Company enters into similar offsetting positions.
Asset derivatives and liability derivatives are included in other assets and accrued expenses and other liabilities on the unaudited consolidated balance sheets.
The following tables presents the Company's customer related derivative positions for the periods indicated below for those derivatives not designated as hedging.
 
Notional Amount Maturing
 
Number of Positions
 
Less than 1 year
 
Less than 2 years
 
Less than 3 years
 
Less than 4 years
 
Thereafter
 
Total
 
Fair Value
 
September 30, 2018
 
(Dollars In Thousands)
Loan level derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Receive fixed, pay variable
80

 
$
5,768

 
$

 
$
26,820

 
$
9,168

 
$
588,162

 
$
629,918

 
$
16,300

Pay fixed, receive variable
80

 
5,768

 

 
26,820

 
9,168

 
588,162

 
629,918

 
16,300

Risk participation-out agreements
20

 

 

 
15,119

 

 
64,691

 
79,810

 
144

Risk participation-in agreements
3

 

 

 

 

 
12,817

 
12,817

 
33

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Buys foreign currency, sells U.S. currency
22

 
$
6,848

 
$

 
$

 
$

 
$

 
$
6,848

 
$
95

Sells foreign currency, buys U.S. currency
41

 
6,853

 

 

 

 

 
6,853

 
90



44

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
Notional Amount Maturing
 
Number of Positions
 
Less than 1 year
 
Less than 2 years
 
Less than 3 years
 
Less than 4 years
 
Thereafter
 
Total
 
Fair Value
 
December 31, 2017
 
(Dollars In Thousands)
Loan level derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Receive fixed, pay variable
66

 
$
3,903

 
$
2,036

 
$
27,992

 
$

 
$
460,728

 
$
494,659

 
$
562

Pay fixed, receive variable
66

 
3,903

 
2,036

 
27,992

 

 
460,728

 
494,659

 
562

Risk participation-out agreements
8

 

 

 
8,613

 

 
28,014

 
36,627

 
65

Risk participation-in agreements
1

 

 

 

 

 
3,825

 
3,825

 
10

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Buys foreign currency, sells U.S. currency
22

 
$
1,495

 
$

 
$

 
$

 
$

 
$
1,495

 
$
65

Sells foreign currency, buys U.S. currency
44

 
1,502

 

 

 

 

 
1,502

 
72

Certain derivative agreements contain provisions that require the Company to post collateral if the derivative exposure exceeds a threshold amount. The Company posted collateral to dealer counterparties of $5.9 million and $26.7 million in the normal course of business as of September 30, 2018 and December 31, 2017, respectively. Dealer counterparties posted $0.2 million to the Company in the normal course of business as of September 30, 2018 compared to no collateral as of December 31, 2017.
The tables below present the offsetting of derivatives and amounts subject to master netting agreements not offset in the unaudited consolidated balance sheet at the dates indicated.
 
At September 30, 2018
 
Gross
Amounts Recognized
 
Gross Amounts
Offset in the
Statement of Financial Position
 
Net Amounts  Presented in the Statement of Financial Position
 
Gross Amounts Not Offset in the
Statement of Financial Position
 
Net Amount
 
 
 
 
Financial Instruments Pledged
 
Cash Collateral Pledged
 
 
(In Thousands)
Asset derivatives
 
 
 
 
 
 
 
 
 
 
 
Loan level derivatives
$
22,923

 
$

 
$
22,923

 
$

 
$
200

 
$
22,723

Risk participation-out agreements
144

 

 
144

 

 

 
144

Foreign exchange contracts
95

 

 
95

 

 

 
95

Total
$
23,162

 
$

 
$
23,162

 
$

 
$
200

 
$
22,962

 
 
 
 
 
 
 
 
 
 
 
 
Liability derivatives
 
 
 
 
 
 
 
 
 
 
 
Loan level derivatives
$
22,923

 
$

 
$
22,923

 
$
5,860

 
$

 
$
17,063

Risk participation-in agreements
33

 

 
33

 

 

 
33

Foreign exchange contracts
90

 

 
90

 

 

 
90

Total
$
23,046

 
$

 
$
23,046

 
$
5,860

 
$

 
$
17,186


45

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
At December 31, 2017
 
Gross
Amounts Recognized
 
Gross Amounts
Offset in the
Statement of Financial Position
 
Net Amounts  Presented in the Statement of Financial Position
 
Gross Amounts Not Offset in the
Statement of Financial Position
 
Net Amount
 
 
 
 
Financial Instruments Pledged
 
Cash Collateral Pledged
 
 
(In Thousands)
Asset derivatives
 
 
 
 
 
 
 
 
 
 
 
Loan level derivatives
$
8,865

 
$

 
$
8,865

 
$

 
$

 
$
8,865

Risk participation-out agreements
65

 

 
65

 

 

 
65

Foreign exchange contracts
72

 

 
72

 

 

 
72

Total
$
9,002

 
$

 
$
9,002

 
$

 
$

 
$
9,002

 
 
 
 
 
 
 
 
 
 
 
 
Liability derivatives
 
 
 
 
 
 
 
 
 
 
 
Loan level derivatives
$
8,865

 
$

 
$
8,865

 
$
25,159

 
$
1,510

 
$

Risk participation-in agreements
10

 

 
10

 

 

 

Foreign exchange contracts
65

 

 
65

 

 

 

Total
$
8,940

 
$

 
$
8,940

 
$
25,159

 
$
1,510

 
$

The Company has agreements with certain of its derivative counterparties that contain credit-risk-related contingent provisions. These provisions provide the counterparty with the right to terminate its derivative positions and require the Company to settle its obligations under the agreements if the Company defaults on certain of its indebtedness or if the Company fails to maintain its status as a well-capitalized institution.
(9) Stock Based Compensation
As of September 30, 2018, the Company had three active recognition and retention plans: the 2003 Recognition and Retention Plan (the "2003 RRP") with 1,250,000 authorized shares, the 2011 Restricted Stock Award Plan ("2011 RSA") with 500,000 authorized shares and the 2014 Equity Incentive Plan ("2014 Plan") with 1,750,000 authorized shares. The 2003 RRP, the 2011 RSA and the 2014 Plan are collectively referred to as the "Plans". The purpose of the Plans is to promote the long-term financial success of the Company and its subsidiaries by providing a means to attract, retain and reward individuals who contribute to such success and to further align their interests with those of the Company's stockholders.
Of the awarded shares, generally 50% vest ratably over three years with one-third of such shares vesting at each of the first, second and third anniversary dates of the awards. These are referred to as "time-based shares". The remaining 50% of each award has a cliff vesting schedule and will vest three years after the award date based on the level of the Company's achievement of identified performance targets in comparison to the level of achievement of such identified performance targets by a defined peer group comprised of 17 financial institutions. These are referred to as "performance-based shares". If a participant leaves the Company prior to the third anniversary date of an award, any unvested shares are usually forfeited. Dividends declared with respect to shares awarded will be held by the Company and paid to the participant only when the shares vest.
Under all the Plans, shares of the Company's common stock were reserved for issuance as restricted stock awards to officers, employees, and non-employee directors of the Company. Shares issued upon vesting may be either authorized but unissued shares or reacquired shares held by the Company as treasury shares. Any shares not issued because vesting requirements are not met will be retired back to treasury and be made available again for issuance under the Plans.
During the three and nine months ended September 30, 2018, 119,040 shares were issued upon satisfaction of required conditions of the Plans. During the three and nine months ended September 30, 2017, 163,204 shares were issued upon satisfaction of required conditions of the Plans.

46

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

Total expense for the Plans was $0.7 million for both the three months ended September 30, 2018 and 2017, respectively. Total expense for the Plans was $1.8 million for both the nine months ended September 30, 2018 and 2017, respectively.
(10) Earnings per Share ("EPS")
The following table is a reconciliation of basic EPS and diluted EPS:
 
Three Months Ended
 
September 30, 2018
 
September 30, 2017
 
Basic
 
Fully
Diluted
 
Basic
 
Fully
Diluted
 
(Dollars in Thousands, Except Per Share Amounts)
Numerator:
 
 
 
 
 
 
 
Net income
$
22,460

 
$
22,460

 
$
15,366

 
$
15,366

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
80,315,050

 
80,315,050

 
76,452,539

 
76,452,539

Effect of dilutive securities

 
200,417

 

 
306,891

Adjusted weighted average shares outstanding
80,315,050

 
80,515,467

 
76,452,539

 
76,759,430

 
 
 
 
 
 
 
 
EPS
$
0.28

 
$
0.28

 
$
0.20

 
$
0.20

 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
Basic
 
Fully
Diluted
 
Basic
 
Fully
Diluted
 
(Dollars in Thousands, Except Per Share Amounts)
Numerator:
 
 
 
 
 
 
 
Net income
$
61,924


$
61,924

 
$
43,691


$
43,691

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
79,471,238

 
79,471,238

 
73,743,658

 
73,743,658

Effect of dilutive securities

 
269,754

 

 
373,522

Adjusted weighted average shares outstanding
79,471,238

 
79,740,992

 
73,743,658

 
74,117,180

 
 
 
 
 
 
 
 
EPS
$
0.78

 
$
0.78

 
$
0.59

 
$
0.59

(11) Fair Value of Financial Instruments
A description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring and non-recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. There were no changes in the valuation techniques used during the three and nine months ended September 30, 2018 and 2017.

47

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following tables set forth the carrying value of assets and liabilities measured at fair value on a recurring basis at the dates indicated:
 
Carrying Value as of September 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In Thousands)
Assets:
 

 
 

 
 

 
 

Investment securities available-for-sale:
 
 
 
 
 
 
 
GSE debentures
$

 
$
178,316

 
$

 
$
178,316

GSE CMOs

 
105,941

 

 
105,941

GSE MBSs

 
170,782

 

 
170,782

SBA commercial loan asset-backed securities

 
53

 

 
53

Corporate debt obligations

 
45,634

 

 
45,634

U.S. Treasury bonds

 
33,102

 

 
33,102

Marketable equity securities
960

 

 

 
960

Total investment securities available-for-sale
$
960

 
$
533,828

 
$

 
$
534,788

Equity securities held for trading
$
4,169

 
$

 
$

 
$
4,169

Loan level derivatives

 
22,923

 

 
22,923

Risk participation-out agreements

 
144

 

 
144

Foreign exchange contracts

 
95

 

 
95

Liabilities:
 
 
 
 
 
 
 
Loan level derivatives
$

 
$
22,923

 
$

 
$
22,923

Risk participation-in agreements

 
33

 

 
33

Foreign exchange contracts

 
90

 

 
90


48

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
Carrying Value as of December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In Thousands)
Assets:
 
 
 
 
 
 
 
Investment securities available-for-sale:
 
 
 
 
 
 
 
GSE debentures
$

 
$
149,924

 
$

 
$
149,924

GSE CMOs

 
127,022

 

 
127,022

GSE MBSs

 
189,313

 

 
189,313

SBA commercial loan asset-backed securities

 
72

 

 
72

Corporate debt obligations

 
62,683

 

 
62,683

U.S. Treasury bonds

 
8,730

 

 
8,730

Trust preferred securities

 
1,398

 

 
1,398

Marketable equity securities
982

 

 

 
982

Total investment securities available-for-sale
$
982

 
$
539,142

 
$


$
540,124

Loan level derivatives
$

 
$
8,865

 
$

 
$
8,865

Risk participation-out agreements

 
65

 

 
65

Foreign exchange contracts

 
72

 

 
72

Liabilities:
 
 
 
 
 
 


Loan level derivatives
$

 
$
8,865

 
$

 
$
8,865

Risk participation-in agreements

 
10

 

 
10

Foreign exchange contracts

 
65

 

 
65

 
 
 
 
 
 
 
 
Investment Securities Available-for-Sale
The fair value of investment securities is based principally on market prices and dealer quotes received from third-party and nationally-recognized pricing services for identical investment securities such as U.S. Treasury and agency securities. The Company's marketable equity securities are priced this way and are included in Level 1. These prices are validated by comparing the primary pricing source with an alternative pricing source when available. When quoted market prices for identical securities are unavailable, the Company uses market prices provided by independent pricing services based on recent trading activity and other observable information, including but not limited to market interest-rate curves, referenced credit spreads and estimated prepayment speeds where applicable. These investments include GSE debentures, GSE mortgage-related securities, SBA commercial loan asset backed securities, corporate debt securities, and trust preferred securities, all of which are included in Level 2. As of September 30, 2018 and December 31, 2017, no investment securities were valued using pricing models included in Level 3.
Additionally, management reviews changes in fair value from period to period and performs testing to ensure that prices received from the third parties are consistent with management's expectation of the market. Changes in the prices obtained from the pricing service are analyzed from month to month, taking into consideration changes in market conditions including changes in mortgage spreads, changes in U.S. Treasury security yields and changes in generic pricing of 15-year and 30-year securities. Additional analysis may include a review of prices provided by other independent parties, a yield analysis, a review of average life changes using Bloomberg analytics and a review of historical pricing for a particular security.
Equity Securities Held for Trading
The fair value of equity securities held for trading is based principally on market prices and dealer quotes received from third-party and nationally-recognized pricing services. The Company's equity securities are priced this way and are included in Level 1. These prices are validated by comparing the primary pricing source with an alternative pricing source when available.



49

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

Derivatives and Hedging Instruments
The fair values for the interest-rate swap assets and liabilities, risk participation agreements (RPA in/out), and foreign exchange derivatives represent a Level 2 valuation and are based on settlement values adjusted for credit risks associated with the counterparties and the Company and observable market interest rate curves and foreign exchange rates where applicable. Credit risk adjustments consider factors such as the likelihood of default by the Company and its counterparties, its net exposures and remaining contractual life. To date, the Company has not realized any losses due to a counterparty's inability to pay any net uncollateralized position. Refer also to Note 8, "Derivatives and Hedging Activities."
There were no transfers between levels for assets and liabilities recorded at fair value on a recurring basis during the three and nine months ended September 30, 2018 and 2017, respectively.
Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis are summarized below at the dated indicated:
 
Carrying Value as of September 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In Thousands)
Assets measured at fair value on a non-recurring basis:
 
 
 
 
 
 
 
Collateral-dependent impaired loans and leases
$

 
$

 
$
14,494

 
$
14,494

OREO

 

 
3,136

 
3,136

Repossessed assets

 
798

 

 
798

Total assets measured at fair value on a non-recurring basis
$

 
$
798

 
$
17,630

 
$
18,428

 
Carrying Value as of December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In Thousands)
Assets measured at fair value on a non-recurring basis:
 
 
 
 
 
 
 
Collateral-dependent impaired loans and leases
$

 
$

 
$
21,195

 
$
21,195

OREO

 

 
3,235

 
3,235

Repossessed assets

 
1,184

 

 
1,184

Total assets measured at fair value on a non-recurring basis
$

 
$
1,184

 
$
24,430

 
$
25,614

Collateral-Dependent Impaired Loans and Leases
For nonperforming loans and leases where the credit quality of the borrower has deteriorated significantly, fair values of the underlying collateral were estimated using purchase and sales agreements (Level 2), or comparable sales or recent appraisals (Level 3), adjusted for selling costs and other expenses.
Other Real Estate Owned
The Company records OREO at the lower of cost or fair value. In estimating fair value, the Company utilizes purchase and sales agreements (Level 2) or comparable sales, recent appraisals or cash flows discounted at an interest rate commensurate with the risk associated with these cash flows (Level 3), adjusted for selling costs and other expenses.
Repossessed Assets
Repossessed assets are carried at estimated fair value less costs to sell based on auction pricing (Level 2).

50

Table of Contents
BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

The table below presents quantitative information about significant unobservable inputs (Level 3) for assets measured at fair value on a recurring basis at the dates indicated.
 
Fair Value
 
Valuation Technique
 
At September 30,
2018
 
At December 31, 2017
 
 
 
(Dollars in Thousands)
 
 
Collateral-dependent impaired loans and leases
$
14,494

 
$
21,195

 
Appraisal of collateral (1)
Other real estate owned
3,136

 
3,235

 
Appraisal of collateral (1)
_______________________________________________________________________________
(1) Fair value is generally determined through independent appraisals of the underlying collateral. The Company may also use another available source of collateral assessment to determine a reasonable estimate of the fair value of the collateral. Appraisals may be adjusted by management for qualitative factors such as economic factors and estimated liquidation expenses. The range of the unobservable inputs used may vary but is generally 0% - 10% on the discount for costs to sell and 0% - 15% on appraisal adjustments.
Summary of Estimated Fair Values of Financial Instruments
The following table presents the carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company's financial instruments at the dates indicated. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which the fair value approximates carrying value include cash and cash equivalents, restricted equity securities, and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include non-maturity deposits, short-term borrowings, and accrued interest payable.
 
 
 
 
 
Fair Value Measurements
 
Carrying
Value
 
Estimated
Fair Value
 
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
 
(In Thousands)
At September 30, 2018
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
Investment securities held-to-maturity:
 
 


 
 
 
 
 
 
GSE debentures
$
50,540

 
$
48,712

 
$

 
$
48,712

 
$

GSE MBSs
11,924

 
11,507

 

 
11,507

 

Municipal obligations
52,720

 
51,564

 

 
51,564

 

Foreign government obligations
500

 
499

 

 

 
499

Loans held-for-sale
937

 
937

 

 
937

 

Loans and leases, net
6,167,710

 
6,027,640

 

 

 
6,027,640

Restricted equity securities
63,963

 
63,963

 

 

 
63,963

Financial liabilities:
 
 
 
 
 
 
 
 
 
Certificates of deposit
1,658,360

 
1,643,358

 

 
1,643,358

 

Borrowed funds
1,082,886

 
1,053,550

 

 
1,053,550

 


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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

 
 
 
 
 
Fair Value Measurements
 
Carrying
Value
 
Estimated
Fair Value
 
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
 
(In Thousands)
At December 31, 2017
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
 
GSE debentures
$
41,612

 
$
40,801

 
$

 
$
40,801

 
$

GSE MBSs
13,923

 
13,705

 

 
13,705

 

Municipal obligations
53,695

 
53,517

 

 
53,517

 

Foreign government obligations
500

 
500

 

 

 
500

Loans held-for-sale
2,628

 
2,628

 

 
2,628

 

Loans and leases, net
5,672,087

 
5,594,543

 

 

 
5,594,543

Restricted equity securities
59,369

 
59,369

 

 

 
59,369

Financial liabilities:
 
 
 
 
 
 
 
 
 
Certificates of deposit
1,207,470

 
1,198,201

 

 
1,198,201

 

Borrowed funds
1,020,819

 
995,335

 

 
995,335

 

Investment Securities Held-to-Maturity
The fair values of certain investment securities held-to-maturity are estimated using market prices provided by independent pricing services based on recent trading activity and other observable information, including but not limited to market interest-rate curves, referenced credit spreads and estimated prepayment speeds where applicable. These investments include GSE debentures, GSE MBSs, and municipal obligations, all of which are included in Level 2. Additionally, fair values of foreign government obligations are estimated using pricing models and are considered to be Level 3.
Loans Held-for-Sale
Fair value is measured using quoted market prices when available. These assets are typically categorized as Level 1. If quoted market prices are not available, comparable market values may be utilized. These assets are typically categorized as Level 2.
Loans and Leases
The fair values of performing loans and leases was estimated by segregating the portfolio into its primary loan and lease categories—commercial real estate mortgage, multi-family mortgage, construction, commercial, equipment financing, condominium association, residential mortgage, home equity and other consumer. These categories were further disaggregated based upon significant financial characteristics such as type of interest rate (fixed / variable) and payment status (current / past-due). The Company discounts the contractual cash flows for each loan category using interest rates currently being offered for loans with similar terms to borrowers of similar quality and incorporates estimates of future loan prepayments.
Restricted Equity Securities
The fair values of certain restricted equity securities are estimated using observable inputs adjusted for other unobservable information, including but not limited to probability assumptions and similar discounts where applicable. These restricted equity securities are considered to be Level 3.
Deposits
The fair values of deposit liabilities with no stated maturity (demand, NOW, savings and money market savings accounts) are equal to the carrying amounts payable on demand. The fair value of certificates of deposit represents contractual cash flows discounted using interest rates currently offered on deposits with similar characteristics and remaining maturities. The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the Company's core deposit relationships (deposit-based intangibles).

