10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

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

For the quarterly period ended March 31, 2013

OR

 

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

For the transition period from                      to                     

Commission file number 001-33898

 

 

Meridian Interstate Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Massachusetts   20-4652200

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

10 Meridian Street,

East Boston, Massachusetts

  02128
(Address of Principal Executive Offices)   Zip Code

(617) 567-1500

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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 and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

At May 3, 2013, the registrant had 22,126,353 shares of no par value common stock outstanding.

 

 

 


Table of Contents

MERIDIAN INTERSTATE BANCORP, INC.

FORM 10-Q

INDEX

 

PART I.

  FINANCIAL INFORMATION   

Item 1.

  Financial Statements      Page   
  Consolidated Balance Sheets at March 31, 2013 and December 31, 2012 (Unaudited)      3   
  Consolidated Statements of Net Income for the three months ended March 31, 2013 and 2012 (Unaudited)      4   
  Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012 (Unaudited)      5   
  Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2013 and 2012 (Unaudited)      6   
  Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (Unaudited)      7   
  Notes to Unaudited Consolidated Financial Statements      9   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      28   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      40   

Item 4.

  Controls and Procedures      41   

PART II.

  OTHER INFORMATION   

Item 1.

  Legal Proceedings      42   

Item 1A.

  Risk Factors      42   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      42   

Item 3.

  Defaults Upon Senior Securities      42   

Item 4.

  Mine Safety Disclosures      42   

Item 5.

  Other Information      42   

Item 6.

  Exhibits      43   

Signatures

       44   

Exhibit 31.1

       45   

Exhibit 31.2

       46   

Exhibit 32.0

       47   

 

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Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     March 31,
2013
    December 31,
2012
 
     (Dollars in thousands)  
ASSETS   

Cash and due from banks

   $ 183,301      $ 93,129   

Federal funds sold

     63        63   
  

 

 

   

 

 

 

Total cash and cash equivalents

     183,364        93,192   

Securities available for sale, at fair value

     236,039        262,785   

Federal Home Loan Bank stock, at cost

     11,907        12,064   

Loans held for sale

     9,613        14,502   

Loans

     1,870,071        1,806,843   

Less allowance for loan losses

     (20,883     (20,504
  

 

 

   

 

 

 

Loans, net

     1,849,188        1,786,339   

Bank-owned life insurance

     36,542        36,251   

Foreclosed real estate, net

     2,080        2,604   

Premises and equipment, net

     39,927        38,719   

Accrued interest receivable

     6,807        6,745   

Deferred tax asset, net

     8,631        9,710   

Goodwill

     13,687        13,687   

Other assets

     2,444        2,173   
  

 

 

   

 

 

 

Total assets

   $ 2,400,229      $ 2,278,771   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Deposits:

    

Non interest-bearing

   $ 215,271      $ 204,079   

Interest-bearing

     1,742,236        1,661,354   
  

 

 

   

 

 

 

Total deposits

     1,957,507        1,865,433   

Long-term debt

     186,721        161,254   

Accrued expenses and other liabilities

     16,904        18,141   
  

 

 

   

 

 

 

Total liabilities

     2,161,132        2,044,828   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock, no par value, 50,000,000 shares authorized; 23,000,000 shares issued

     —          —     

Additional paid-in capital

     98,531        98,338   

Retained earnings

     150,027        146,959   

Accumulated other comprehensive income

     6,569        4,915   

Treasury stock, at cost, 660,310 and 660,800 shares at March 31, 2013 and December 31, 2012, respectively

     (8,342     (8,331

Unearned compensation - ESOP, 610,650 and 621,000 shares at March 31, 2013 and December 31, 2012, respectively

     (6,106     (6,210

Unearned compensation - restricted shares, 198,285 and 203,345 at March 31, 2013 and December 31, 2012, respectively

     (1,582     (1,728
  

 

 

   

 

 

 

Total stockholders’ equity

     239,097        233,943   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,400,229      $ 2,278,771   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME

(Unaudited)

 

     Three Months Ended March 31,  
     2013      2012  
     (Dollars in thousands, except per share amounts)  

Interest and dividend income:

     

Interest and fees on loans

   $ 20,794       $ 17,988   

Interest on debt securities

     1,209         2,198   

Dividends on equity securities

     349         361   

Interest on certificates of deposit

     —           9   

Other interest and dividend income

     64         81   
  

 

 

    

 

 

 

Total interest and dividend income

     22,416         20,637   
  

 

 

    

 

 

 

Interest expense:

     

Interest on deposits

     3,948         4,003   

Interest on borrowings

     842         783   
  

 

 

    

 

 

 

Total interest expense

     4,790         4,786   
  

 

 

    

 

 

 

Net interest income

     17,626         15,851   

Provision for loan losses

     1,260         1,264   
  

 

 

    

 

 

 

Net interest income, after provision for loan losses

     16,366         14,587   
  

 

 

    

 

 

 

Non-interest income:

     

Customer service fees

     1,586         1,579   

Loan fees

     56         62   

Mortgage banking gains, net

     155         625   

Gain on sales of securities, net

     2,273         1,083   

Income from bank-owned life insurance

     291         301   

Equity income on investment in affiliate bank

     —           243   
  

 

 

    

 

 

 

Total non-interest income

     4,361         3,893   
  

 

 

    

 

 

 

Non-interest expenses:

     

Salaries and employee benefits

     10,075         9,301   

Occupancy and equipment

     2,334         2,037   

Data processing

     991         832   

Marketing and advertising

     691         559   

Professional services

     601         833   

Foreclosed real estate

     106         183   

Deposit insurance

     475         431   

Other general and administrative

     1,019         1,090   
  

 

 

    

 

 

 

Total non-interest expenses

     16,292         15,266   
  

 

 

    

 

 

 

Income before income taxes

     4,435         3,214   

Provision for income taxes

     1,367         1,058   
  

 

 

    

 

 

 

Net income

   $ 3,068       $ 2,156   
  

 

 

    

 

 

 

Income per share:

     

Basic

   $ 0.14       $ 0.10   

Diluted

   $ 0.14       $ 0.10   

Weighted average shares:

     

Basic

     21,639,122         21,662,471   

Diluted

     21,952,607         21,826,307   

See accompanying notes to unaudited consolidated financial statements.

 

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MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended March 31,  
     2013     2012  
     (In thousands)  

Net income

   $ 3,068      $ 2,156   
  

 

 

   

 

 

 

Other comprehensive income, net of taxes:

    

Unrealized holding gain on securities available for sale

     5,029        4,723   

Reclassification adjustments for gain realized in income

     (2,273     (1,083
  

 

 

   

 

 

 

Unrealized gain

     2,756        3,640   

Tax effect

     (1,102     (1,426
  

 

 

   

 

 

 

Total other comprehensive income

     1,654        2,214   
  

 

 

   

 

 

 

Total comprehensive income

   $ 4,722      $ 4,370   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2013 and 2012

(Unaudited)

 

     Shares of
Common Stock
Outstanding
    Additional
Paid-in
Capital
    Retained
Earnings
     Accumulated
Other
Comprehensive