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

Borrowed Funds
The fair value of federal funds purchased is equal to the amount borrowed. The fair value of FHLBB advances and repurchase agreements represents contractual repayments discounted using interest rates currently available for borrowings with similar characteristics and remaining maturities. The fair values reported for retail repurchase agreements are based on the discounted value of contractual cash flows. The discount rates used are representative of approximate rates currently offered on borrowings with similar characteristics and maturities. The fair values reported for subordinated deferrable interest debentures are based on the discounted value of contractual cash flows. The discount rates used are representative of approximate rates currently offered on instruments with similar terms and maturities.
(12) Commitments and Contingencies
Off-Balance Sheet Financial Instruments
The Company is party to off-balance sheet financial instruments in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include loan commitments, standby and commercial letters of credits, and loan level derivatives. According to GAAP, these financial instruments are not recorded in the financial statements until they are funded or related fees are incurred or received.
The contract amounts reflect the extent of the involvement the Company has in particular classes of these instruments. Such commitments involve, to varying degrees, elements of credit risk and interest-rate risk in excess of the amount recognized in the consolidated balance sheets. The Company's exposure to credit loss in the event of non-performance by the counterparty is represented by the fair value of the instruments. The Company uses the same policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Financial instruments with off-balance-sheet risk at the dates indicated follow:
 
At September 30, 2018

At December 31, 2017
 
(In Thousands)
Financial instruments whose contract amounts represent credit risk:
 

 
Commitments to originate loans and leases:
 

 
Commercial real estate
$
130,744


$
76,653

Commercial
86,329


83,032

Residential mortgage
22,195


28,745

Unadvanced portion of loans and leases
611,073


571,668

Unused lines of credit:
 

 
Home equity
466,643


407,552

Other consumer
26,599


34,191

Other commercial
330


323

Unused letters of credit:


 
Financial standby letters of credit
10,123


12,422

Performance standby letters of credit
1,036


736

Commercial and similar letters of credit
2,385


184

Loan level derivatives (Notional principal amounts):





Receive fixed, pay variable
629,918


494,659

Pay fixed, receive variable
629,918


494,659

Risk participation-out agreements
79,810


36,627

Risk participation-in agreements
12,817

 
3,825

Foreign exchange contracts (Notional amounts):





Buys foreign currency, sells U.S. currency
6,848


1,495

Sells foreign currency, buys U.S. currency
6,853


1,502


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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee by the customer. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if any, is based on management's credit evaluation of the borrower.
Standby and commercial letters of credits are conditional commitments issued by the Company to guarantee performance of a customer to a third party. These standby and commercial letters of credit are primarily issued to support the financing needs of the Company's commercial customers. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
From time to time, the Company enters into loan level derivatives, risk participation agreements or foreign exchange contracts with commercial customers and third-party financial institutions. These derivatives allow the Company to offer long-term fixed-rate commercial loans while mitigating the interest-rate or foreign exchange risk of holding those loans. In a loan level derivative transaction, the Company lends to a commercial customer on a floating-rate basis and then enters into an loan level derivative with that customer. Concurrently, the Company enters into offsetting swaps with a third-party financial institution, effectively minimizing its net interest-rate risk exposure resulting from such transactions.
The fair value of derivative assets and liabilities was $23.2 million and $23.0 million, respectively, as of September 30, 2018. The fair value of derivative assets and liabilities was $9.0 million and $8.9 million, respectively, as of December 31, 2017.
The fair value of foreign exchange assets and liabilities was $95 thousand and $90 thousand, respectively, as of September 30, 2018. The fair value of foreign exchange assets and liabilities was $72 thousand and $65 thousand as of December 31, 2017.
Lease Commitments
The Company leases certain office space under various noncancellable operating leases. These leases have original terms ranging from 5 years to over 25 years. Certain leases contain renewal options and escalation clauses which can increase rental expenses based principally on the consumer price index and fair market rental value provisions.
A summary of future minimum rental payments under such leases at the dates indicated follows:
 
Minimum Rental Payments
 
(In Thousands)
 
 
Remainder of 2018
$
1,392

Year ending:
 
2019
5,308

2020
4,635

2021
3,667

2022
3,001

2023
2,421

Thereafter
8,933

Total
$
29,357

Certain leases contain escalation clauses for real estate taxes and other expenditures, which are not included above. Total rental expense was $1.6 million and $1.4 million for the three months ended September 30, 2018 and 2017, respectively. Total rental expense was $4.6 million and $4.2 million for the nine months ended September 30, 2018 and 2017, respectively. The increase in expense was due to the addition of three operating leases from the First Commons Bank acquisition and the opening of banking offices in Wakefield and Braintree, Massachusetts. In July 2018, a lease termination agreement was entered into for one of the former First Commons Bank branches.

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

Legal Proceedings
In the normal course of business, there are various outstanding legal proceedings. In the opinion of management, after consulting with legal counsel, the consolidated financial position and results of operations of the Company are not expected to be affected materially by the outcome of such proceedings.
(13) Revenue from Contracts with Customers
Overview
Revenue from contracts with customers in the scope of Accounting Standards Codification (“ASC”) ("Topic 606") is measured based on the consideration specified in the contract with a customer and excludes amounts collected on behalf of third parties. The Company recognizes revenue from contracts with customers when it satisfies its performance obligations.
The Company’s performance obligations are generally satisfied as services are rendered and can either be satisfied at a point in time or over time. Unsatisfied performance obligations at the report date are not material to our consolidated financial statements.
In certain cases, other parties are involved with providing services to our customers. If the Company is a principal in the transaction (providing services itself or through a third party on its behalf), revenues are reported based on the gross consideration received from the customer and any related expenses are reported gross in noninterest expense. If the Company is an agent in the transaction (referring to another party to provide services), the Company reports its net fee or commission retained as revenue.
Accounting Policy Updates
The Company adopted Topic 606, “Revenue from Contracts with Customers” effective January 1, 2018 and has applied the guidance to all contracts within the scope of Topic 606 as of that date. As a result, the Company has modified its accounting policy for revenue recognition as detailed in this Note.
As discussed in Note 1, the Company applied Topic 606 using the modified retrospective method, therefore, the prior period comparative information has not been adjusted and continues to be reported under Topic 605. There was no cumulative effect adjustment as of January 1, 2018, and there were no material changes to our consolidated financial statements at or for the nine months ended September 30, 2018, as a result of adopting Topic 606.
The Company applied the practical expedient pertaining to contracts with original expected duration of one year or less and does not disclose information about remaining performance obligations on such contracts.
The Company also applied the practical expedient pertaining to contracts for which, at contract inception, the period between when the entity transfers the services and when the customer pays for those services will be one year or less. As such, the Company does not adjust the consideration from customers for the effects of a significant financing component.
A substantial portion of the Company’s revenue is specifically excluded from the scope of Topic 606. This exclusion is associated with financial instruments, including interest income on loans and investment securities, in addition to loan derivative income and gains on loan and investment sales. For the revenue that is in-scope of Topic 606, the following is a description of principal activities from which the Company generates its revenue from contracts with customers, separated by the timing of revenue recognition.
Revenue Recognized at a Point in Time
The Company recognizes revenue that is transactional in nature and such revenue is earned at a point in time. Revenue that is recognized at a point in time includes card interchange fees (fee income related to debit card transactions), ATM fees, wire transfer fees, overdraft charge fees, and stop-payment and returned check fees. Additionally, revenue is collected from loan fees, such as letters of credit, line renewal fees and application fees. Such revenue is derived from transactional information and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction.

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BROOKLINE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)

Revenue Recognized Over Time
The Company recognizes revenue over a period of time, generally monthly, as services are performed and performance obligations are satisfied. Such revenue includes commissions on investments, insurance sales and service charges on deposit accounts. Fee revenue from service charges on deposit accounts represent the service charges assessed to customers who hold deposit accounts at the Bank.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. These statements, which are based on certain assumptions and describe Brookline Bancorp, Inc.’s (the “Company’s”) future plans, strategies and expectations, can generally be identified by the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. These statements include, among others, statements regarding the Company’s intent, belief or expectations with respect to economic conditions, trends affecting the Company’s financial condition or results of operations, and the Company’s exposure to market, liquidity, interest-rate and credit risk.
Forward-looking statements are based on the current assumptions underlying the statements and other information with respect to the beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions of management and the financial condition, results of operations, future performance and business are only expectations of future results. Although the Company believes that the expectations reflected in the Company’s forward-looking statements are reasonable, the Company’s actual results could differ materially from those projected in the forward-looking statements as a result of, among other factors, adverse conditions in the capital and debt markets; changes in interest rates; competitive pressures from other financial institutions; the effects of weakness in general economic conditions on a national basis or in the local markets in which the Company operates, including changes which adversely affect borrowers’ ability to service and repay their loans and leases; changes in the value of securities and other assets in the Company’s investment portfolio; changes in loan and lease default and charge-off rates; the adequacy of allowances for loan and lease losses; decreases in deposit levels that necessitate increases in borrowing to fund loans and investments; operational risks including, but not limited to, cybersecurity and natural disaster; changes in government regulation; the risk that goodwill and intangibles recorded in the Company’s financial statements will become impaired; and changes in assumptions used in making such forward-looking statements, as well as the other risks and uncertainties detailed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and other filings submitted to the Securities and Exchange Commission. Forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.
Introduction
Brookline Bancorp, Inc., a Delaware corporation, operates as a multi-bank holding company for Brookline Bank and its subsidiaries; Bank Rhode Island and its subsidiaries ("BankRI"); First Ipswich Bank and its subsidiaries ("First Ipswich"); and Brookline Securities Corp.
As a commercially-focused financial institution with 51 full-service banking offices throughout greater Boston, the north shore of Massachusetts and Rhode Island, the Company, through Brookline Bank, BankRI and First Ipswich (the “Banks”), offers a wide range of commercial, business and retail banking services, including a full complement of cash management products, foreign exchange services, on-line and mobile banking services, consumer and residential loans and investment advisory services, designed to meet the financial needs of small- to mid-sized businesses and individuals throughout central New England. Specialty lending activities include equipment financing primarily in the New York and New Jersey metropolitan area.
The Company focuses its business efforts on profitably growing its commercial lending businesses, both organically and through acquisitions. The Company’s customer focus, multi-bank structure, and risk management are integral to its organic growth strategy and serve to differentiate the Company from its competitors. As full-service financial institutions, the Banks and their subsidiaries focus their efforts on developing and deepening long-term banking relationships with qualified customers through a full complement of products and excellent customer service, and strong risk management.

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The Company manages the Banks under uniform strategic objectives, with one set of uniform policies consistently applied by one executive management team. Within this environment, the Company believes that the ability to make customer decisions locally enhances management's motivation, service levels and, as a consequence, the Company's financial results. As such, while most back-office functions are consolidated at the holding company level, branding and decision-making, including credit decisions and pricing, remain largely local in order to better meet the needs of bank customers and further motivate the Banks’ commercial, business and retail bankers. These credit decisions, at the local level, are executed through corporate policies overseen by the Company's credit department.
The competition for loans and leases and deposits remains intense. While the economy has improved in 2018, the Company expects the operating environment to remain challenging. The volume of loan and lease originations and loan and lease losses will depend, to a large extent, on how the economy performs. Loan and lease growth and deposit growth are also greatly influenced by the rate-setting actions of the Board of Governors of the Federal Reserve System (“FRB”). A sustained, low interest rate environment with a flat interest rate curve may negatively impact the Company's yields and net interest margin. While the Company is slightly asset sensitive and should benefit from rising rates, these rate increases could precipitate a change in the mix and volume of the Company's deposits and loans. The future operating results of the Company will depend on its ability to maintain or increase the current net interest margin, while minimizing exposure to credit risk, along with increasing sources of non-interest income, while controlling the growth of non-interest expenses.
The Company and the Banks are supervised, examined and regulated by the FRB. As a Massachusetts-chartered savings bank and trust company, respectively, Brookline Bank and First Ipswich are also subject to regulation under the laws of the Commonwealth of Massachusetts and the jurisdiction of the Massachusetts Division of Banks. As a Rhode Island-chartered financial institution, BankRI is also subject to regulation under the laws of the State of Rhode Island and the jurisdiction of the Banking Division of the Rhode Island Department of Business Regulation. The FDIC continues to insure each of the Banks’ deposits up to $250,000 per depositor. As a Massachusetts-chartered savings bank, Brookline Bank is also insured by the Depositors Insurance Fund (“DIF”), a private industry-sponsored company. The DIF insures savings bank deposits in excess of the FDIC insurance limits. As such, Brookline Bank offers 100% insurance on all deposits as a result of a combination of insurance from the FDIC and the DIF.
The Company’s common stock is traded on the Nasdaq Global Select MarketSM under the symbol “BRKL.”

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Selected Financial Data
The following is based in part on, and should be read in conjunction with, the consolidated financial statements and accompanying notes, and other information appearing elsewhere in this Form 10-Q.
 
At and for the Three Months Ended
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
2018
 
2018
 
2018
 
2017
 
2017
 
(Dollars in Thousands, Except Per Share Data)
PER COMMON SHARE DATA
 
 
 
 
 
 
 
 
 
Earnings per share - Basic
$
0.28

 
$
0.26

 
$
0.24

 
$
0.09

 
$
0.20

Earnings per share - Diluted
0.28

 
0.26

 
0.24

 
0.09

 
0.20

Book value per share (end of period)
11.08

 
10.94

 
10.80

 
10.49

 
10.52

Tangible book value per share (end of period) (1)
9.00

 
8.85

 
8.69

 
8.61

 
8.63

Dividends paid per common share
0.10

 
0.10

 
0.09

 
0.09

 
0.09

Stock price (end of period)
16.70

 
18.60

 
16.20

 
15.70

 
15.50

 
 
 
 
 
 
 
 
 
 
PERFORMANCE RATIOS (2)
 
 
 
 
 
 
 
 
 
Net interest margin (taxable equivalent basis)
3.57
%
 
3.64
%
 
3.66
%
 
3.59
%
 
3.57
%
Return on average assets
1.23
%
 
1.15
%
 
1.08
%
 
0.41
%
 
0.92
%
Return on average tangible assets (1)
1.26
%
 
1.17
%
 
1.10
%
 
0.41
%
 
0.94
%
Return on average stockholders' equity
10.10
%
 
9.53
%
 
8.98
%
 
3.37
%
 
7.64
%
Return on average tangible stockholders' equity (1)
12.44
%
 
11.80
%
 
11.01
%
 
4.09
%
 
9.31
%
Dividend payout ratio (1)
35.81
%
 
38.56
%
 
37.11
%
 
101.05
%
 
44.90
%
Efficiency ratio (3)
53.76
%
 
55.25
%
 
60.83
%
 
55.38
%
 
56.37
%
 
 
 
 
 
 
 
 
 
 
ASSET QUALITY RATIOS
 
 
 
 
 
 
 
 
 
Net loan and lease charge-offs as a percentage of average loans and leases (annualized)
0.04
%
 
0.15
%
 
0.03
%
 
0.60
%
 
0.14
%
Nonperforming loans and leases as a percentage of total loans and leases
0.41
%
 
0.42
%
 
0.43
%
 
0.48
%
 
0.71
%
Nonperforming assets as a percentage of total assets
0.41
%
 
0.41
%
 
0.42
%
 
0.47
%
 
0.66
%
Total allowance for loan and lease losses as a percentage of total loans and leases
0.96
%
 
0.94
%
 
0.96
%
 
1.02
%
 
1.16
%
Allowance for loan and lease losses related to originated loans and leases as a percentage of originated loans and leases (1)
1.00
%
 
0.98
%
 
1.03
%

1.05
%

1.20
%
 
 
 
 
 
 
 
 
 
 
CAPITAL RATIOS
 
 
 
 
 
 
 
 
 
Stockholders' equity to total assets
12.16
%
 
12.04
%
 
11.94
%
 
11.86
%
 
12.04
%
Tangible equity ratio (1)
10.11
%
 
9.97
%
 
9.85
%
 
9.94
%
 
10.09
%
 
 
 
 
 
 
 
 
 
 
FINANCIAL CONDITION DATA
 
 
 
 
 
 
 
 
 
Total assets
$
7,320,596

 
$
7,285,710

 
$
7,248,114

 
$
6,780,249

 
$
6,686,284

Total loans and leases
6,227,707

 
6,171,274

 
6,114,461

 
5,730,679

 
5,639,440

Allowance for loan and lease losses
59,997

 
57,981

 
58,714

 
58,592

 
65,413

Investment securities available-for-sale
534,788

 
558,602

 
558,357

 
540,124

 
522,910

Investment securities held-to-maturity
115,684

 
116,670

 
117,352

 
109,730

 
107,738

Investment securities trading
4,169

 

 

 

 

Goodwill and identified intangible assets
167,050

 
167,587

 
168,593

 
143,934

 
144,453

Total deposits
5,233,611

 
5,198,280

 
5,191,520

 
4,871,343

 
4,805,683

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Continued)


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At and for the Three Months Ended
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
2018
 
2018
 
2018
 
2017
 
2017
 
(Dollars in Thousands, Except Per Share Data)
 
 
 
 
 
 
 
 
 
 
Total borrowed funds
1,082,886

 
1,110,923

 
1,099,429

 
1,020,819

 
985,895

Stockholders' equity
890,368

 
877,283

 
865,777

 
803,830

 
804,762

 
 
 
 
 
 
 
 
 
 
EARNINGS DATA
 
 
 
 
 
 
 
 
 
Net interest income
$
62,332

 
$
62,717

 
$
59,491

 
$
57,657

 
$
56,843

Provision for credit losses
2,717

 
1,470

 
641

 
1,802

 
2,911

Non-interest income
7,069

 
5,526

 
6,168

 
5,815

 
5,973

Non-interest expense
37,310

 
37,702

 
39,938

 
35,152

 
35,408

Net income
22,460

 
20,831

 
18,633

 
6,827

 
15,366

_______________________________________________________________________________
(1) Refer to "Non-GAAP Financial Measures and Reconciliations to GAAP".

(2) All performance ratios are annualized and are based on average balance sheet amounts, where applicable.

(3) Efficiency ratio is calculated by dividing non-interest expense by the sum of non-interest income and net interest income.
Executive Overview
Growth
Total assets of $7.3 billion as of September 30, 2018 increased $540.3 million, or 10.6% on an annualized basis, from December 31, 2017. The increase was primarily driven by increases in loans and leases.
Total loans and leases of $6.2 billion as of September 30, 2018 increased $497.0 million, or 11.6% on an annualized basis, from December 31, 2017. The Company's commercial loan portfolios, which are comprised of commercial real estate loans and commercial loans and leases, totaled $5.1 billion, or 81.2% of total loans and leases, as of September 30, 2018, an increase of $359.1 million, or 10.2% on an annualized basis, from $4.7 billion, or 82.0% of total loans and leases, as of December 31, 2017.
Total deposits of $5.2 billion as of September 30, 2018 increased $362.3 million, or 9.9% on an annualized basis, from $4.9 billion as of December 31, 2017. Core deposits, which include demand checking, NOW, money market and savings accounts, totaled $3.6 billion, or 68.3% of total deposits as of September 30, 2018, a decrease of $88.6 million, or 3.2% on an annualized basis from $3.7 billion, or 75.2% of total deposits, as of December 31, 2017. Certificate of deposit balances totaled $1.7 billion, or 31.7% of total deposits as of September 30, 2018, an increase of $450.9 million, or 49.8% on an annualized basis from $1.2 billion, or 24.8% of total deposits, as of December 31, 2017.
Asset Quality
Nonperforming assets as of September 30, 2018 totaled $29.7 million, or 0.41% of total assets, compared to $31.7 million, or 0.47% of total assets, as of December 31, 2017. Net charge-offs for the three months ended September 30, 2018 were $0.6 million, or 0.04% of average loans and leases on an annualized basis, compared to $2.0 million, or 0.14% of average loans and leases on an annualized basis, for the three months ended September 30, 2017. The decrease in nonperforming loans and leases and nonperforming assets was primarily driven by the partial charge offs on certain taxi medallion loans.
The ratio of the allowance for loan and lease losses to total loans and leases was 0.96% as of September 30, 2018, compared to 1.02% as of December 31, 2017. Excluding the loans acquired from BankRI, First Ipswich and First Commons Bank, the allowance for loan and lease losses related to originated loans and leases as a percentage of the total originated loan and lease portfolio was 1.00% as of September 30, 2018, compared to 1.05% as of December 31, 2017. The Company continued to employ its historical underwriting methodology throughout the three month period ended September 30, 2018. Refer also to Note 5, "Allowance for Loan and Lease Losses."

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Capital Strength
The Company is a "well-capitalized" bank holding company as defined in the FRB's Regulation Y. The Company's common equity Tier 1 Capital Ratio was 12.28% as of September 30, 2018, compared to 12.02% as of December 31, 2017. The Company's Tier 1 Leverage Ratio was 10.62% as of September 30, 2018, compared to 10.43% as of December 31, 2017. As of September 30, 2018, the Company's Tier 1 Risk-Based Capital Ratio was 12.59%, compared to 12.34% as of December 31, 2017. The Company's Total Risk-Based Capital Ratio was 14.84% as of September 30, 2018, compared to 14.75% as of December 31, 2017.
The Company's ratio of stockholders' equity to total assets was 12.16% and 11.86% as of September 30, 2018 and December 31, 2017, respectively. The Company's tangible equity ratio was 10.11% and 9.94% as of September 30, 2018 and December 31, 2017, respectively.
Net Income
For the three months ended September 30, 2018, the Company reported net income of $22.5 million, or $0.28 per basic and diluted share, an increase of $7.1 million, or 61.6% on an annualized basis, from $15.4 million, or $0.20 per basic and diluted share for the three months ended September 30, 2017. This increase in net income is primarily the result of an increase in net interest income of $5.5 million, a decrease in provision for income taxes of $2.2 million, an increase in non-interest income of $1.1 million and a decrease in the provision for credit losses of $0.2 million, partially offset by an increase in non-interest expense of $1.9 million. Refer to “Results of Operations" below for further discussion.
For the nine months ended September 30, 2018, the Company reported net income of $61.9 million, or $0.78 per basic and diluted share, an increase of $18.2 million, or 55.6% on an annualized basis, from $43.7 million, or $0.59 per basic and diluted share for the nine months ended September 30, 2017. This increase in net income is primarily the result of an increase in net interest income of $19.0 million, a decrease in the provision for credit losses of $12.4 million and a decrease in the provision for income taxes of $5.8 million, partially offset by an increase in non-interest expense of $11.0 million, a decrease in non-interest income of $7.6 million and an increase in net income attributed to controlling interest of $0.3 million. Refer to “Results of Operations" below for further discussion.
The annualized return on average assets was 1.23% for the three months ended September 30, 2018, compared to 0.92% for the three months ended September 30, 2017. The annualized return on average stockholders' equity was 10.10% for the three months ended September 30, 2018, compared to 7.64% for the three months ended September 30, 2017.
The net interest margin remained consistent at 3.57% for the three months ended September 30, 2018, and September 30, 2017. The consistency in the net interest margin is a result of an increase in the yield on interest-earning assets of 40 basis points to 4.65% for the three months ended September 30, 2018 from 4.25% for the three months ended September 30, 2017, partially offset by an increase of 54 basis points in the Company's overall cost of funds to 1.38% for the three months ended September 30, 2018 from 0.84% for the three months ended September 30, 2017.
The net interest margin was 3.62% for the nine months ended September 30, 2018, up from 3.56% for the nine months ended September 30, 2017. The increase in the net interest margin is a result of an increase in the yield on interest-earning assets of 34 basis points to 4.51% for the nine months ended September 30, 2018 from 4.17% for the nine months ended September 30, 2017, partially offset by an increase of 36 basis points in the Company's overall cost of funds to 1.17% for the nine months ended September 30, 2018 from 0.81% for the nine months ended September 30, 2017.
The Company’s net interest margin and net interest income have demonstrated improvement as interest rates continue to rise, however the Company’s net interest margin and net interest income may come under pressure due to competitive pricing in all loan categories and the Company’s ability to contain cost of funds.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") defines “critical accounting policies” as those involving significant judgments and difficult or complex assumptions by management, often as a result of the need to make estimates about matters that are inherently uncertain or variable, which have, or could have, a material impact on the carrying value of certain assets or net income. The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. As discussed in the Company’s 2017 Annual Report on Form 10-K, management has identified the valuation of available-for-sale securities, accounting for assets and liabilities acquired, the determination of the allowance for loan and lease losses, the review of goodwill and intangibles for impairment, income tax accounting, and valuation of deferred tax assets as the Company’s most critical accounting policies.

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Non-GAAP Financial Measures and Reconciliation to GAAP
In addition to evaluating the Company’s results of operations in accordance with GAAP, management periodically supplements this evaluation with an analysis of certain non-GAAP financial measures, such as operating earnings metrics, the return on average tangible assets, return on average tangible equity, the tangible equity ratio, tangible book value per share, dividend payout ratio, and the ratio of the allowance for loan and lease losses related to originated loans and leases as a percentage of originated loans and leases. Management believes that these non-GAAP financial measures provide information useful to investors in understanding the Company’s underlying operating performance and trends, and facilitates comparisons with the performance assessment of financial performance, including non-interest expense control, while the tangible equity ratio and tangible book value per share are used to analyze the relative strength of the Company’s capital position.
The following table summarizes the Company’s operating earnings, operating return on average assets and operating return on average stockholders’ equity for the periods indicated:
 
At and for the Three Months Ended  
September 30,
 
At and for the Nine Months Ended  
September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in Thousands)
Net income, as reported
$
22,460

 
$
15,366

 
$
61,924

 
$
43,691

Less:
 
 
 
 
 
 
 
Security gains (after-tax of 24.0% for 2018 and 35.9% for 2017) (1)

 

 
883

 

Add:
 
 
 
 
 
 
 
Merger and acquisition-related expenses (after-tax of 24.0% for 2018 and 35.9% for 2017) (1) (2)
17

 
135

 
2,478

 
133

Operating earnings
$
22,477

 
$
15,501

 
$
63,519

 
$
43,824

 
 
 
 
 
 
 
 
Basic earnings per share, as reported
$
0.28

 
$
0.20

 
$
0.78

 
$
0.59

Less:
 
 
 
 
 
 
 
Security gains

 

 
0.01

 

Add:
 
 
 
 
 
 
 
Merger and acquisition-related expenses (2)

 

 
0.03

 

Basic operating earnings per share
$
0.28

 
$
0.20

 
$
0.80

 
$
0.59

___________________________________________________________________
(1) Based on current expected effective tax rate of 24% for the remainder of 2018.
(2) Merger and acquisition expense related to the acquisition of First Commons Bank in the first quarter of 2018.


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The following table summarizes the Company’s return on average tangible assets and return on average tangible stockholders’ equity for the periods indicated:
 
Three Months Ended
 
September 30,
2018
 
June 30,
2018
 
March 31, 2018
 
December 31,
2017
 
September 30,
2017
 
(Dollars in Thousands)
Operating earnings
$
22,477

 
$
21,085

 
$
19,958

 
$
15,922

 
$
15,501

 
 
 
 
 
 
 
 
 
 
Average total assets
$
7,302,413

 
$
7,273,793

 
$
6,927,309

 
$
6,725,730

 
$
6,681,042

Less: Average goodwill and average identified intangible assets, net
167,313

 
168,185

 
152,377

 
144,226

 
144,747

Average tangible assets
$
7,135,100

 
$
7,105,608

 
$
6,774,932

 
$
6,581,504

 
$
6,536,295

 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)
1.23
%
 
1.15
%
 
1.08
%
 
0.41
%
 
0.92
%
Less:
 
 
 
 
 
 
 
 
 
Security gains
%
 
%
 
0.05
%
 
%
 
%
Add:
 
 
 
 
 
 
 
 
 
Merger and acquisition-related expenses
%
 
0.01
%
 
0.12
%
 
0.01
%
 
0.01
%
Impact of Tax Reform Act
%
 
%
 
%
 
0.53
%
 
%
Operating return on average assets (annualized)
1.23
%
 
1.16
%
 
1.15
%
 
0.95
%
 
0.93
%
 
 
 
 
 
 
 
 
 
 
Return on average tangible assets (annualized)
1.26
%
 
1.17
%
 
1.10
%
 
0.41
%
 
0.94
%
Less:
 
 
 
 
 
 
 
 
 
Security gains
%
 
%
 
0.05
%
 
%
 
%
Add:
 
 
 
 
 
 
 
 
 
Merger and acquisition-related expenses
%
 
0.02
%
 
0.13
%
 
0.01
%
 
0.01
%
Impact of Tax Reform Act
%
 
%
 
%
 
0.55
%
 
%
Operating return on average tangible assets (annualized)
1.26
%
 
1.19
%
 
1.18
%
 
0.97
%
 
0.95
%
 
 
 
 
 
 
 
 
 
 
Average total stockholders' equity
$
889,259

 
$
874,513

 
$
829,598

 
$
811,219

 
$
804,666

Less: Average goodwill and average identified intangible assets, net
167,313

 
168,185

 
152,377

 
144,226

 
144,747

Average tangible stockholders' equity
$
721,946

 
$
706,328

 
$
677,221

 
$
666,993

 
$
659,919

 
 
 
 
 
 
 
 
 
 
Return on average stockholders' equity (annualized)
10.10
%
 
9.53
%
 
8.98
%
 
3.37
%
 
7.64
%
Less:
 
 
 
 
 
 
 
 
 
Security gains
%
 
%
 
0.43
%
 
%
 
%
Add:
 
 
 
 
 
 
 
 
 
Merger and acquisition-related expenses
0.01
%
 
0.11
%
 
1.07
%
 
0.06
%
 
0.07
%
Impact of Tax Reform Act
%
 
%
 
%
 
4.42
%
 
%
Operating return on average stockholders' equity (annualized)
10.11
%
 
9.64
%
 
9.62
%
 
7.85
%
 
7.71
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Continued)


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Three Months Ended
 
September 30,
2018
 
June 30,
2018
 
March 31, 2018
 
December 31,
2017
 
September 30,
2017
 
(Dollars in Thousands)
Return on average tangible stockholders' equity (annualized)
12.44
%
 
11.80
%
 
11.01
%
 
4.09
%
 
9.31
%
Less:
 
 
 
 
 
 
 
 
 
Security gains
%
 
%
 
0.52
%
 
%
 
%
Add:
 
 
 
 
 
 
 
 
 
Merger and acquisition-related expenses
0.01
%
 
0.14
%
 
1.30
%
 
0.08
%
 
0.09
%
Impact of Tax Reform Act
%
 
%
 
%
 
5.38
%
 
%
Operating return on average tangible stockholders' equity (annualized)
12.45
%
 
11.94
%
 
11.79
%
 
9.55
%
 
9.40
%

 
Three Months Ended
 
September 30,
2018

June 30,
2018

March 31, 2018

December 31,
2017

September 30,
2017
 
(Dollars in Thousands)
Net income, as reported
$
22,460

 
$
20,831

 
$
18,633

 
$
6,827

 
$
15,366

 
 
 
 
 
 
 
 
 
 
Average total assets
$
7,302,413

 
$
7,273,793

 
$
6,927,309

 
$
6,725,730

 
$
6,681,042

Less: Average goodwill and average identified intangible assets, net
167,313


168,185


152,377


144,226


144,747

Average tangible assets
$
7,135,100

 
$
7,105,608

 
$
6,774,932

 
$
6,581,504

 
$
6,536,295

 
 
 
 
 
 
 
 
 
 
Return on average tangible assets (annualized)
1.26
%
 
1.17
%
 
1.10
%
 
0.41
%
 
0.94
%
 
 
 
 
 
 
 
 
 
 
Average total stockholders' equity
$
889,259

 
$
874,513

 
$
829,598

 
$
811,219

 
$
804,666

Less: Average goodwill and average identified intangible assets, net
167,313

 
168,185

 
152,377

 
144,226

 
144,747

Average tangible stockholders' equity
$
721,946

 
$
706,328

 
$
677,221

 
$
666,993

 
$
659,919

 
 
 
 
 
 
 
 
 
 
Return on average tangible stockholders' equity (annualized)
12.44
%
 
11.80
%
 
11.01
%
 
4.09
%
 
9.31
%

The following tables summarize the Company's tangible equity ratio for the periods indicated:
 
Three Months Ended
 
September 30,
2018
 
June 30,
2018
 
March 31,
2018
 
December 31,
2017
 
September 30,
2017
 
(Dollars in Thousands)
Total stockholders' equity
$
890,368

 
$
877,283

 
$
865,777

 
$
803,830

 
$
804,762

Less: Goodwill and identified intangible assets, net
167,050

 
167,587

 
168,593

 
143,934

 
144,453

Tangible stockholders' equity
$
723,318

 
$
709,696

 
$
697,184

 
$
659,896

 
$
660,309

 
 
 
 
 
 
 
 
 
 
Total assets
$
7,320,596

 
$
7,285,710

 
$
7,248,114

 
$
6,780,249

 
$
6,686,284

Less: Goodwill and identified intangible assets, net
167,050

 
167,587

 
168,593

 
143,934

 
144,453

Tangible assets
$
7,153,546

 
$
7,118,123

 
$
7,079,521

 
$
6,636,315

 
$
6,541,831

 
 
 
 
 
 
 
 
 
 
Tangible equity ratio
10.11
%
 
9.97
%
 
9.85
%
 
9.94
%
 
10.09
%


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The following tables summarize the Company's tangible book value per share for the periods indicated:
 
Three Months Ended
 
September 30,
2018
 
June 30,
2018
 
March 31, 2018
 
December 31,
2017
 
September 30,
2017
 
(Dollars in Thousands)
Tangible stockholders' equity
$
723,318

 
$
709,696

 
$
697,184

 
$
659,896

 
$
660,309

 
 
 
 
 
 
 
 
 
 
Common shares issued
85,177,172

 
85,177,172

 
85,177,172

 
81,695,695

 
81,695,695

Less:
 
 
 
 
 
 
 
 
 
Treasury shares
4,291,317

 
4,409,501

 
4,401,333

 
4,440,665

 
4,572,954

Unallocated ESOP
118,050

 
126,144

 
134,238

 
142,332

 
150,921

Unvested restricted stock
398,094

 
455,283

 
455,283

 
455,283

 
471,702

Common shares outstanding
80,369,711

 
80,186,244

 
80,186,318

 
76,657,415

 
76,500,118

 
 
 
 
 
 
 
 
 
 
Tangible book value per share
$
9.00

 
$
8.85

 
$
8.69

 
$
8.61

 
$
8.63


The following table summarizes the Company's dividend payout ratio for the periods indicated:
 
Three Months Ended
 
September 30,
2018
 
June 30,
2018
 
March 31, 2018
 
December 31,
2017
 
September 30,
2017
 
(Dollars in Thousands)
Dividends paid
$
8,043

 
$
8,032

 
$
6,914

 
$
6,899

 
$
6,899

 
 
 
 
 
 
 
 
 
 
Net income, as reported
$
22,460

 
$
20,831

 
$
18,633

 
$
6,827

 
$
15,366

 
 
 
 
 
 
 
 
 
 
Dividend payout ratio
35.81
%
 
38.56
%
 
37.11
%
 
101.05
%
 
44.90
%

The following table summarizes the Company’s allowance for loan and lease losses related to originated loans and leases as a percentage of total originated loans and leases for the periods indicated:
 
Three Months Ended
 
September 30,
2018
 
June 30,
2018
 
March 31, 2018
 
December 31,
2017
 
September 30,
2017
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses
$
59,997

 
$
57,981

 
$
58,714

 
$
58,592

 
$
65,413

Less: Allowance for acquired loan and lease losses
1,817

 
1,961

 
910

 
1,040

 
1,003

Allowance for originated loan and lease losses
$
58,180


$
56,020


$
57,804


$
57,552


$
64,410

 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
6,227,707

 
$
6,171,274

 
$
6,114,461

 
$
5,730,679

 
$
5,639,440

Less: Total acquired loans and leases
426,865

 
460,142

 
482,237

 
240,057

 
260,196

Total originated loan and leases
$
5,800,842


$
5,711,132


$
5,632,224


$
5,490,622


$
5,379,244

 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses related to originated loans and leases as a percentage of originated loan and leases
1.00
%

0.98
%

1.03
%

1.05
%

1.20
%


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Financial Condition
Loans and Leases
The following table summarizes the Company's portfolio of loans and leases receivables as of the dates indicated:
 
At September 30, 2018
 
At December 31, 2017
 
Balance
 
Percent
of Total
 
Balance
 
Percent
of Total
 
(Dollars in Thousands)
Commercial real estate loans:
 
 
 
 
 
 
 
Commercial real estate
$
2,287,979

 
36.7
%
 
$
2,174,969

 
38.0
%
Multi-family mortgage
828,849

 
13.3
%
 
760,670

 
13.3
%
Construction
164,217

 
2.7
%
 
140,138

 
2.4
%
Total commercial real estate loans
3,281,045

 
52.7
%
 
3,075,777

 
53.7
%
Commercial loans and leases:
 
 
 
 
 
 
 
Commercial
771,200

 
12.4
%
 
705,004

 
12.3
%
Equipment financing
954,579

 
15.3
%
 
866,488

 
15.1
%
Condominium association
52,205

 
0.8
%
 
52,619

 
0.9
%
Total commercial loans and leases
1,777,984

 
28.5
%
 
1,624,111

 
28.3
%
Consumer loans:
 
 
 
 
 
 
 
Residential mortgage
759,167

 
12.2
%
 
660,065

 
11.5
%
Home equity
380,303

 
6.1
%
 
355,954

 
6.2
%
Other consumer
29,208

 
0.5
%
 
14,772

 
0.3
%
Total consumer loans
1,168,678

 
18.8
%
 
1,030,791

 
18.0
%
Total loans and leases
6,227,707

 
100.0
%
 
5,730,679

 
100.0
%
Allowance for loan and lease losses
(59,997
)
 
 
 
(58,592
)
 
 
Net loans and leases
$
6,167,710

 
 
 
$
5,672,087

 
 

The following table sets forth the growth in the Company’s loan and lease portfolios during the nine months ended September 30, 2018:
 
At September 30,
2018
 
At December 31,
2017
 
Dollar Change
 
Percent Change
(Annualized)
 
(Dollars in Thousands)
Commercial real estate
$
3,281,045

 
$
3,075,777

 
$
205,268

 
8.9
%
Commercial
1,777,984

 
1,624,111

 
153,873

 
12.6
%
Consumer
1,168,678

 
1,030,791

 
137,887

 
17.8
%
Total loans and leases
$
6,227,707

 
$
5,730,679

 
$
497,028

 
11.6
%
The Company's loan portfolio consists primarily of first mortgage loans secured by commercial, multi-family and residential real estate properties located in the Company's primary lending area, loans to business entities, including commercial lines of credit, loans to condominium associations and loans and leases used to finance equipment used by small businesses. The Company also provides financing for construction and development projects, home equity and other consumer loans.
The Company employs seasoned commercial lenders and retail bankers who rely on community and business contacts as well as referrals from customers, attorneys and other professionals to generate loans and deposits. Existing borrowers are also an important source of business since many of them have more than one loan outstanding with the Company. The Company's ability to originate loans depends on the strength of the economy, trends in interest rates, and levels of customer demand and market competition.
The Company's current policy is that the aggregate amount of loans outstanding to any one borrower or related entities may not exceed $35.0 million unless approved by the Credit Committee, a committee of the Company's Board of Directors.

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As of September 30, 2018, there were eleven borrowers with loans and commitments over $35.0 million. The total of those loans and commitments were $472.5 million, or 6.44% of total loans and commitments, as of September 30, 2018. As of December 31, 2017 there were twelve borrowers with loans and commitments over $35.0 million. The total of those loans and commitments was $537.1 million or 7.96% of total loans and commitments, as of December 31, 2017.
The Company has written underwriting policies to control the inherent risks in loan origination. The policies address approval limits, loan-to-value ratios, appraisal requirements, debt service coverage ratios, loan concentration limits and other matters relevant to loan underwriting.
Commercial Real Estate Loans
The commercial real estate portfolio is comprised of commercial real estate loans, multi-family mortgage loans, and construction loans and is the largest component of the Company's overall loan portfolio, representing 52.7% of total loans and leases outstanding as of September 30, 2018.
Typically, commercial real estate loans are larger in size and involve a greater degree of risk than owner-occupied residential mortgage loans. Loan repayment is usually dependent on the successful operation and management of the properties and the value of the properties securing the loans. Economic conditions can greatly affect cash flows and property values.
A number of factors are considered in originating commercial real estate and multi-family mortgage loans. The qualifications and financial condition of the borrower (including credit history), as well as the potential income generation and the value and condition of the underlying property, are evaluated. When evaluating the qualifications of the borrower, the Company considers the financial resources of the borrower, the borrower's experience in owning or managing similar property and the borrower's payment history with the Company and other financial institutions. Factors considered in evaluating the underlying property include the net operating income of the mortgaged premises before debt service and depreciation, the debt service coverage ratio (the ratio of cash flow before debt service to debt service), the use of conservative capitalization rates, and the ratio of the loan amount to the appraised value. Generally, personal guarantees are obtained from commercial real estate loan borrowers.
Commercial real estate and multi-family mortgage loans are typically originated for terms of five to fifteen years with amortization periods of 20 to 30 years. Many of the loans are priced at inception on a fixed-rate basis generally for periods ranging from two to five years with repricing periods for longer-term loans. When possible, prepayment penalties are included in loan covenants on these loans. For commercial customers who are interested in loans with terms longer than five years, the Company offers loan level derivatives to accommodate customer need.
The Company's urban and suburban market area is characterized by a large number of apartment buildings, condominiums and office buildings. As a result, commercial real estate and multi-family mortgage lending has been a significant part of the Company's activities for many years. These types of loans typically generate higher yields, but also involve greater credit risk. Many of the Company's borrowers have more than one multi-family or commercial real estate loan outstanding with the Company.
The commercial real estate portfolio is composed primarily of loans secured by apartment buildings ($774.5 million), office buildings ($641.6 million), retail stores ($520.4 million), industrial properties ($399.3 million), mixed-use properties ($250.3 million), lodging services ($115.8 million) and food services ($54.0 million) as of September 30, 2018. At that date, approximately 97.1% of the commercial real estate loans outstanding were secured by properties located in New England.
Construction and development financing is generally considered to involve a higher degree of risk than long-term financing on improved, occupied real estate and thus has lower concentration limits than do other commercial credit classes. Risk of loss on a construction loan is largely dependent upon the accuracy of the initial estimate of construction costs, the estimated time to sell or rent the completed property at an adequate price or rate of occupancy, and market conditions. If the estimates and projections prove to be inaccurate, the Company may be confronted with a project which, upon completion, has a value that is insufficient to assure full loan repayment.
Criteria applied in underwriting construction loans for which the primary source of repayment is the sale of the property are different from the criteria applied in underwriting construction loans for which the primary source of repayment is the stabilized cash flow from the completed project. For those loans where the primary source of repayment is from resale of the property, in addition to the normal credit analysis performed for other loans, the Company also analyzes project costs, the attractiveness of the property in relation to the market in which it is located and demand within the market area. For those construction loans where the source of repayment is the stabilized cash flow from the completed project, the Company analyzes not only project costs but also how long it might take to achieve satisfactory occupancy and the reasonableness of projected rental rates in relation to market rental rates.

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Commercial Loans
The commercial loan and lease portfolio is comprised of commercial loans, equipment financing loans and leases and condominium association loans and represented 28.5% of total loans outstanding as of September 30, 2018.
The commercial loan and lease portfolio is composed primarily of loans to small to medium sized businesses ($568.7 million), transportation services ($380.7 million; which includes $9.6 million in taxi medallions), food services ($124.5 million), manufacturing ($114.5 million), rental and leasing services ($55.8 million), retail ($79.6 million), and recreation services ($36.1 million) as of September 30, 2018.
The Company provides commercial banking services to companies in its market area. Approximately 47.2% of the commercial loans outstanding as of September 30, 2018 were made to borrowers located in New England. The remaining 52.8% of the commercial loans outstanding were made to borrowers in other areas in the United States of America, primarily by the Company's equipment financing divisions. Product offerings include lines of credit, term loans, letters of credit, deposit services and cash management. These types of credit facilities have as their primary source of repayment cash flows from the operations of a business. Interest rates offered are available on a floating basis tied to the prime rate or a similar index or on a fixed-rate basis referenced on the Federal Home Loan Bank of Boston ("FHLBB") index.
Credit extensions are made to established businesses on the basis of loan purpose and assessment of capacity to repay as determined by an analysis of their financial statements, the nature of collateral to secure the credit extension and, in most instances, the personal guarantee of the owner of the business as well as industry and general economic conditions. The Company also participates in U.S. Government programs such as the Small Business Administration (the "SBA") in both the 7A program and as an SBA preferred lender.
The Company’s equipment financing divisions focus on market niches in which its lenders have deep experience and industry contacts, and on making loans to customers with business experience. An important part of the Company’s equipment financing loan origination volume comes from equipment manufacturers and existing customers as they expand their operations. The equipment financing portfolio is composed primarily of loans to finance laundry, tow trucks, fitness, dry cleaning and convenience store equipment. Approximately 15.0% of the commercial loans outstanding were made to borrowers located primarily in the greater New York and New Jersey metropolitan area. Typically, the loans are priced at a fixed rate of interest and require monthly payments over their three- to seven-year life. The yields earned on equipment financing loans are higher than those earned on the commercial loans made by the Banks because they involve a higher degree of credit risk. Equipment financing customers are typically small-business owners who operate with limited financial resources and who face greater risks when the economy weakens or unforeseen adverse events arise. Because of these characteristics, personal guarantees of borrowers are usually obtained along with liens on available assets. The size of loan is determined by an analysis of cash flow and other characteristics pertaining to the business and the equipment to be financed, based on detailed revenue and profitability data of similar operations.
Loans to condominium associations are for the purpose of funding capital improvements, are made for five- to ten-year terms and are secured by a general assignment of condominium association revenues. Among the factors considered in the underwriting of such loans are the level of owner occupancy, the financial condition and history of the condominium association, the attractiveness of the property in relation to the market in which it is located and the reasonableness of estimates of the cost of capital improvements to be made. Depending on loan size, funds are advanced as capital improvements are made and, in more complex situations, after completion of engineering inspections.
Consumer Loans
The consumer loan portfolio is comprised of residential mortgage loans, home equity loans and lines of credit, and other consumer loans and represented 18.8% of total loans outstanding as of September 30, 2018. The Company focuses its mortgage and home equity lending on existing and new customers within its branch networks in its urban and suburban marketplaces in the greater Boston and Providence metropolitan areas.
The Company originates adjustable- and fixed-rate residential mortgage loans secured by one- to four-family residences. Each residential mortgage loan granted is subject to a satisfactorily completed application, employment verification, credit history and a demonstrated ability to repay the debt. Generally, loans are not made when the loan-to-value ratio exceeds 80% unless private mortgage insurance is obtained and/or there is a financially strong guarantor. Appraisals are performed by outside independent fee appraisers.

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In general, the Company maintains three-, five- and seven-year adjustable-rate mortgage loans and ten-year fixed-rate fully amortizing mortgage loans in its portfolio. Fixed-rate mortgage loans with maturities beyond ten years, such as 15- and 30-year fixed-rate mortgages, are generally sold into the secondary market on a servicing-released basis. The Banks act as correspondent banks in these secondary-market transactions. Loan sales in the secondary market provide funds for additional lending and other banking activities.
Underwriting guidelines for home equity loans and lines of credit are similar to those for residential mortgage loans. Home equity loans and lines of credit are limited to no more than 80% of the appraised value of the property securing the loan including the amount of any existing first mortgage liens.
Other consumer loans have historically been a modest part of the Company's loan originations. As of September 30, 2018, other consumer loans equaled $29.2 million, or 0.5% of total loans outstanding.
Asset Quality
Criticized and Classified Assets
The Company's management rates certain loans and leases as "other assets especially mentioned" ("OAEM"), "substandard" or "doubtful" based on criteria established under banking regulations.These loans and leases are collectively referred to as "criticized" assets. Loans and leases rated OAEM have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects of the loan or lease at some future date. Loans and leases rated as substandard are inadequately protected by the payment capacity of the obligor or of the collateral pledged, if any. Substandard loans and leases have a well-defined weakness or weaknesses that jeopardize the liquidation of debt and are characterized by the distinct possibility that the Company will sustain some loss if existing deficiencies are not corrected. Loans and leases rated as doubtful have well-defined weaknesses that jeopardize the orderly liquidation of debt and partial loss of principal is likely. As of September 30, 2018, the Company had $57.6 million of total assets, including acquired assets, that were designated as criticized. This compares to $68.2 million of assets designated as criticized as of December 31, 2017. The decrease of $10.6 million in criticized assets was primarily due to charge-offs and paydowns of criticized loans during the first nine months of 2018.
Nonperforming Assets
"Nonperforming assets" consist of nonperforming loans and leases, other real estate owned ("OREO") and other repossessed assets. Under certain circumstances, the Company may restructure the terms of a loan or lease as a concession to a borrower, except for acquired loans and leases which are individually evaluated against expected performance on the date of acquisition. These restructured loans and leases are generally considered "nonperforming loans and leases" until a history of collection of at least six months on the restructured terms of the loan or lease has been established. OREO consists of real estate acquired through foreclosure proceedings and real estate acquired through acceptance of a deed in lieu of foreclosure. Other repossessed assets consist of assets that have been acquired through foreclosure that are not real estate and are included in other assets on the Company's unaudited consolidated balance sheets.
Accrual of interest on loans generally is discontinued when contractual payment of principal or interest becomes past due 90 days or, if in management's judgment, reasonable doubt exists as to the full timely collection of interest. Exceptions may be made if the loan has matured and is in the process of renewal or is well-secured and in the process of collection. When a loan is placed on nonaccrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current interest income. Interest payments on nonaccrual loans are generally applied to principal. If collection of the principal is reasonably assured, interest payments are recognized as income on the cash basis. Loans are generally returned to accrual status when principal and interest payments are current, full collectability of principal and interest is reasonably assured and a consistent record of at least six months of performance has been achieved.
In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructured loan. In determining whether a debtor is experiencing financial difficulties, the Company considers, among other factors, if the debtor is in payment default or is likely to be in payment default in the foreseeable future without the modification, the debtor declared or is in the process of declaring bankruptcy, there is substantial doubt that the debtor will continue as a going concern, the debtor's entity-specific projected cash flows will not be sufficient to service its debt, or the debtor cannot obtain funds from sources other than the existing creditors at market terms for debt with similar risk characteristics.
Nonperforming assets are composed of nonaccrual loans and leases, OREO and other repossessed assets. As of September 30, 2018, the Company had nonperforming assets of $29.7 million, representing 0.41% of total assets, compared to nonperforming assets of $31.7 million, or 0.47% of total assets, as of December 31, 2017. The decrease in nonperforming assets was primarily driven by charge-offs on taxi medallion loans during the first nine months of 2018.

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The Company evaluates the underlying collateral of each nonperforming loan and lease and continues to pursue the collection of interest and principal. Management believes that the current level of nonperforming assets remains manageable relative to the size of the Company's loan and lease portfolio. If economic conditions were to worsen or if the marketplace were to experience prolonged economic stress, it is likely that the level of nonperforming assets would increase, as would the level of charged-off loans.            
Past Due and Accruing
Accrual of interest on loans generally is discontinued when contractual payment of principal or interest becomes past due 90 days or, if in management's judgment, reasonable doubt exists as to the full timely collection of interest. Exceptions may be made if the loan has matured and is in the process of renewal or is well-secured and in the process of collection. When a loan is placed on nonaccrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current interest income. Interest payments on nonaccrual loans are generally applied to principal. If collection of the principal is reasonably assured, interest payments are recognized as income on the cash basis. Loans are generally returned to accrual status when principal and interest payments are current, full collectability of principal and interest is reasonably assured and a consistent record of at least six consecutive months of performance has been achieved.
As of September 30, 2018, the Company had loans and leases greater than 90 days past due and accruing of $15.0 million, or 0.24% of total loans and leases, compared to $3.0 million, or 0.05% of total loans and leases, as of December 31, 2017, representing an increase of $12.0 million. The increase in past due and accruing loans was primarily due to a commercial real estate loan and a commercial loan which became greater than 90 days past due during the first nine months of 2018.

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The following table sets forth information regarding nonperforming assets for the periods indicated:
 
At September 30, 2018
 
At December 31, 2017
 
(Dollars in Thousands)
Nonperforming loans and leases:
 
 
 
Nonaccrual loans and leases:
 
 
 
Commercial real estate
$
3,369

 
$
3,313

Multi-family mortgage
357

 
608

Construction
640

 
860

Total commercial real estate loans
4,366

 
4,781

 
 
 
 
Commercial
7,862

 
11,619

Equipment financing
9,659

 
8,106

Condominium association
295

 

Total commercial loans and leases
17,816

 
19,725

 
 
 
 
Residential mortgage
2,538

 
1,979

Home equity
1,053

 
744

Other consumer
11

 
43

Total consumer loans
3,602

 
2,766

 
 
 
 
Total nonaccrual loans and leases
25,784

 
27,272

 
 
 
 
Other real estate owned
3,136

 
3,235

Other repossessed assets
798

 
1,184

Total nonperforming assets
$
29,718

 
$
31,691

 
 
 
 
Loans and leases past due greater than 90 days and accruing
$
14,954

 
$
3,020

 
 
 
 
Total nonperforming loans and leases as a percentage of total loans and leases
0.41
%
 
0.48
%
Total nonperforming assets as a percentage of total assets
0.41
%
 
0.47
%

Troubled Debt Restructured Loans and Leases
As of September 30, 2018, restructured loans included $2.0 million of commercial real estate loans, $0.4 million of multi-family mortgage loans, $10.3 million of commercial loans, $5.5 million of equipment financing loans and leases, $1.6 million of residential mortgage loans and $1.6 million of home equity loans. As of December 31, 2017, restructured loans included $5.0 million of commercial real estate loans, $0.6 million of multi-family mortgage loans, $13.9 million of commercial loans, $4.0 million of equipment financing loans and leases, $1.1 million of residential mortgage loans and $1.4 million of home equity loans. A restructured loan is a loan for which the maturity date was extended, the principal was reduced, and/or the interest rate was modified to drop the required monthly payment to a more manageable amount for the borrower.
The following table sets forth information regarding troubled debt restructured loans and leases at the dates indicated:
 
At September 30, 2018
 
At December 31, 2017
 
(Dollars in Thousands)
Troubled debt restructurings:
 

 
 

On accrual
$
12,657

 
$
16,241

On nonaccrual
8,779

 
9,770

Total troubled debt restructurings
$
21,436

 
$
26,011


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Changes in troubled debt restructured loans and leases were as follows for the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018

2017
 
(Dollars in Thousands)
Balance at beginning of period
$
22,302

 
$
30,878

 
$
26,011

 
$
25,802

Additions
346

 
1,154

 
5,275

 
9,303

Net charge-offs
(35
)
 
(590
)
 
(723
)
 
(2,580
)
Repayments
(1,177
)
 
(2,128
)
 
(9,127
)
 
(2,289
)
Other reductions (1)

 

 

 
(922
)
Balance at end of period
$
21,436

 
$
29,314

 
$
21,436

 
$
29,314

__________________________________________________________________________________ 
(1) Includes loans and leases that were removed from TDR status. 
Allowances for Credit Losses
The allowance for loan and lease losses consists of general and specific allowances and reflects management's estimate of probable loan and lease losses inherent in the loan portfolio at the balance sheet date. Management uses a consistent and systematic process and methodology to evaluate the adequacy of the allowance for loan and lease losses on a quarterly basis. The allowance is calculated by loan type: commercial real estate loans, commercial loans and leases, and consumer loans, each category of which is further segregated. A formula-based credit evaluation approach is applied to each group that is evaluated collectively, primarily by loss factors, which includes estimates of incurred losses over an estimated Loss Emergence Period ("LEP"), assigned to each risk rating by type, coupled with an analysis of certain loans individually evaluated for impairment. Management continuously evaluates and challenges inputs and assumptions in the allowance for loan and lease loss.
The process to determine the allowance for loan and lease losses requires management to exercise considerable judgment regarding the risk characteristics of the loan portfolios and the effect of relevant internal and external factors. While management evaluates currently available information in establishing the allowance for loan and lease losses, future adjustments to the allowance for loan and lease losses may be necessary if conditions differ substantially from the assumptions used in making the evaluations. Management performs a comprehensive review of the allowance for loan and lease losses on a quarterly basis. In addition, various regulatory agencies, as an integral part of their examination process, periodically review a financial institution's allowance for loan and lease losses and carrying amounts of other real estate owned. Such agencies may require the financial institution to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
The Company’s general allowance methodology provides a quantification of probable losses in the portfolio. Under the current methodology, Management combines the historical loss information of the Banks to generate a single set of ratios. Management believes it is appropriate to aggregate the ratios as the Banks share common environmental factors, operate in similar markets, and utilize common underwriting standards in accordance with the Company's Credit Policy.
Management employs a similar analysis for the consolidation of the qualitative factors as it does for the quantitative factors. Again, Management believes the combination of the existing nine qualitative factors used at each of the Banks into a single group of factors for use across the Company is appropriate based on the commonality of environmental factors, markets, and underwriting standards among the Banks.
As of September 30, 2018, the Company had a portfolio of approximately $14.5 million in loans secured by taxi medallions issued by the cities of Boston and Cambridge, Massachusetts. As of December 31, 2017, this portfolio was approximately $19.7 million. For collateral valuation purposes, taxi medallions are currently estimated at $35 thousand for Boston and $20 thousand for Cambridge. The Company has no taxi medallion exposure outside Massachusetts and the risk of loss is minimal. Application-based mobile ride services, such as Uber and Lyft, have generated increased competition in the transportation sector, resulting in a reduction in taxi utilization and, as a result, a reduction in the collateral value and credit quality of taxi medallion loans. This has increased the likelihood that loans secured by taxi medallions may default, or that the borrowers may be unable to repay these loans at maturity, potentially resulting in an increase in past due loans, troubled debt restructurings, and charge-offs. The Company’s allowance calculation included a further segmentation of the commercial loans and leases to reflect the increased risk in the Company’s taxi medallion portfolio. This allowance calculation segmentation represents management’s estimations of the risks associated with the portfolio.

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The following tables present the changes in the allowance for loan and lease losses by portfolio category for the three and nine months ended September 30, 2018 and 2017.
 
At and for the Three Months Ended September 30, 2018
 
Commercial
Real Estate
 
Commercial
 
Consumer
 
Total
 
(In Thousands)
Balance at June 30, 2018
$
27,045

 
$
26,120

 
$
4,816

 
$
57,981

Charge-offs

 
(1,198
)
 
(29
)
 
(1,227
)
Recoveries

 
619

 
44

 
663

Provision for loan and lease losses
319

 
2,217

 
44

 
2,580

Balance at September 30, 2018
$
27,364

 
$
27,758

 
$
4,875

 
$
59,997

 
 
 
 
 
 
 
 
Total loans and leases
$
3,281,045

 
$
1,777,984

 
$
1,168,678

 
$
6,227,707

Total allowance for loan and lease losses as a percentage of total loans and leases
0.83
%
 
1.56
%
 
0.42
%
 
0.96
%
 
At and for the Three Months Ended September 30, 2017
 
Commercial
Real Estate
 
Commercial
 
Consumer
 
Total
 
(In Thousands)
Balance at June 30, 2017
$
27,954

 
$
31,099

 
$
5,468

 
$
64,521

Charge-offs
(65
)
 
(1,965
)
 
(113
)
 
(2,143
)
Recoveries

 
109

 
80

 
189

Provision for loan and lease losses
979

 
1,832

 
35

 
2,846

Balance at September 30, 2017
$
28,868

 
$
31,075

 
$
5,470

 
$
65,413

 
 
 
 
 
 
 
 
Total loans and leases
$
3,029,009

 
$
1,585,296

 
$
1,025,135

 
$
5,639,440

Total allowance for loan and lease losses as a percentage of total loans and leases
0.95
%
 
1.96
%
 
0.53
%
 
1.16
%
 
At and for the Nine Months Ended September 30, 2018
 
Commercial
Real Estate
 
Commercial
 
Consumer
 
Total
 
(In Thousands)
Balance at December 31, 2017
$
27,112

 
$
26,333

 
$
5,147

 
$
58,592

Charge-offs
(103
)
 
(5,387
)
 
(134
)
 
(5,624
)
Recoveries

 
1,972

 
253

 
2,225

Provision for loan and lease losses
355

 
4,840

 
(391
)
 
4,804

Balance at September 30, 2018
$
27,364

 
$
27,758

 
$
4,875

 
$
59,997

 
 
 
 
 
 
 
 
Total loans and leases
$
3,281,045

 
$
1,777,984

 
$
1,168,678

 
$
6,227,707

Allowance for loan and lease losses as a percentage of total loans and leases
0.83
%

1.56
%

0.42
%

0.96
%

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At and for the Nine Months Ended September 30, 2017
 
Commercial
Real Estate
 
Commercial
 
Consumer
 
Total
 
(In Thousands)
Balance at December 31, 2016
$
27,645

 
$
20,906

 
$
5,115

 
$
53,666

Charge-offs
(294
)
 
(6,267
)
 
(329
)
 
(6,890
)
Recoveries
476

 
800

 
263

 
1,539

Provision for loan and lease losses
1,041

 
15,636

 
421

 
17,098

Balance at September 30, 2017
$
28,868

 
$
31,075

 
$
5,470

 
$
65,413

 
 
 
 
 
 
 
 
Total loans and leases
$
3,029,009

 
$
1,585,296

 
$
1,025,135

 
$
5,639,440

Allowance for loan and lease losses as a percentage of total loans and leases
0.95
%

1.96
%

0.53
%

1.16
%
The allowance for loan and lease losses was $60.0 million as of September 30, 2018, or 0.96% of total loans and leases outstanding. This compared to an allowance for loan and lease losses of $58.6 million, or 1.02% of total loans and leases outstanding, as of December 31, 2017. The increase in the allowance for loan and lease losses is largely a result of the continued deterioration in value of the collateral underlying the taxi medallion portfolio. Excluding the First Commons Bank loans, loans increased $263.3 million during the first nine months of 2018 or 6.1% on an annualized basis.
Management believes that the allowance for loan and lease losses as of September 30, 2018 is appropriate based on the facts and circumstances discussed further below.
Commercial Real Estate Loans
The allowance for commercial real estate loan losses was $27.4 million, or 0.83% of total commercial real estate loans outstanding, as of September 30, 2018. This compared to an allowance for commercial real estate loan losses of $27.1 million, or 0.88% of total commercial real estate loans outstanding, as of December 31, 2017. There were no specific reserves on commercial real estate loans as of both September 30, 2018 and December 31, 2017.
The ratio of total criticized and classified commercial real estate loans to total commercial real estate loans decreased to 0.63% as of September 30, 2018 from 0.91% as of December 31, 2017. The ratio of originated commercial real estate loans on nonaccrual to total originated commercial real estate loans remained consistent at 0.14% as of September 30, 2018 and December 31, 2017.
There were no charge-offs in the commercial real estate loan portfolio for the three months ended September 30, 2018 compared to net charge-offs of $65 thousand for the three month ended September 30, 2017. As a percentage of average commercial real estate loan portfolio, annualized net charge-offs for the three months ended September 30, 2018 and September 30, 2017 were minimal.
Net charge-offs in the commercial real estate loan portfolio totaled $103 thousand for the nine months ended September 30, 2018 compared to net recoveries of $182 thousand for the nine months ended September 30, 2017. As a percentage of average commercial real estate loan portfolio, annualized net charge-offs and recoveries for the nine months ended September 30, 2018 and September 30, 2017 were minimal.
Commercial Loans and Leases
The allowance for commercial loan and lease losses was $27.8 million, or 1.56% of total commercial loans and leases outstanding, as of September 30, 2018, compared to $26.3 million, or 1.62% of total commercial loans and leases outstanding, as of December 31, 2017. Specific reserves on commercial loans and leases increased from $3.1 million as of December 31, 2017 to $3.5 million as of September 30, 2018.
The ratio of total criticized and classified commercial loans and leases to total commercial loans and leases was 2.09% as of September 30, 2018, compared to 2.47% as of December 31, 2017. The ratio of originated commercial loans and leases on nonaccrual to total originated commercial loans and leases decreased to 0.99% as of September 30, 2018 from 1.15% as of December 31, 2017.
Net charge-offs in the commercial loan and lease portfolio for the three months ended September 30, 2018 and September 30, 2017 were $0.6 million and $1.9 million, respectively. As a percentage of average commercial loans and leases,

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annualized net charge-offs for the three months ended September 30, 2018 and September 30, 2017 were 0.04% and 0.16%, respectively.
Net charge-offs in the commercial loan and lease portfolio for the nine months ended September 30, 2018 and September 30, 2017 were $3.4 million and $5.5 million, respectively. As a percentage of average commercial loans and leases, annualized net charge-offs for the nine months ended September 30, 2018 and September 30, 2017 were 0.27% and 0.47%, respectively.
Consumer Loans
The allowance for consumer loan losses, including residential loans and home equity loans and lines of credit, was $4.9 million, or 0.42% of total consumer loans outstanding, as of September 30, 2018, compared to $5.1 million, or 0.50% of consumer loans outstanding, as of December 31, 2017. Specific reserves on consumer loans were $112 thousand and $22 thousand as of September 30, 2018 and December 31, 2017, respectively.
The ratio of originated consumer loans on nonaccrual to total originated consumer loans increased to 0.28% as of September 30, 2018 from 0.21% as of December 31, 2017. The risk of loss on a home equity loan is higher since the property securing the loan has often been previously pledged as collateral for a first mortgage loan. The Company gathers and analyzes delinquency data, to the extent that data are available on these first liens, for purposes of assessing the collectability of the second liens held by the Company even if these home equity loans are not delinquent. This data are further analyzed for performance differences between amortizing and non-amortizing home equity loans, the percentage borrowed to total loan commitment and by the amount of payments made by the borrowers. The loss exposure is not considered to be high due to the combination of current property values, the historically low loan-to-value ratios, the low level of losses experienced in the past few years and the low level of loan delinquencies as of September 30, 2018. If the local economy weakens, however, a rise in losses in those loan classes could occur. Historically, losses in these classes have been low.
Net recoveries in the consumer loan portfolio totaled $15 thousand for the three months ended September 30, 2018 compared to net charge-offs of $33 thousand for the three months ended September 30, 2017. Provisions for consumer loans recorded in these periods more than adequately covered charge-offs during those periods.
Net recoveries in the consumer loan portfolio totaled $119 thousand for the nine months ended September 30, 2018 compared to net charge-offs of $66 thousand for the nine months ended September 30, 2017. Provisions for consumer loans recorded in these periods more than adequately covered charge-offs during those periods.

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The following table sets forth the Company's percent of allowance for loan and lease losses to the total allowance for loan and lease losses and the percent of loans to total loans for each of the categories listed at the dates indicated.
 
At September 30, 2018
 
At December 31, 2017
 
Amount
 
Percent of
Allowance
to Total
Allowance
 
Percent of
Loans
in Each
Category to
Total
Loans
 
Amount
 
Percent of
Allowance
to Total
Allowance
 
Percent of
Loans
in Each
Category to
Total
Loans
 
(Dollars in Thousands)
Commercial real estate
$
20,727

 
34.5
%
 
36.7
%
 
$
20,089

 
34.3
%
 
38.0
%
Multi-family mortgage
5,321

 
8.9
%
 
13.3
%
 
5,667

 
9.7
%
 
13.3
%
Construction
1,315

 
2.2
%
 
2.7
%
 
1,356

 
2.3
%
 
2.4
%
Total commercial real estate loans
27,363

 
45.6
%
 
52.7
%
 
27,112

 
46.3
%
 
53.7
%
Commercial
15,900

 
26.5
%
 
12.4
%
 
15,366

 
26.2
%
 
12.3
%
Equipment financing
11,486

 
19.1
%
 
15.3
%
 
10,586

 
18.1
%
 
15.1
%
Condominium association
374

 
0.6
%
 
0.8
%
 
381

 
0.7
%
 
0.9
%
Total commercial loans and leases
27,760

 
46.2
%
 
28.5
%
 
26,333

 
45.0
%
 
28.3
%
Residential mortgage
2,675

 
4.5
%
 
12.2
%
 
2,743

 
4.7
%
 
11.5
%
Home equity
2,079

 
3.5
%
 
6.1
%
 
2,219

 
3.8
%
 
6.2
%
Other consumer
120

 
0.2
%
 
0.5
%
 
185

 
0.2
%
 
0.3
%
Total consumer loans
4,874

 
8.2
%
 
18.8
%
 
5,147

 
8.7
%
 
18.0
%
Total
$
59,997

 
100.0
%
 
100.0
%
 
$
58,592

 
100.0
%
 
100.0
%
Investment Securities
The investment portfolio exists primarily for liquidity purposes, and secondarily as sources of interest and dividend income, interest-rate risk management and tax planning as a counterbalance to loan and deposit flows. Investment securities are utilized as part of the Company's asset/liability management and may be sold in response to, or in anticipation of, factors such as changes in market conditions and interest rates, security prepayment rates, deposit outflows, liquidity concentrations and regulatory capital requirements.
The investment policy of the Company, which is reviewed and approved by the Board of Directors on an annual basis, specifies the types of investments that are acceptable, required investment ratings by at least one nationally recognized rating agency, concentration limits and duration guidelines. Compliance with the investment policy is monitored on a regular basis. In general, the Company seeks to maintain a high degree of liquidity and targets cash, cash equivalents and investment securities available-for-sale balances between 10% and 30% of total assets.
Cash, cash equivalents, and investment securities decreased $2.3 million, or 0.4% on an annualized basis, to $708.5 million as of September 30, 2018 from $710.9 million as of December 31, 2017. The decrease was primarily driven by decreases in deposit balances and investment securities. Cash, cash equivalents, and investment securities were 9.7% of total assets as of September 30, 2018, compared to 10.5% of total assets at December 31, 2017.

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The following table sets forth certain information regarding the amortized cost and market value of the Company's investment securities at the dates indicated:
 
At September 30, 2018
 
At December 31, 2017
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
(In Thousands)
Investment securities available-for-sale:
 
 
 
 
 
 
 
GSE debentures
$
184,118

 
$
178,316

 
$
151,483

 
$
149,924

GSE CMOs
112,325

 
105,941

 
131,082

 
127,022

GSE MBSs
177,324

 
170,782

 
191,281

 
189,313

SBA commercial loan asset- backed securities
53

 
53

 
73

 
72

Corporate debt obligations
46,657

 
45,634

 
62,811

 
62,683

U.S. Treasury bonds
33,569

 
33,102

 
8,785

 
8,730

Trust preferred securities

 

 
1,471

 
1,398

Total debt securities
554,046

 
533,828

 
546,986

 
539,142

Marketable equity securities
964

 
960

 
978

 
982

Total investment securities available-for-sale
$
555,010

 
$
534,788

 
$
547,964

 
$
540,124

Investment securities held-to-maturity:
 
 
 
 
 
 
 
GSE debentures
$
50,540

 
$
48,712

 
$
41,612

 
$
40,801

GSE MBSs
11,924

 
11,507

 
13,923

 
13,705

Municipal obligations
52,720

 
51,564

 
53,695

 
53,517

Foreign government obligations
500

 
499

 
500

 
500

Total investment securities held-to-maturity
$
115,684

 
$
112,282

 
$
109,730

 
$
108,523

Equity securities held for trading
$
4,169

 
$
4,169

 
$

 
$


The fair value of investment securities is based principally on market prices and dealer quotes received from third-party, nationally-recognized pricing services for identical investment securities such as U.S. Treasury and agency securities. The Company's marketable equity securities are priced this way and are included in Level 1 of the fair value hierarchy in accordance with ASC 820. These prices are validated by comparing the primary pricing source with an alternative pricing source when available. When quoted market prices for identical securities are unavailable, the Company uses market prices provided by independent pricing services based on recent trading activity and other observable information, including but not limited to market interest-rate curves, referenced credit spreads and estimated prepayment speeds where applicable. These investments include certain U.S. and government agency debt securities, municipal and corporate debt securities, GSE residential MBSs and CMOs, trust preferred securities, and equity securities held for trading, all of which are included in Level 2. Certain fair values are estimated using pricing models and are included in Level 3.

Additionally, management reviews changes in fair value from period to period and performs testing to ensure that prices received from the third parties are consistent with their expectation of the market. Changes in the prices obtained from the pricing service are analyzed from month to month, taking into consideration changes in market conditions including changes in mortgage spreads, changes in U.S. Treasury security yields and changes in generic pricing of 15-year and 30-year securities. Additional analysis may include a review of prices provided by other independent parties, a yield analysis, a review of average life changes using Bloomberg analytics and a review of historical pricing for the particular security.

Maturities, calls and principal repayments for investment securities available-for-sale totaled $64.2 million for the nine months ended September 30, 2018 compared to $55.0 million for the same period in 2017. For the nine months ended September 30, 2018, the Company sold $1.5 million of investment securities, compared to none for the same period in 2017. For the nine months ended September 30, 2018, the Company purchased $73.9 million of investment securities available-for-sale, compared to $52.4 million in purchases of investment securities available-for-sale for the same period in 2017.

Maturities, calls and principal repayments for investment securities held-to-maturity totaled $2.5 million for the nine months ended September 30, 2018 compared to $3.2 million for the same period in 2017. There were no sales of investment securities held-to-maturity for the nine months ended September 30, 2018 and 2017. For the nine months ended September 30,

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2018, the Company purchased $8.9 million of investment securities held-to-maturity, compared to $23.9 million in purchases of investment securities held-to-maturity for the same period in 2017.
As of September 30, 2018, the fair value of all investment securities available-for-sale was $534.8 million and carried a total of $20.2 million of net unrealized losses, compared to a fair value of $540.1 million and net unrealized losses of $7.8 million as of December 31, 2017. As of September 30, 2018, $528.1 million, or 98.7%, of the portfolio, had gross unrealized losses of $20.4 million. This compares to $469.2 million, or 86.9%, of the portfolio with gross unrealized losses of $8.4 million as of December 31, 2017. The Company's unrealized loss position has increased in 2018 driven by higher long-term interest rates.
As of September 30, 2018, the fair value of all investment securities held-to-maturity was $112.3 million and carried a total of $3.4 million of net unrealized losses, compared to a fair value of $108.5 million and net unrealized losses of $1.2 million as of December 31, 2017. As of September 30, 2018, $112.2 million, or 100.0%, of the portfolio, had gross unrealized losses of $3.4 million. This compares to $92.9 million, or 85.6%, of the portfolio with gross unrealized losses of $1.4 million as of December 31, 2017. The Company's unrealized loss position increased in 2018 driven by higher long-term interest rates.
Management believes that these negative differences between amortized cost and fair value do not include credit losses, but rather differences in interest rates between the time of purchase and the time of measurement. It is more likely than not that the Company will not sell or be required to sell the investment securities before recovery, and, as a result, it will recover the amortized cost basis of the investment securities. As such, management has determined that the securities are not other-than-temporarily impaired as of September 30, 2018. If market conditions for securities worsen or the creditworthiness of the underlying issuers deteriorates, it is possible that the Company may recognize additional other-than-temporary impairments in future periods. For additional discussion on how the Company validates fair values provided by the third-party pricing service, see Note 11, “Fair Value of Financial Instruments.”
Restricted Equity Securities
FHLBB Stock—The Company invests in the stock of the FHLBB as one of the requirements to borrow. The Company maintains an excess balance of capital stock, which allows for additional borrowing capacity at each of the Banks. As of September 30, 2018, the excess balance of capital stock is $0.1 million, as compared to no excess balance at December 31, 2017.
As of September 30, 2018, the Company owned stock in the FHLBB with a carrying value of $45.9 million, an increase of $3.5 million from $42.4 million as of December 31, 2017. As of September 30, 2018, the FHLBB had total assets of $64.7 billion and total capital of $3.5 billion, of which $1.4 billion was retained earnings. The FHLBB stated that it remained in compliance with all regulatory capital ratios as of September 30, 2018 and was classified as "adequately capitalized" by its regulator, based on the FHLBB's financial information as of June 30, 2018.
Federal Reserve Bank Stock—The Company invests in the stock of the Federal Reserve Bank of Boston, as a condition of the membership for the Banks in the Federal Reserve System. As of September 30, 2018 the Company owned stock in the Federal Reserve Bank of Boston with a carrying value of $18.0 million, compared to a carrying value of $16.8 million at December 31,2017.
Other Stock—The Company invests in a small number of other restricted equity securities which includes Infinex and American Financial Exchange.

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Deposits
The following table presents the Company's deposit mix at the dates indicated.
 
At September 30, 2018
 
At December 31, 2017
 
Amount
 
Percent
of Total
 
Weighted
Average
Rate
 
Amount
 
Percent
of Total
 
Weighted
Average
Rate
 
(Dollars in Thousands)
Non-interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Demand checking accounts
$
1,017,234

 
19.4
%
 
%
 
$
942,583

 
19.3
%
 
%
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
NOW accounts
322,587

 
6.2
%
 
0.10
%
 
350,568

 
7.2
%
 
0.07
%
Savings accounts
612,210

 
11.7
%
 
0.35
%
 
646,359

 
13.3
%
 
0.25
%
Money market accounts
1,623,220

 
31.0
%
 
1.07
%
 
1,724,363

 
35.4
%
 
0.56
%
Certificate of deposit accounts
1,658,360

 
31.7
%
 
1.87
%
 
1,207,470

 
24.8
%
 
1.27
%
Total interest-bearing deposits
4,216,377

 
80.6
%
 
1.21
%
 
3,928,760

 
80.7
%
 
0.68
%
Total deposits
$
5,233,611

 
100.0
%
 
0.97
%
 
$
4,871,343

 
100.0
%
 
0.55
%
Total deposits increased $362.3 million to $5.2 billion as of September 30, 2018, compared to $4.9 billion as of December 31, 2017. Deposits as a percentage of total assets decreased to 71.5% as of September 30, 2018, compared to 71.8% as of December 31, 2017.
As of September 30, 2018, the Company had $330.4 million of brokered deposits compared to $274.7 million as of December 31, 2017. Brokered deposits allow the Company to seek additional funding by attracting deposits from outside the Company's core market. The Company's investment policy limits the amount of brokered deposits to 15% of total assets. Brokered deposits are included in the certificate of deposit balance, which increased $450.9 million during the nine months ended September 30, 2018. Certificates of deposit have also increased as a percentage of total deposits to 31.7% as of September 30, 2018 from 24.8% as of December 31, 2017.
During the nine months ended September 30, 2018, core deposits decreased $88.6 million. The ratio of core deposits to total deposits decreased from 75.2% as of December 31, 2017 to 68.3% as of September 30, 2018, primarily due to the shift in deposit mix and increase in certificate of deposit accounts.
The following table sets forth the distribution of the average balances of the Company's deposit accounts for the periods indicated and the weighted average interest rates on each category of deposits presented. Averages for the periods presented are based on daily balances.
 
Three Months Ended September 30,
 
2018
 
2017
 
Average
Balance
 
Percent
of Total
Average
Deposits
 
Weighted
Average
Rate
 
Average
Balance
 
Percent
of Total
Average
Deposits
 
Weighted
Average
Rate
 
(Dollars in Thousands)
Core deposits:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing demand checking accounts
1,023,610

 
19.5
%
 
%
 
$
918,054

 
19.3
%
 
%
NOW accounts
344,760

 
6.6
%
 
0.08
%
 
321,731

 
6.8
%
 
0.07
%
Savings accounts
599,514

 
11.4
%
 
0.31
%
 
605,303

 
12.7
%
 
0.20
%
Money market accounts
1,668,402

 
31.8
%
 
1.04
%
 
1,765,610

 
37.2
%
 
0.51
%
Total core deposits
3,636,286

 
69.3
%
 
0.54
%
 
3,610,698

 
76.0
%
 
0.29
%
Certificate of deposit accounts
1,612,551

 
30.7
%
 
1.72
%
 
1,139,699

 
24.0
%
 
1.17
%
Total deposits
$
5,248,837

 
100.0
%
 
0.90
%
 
$
4,750,397

 
100.0
%
 
0.50
%

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Nine Months Ended September 30,
 
2018
 
2017
 
Average
Balance
 
Percent
of Total
Average
Deposits
 
Weighted
Average
Rate
 
Average
Balance
 
Percent
of Total
Average
Deposits
 
Weighted
Average
Rate
 
(Dollars in Thousands)
Core deposits:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing demand checking accounts
$
986,763

 
19.3
%
 
%
 
$
905,684

 
19.4
%
 
%
NOW accounts
342,418

 
6.7
%
 
0.08
%
 
319,633

 
6.8
%
 
0.07
%
Savings accounts
619,317

 
12.1
%
 
0.28
%
 
603,814

 
12.9
%
 
0.20
%
Money market accounts
1,735,710

 
34.0
%
 
0.81
%
 
1,759,449

 
37.6
%
 
0.49
%
Total core deposits
3,684,208

 
72.1
%
 
0.43
%
 
3,588,580

 
76.7
%
 
0.28
%
Certificate of deposit accounts
1,428,799

 
27.9
%
 
1.53
%
 
1,088,011

 
23.3
%
 
1.12
%
Total deposits
$
5,113,007

 
100.0
%
 
0.74
%
 
$
4,676,591

 
100.0
%
 
0.47
%
As of September 30, 2018 and December 31, 2017, the Company had outstanding certificates of deposit of $100,000 or more, maturing as follows:
 
At September 30, 2018
 
At December 31, 2017
 
Amount
 
Weighted
Average Rate
 
Amount
 
Weighted
Average Rate
 
(Dollars in Thousands)
Maturity period:
 
 
 
 
 
 
 
Six months or less
$
240,667

 
1.59
%
 
$
157,263

 
0.96
%
Over six months through 12 months
238,068

 
1.84
%
 
134,297

 
1.08
%
Over 12 months
387,100

 
2.30
%
 
244,348

 
1.73
%
Total certificate of deposit of $100,000 or more
$
865,835

 
1.98
%
 
$
535,908

 
1.34
%
Borrowed Funds
The following table sets forth certain information regarding advances from the FHLBB, subordinated debentures and notes and other borrowed funds for the periods indicated:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in Thousands)
Borrowed funds:
 
 
 
 
 
 
 
Average balance outstanding
$
1,047,594

 
$
1,037,778

 
$
1,090,372

 
$
1,046,054

Maximum amount outstanding at any month-end during the period
1,082,886

 
1,070,681

 
1,209,310

 
1,093,693

Balance outstanding at end of period
1,082,886

 
985,896

 
1,082,886

 
985,896

Weighted average interest rate for the period
2.39
%
 
1.64
%
 
2.13
%
 
1.59
%
Weighted average interest rate at end of period
2.36
%
 
1.67
%
 
2.36
%
 
1.67
%
Advances from the FHLBB
On a long-term basis, the Company intends to continue to increase its core deposits. The Company also uses FHLBB borrowings and other wholesale borrowing as part of the Company's overall strategy to fund loan growth and manage interest-rate risk and liquidity. The advances are secured by a blanket security agreement which requires the Banks to maintain certain qualifying assets as collateral, principally mortgage loans and securities in an aggregate amount at least equal to outstanding advances. The maximum amount that the FHLBB will advance to member institutions, including the Company, fluctuates from time to time in accordance with the policies of the FHLBB. The Company may also borrow from the FRB's "discount window" as necessary.

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FHLBB borrowings increased by $69.5 million to $959.4 million as of September 30, 2018 from the December 31, 2017 balance of $889.9 million. The increase in FHLBB borrowings was primarily due to an increase in new advances from the FHLBB to fund loan growth.
Subordinated Debentures and Notes
The Company acquired two $5.0 million subordinated debentures due on June 26, 2033 and March 17, 2034, respectively. The Company is obligated to pay 3-month LIBOR plus 3.10% and 3-month LIBOR plus 2.79%, respectively, on a quarterly basis until the debentures mature.
The Company sold $75.0 million of 6.0% fixed-to-floating subordinated notes due September 15, 2029. The Company is obligated to pay 6.0% interest semiannually between September 2014 and September 2024. Subsequently, the Company is obligated to pay 3-month LIBOR plus 3.315% quarterly until the notes mature in September 2029.
The following table summarizes the Company's subordinated debentures and notes at the dates indicated.
 
 
 
 
 
 
 
 
Carrying Amount
Issue Date
 
Rate
 
Maturity Date
 
Next Call Date
 
September 30,
2018
 
December 31, 2017
 
 
(Dollars in Thousands)
June 26, 2003
 
Variable;
3-month LIBOR + 3.10%
 
June 26, 2033
 
December 26, 2018
 
$
4,797

 
$
4,778

March 17, 2004
 
Variable;
3-month LIBOR + 2.79%
 
March 17, 2034
 
December 17, 2018
 
4,695

 
4,668

September 15, 2014
 
6.0% Fixed-to-Variable;
3-month LIBOR + 3.315%
 
September 15, 2029
 
September 15, 2024
 
73,900

 
73,825

 
 
 
 
 
 
Total
 
$
83,392

 
$
83,271

The above carrying amounts of the subordinated debentures included $0.5 million of accretion adjustments and $1.1 million of capitalized debt issuance costs as of September 30, 2018. This compares to $0.6 million of accretion adjustments and $1.2 million of capitalized debt issuance costs as of December 31, 2017.
Other Borrowed Funds
In addition to advances from the FHLBB and subordinated debentures and notes, the Company utilizes other funding sources as part of the overall liquidity strategy. Those funding sources include repurchase agreements, and committed and uncommitted lines of credit with several financial institutions.
The Company periodically enters into repurchase agreements with its larger deposit and commercial customers as part of its cash management services which are typically overnight borrowings. Repurchase agreements with customers increased $2.4 million to $40.0 million as of September 30, 2018 from $37.6 million as of December 31, 2017.
The Company has access to a $12.0 million committed line of credit as of September 30, 2018. As of September 30, 2018 and December 31, 2017, the Company did not have any borrowings on this committed line of credit outstanding.
The Banks also have access to funding through several uncommitted lines of credit of $236.0 million. As of September 30, 2018 , the Company did not have any borrowings on these uncommitted lines of credit as compared to December 31, 2017, when the Company had $10.0 million in borrowings on the uncommitted lines.

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Derivative Financial Instruments
The Company has entered into loan level derivatives, risk participation agreements, and foreign exchange contracts with certain of its commercial customers and concurrently enters into offsetting swaps with third-party financial institutions. The Company may also, from time to time, enter into risk participation agreements. The Company did not have derivative fair value hedges or derivative cash flow hedges at September 30, 2018 or December 31, 2017.
The following table summarizes certain information concerning the Company's loan level derivatives, risk participation agreements, and foreign exchange contracts at September 30, 2018 and December 31, 2017:
 
At September 30, 2018
At December 31, 2017
 
(Dollars in Thousands)
Loan level derivatives (Notional principal amounts):
 
 
Receive fixed, pay variable
$
629,918

$
494,659

Pay fixed, receive variable
629,918

494,659

Risk participation-out agreements
79,810

36,627

Risk participation-in agreements
12,817

3,825

Foreign exchange contracts (Notional amounts):
 
 
Buys foreign currency, sells U.S. currency
$
6,848

$
1,495

Sells foreign currency, buys U.S. currency
6,853

1,502

Fixed weighted average interest rate from the Company to counterparty
4.32
%
4.17
%
Floating weighted average interest rate from counterparty to the Company
4.15
%
3.19
%
Weighted average remaining term to maturity (in months)
87

81

Fair value:
 
 
Recognized as an asset:
 
 
Loan level derivatives
$
22,923

$
8,865

Risk participation-out agreements
144

65

Foreign exchange contracts
95

72

Recognized as a liability:
 
 
Loan level derivatives
$
22,923

$
8,865

Risk participation-in agreements
33

10

Foreign exchange contracts
90

65

Stockholders' Equity and Dividends
The Company's total stockholders' equity was $890.4 million as of September 30, 2018, representing a $86.6 million increase compared to $803.8 million at December 31, 2017. The increase primarily reflects net income attributable to the Company of $61.9 million for the nine months ended September 30, 2018 and an increase of $55.2 million related to acquisition of First Commons Bank, which was partially offset by an unrealized loss on securities available-for-sale of $9.6 million and dividends paid by the Company of $23.0 million in that same period.
Stockholders' equity represented 12.16% of total assets as of September 30, 2018 and 11.86% of total assets as of December 31, 2017. Tangible stockholders' equity (total stockholders' equity less goodwill and identified intangible assets, net) represented 10.11% of tangible assets (total assets less goodwill and identified intangible assets, net) as of September 30, 2018 and 9.94% as of December 31, 2017.
The dividend payout ratio was 35.81% for the three months ended September 30, 2018, compared to 44.90% for the same period in 2017 and 37.12% for the nine months ended September 30, 2018, compared to 46.09% for the same period in 2017.
Results of Operations
The primary drivers of the Company's net income are net interest income, which is strongly affected by the net yield on and growth of interest-earning assets and liabilities ("net interest margin"), the quality of the Company's assets, its levels of non-interest income and non-interest expense, and its tax provision.
The Company's net interest income represents the difference between interest income earned on its investments, loans and leases, and its cost of funds. Interest income is dependent on the amount of interest-earning assets outstanding during the

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period and the yield earned thereon. Cost of funds is a function of the average amount of deposits and borrowed money outstanding during the year and the interest rates paid thereon. The net interest margin is calculated by dividing net interest income by average interest-earning assets. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The increases or decreases, as applicable, in the components of interest income and interest expense, expressed in terms of fluctuation in average volume and rate, are summarized under "Rate/Volume Analysis" below. Information as to the components of interest income, interest expense and average rates is provided under "Average Balances, Net Interest Income, Interest-Rate Spread and Net Interest Margin" below.
Because the Company's assets and liabilities are not identical in duration and in repricing dates, the differential between the two is vulnerable to changes in market interest rates as well as the overall shape of the yield curve. These vulnerabilities are inherent to the business of banking and are commonly referred to as "interest-rate risk." How interest-rate risk is measured and, once measured, how much interest-rate risk is taken are based on numerous assumptions and other subjective judgments. See the discussion in “Item 3. Quantitative and Qualitative Disclosures about Market Risk” below.
The quality of the Company's assets also influences its earnings. Loans and leases that are not paid on a timely basis and exhibit other weaknesses can result in the loss of principal and/or interest income. Additionally, the Company must make timely provisions to the allowance for loan and lease losses based on estimates of probable losses inherent in the loan and lease portfolio. These additions, which are charged against earnings, are necessarily greater when greater probable losses are expected. Further, the Company incurs expenses as a result of resolving troubled assets. These variables reflect the "credit risk" that the Company takes on in the ordinary course of business and are further discussed under "Financial Condition—Asset Quality" above.
Net Interest Income
Net interest income increased $5.5 million to $62.3 million for the three months ended September 30, 2018 from $56.8 million for the three months ended September 30, 2017. This increase reflects a $12.8 million increase in interest income on loans and leases, partially offset by an $8.0 million increase in interest expense on deposit and borrowings, which is reflective of the various portfolios repricing and replacing balances into the current interest rate environment. Refer to “Results of Operations - Comparison of the Three-Month Period Ended September 30, 2018 and September 30, 2017 — Interest Income” and “Results of Operations - Comparison of the Three-Month Period Ended September 30, 2018 and September 30, 2017 — Interest Expense Deposit and Borrowed Funds” below for more details.
Net interest income increased $19.0 million to $184.5 million for the nine months ended September 30, 2018 from $165.5 million for the nine months ended September 30, 2017. This overall increase reflects a $33.7 million increase in interest income on loans and leases, partially offset by a $16.6 million increase in interest expense on deposit and borrowings, which is reflective of the various portfolios repricing and replacing balances into the current interest rate environment. Refer to “Results of Operations - Comparison of the Nine-Month Period Ended September 30, 2018 and September 30, 2017 — Interest Income” and “Results of Operations - Comparison of the Nine-Month Period Ended September 30, 2018 and September 30, 2017 — Interest Expense Deposit and Borrowed Funds” below for more details.
Net interest margin remained consistent at 3.57% for the three months ended September 30, 2018 and September 30, 2017. The Company's weighted average interest rate on loans (prior to purchase accounting adjustments) increased to 4.92% for the three months ended September 30, 2018 from 4.52% for the three months ended September 30, 2017. Interest amortization and accretion on acquired loans totaled $0.3 million and contributed 2 basis points to loan yields during the three months ended September 30, 2018 compared to $0.2 million, or 1 basis point, for the three months ended September 30, 2017. The flat net interest margin is the result of repricing interest-earning assets in a slightly higher rate environment, offset by a comparable increase in funding costs.
Net interest margin increased by 6 basis points to 3.62% for the nine months ended September 30, 2018 from 3.56% for the nine months ended September 30, 2017. The Company's weighted average interest rate on loans (prior to purchase accounting adjustments) increased to 4.77% for the nine months ended September 30, 2018 from 4.44% for the nine months ended September 30, 2017. Interest amortization and accretion on acquired loans totaled $0.6 million and contributed 1 basis point to loan yields during the nine months ended September 30, 2018 compared to $0.6 million, or 1 basis point, for the nine months ended September 30, 2017. The increase in the net interest margin is the result of repricing interest-earning assets in a slightly higher rate environment partially offset by a comparable increase in funding costs.
The yield on interest-earning assets increased to 4.65% for the three months ended September 30, 2018 from 4.25% for the three months ended September 30, 2017. This increase is the result of higher yields on loans and leases and investments. During the three months ended September 30, 2018, the Company recorded $0.9 million in prepayment penalties and late charges, which contributed 5 basis points to yields on interest-earning assets in the three months ended September 30, 2018, compared to $0.8 million, or 5 basis points, for the three months ended September 30, 2017.

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The yield on interest-earning assets increased to 4.51% for the nine months ended September 30, 2018 from 4.17% for the nine months ended September 30, 2017. This increase is the result of higher yields on loans and leases and investments. During the nine months ended September 30, 2018, the Company recorded $2.4 million in prepayment penalties and late charges, which contributed 5 basis points to yields on interest-earning assets in the nine months ended September 30, 2018. The company recorded $2.6 million in prepayment penalties and late charges, which contributed 6 basis points to yields on interest-earning assets in the nine months ended September 30, 2017.
The overall cost of funds (including non-interest-bearing demand checking accounts) increased 44 basis points to 1.15% for the three months ended September 30, 2018 from 0.71% for the three months ended September 30, 2017. The overall cost of funds (including non-interest-bearing demand checking accounts) increased 30 basis points to 0.98% for the nine months ended September 30, 2018 from 0.68% for the nine months ended September 30, 2017. Refer to "Financial Condition - Borrowed Funds" above for more details.
Management seeks to position the balance sheet to be neutral to asset sensitive to changes in interest rates. Since the end of 2016, short term interest rates have risen while at the same time net interest income, net interest spread, and net interest margin have also increased. In general, the Company's balance sheet position should respond positively in a rising interest rate environment and when the rate curves are steepening which should result in a positive impact to net interest income, net interest spread, and the net interest margin. A declining interest rate or flattening yield curve environment is expected to have a negative impact on the Company's yields and net interest margin. Additional risk factors include, but are not limited to: ongoing pricing pressures in both the loan and deposit portfolios, the ability to increase the Company's core deposits, decrease its loan-to-deposit ratio, and decrease its reliance on FHLBB advances. Net interest income may also be negatively affected by changes in the amount of accretion on acquired loans and leases, deposits and borrowed funds, which are included in interest income and interest expense, respectively.

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Table of Contents

Average Balances, Net Interest Income, Interest-Rate Spread and Net Interest Margin
The following table sets forth information about the Company's average balances, interest income and interest rates earned on average interest-earning assets, interest expense and interest rates paid on average interest-bearing liabilities, interest-rate spread and net interest margin for the three and nine months ended September 30, 2018 and September 30, 2017. Average balances are derived from daily average balances and yields include fees, costs and purchase-accounting-related premiums and discounts which are considered adjustments to coupon yields in accordance with GAAP. Certain amounts previously reported have been reclassified to conform to the current presentation.
 
Three Months Ended
 
September 30, 2018
 
September 30, 2017
 
Average
Balance
 
Interest (1)
 
Average
Yield/
Cost
 
Average
Balance
 
Interest (1)
 
Average
Yield/
Cost
 
(Dollars in Thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Debt securities
$
663,125

 
$
3,638

 
2.20
%
 
$
642,018

 
$
3,264

 
2.03
%
Marketable and restricted equity securities
67,607

 
1,029

 
6.09
%
 
66,212

 
789

 
4.76
%
Short-term investments
31,061

 
145

 
1.87
%
 
52,674

 
180

 
1.36
%
Total investments
761,793

 
4,812

 
2.53
%
 
760,904

 
4,233

 
2.23
%
Commercial real estate loans (2)
3,260,634

 
37,332

 
4.48
%
 
2,974,185

 
31,299

 
4.12
%
Commercial loans (2)
819,383

 
9,862

 
4.72
%
 
760,115

 
7,959

 
4.10
%
Equipment financing (2)
933,007

 
16,220

 
6.95
%
 
846,027

 
13,983

 
6.61
%
Residential mortgage loans (2)
756,421

 
7,648

 
4.04
%
 
649,831

 
6,043

 
3.72
%
Other consumer loans (2)
412,248

 
4,928

 
4.73
%
 
369,925

 
4,015

 
4.30
%
Total loans and leases
6,181,693

 
75,990

 
4.92
%
 
5,600,083

 
63,299

 
4.52
%
Total interest-earning assets
6,943,486

 
80,802

 
4.65
%
 
6,360,987

 
67,532

 
4.25
%
Allowance for loan and lease losses
(58,576
)
 
 
 
 
 
(65,140
)
 
 
 
 
Non-interest-earning assets
417,503

 
 
 
 
 
385,195

 
 
 
 
Total assets
$
7,302,413

 
 
 
 
 
$
6,681,042

 
 
 
 
Liabilities and Stockholders' Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
NOW accounts
$
344,760

 
72

 
0.08
%
 
$
321,731

 
55

 
0.07
%
Savings accounts
599,514

 
472

 
0.31
%
 
605,303

 
306

 
0.20
%
Money market accounts
1,668,402

 
4,367

 
1.04
%
 
1,765,610

 
2,267

 
0.51
%
Certificate of deposit
1,612,551

 
7,005

 
1.72
%
 
1,139,699

 
3,356

 
1.17
%
Total interest-bearing deposits (3)
4,225,227

 
11,916

 
1.12
%
 
3,832,343

 
5,984

 
0.62
%
Advances from the FHLBB
907,306

 
4,979

 
2.15
%
 
913,206

 
3,028

 
1.30
%
Subordinated debentures and notes
83,370

 
1,301

 
6.24
%
 
83,204

 
1,274

 
6.13
%
Other borrowed funds
56,918

 
108

 
0.75
%
 
41,368

 
47

 
0.45
%
Total borrowed funds
1,047,594

 
6,388

 
2.39
%
 
1,037,778

 
4,349

 
1.64
%
Total interest-bearing liabilities
5,272,821

 
18,304

 
1.38
%
 
4,870,121

 
10,333

 
0.84
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing demand checking accounts (3)
1,023,610

 
 

 
 

 
918,054

 
 

 
 

Other non-interest-bearing liabilities
107,449

 
 

 
 

 
80,616

 
 

 
 

Total liabilities
6,403,880

 
 

 
 

 
5,868,791

 
 

 
 

Brookline Bancorp, Inc. stockholders' equity
889,259

 
 

 
 

 
804,666

 
 

 
 

Noncontrolling interest in subsidiary
9,274

 
 

 
 

 
7,585

 
 

 
 

Total liabilities and stockholders' equity
$
7,302,413

 
 

 
 

 
$
6,681,042

 
 

 
 

Net interest income (tax-equivalent basis) / Interest-rate spread (4)
 

 
62,498

 
3.27
%
 
 

 
57,199

 
3.41
%
Less adjustment of tax-exempt income
 

 
166

 
 

 
 

 
356

 
 

Net interest income
 

 
$
62,332

 
 

 
 

 
$
56,843

 
 

Net interest margin (5)
 

 
 

 
3.57
%
 
 

 
 

 
3.57
%
_________________________________________________________________________
(1) Tax-exempt income on debt securities, equity securities and industrial revenue bonds are included in commercial real estate loans on a tax-equivalent basis.
(2) Loans on nonaccrual status are included in the average balances.
(3) Including non-interest-bearing checking accounts, the average interest rate on total deposits was 0.90% and 0.50% in the three months ended September 30, 2018 and September 30, 2017, respectively.
(4) Interest-rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income (tax equivalent basis) divided by average interest-earning assets.

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Table of Contents

 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
Average
Balance
 
Interest (1)
 
Average
Yield/
Cost
 
Average
Balance
 
Interest (1)
 
Average
Yield/
Cost
 
(Dollars in Thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Debt securities
$
658,993

 
$
10,632

 
2.15
%
 
$
631,549

 
$
9,641

 
2.04
%
Marketable and restricted equity securities
67,056

 
2,956

 
5.88
%
 
68,104

 
2,306

 
4.52
%
Short-term investments
34,295

 
444

 
1.73
%
 
42,922

 
342

 
1.06
%
Total investments
760,344

 
14,032

 
2.46
%
 
742,575

 
12,289

 
2.21
%
Commercial real estate loans (2)
3,209,798

 
107,133

 
4.40
%
 
2,949,313

 
91,134

 
4.07
%
Commercial loans (2)
809,849

 
27,609

 
4.50
%
 
730,453

 
22,737

 
4.11
%
Equipment financing (2)
905,345

 
46,823

 
6.90
%
 
826,494

 
40,907

 
6.60
%
Residential mortgage loans (2)
740,507

 
21,933

 
3.95
%
 
641,443

 
17,511

 
3.64
%
Other consumer loans (2)
400,304

 
13,333

 
4.45
%
 
364,407

 
11,187

 
4.10
%
Total loans and leases
6,065,803

 
216,831

 
4.77
%
 
5,512,110

 
183,476

 
4.44
%
Total interest-earning assets
6,826,147

 
230,863

 
4.51
%
 
6,254,685

 
195,765

 
4.17
%
Allowance for loan and lease losses
(58,935
)
 
 
 
 
 
(62,142
)
 
 
 
 
Non-interest-earning assets
401,999

 
 
 
 
 
374,558

 
 
 
 
Total assets
$
7,169,211

 
 
 
 
 
$
6,567,101

 
 
 
 
Liabilities and Stockholders' Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
NOW accounts
$
342,418

 
195

 
0.08
%
 
$
319,633

 
164

 
0.07
%
Savings accounts
619,317

 
1,278

 
0.28
%
 
603,814

 
916

 
0.20
%
Money market accounts
1,735,710

 
10,455

 
0.81
%
 
1,759,449

 
6,407

 
0.49
%
Certificate of deposit
1,428,799

 
16,306

 
1.53
%
 
1,088,011

 
9,120

 
1.12
%
Total interest-bearing deposits (3)
4,126,244

 
28,234

 
0.91
%
 
3,770,907

 
16,607

 
0.59
%
Advances from the FHLBB
960,399

 
13,423

 
1.84
%
 
913,137

 
8,640

 
1.25
%
Subordinated debentures and notes
83,330

 
3,879

 
6.21
%
 
83,165

 
3,805

 
6.10
%
Other borrowed funds
46,643

 
273

 
0.78
%
 
49,752

 
137

 
0.37
%
Total borrowed funds
1,090,372

 
17,575

 
2.13
%
 
1,046,054

 
12,582

 
1.59
%
Total interest-bearing liabilities
5,216,616

 
45,809

 
1.17
%
 
4,816,961

 
29,189

 
0.81
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing demand checking accounts (3)
986,763

 
 

 
 

 
905,684

 
 

 
 

Other non-interest-bearing liabilities
92,280

 
 

 
 

 
76,735

 
 

 
 

Total liabilities
6,295,659

 
 

 
 

 
5,799,380

 
 

 
 

Brookline Bancorp, Inc. stockholders' equity
864,675

 
 

 
 

 
760,447

 
 

 
 

Noncontrolling interest in subsidiary
8,877

 
 

 
 

 
7,274

 
 

 
 

Total liabilities and stockholders' equity
$
7,169,211

 
 

 
 

 
$
6,567,101

 
 

 
 

Net interest income (tax-equivalent basis) / Interest-rate spread (4)
 

 
185,054

 
3.34
%
 
 

 
166,576

 
3.36
%
Less adjustment of tax-exempt income
 

 
514

 
 

 
 

 
1,052

 
 

Net interest income
 

 
$
184,540

 
 

 
 

 
$
165,524

 
 

Net interest margin (5)
 

 
 

 
3.62
%
 
 

 
 

 
3.56
%
_________________________________________________________________________
(1) Tax-exempt income on debt securities, equity securities and industrial revenue bonds are included in commercial real estate loans on a tax-equivalent basis.
(2) Loans on nonaccrual status are included in the average balances.
(3) Including non-interest-bearing checking accounts, the average interest rate on total deposits was 0.74% and 0.47% in the nine months ended September 30, 2018 and September 30, 2017, respectively.
(4) Interest-rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income (tax equivalent basis) divided by average interest-earning assets.
Rate/Volume Analysis
The following table presents, on a tax-equivalent basis, the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

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Table of Contents

 
Three Months Ended September 30, 2018 as Compared to the Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2018 as Compared to the Nine Months Ended September 30, 2017
 
Increase
(Decrease) Due To
 
 
 
Increase
(Decrease) Due To
 
 
 
Volume
 
Rate
 
Net Change
 
Volume
 
Rate
 
Net Change
 
(In Thousands)
Interest and dividend income:
 
 
 
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
 
 
 
Debt securities
$
105

 
$
269

 
$
374

 
$
442

 
$
549

 
$
991

Marketable and restricted equity securities
17

 
223

 
240

 
(36
)
 
686

 
650

Short-term investments
(89
)
 
54

 
(35
)
 
(79
)
 
181

 
102

Total investments
33

 
546

 
579

 
327

 
1,416

 
1,743

Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate loans
3,163

 
2,870

 
6,033

 
8,341

 
7,658

 
15,999

Commercial loans and leases
647

 
1,256

 
1,903

 
2,601

 
2,271

 
4,872

Equipment financing
1,491

 
746

 
2,237

 
4,007

 
1,909

 
5,916

Residential mortgage loans
1,053

 
552

 
1,605

 
2,850

 
1,572

 
4,422

Other consumer loans
487

 
426

 
913

 
1,150

 
996

 
2,146

Total loans
6,841

 
5,850

 
12,691

 
18,949

 
14,406

 
33,355

Total change in interest and dividend income
6,874

 
6,396

 
13,270

 
19,276

 
15,822

 
35,098

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
NOW accounts
6

 
11

 
17

 
10

 
21

 
31

Savings accounts
(3
)
 
169

 
166

 
22

 
340

 
362

Money market accounts
(132
)
 
2,232

 
2,100

 
(89
)
 
4,137

 
4,048

Certificate of deposit
1,711

 
1,938

 
3,649

 
3,313

 
3,873

 
7,186

Total deposits
1,582

 
4,350

 
5,932

 
3,256

 
8,371

 
11,627

Borrowed funds:
 
 
 
 
 
 
 
 
 
 
 
Advances from the FHLBB
(19
)
 
1,970

 
1,951

 
473

 
4,310

 
4,783

Subordinated debentures and notes
3

 
24

 
27

 
7

 
67

 
74

Other borrowed funds
22

 
39

 
61

 
(9
)
 
145

 
136

Total borrowed funds
6

 
2,033

 
2,039

 
471

 
4,522

 
4,993

Total change in interest expense
1,588

 
6,383

 
7,971

 
3,727

 
12,893

 
16,620

Change in tax-exempt income
(190
)
 

 
(190
)
 
(538
)
 

 
(538
)
Change in net interest income
$
5,476

 
$
13

 
$
5,489

 
$
16,087

 
$
2,929

 
$
19,016



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Table of Contents

Interest Income

Loans and Leases
 
Three Months Ended September 30,
 
Dollar
Change
 
Percent
Change
 
Nine Months Ended 
 September 30,
 
Dollar
Change
 
Percent
Change
 
2018

2017
 
 
 
2018
 
2017
 
 
 
(Dollars in Thousands)
Interest income—loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate loans
$
37,333

 
$
31,298

 
$
6,035

 
19.3
%
 
$
107,134

 
$
91,133

 
$
16,001

 
17.6
%
Commercial loans
9,748

 
7,714

 
2,034

 
26.4
%
 
27,255

 
22,011

 
5,244

 
23.8
%
Equipment financing
16,221

 
13,983

 
2,238

 
16.0
%
 
46,823

 
40,907

 
5,916

 
14.5
%
Residential mortgage loans
7,648

 
6,043

 
1,605

 
26.6
%
 
21,933

 
17,511

 
4,422

 
25.3
%
Other consumer loans
4,927

 
4,016

 
911

 
22.7
%
 
13,333

 
11,188

 
2,145

 
19.2
%
Total interest income—loans and leases
$
75,877

 
$
63,054

 
$
12,823

 
20.3
%
 
$
216,478

 
$
182,750

 
$
33,728

 
18.5
%
Interest income from loans and leases was $75.9 million for the three months ended September 30, 2018, and represented a yield on total loans of 4.92%. This compares to $63.1 million of interest on loans and a yield of 4.52% for September 30, 2017. The $12.8 million increase in interest income from loans and leases was primarily attributable to $6.8 million in origination volume and $5.9 million in a change in interest rates.
Accretion on acquired loans and leases totaled $0.3 million, or 2 basis points to the Company's net interest margin for the three months ended September 30, 2018, compared to $0.2 million and 1 basis point for the three months ended September 30, 2017.
Interest income from loans and leases was $216.5 million for the nine months ended September 30, 2018, and represented a yield on total loans of 4.77%. This compares to $182.8 million of interest on loans and a yield of 4.44% for September 30, 2017. The $33.7 million increase in interest income from loans and leases was primarily attributable to $18.9 million in origination volume and $14.4 million in a change in interest rates.
Accretion on acquired loans and leases totaled $0.6 million, or 1 basis point to the Company's net interest margin for the nine months ended September 30, 2018 and 2017.
Investments
 
Three Months Ended September 30,
 
Dollar
Change
 
Percent
Change
 
Nine Months Ended September 30,
 
Dollar
Change
 
Percent
Change
 
2018
 
2017
 
 
 
2018
 
2017
 
 
 
(Dollars in Thousands)
Interest income—investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
$
3,585

 
$
3,154

 
$
431

 
13.7
 %
 
$
10,471

 
$
9,310

 
$
1,161

 
12.5
%
Marketable and restricted equity securities
1,029

 
788

 
241

 
30.6
 %
 
2,956

 
2,311

 
645

 
27.9
%
Short-term investments
145

 
180

 
(35
)
 
(19.4
)%
 
444

 
342

 
102

 
29.8
%
Total interest income—investments
$
4,759

 
$
4,122

 
$
637

 
15.5
 %
 
$
13,871

 
$
11,963

 
$
1,908

 
15.9
%
Total investment income was $4.8 million for the three months ended September 30, 2018 compared to $4.1 million for the three months ended September 30, 2017. As of September 30, 2018 and 2017, the yield on total investments was 2.5% and 2.2%, respectively. The year over year increase in interest income on investments of $0.6 million, or 15.5%, was driven by a $546 thousand increase due to rates and a $33 thousand increase due to volume.
Total investment income was $13.9 million for the nine months ended September 30, 2018 compared to $12.0 million for the nine months ended September 30, 2017. As of September 30, 2018 and 2017, the yield on total investments was 2.5% and 2.2%, respectively. The year over year increase in interest income on investments of $1.9 million, or 15.9%, was driven by a $1.4 million increase due to rates and a $0.3 million increase due to volume.

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Table of Contents

Interest Expense—Deposits and Borrowed Funds
 
Three Months Ended September 30,
 
Dollar
Change
 
Percent
Change
 
Nine Months Ended September 30,
 
Dollar
Change
 
Percent
Change
 
2018
 
2017
 
 
 
2018
 
2017
 
 
 
(Dollars in Thousands)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NOW accounts
$
72

 
$
55

 
$
17

 
30.9
%
 
$
195

 
$
164

 
$
31

 
18.9
%
Savings accounts
472

 
306

 
166

 
54.2
%
 
1,278

 
916

 
362

 
39.5
%
Money market accounts
4,367

 
2,267

 
2,100

 
92.6
%
 
10,455

 
6,407

 
4,048

 
63.2
%
Certificates of deposit
7,005

 
3,356

 
3,649

 
108.7
%
 
16,306

 
9,120

 
7,186

 
78.8
%
Total interest expense - deposits
11,916

 
5,984

 
5,932

 
99.1
%
 
28,234

 
16,607

 
11,627

 
70.0
%
Borrowed funds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advances from the FHLBB
4,979

 
3,028

 
1,951

 
64.4
%
 
13,423

 
8,640

 
4,783

 
55.4
%
Subordinated debentures and notes
1,301

 
1,274

 
27

 
2.1
%
 
3,879

 
3,805

 
74

 
1.9
%
Other borrowed funds
108

 
47

 
61

 
129.8
%
 
273

 
137

 
136

 
99.3
%
Total interest expense - borrowed funds
6,388

 
4,349

 
2,039

 
46.9
%
 
17,575

 
12,582

 
4,993

 
39.7
%
Total interest expense
$
18,304

 
$
10,333

 
$
7,971

 
77.1
%
 
$
45,809

 
$
29,189

 
$
16,620

 
56.9
%
Deposits
For the three months ended September 30, 2018, interest expense on deposits increased $5.9 million, or 99.1%, as compared to the same period in 2017. Interest expense increased $4.4 million due to an increase in interest rates and $1.6 million due to the growth in deposits. Purchase accounting amortization on acquired deposits for the three months ended September 30, 2018 was $245 thousand and one basis point, compared to no amortization for the three months ended September 30, 2017.
Interest expense on deposits increased $11.6 million, or 70.0%, to $28.2 million for the nine months ended September 30, 2018 from $16.6 million for the nine months ended September 30, 2017. The increase in interest expense on deposits was due to a $8.4 million increase due to rate increases and a $3.3 million increase due to growth in deposits. Purchase accounting amortization on acquired deposits for the nine months ended September 30, 2018 was $572 thousand and one basis point, compared to no amortization for the nine months ended September 30, 2017.
Borrowed Funds
During the three months ended September 30, 2018, interest paid on borrowed funds increased $2.0 million, or 46.9% year over year, primarily driven by an increase in FHLBB borrowing rates. The cost of borrowed funds increased to 2.39% for the three months ended September 30, 2018 from 1.64% for the three months ended September 30, 2017. The increase in interest expense was driven by an increase of $2.0 million due to borrowing rates. Volume had no impact on the increase in interest expense. For the three months ended September 30, 2018, there was purchase accounting accretion of $15 thousand and zero basis points on acquired borrowed funds compared to no amortization for the three months ended September 30, 2017.
Interest expense on borrowed funds increased by $5.0 million, or 39.7%, to $17.6 million for the nine months ended September 30, 2018 from $12.6 million for the nine months ended September 30, 2017. The cost of borrowed funds increased to 2.13% for the nine months ended September 30, 2018 from 1.59% for the nine months ended September 30, 2017. The increase in interest expense was driven by an increase of $4.5 million due to borrowing rates and an increase of $0.5 million due to volume. For the nine months ended September 30, 2018, there was purchase accounting accretion of $46 thousand and zero basis points on acquired borrowed funds compared to amortization of $1.0 million and two basis points for the nine months ended September 30, 2017.

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Provision for Credit Losses
The provisions for credit losses are set forth below:
 
Three Months Ended September 30,
 
Dollar
 
Percent
 
Nine Months Ended September 30,
 
Dollar
 
Percent
 
2018

2017
 
Change
 
Change
 
2018
 
2017
 
Change
 
Change
 
(Dollars in Thousands)
Provision for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
319

 
$
979

 
$
(660
)
 
67.4
 %
 
$
355

 
$
1,041

 
$
(686
)
 
65.9
 %
Commercial
2,217

 
1,832

 
385

 
21.0
 %
 
4,840

 
15,636

 
(10,796
)
 
(69.0
)%
Consumer
44

 
35

 
9

 
(25.7
)%
 
(391
)
 
421

 
(812
)
 
(192.9
)%
Total provision for loan and lease losses
2,580

 
2,846

 
(266
)
 
(9.3
)%
 
4,804

 
17,098

 
(12,294
)
 
(71.9
)%
Unfunded credit commitments
137

 
65

 
72

 
110.8
 %
 
24

 
88

 
(64
)
 
(72.7
)%
Total provision for credit losses
$
2,717

 
$
2,911

 
$
(194
)
 
(6.7
)%
 
$
4,828

 
$
17,186

 
$
(12,358
)
 
(71.9
)%
For the three months ended September 30, 2018, the provision for credit losses decreased $0.2 million, or 6.7%, to $2.7 million from $2.9 million for the three months ended September 30, 2017. The decrease in the provision for credit losses for the three months ended September 30, 2018 was primarily driven by decreases in net charge-offs and reserves for loan growth, partially offset by the increase in the specific reserve for taxi medallion loans due to the reduction in collateral values of the taxi medallions in the third quarter of 2018.
For the nine months ended September 30, 2018, the provision for credit losses decreased $12.4 million, or 71.9%, to $4.8 million from $17.2 million for the nine months ended September 30, 2017. The decrease in the provision for credit losses for the nine months ended September 30, 2018 was primarily driven by a reduction in the specific reserve requirement for taxi medallion loans due to charge-offs, partially offset by additional reserves provided for loan growth during the first nine months of 2018.
See management’s discussion of “Financial Condition — Allowance for Loan and Lease Losses” and Note 5, “Allowance for Loan and Lease Losses,” to the unaudited consolidated financial statements for a description of how management determined the allowance for loan and lease losses for each portfolio and class of loans.
Non-Interest Income
The following table sets forth the components of non-interest income:
 
Three Months Ended September 30,
 
Dollar
Change
 
Percent
Change
 
Nine Months Ended September 30,
 
Dollar
Change
 
Percent
Change
 
2018

2017
 
 
 
2018
 
2017
 
 
 
(Dollars in Thousands)
Deposit fees
$
2,648

 
$
2,547

 
$
101

 
4.0
 %
 
$
7,731

 
$
7,508

 
$
223

 
3.0
 %
Loan fees
417

 
282

 
135

 
47.9
 %
 
1,037

 
772

 
265

 
34.3
 %
Loan level derivative income, net
2,192

 
844

 
1,348

 
159.7
 %
 
3,629

 
1,432

 
2,197

 
153.4
 %
Gain on sales of investment securities

 

 


 %
 
1,162

 
11,393

 
(10,231
)
 
(89.8
)%
Gain on sales of loans and leases held-for-sale
535

 
1,049

 
(514
)
 
(49.0
)%
 
1,556

 
1,709

 
(153
)
 
(9.0
)%
Other
1,277

 
1,251

 
26

 
2.1
 %
 
3,648

 
3,544

 
104

 
2.9
 %
Total non-interest income
$
7,069

 
$
5,973

 
$
1,096

 
18.3
 %
 
$
18,763

 
$
26,358

 
$
(7,595
)
 
(28.8
)%
For the three months ended September 30, 2018, non-interest income increased $1.1 million, or 18.3%, to $7.1 million as compared to $6.0 million for the same period in 2017. This increase is primarily due to a $1.3 million increase in loan level derivative income and a $0.1 million increase in loan fees, partially offset by a $0.5 million decrease in gain on sales of loans and leases held-for-sale.

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For the nine months ended September 30, 2018, non-interest income decreased $7.6 million, or 28.8%, to $18.8 million as compared to $26.4 million for the same period in 2017. This decrease is primarily due to a $10.2 million decrease in gain on sales of investment securities, partially offset by a $2.2 million increase in loan level derivative income and a $0.3 million increase in loan fees.
Loan fees increased $0.1 million, or 47.9%, to $0.4 million for the three months ended September 30, 2018 from $0.3 million for the same period in 2017 and increased $0.3 million, or 34.3%, to $1.0 million for the nine months ended September 30, 2018 from $0.8 million for the same period in 2017, primarily driven by an increase in loan originations.
Loan level derivative income increased $1.3 million, or 159.7%, to $2.2 million for the three months ended September 30, 2018 from $0.8 million for the same period in 2017, and increase $2.2 million, or 153.4% to $3.6 million for the nine months ended September 30, 2018 from $1.4 million for the same period in 2017, primarily driven by an increase in loan level derivative transactions completed for the three and nine months ended September 30, 2018.
Gain on sales of loans and leases held-for-sale decreased $0.5 million, or 49.0%, to $0.5 million for the three months ended September 30, 2018 from $1.0 million for the same period in 2017, primarily driven by a decrease in gain on sale of loans and leases in 2018.
Gain on sales of investment securities decreased $10.2 million, or 89.8%, to $1.2 million for the nine months ended September 30, 2018 from $11.4 million for the same period in 2017, primarily driven by the gain on sale of investment securities in the first quarter of 2017.
Non-Interest Expense
The following table sets forth the components of non-interest expense:
 
Three Months Ended September 30,
 
Dollar
Change
 
Percent
Change
 
Nine Months Ended September 30,
 
Dollar
Change
 
Percent
Change
 
2018
 
2017
 
 
 
2018
 
2017
 
 
 
(Dollars in Thousands)
Compensation and employee benefits
$
22,338

 
$
21,067

 
$
1,271

 
6.0
 %
 
$
67,217

 
$
61,761

 
$
5,456

 
8.8
 %
Occupancy
3,913

 
3,650

 
263

 
7.2
 %
 
11,751

 
10,952

 
799

 
7.3
 %
Equipment and data processing
4,601

 
4,210

 
391

 
9.3
 %
 
13,587

 
12,437

 
1,150

 
9.2
 %
Professional services
1,075

 
973

 
102

 
10.5
 %
 
3,274

 
3,115

 
159

 
5.1
 %
FDIC insurance
846

 
842

 
4

 
0.5
 %
 
1,995

 
2,648

 
(653
)
 
(24.7
)%
Advertising and marketing
1,068

 
839

 
229

 
27.3
 %
 
3,243

 
2,513

 
730

 
29.0
 %
Amortization of identified intangible assets
537

 
519

 
18

 
3.5
 %
 
1,543

 
1,570

 
(27
)
 
(1.7
)%
Merger and acquisition expense
22

 
205

 
(183
)
 
(89.3
)%
 
3,261

 
205

 
3,056

 
1,490.7
 %
Other
2,910

 
3,103

 
(193
)
 
(6.2
)%
 
9,079

 
8,758

 
321

 
3.7
 %
Total non-interest expense
$
37,310

 
$
35,408

 
$
1,902

 
5.4
 %
 
$
114,950

 
$
103,959

 
$
10,991

 
10.6
 %
For the three months ended September 30, 2018, non-interest expense increased $1.9 million, or 5.4%, to $37.3 million as compared to $35.4 million for the same period in 2017. The increase is due to a $1.3 million increase in compensation and employee benefits expense, a $0.4 million increase in equipment and data processing expense, and a $0.3 million increase in occupancy expense.
For the nine months ended September 30, 2018, non-interest expense increased $11.0 million, or 10.6%, to $115.0 million as compared to $104.0 million for the same period in 2017. This increase is primarily due to a $5.5 million increase in compensation and employee benefits expense, a $3.1 million increase in merger and acquisition expense primarily due to the closing of the First Commons Bank acquisition, and a $1.2 million increase in equipment and data processing expense.
The efficiency ratio decreased to 53.8% for the three months ended September 30, 2018 from 56.37% for the same period in 2017. The decrease was primarily driven by an increase in loan level derivative income. The efficiency ratio increased to

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56.56% for the nine months ended September 30, 2018 from 54.18% for the same period in 2017. The increase was primarily driven by merger and acquisition expenses associated with the First Commons Bank acquisition.
Compensation and employee benefits expense increased $1.3 million, or 6.0%, to $22.3 million for the three months ended September 30, 2018 from $21.1 million for the same period in 2017 and increased $5.5 million, or 8.8% to $67.2 million for the nine months ended September 30, 2018 from $61.8 million for the same period in 2017, primarily driven by an increase in employee headcount and incentive plan expenses.
Occupancy expense increased $0.3 million, or 7.2%, to $3.9 million for the three months ended September 30, 2018 from $3.7 million for the same period in 2017, primarily driven by increase in rent and utilities.
Equipment and data processing expense increased $0.4 million, or 9.3%, to $4.6 million for the three months ended September 30, 2018 from $4.2 million for the same period in 2017, and increased $1.2 million, or 9.2%, to $13.6 million for the nine months ended September 30, 2018 from $12.4 million for the same period in 2017, primarily driven by an increase related to software licenses and core processing expense.
Merger and acquisition expense increased $3.1 million, or 1,490.7%, to $3.3 million for the nine months ended September 30, 2018 from $0.2 million for the same period in 2017, due to the First Commons Bank acquisition.
Provision for Income Taxes
 
Three Months Ended September 30,
 
Dollar
Change
 
Percent
Change
 
Nine Months Ended September 30,
 
Dollar
Change
 
Percent
Change
 
2018

2017
 
 
 
2018
 
2017
 
 
 
(Dollars in Thousands)
Income before provision for income taxes
$
29,374

 
$
24,497

 
$
4,877

 
19.9
 %
 
$
83,525

 
$
70,737

 
$
12,788

 
18.1
 %
Provision for income taxes
6,140

 
8,330

 
(2,190
)
 
(26.3
)%
 
19,134

 
24,924

 
(5,790
)
 
(23.2
)%
Net income, before non-controlling interest in subsidiary
$
23,234

 
$
16,167

 
$
7,067

 
43.7
 %
 
$
64,391

 
$
45,813

 
$
18,578

 
40.6
 %
Effective tax rate
20.9
%
 
34.0
%
 
N/A

 
(38.5
)%
 
22.9
%
 
35.2
%
 
N/A

 
(34.9
)%
The Company recorded income tax expense of $6.1 million for the three months ended September 30, 2018, compared to $8.3 million for the three months ended September 30, 2017, representing effective tax rates of 20.9% and 34.0%, respectively. The Company recorded income tax expense of $19.1 million for the nine months ended September 30, 2018, compared to $24.9 million for the nine months ended September 30, 2017, representing effective tax rates of 22.9% and 35.2%, respectively. The decrease in the Company's effective tax rate for the three and nine months ended September 30, 2018 was primarily driven by changes made to the Internal Revenue Code by the enactment of the Tax Reform Act, as well as several discrete items that were recognized during the period.
In the third quarter of 2017, the Company was notified by the Internal Revenue Service (IRS) of its intent to examine the Company's 2015 consolidated federal income tax return. In the second quarter of 2018, the Company was notified by the IRS that the examination was complete with no changes to the Company's 2015 reported federal income tax.
Liquidity and Capital Resources
Liquidity
Liquidity is defined as the ability to meet current and future financial obligations of a short-term nature. The Company further defines liquidity as the ability to respond to the needs of depositors and borrowers, as well as to earnings enhancement opportunities, in a changing marketplace. Liquidity management is monitored by an Asset/Liability Committee ("ALCO"), consisting of members of management, which is responsible for establishing and monitoring liquidity targets as well as strategies and tactics to meet these targets.
The primary source of funds for the payment of dividends and expenses by the Company is dividends paid to it by the Banks and Brookline Securities Corp. The primary sources of liquidity for the Banks consist of deposit inflows, loan repayments, borrowed funds, and maturing investment securities.
Deposits, which are considered the most stable source of liquidity, totaled $5.2 billion as of September 30, 2018 and represented 82.9% of total funding (the sum of total deposits and total borrowings), compared to deposits of $4.9 billion, or 82.7% of total funding, as of December 31, 2017. Core deposits, which consist of demand checking, NOW, savings and money

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market accounts, totaled $3.6 billion as of September 30, 2018 and represented 68.3% of total deposits, compared to core deposits of $3.7 billion, or 75.2% of total deposits, as of December 31, 2017. Additionally, the Company had $330.4 million of brokered deposits as of September 30, 2018, which represented 6.3% of total deposits, compared to $274.7 million or 5.6% of total deposits, as of December 31, 2017. The Company offers attractive interest rates based on market conditions to increase deposits balances, while managing cost of funds.
Borrowings are used to diversify the Company's funding mix and to support asset growth. When profitable lending and investment opportunities exist, access to borrowings provides a means to grow the balance sheet. Borrowings totaled $1.1 billion as of September 30, 2018, representing 17.1% of total funding, compared to $1.0 billion, or 17.3% of total funding, as of December 31, 2017.
As members of the FHLBB, the Banks have access to both short- and long-term borrowings. As of September 30, 2018, the Company's total borrowing limit from the FHLBB for advances and repurchase agreements was $1.9 billion as compared to $1.7 billion as of December 31, 2017, based on the level of qualifying collateral available for these borrowings.
As of September 30, 2018, the Banks also have access to funding through certain uncommitted lines of credit of $236.0 million.
The Company had a $12.0 million committed line of credit for contingent liquidity as of September 30, 2018. As of September 30, 2018, the Company did not have any borrowings on this committed line of credit outstanding.
The Company has access to the Federal Reserve Bank "discount window" to supplement its liquidity. The Company has $74.6 million of borrowing capacity at the Federal Reserve Bank as of September 30, 2018. As of September 30, 2018, the Company did not have any borrowings with the Federal Reserve Bank outstanding.
Additionally, the Banks have access to liquidity through repurchase agreements and brokered deposits.
In general, the Company seeks to maintain a high degree of liquidity and targets cash, cash equivalents and investment securities available-for-sale balances of between 10% and 30% of total assets. As of September 30, 2018, cash, cash equivalents and investment securities available-for-sale totaled $588.7 million, or 8.0% of total assets. This compares to $601.1 million, or 8.9% of total assets as of December 31, 2017.
While management believes that the Company has adequate liquidity to meet its commitments and to fund the Banks' lending and investment activities, the availabilities of these funding sources are subject to broad economic conditions and could be restricted in the future. Such restrictions would impact the Company's immediate liquidity and/or additional liquidity needs.
Off-Balance-Sheet Financial Instruments

The Company is party to off-balance-sheet financial instruments in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include loan commitments, standby and commercial letters of credit and interest-rate swaps. According to GAAP, these financial instruments are not recorded in the financial statements until they are funded or related fees are incurred or received.
 
The contract amounts reflect the extent of the involvement the Company has in particular classes of these instruments. Such commitments involve, to varying degrees, elements of credit risk and interest-rate risk in excess of the amount recognized in the consolidated balance sheet. The Company’s exposure to credit loss in the event of non-performance by the counterparty is represented by the contractual amount of the instruments. The Company uses the same policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

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Financial instruments with off-balance-sheet risk at the dates indicated follow:
 
At September 30, 2018
 
At December 31, 2017
 
(In Thousands)
Financial instruments whose contract amounts represent credit risk:
 
 
 
Commitments to originate loans and leases:
 
 
 
Commercial real estate
$
130,744

 
$
76,653

Commercial
86,329

 
83,032

Residential mortgage
22,195

 
28,745

Unadvanced portion of loans and leases
611,073

 
571,668

Unused lines of credit:
 
 
 
Home equity
466,643

 
407,552

Other consumer
26,599

 
34,191

Other commercial
330

 
323

Unused letters of credit:
 
 
 
Financial standby letters of credit
10,123

 
12,422

Performance standby letters of credit
1,036

 
736

Commercial and similar letters of credit
2,385

 
184

Loan level derivatives:
 
 
 
Receive fixed, pay variable
629,918

 
494,659

Pay fixed, receive variable
629,918

 
494,659

Risk participation-out agreements
79,810

 
36,627

Risk participation-in agreements
12,817

 
3,825

Foreign exchange contracts:
 
 
 
Buys foreign currency, sells U.S. currency
6,848

 
1,495

Sells foreign currency, buys U.S. currency
6,853

 
1,502



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Table of Contents

Capital Resources
As of September 30, 2018, the Company and the Banks are each under the primary regulation of, and must comply with, the capital requirements of the FRB. Under these rules, the Company and the Banks are each required to maintain a minimum common equity Tier 1 capital to risk-weighted assets ratio of 4.5%, a minimum total Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8% and a minimum leverage ratio of 4%. Additionally, subject to a transition schedule, the Company and the Bank are required to establish a capital conservation buffer of common equity Tier 1 capital in an amount above the minimum risk-based capital requirements for “adequately capitalized” institutions equal to 2.5% of total risk weighted assets, or face restrictions on the ability to pay dividends, pay discretionary bonuses, and to engage in share repurchases. As of September 30, 2018, the Company and the Banks exceeded all regulatory capital requirements, and the Banks were each considered “well-capitalized” under prompt corrective action regulations.

The following table presents actual and required capital amounts and capital ratios as of September 30, 2018 for the Company and the Banks.

 
Actual
 
Minimum Required for Capital Adequacy Purposes
 
Minimum Required for Fully Phased in Capital Adequacy Purposes plus Capital Conservation Buffer
 
Minimum Required  to be Considered “Well-Capitalized” Under Prompt Corrective Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in Thousands)
At September 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brookline Bancorp, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital ratio (1)
$
740,825

 
12.28
%
 
$
271,475

 
4.50
%
 
$
422,294

 
7.00
%
 
N/A

 
N/A

Tier 1 leverage capital ratio (2)
759,774

 
10.62
%
 
286,167

 
4.00
%
 
286,167

 
4.00
%
 
N/A

 
N/A

Tier 1 risk-based capital ratio (3)
759,774

 
12.59
%
 
362,085

 
6.00
%
 
512,953

 
8.50
%
 
N/A

 
N/A

Total risk-based capital ratio (4)
895,352

 
14.84
%
 
482,670

 
8.00
%
 
633,504

 
10.50
%
 
N/A

 
N/A

Brookline Bank
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital ratio (1)
$
489,692

 
12.42
%
 
$
177,425

 
4.50
%
 
$
275,994

 
7.00
%
 
$
256,280

 
6.50
%
Tier 1 leverage capital ratio (2)
499,149

 
10.91
%
 
183,006

 
4.00
%
 
183,006

 
4.00
%
 
228,758

 
5.00
%
Tier 1 risk-based capital ratio (3)
499,149

 
12.66
%
 
236,564

 
6.00
%
 
335,132

 
8.50
%
 
315,418

 
8.00
%
Total risk-based capital ratio (4)
539,157

 
13.67
%
 
315,527

 
8.00
%
 
414,129

 
10.50
%
 
394,409

 
10.00
%
BankRI
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital ratio (1)
$
211,440

 
11.68
%
 
$
81,462

 
4.50
%
 
$
126,719

 
7.00
%
 
$
117,668

 
6.50
%
Tier 1 leverage capital ratio (2)
211,440

 
9.66
%
 
87,553

 
4.00
%
 
87,553

 
4.00
%
 
109,441

 
5.00
%
Tier 1 risk-based capital ratio (3)
211,440

 
11.68
%
 
108,616

 
6.00
%
 
153,873

 
8.50
%
 
144,822

 
8.00
%
Total risk-based capital ratio (4)
229,456

 
12.68
%
 
144,767

 
8.00
%
 
190,007

 
10.50
%
 
180,959

 
10.00
%
First Ipswich
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital ratio (1)
$
38,948

 
14.06
%
 
$
12,466

 
4.50
%
 
$
19,391

 
7.00
%
 
$
18,006

 
6.50
%
Tier 1 leverage capital ratio (2)
38,948

 
9.48
%
 
16,434

 
4.00
%
 
16,434

 
4.00
%
 
20,542

 
5.00
%
Tier 1 risk-based capital ratio (3)
38,948

 
14.06
%
 
16,621

 
6.00
%
 
23,546

 
8.50
%
 
22,161

 
8.00
%
Total risk-based capital ratio (4)
42,414

 
15.31
%
 
22,163

 
8.00
%
 
29,089

 
10.50
%
 
27,703

 
10.00
%
_______________________________________________________________________________
(1) Common equity Tier 1 capital ratio is calculated by dividing common equity Tier 1 capital by risk-weighted assets.

(2) Tier 1 leverage capital ratio is calculated by dividing Tier 1 capital by average assets.

(3) Tier 1 risk-based capital ratio is calculated by dividing Tier 1 capital by risk-weighted assets.

(4) Total risk-based capital ratio is calculated by dividing total capital by risk-weighted assets.




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The following table presents actual and required capital amounts and capital ratios as of December 31, 2017 for the Company and the Banks under the regulatory capital rules then in effect.
 
Actual
 
Minimum Required for Capital Adequacy Purposes
 
Minimum Required for Fully Phased in Capital Adequacy Purposes plus Capital Conservation Buffer
 
Minimum Required To
Be Considered
 “Well-Capitalized” Under Prompt Corrective Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in Thousands)
At December 31, 2017:
 

 
 

 
 

 
 
 
 
 
 

 
 

 
 

Brookline Bancorp, Inc.
 

 
 

 
 

 
 
 
 
 
 

 
 

 
 

Common equity Tier 1 capital ratio (1)
$
669,238

 
12.02
%
 
$
250,547

 
4.50
%
 
$
389,739

 
7.00
%
 
N/A

 
N/A

Tier 1 leverage capital ratio (2)
687,299

 
10.43
%
 
263,585

 
4.00
%
 
263,585

 
4.00
%
 
N/A

 
N/A

Tier 1 risk-based capital ratio (3)
687,299

 
12.34
%
 
334,181

 
6.00
%
 
473,423

 
8.50
%
 
N/A

 
N/A

Total risk-based capital ratio (4)
821,373

 
14.75
%
 
445,490

 
8.00
%
 
584,706

 
10.50
%
 
N/A

 
N/A

Brookline Bank
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

Common equity Tier 1 capital ratio (1)
$
414,282

 
11.56
%
 
$
161,269

 
4.50
%
 
$
250,863

 
7.00
%
 
$
232,944

 
6.50
%
Tier 1 leverage capital ratio (2)
423,035

 
10.35
%
 
163,492

 
4.00
%
 
163,492

 
4.00
%
 
204,365

 
5.00
%
Tier 1 risk-based capital ratio (3)
423,035

 
11.81
%
 
214,920

 
6.00
%
 
304,471

 
8.50
%
 
286,561

 
8.00
%
Total risk-based capital ratio (4)
463,986

 
12.95
%
 
286,632

 
8.00
%
 
376,205

 
10.50
%
 
358,290

 
10.00
%
BankRI
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital ratio (1)
$
193,849

 
11.38
%
 
$
76,654

 
4.50
%
 
$
119,239

 
7.00
%
 
$
110,722

 
6.50
%
Tier 1 leverage capital ratio (2)
193,849

 
9.16
%
 
84,650

 
4.00
%
 
84,650

 
4.00
%
 
105,813

 
5.00
%
Tier 1 risk-based capital ratio (3)
193,849

 
11.38
%
 
102,205

 
6.00
%
 
144,791

 
8.50
%
 
136,273

 
8.00
%
Total risk-based capital ratio (4)
210,025

 
12.33
%
 
136,269

 
8.00
%
 
178,853

 
10.50
%
 
170,337

 
10.00
%
First Ipswich
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

Common equity Tier 1 capital ratio (1)
$
37,502

 
13.38
%
 
$
12,613

 
4.50
%
 
$
19,620

 
7.00
%
 
$
18,218

 
6.50
%
Tier 1 leverage capital ratio (2)
37,502

 
9.44
%
 
15,891

 
4.00
%
 
15,891

 
4.00
%
 
19,863

 
5.00
%
Tier 1 risk-based capital ratio (3)
37,502

 
13.38
%
 
16,817

 
6.00
%
 
23,824

 
8.50
%
 
22,423

 
8.00
%
Total risk-based capital ratio (4)
40,625

 
14.50
%
 
22,414

 
8.00
%
 
29,418

 
10.50
%
 
28,017

 
10.00
%
_______________________________________________________________________________
(1) Common equity Tier 1 capital ratio is calculated by dividing common equity Tier 1 capital by risk-weighted assets.

(2) Tier 1 leverage capital ratio is calculated by dividing Tier 1 capital by average assets.

(3) Tier 1 risk-based capital ratio is calculated by dividing Tier 1 capital by risk-weighted assets.

(4) Total risk-based capital ratio is calculated by dividing total capital by risk-weighted assets.



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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Market risk is the risk that the market value or estimated fair value of the Company's assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that the Company's net income will be significantly reduced by interest-rate changes.
Interest-Rate Risk
The principal market risk facing the Company is interest-rate risk, which can occur in a variety of forms, including repricing risk, yield-curve risk, basis risk, and prepayment risk. Repricing risk occurs when the change in the average yield of either interest-earning assets or interest-bearing liabilities is more sensitive than the other to changes in market interest rates. Such a change in sensitivity could reflect a number of possible mismatches in the repricing opportunities of the Company's assets and liabilities. Yield-curve risk reflects the possibility that changes in the shape of the yield curve could have different effects on the Company's assets and liabilities. Basis risk occurs when different parts of the balance sheet are subject to varying base rates reflecting the possibility that the spread from those base rates will deviate. Prepayment risk is associated with financial instruments with an option to prepay before the stated maturity, often a disadvantage to person selling the option; this risk is most often associated with the prepayment of loans, callable investments, and callable borrowings.
Asset/Liability Management
Market risk and interest-rate risk management is governed by the Company's Asset/Liability Committee ("ALCO"). The ALCO establishes exposure limits that define the Company's tolerance for interest-rate risk. The ALCO and the Company's Treasury Group measure and manage the composition of the balance sheet over a range of possible changes in interest rates while remaining responsive to market demand for loan and deposit products. The ALCO monitors current exposures versus limits and reports those results to the Board of Directors. The policy limits and guidelines serve as benchmarks for measuring interest-rate risk and for providing a framework for evaluation and interest-rate risk-management decision-making. The Company measures its interest-rate risk by using an asset/liability simulation model. The model considers several factors to determine the Company's potential exposure to interest-rate risk, including measurement of repricing gaps, duration, convexity, value-at-risk, market value of portfolio equity under assumed changes in the level of interest rates, the shape of yield curves, and general market volatility.
Management controls the Company's interest-rate exposure using several strategies, which include adjusting the maturities of securities in the Company's investment portfolio, limiting or expanding the terms of loans originated, limiting fixed-rate deposits with terms of more than five years, and adjusting maturities of FHLBB advances. The Company limits this risk by restricting the types of MBSs it invests in to those with limited average life changes under certain interest-rate-shock scenarios, or securities with embedded prepayment penalties. The Company also places limits on holdings of fixed-rate mortgage loans with maturities greater than five years. The Company may also use derivative instruments, principally interest-rate swaps, to manage its interest-rate risk; however, the Company had no derivative fair value hedges or derivative cash flows hedges as of September 30, 2018 or December 31, 2017. See Note 8, “Derivatives and Hedging Activities,” to the unaudited consolidated financial statements.
Measuring Interest-Rate Risk
As noted above, interest-rate risk can be measured by analyzing the extent to which the repricing of assets and liabilities are mismatched to create an interest-rate sensitivity gap. An asset or liability is said to be interest-rate sensitive within a specific period if it will mature or reprice within that period. The interest-rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest-rate-sensitive assets exceeds the amount of interest-rate-sensitive liabilities. A gap is considered negative when the amount of interest-rate-sensitive liabilities exceeds the amount of interest-rate-sensitive assets. During a period of falling interest rates, therefore, a positive gap would tend to adversely affect net interest income. Conversely, during a period of rising interest rates, a positive gap position would tend to result in an increase in net interest income.
The Company's interest-rate risk position is measured using both income simulation and interest-rate sensitivity "gap" analysis. Income simulation is the primary tool for measuring the interest-rate risk inherent in the Company's balance sheet at a given point in time by showing the effect on net interest income, over a twelve-month period, of a variety of interest-rate shocks. These simulations take into account repricing, maturity, and prepayment characteristics of individual products. The ALCO reviews simulation results to determine whether exposure resulting from changes in market interest rates remains within

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established tolerance levels over a twelve-month horizon, and develops appropriate strategies to manage this exposure. The Company's interest-rate risk analysis remains modestly asset-sensitive as of September 30, 2018.
The assumptions used in the Company’s interest-rate sensitivity simulation discussed above are inherently uncertain and, as a result, the simulations cannot precisely measure net interest income or precisely predict the impact of changes in interest rates.
As of September 30, 2018, net interest income simulation indicated that the Company's exposure to changing interest rates was within tolerance. The ALCO reviews the methodology utilized for calculating interest-rate risk exposure and may periodically adopt modifications to this methodology. The following table presents the estimated impact of interest-rate changes on the Company's estimated net interest income over the twelve-month periods indicated:
 
Estimated Exposure to Net Interest Income
over Twelve-Month Horizon Beginning
 
September 30, 2018
 
December 31, 2017
Gradual Change in Interest Rate Levels
Dollar
Change
 
Percent
Change
 
Dollar
Change
 
Percent
Change
 
(Dollars in Thousands)
Up 300 basis points
$
19,030

 
7.7
 %
 
$
11,494

 
4.9
 %
Up 200 basis points
8,926

 
3.6
 %
 
8,179

 
3.5
 %
Up 100 basis points
4,772

 
1.9
 %
 
4,434

 
1.9
 %
Down 100 basis points
(9,643
)
 
(3.9
)%
 
(10,512
)
 
(4.5
)%

The estimated impact of a 300 basis point increase in market interest rates on the Company's estimated net interest income over a twelve-month horizon was a positive 7.7% as of September 30, 2018, compared to a positive 4.9% as of December 31, 2017. The slight increase in asset sensitivity was due to a change in the funding mix, as core deposits replaced wholesale borrowings.

The Company also uses interest-rate sensitivity “gap” analysis to provide a more general overview of its interest-rate risk profile. The interest-rate sensitivity gap is defined as the difference between interest-earning assets and interest-bearing
liabilities maturing or repricing within a given time period. At September 30, 2018, the Company’s one-year cumulative gap was a positive $11.8 million, or 0.16% of total interest-earning assets, compared with a positive $21.0 million, or 0.33% of total interest-earning assets, at December 31, 2017.
 
The assumptions used in the Company's interest-rate sensitivity simulation discussed above are inherently uncertain and, as a result, the simulations cannot precisely measure net interest income or precisely predict the impact of changes in interest rates. For additional discussion on interest-rate risk see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” of the Company’s 2017 Annual Report on Form 10-K.

Economic Value of Equity ("EVE") at Risk Simulation is conducted in tandem with net interest income simulations to ascertain a longer term view of the Company’s interest-rate risk position by capturing longer-term repricing risk and options risk embedded in the balance sheet. It measures the sensitivity of the economic value of equity to changes in interest rates. The EVE at Risk Simulation values only the current balance sheet and does not incorporate growth assumptions. As with the net interest income simulation, this simulation captures product characteristics such as loan resets, repricing terms, maturity dates, and rate caps and floors. Key assumptions include loan prepayment speeds, deposit pricing elasticity, and non-maturity deposit attrition rates. These assumptions can have significant impacts on valuation results as the assumptions remain in effect for the entire life of each asset and liability. The Company conducts non-maturity deposit behavior studies on a periodic basis to support deposit assumptions used in the valuation process. All key assumptions are subject to a periodic review.

EVE at Risk is calculated by estimating the net present value of all future cash flows from existing assets and liabilities using current interest rates as well as parallel shocks to the current interest-rate environment. The following table sets forth the estimated percentage change in the Company’s EVE at Risk, assuming various shifts in interest rates. Given the interest rate environment as of September 30, 2018, simulations for interest rate declines of more than 100 basis points were not deemed to be meaningful.

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Estimated Percent Change in Economic Value of Equity
Parallel Shock in Interest Rate Levels
 
At September 30, 2018

At December 31, 2017
Up 300 basis points
 
0.6
 %
 
(0.7
)%
Up 200 basis points
 
0.7
 %
 
 %
Up 100 basis points
 
1.1
 %
 
1.0
 %
Down 100 basis points
 
(6.2
)%
 
(7.1
)%

The Company's EVE sensitivity is materially unchanged from December 31, 2017 to September 30, 2018.

Item 4. Controls and Procedures
 
Controls and Procedures
 
Under the supervision and with the participation of the Company’s Management, including the Company’s Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), the Company has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer considered that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s Management, including its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
There has been no change in the Company's internal control over financial reporting identified in connection with the quarterly evaluation that occurred during the Company's last fiscal quarter that has materially and detrimentally affected, or is reasonably likely to materially and detrimentally affect, the Company's internal controls over financial reporting.
 
The Company’s Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a -15(f). The Company’s internal control system was designed to provide reasonable assurance to its Management and the Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The Company’s Management assessed the effectiveness of its internal control over financial reporting as of the end of the period covered by this report.
 
Management’s Report on Internal Control Over Financial Reporting as of December 31, 2017 and the related Report of Independent Registered Public Accounting Firm thereon appear on pages F-1 and F-2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
 
There are no material pending legal proceedings other than those that arise in the normal course of business. In the opinion of Management, after consulting with legal counsel, the consolidated financial position and results of operations of the Company are not expected to be affected materially by the outcome of such proceedings. 

Item 1A.    Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A of the Company’s Form 10-K for the year ended December 31, 2017.

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

a)        Not applicable.
 
b)        Not applicable.
 
c)         None.

Item 3. Defaults Upon Senior Securities

a)        None.
 
b)        None.

Item 4.    Mine Safety Disclosures

Not applicable.

Item 5.    Other Information

None.

Item 6. Exhibits
 
Exhibits
Exhibit 31.1*
 
 
 
 
Exhibit 31.2*
 
 
 
 
Exhibit 32.1**
 
 
 
 
Exhibit 32.2**
 
 
 
 
Exhibit 101
 
The following materials from Brookline Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (1) Unaudited Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017; (2) Unaudited Consolidated Statements of Income for the three and nine months September 30, 2018 and September 30, 2017; (3) Unaudited Consolidated Statements of Comprehensive Income for the three and nine months September 30, 2018 and September 30, 2017; (4) Unaudited Consolidated Statements of Changes in Equity for the nine months ended September 30, 2018 and September 30, 2017; (5) Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and September 30, 2017; and (6) Notes to Unaudited Consolidated Financial Statements at and for the nine months ended September 30, 2018 and September 30, 2017.
_______________________________________________________________________________
* Filed herewith
** Furnished herewith

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

 
BROOKLINE BANCORP, INC.
 
 
 
 
 
 
 
 
Date: November 7, 2018
By:
/s/ Paul A. Perrault
 
 
Paul A. Perrault
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
 
Date: November 7, 2018
By:
/s/ Carl M. Carlson
 
 
Carl M. Carlson
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer)
 




100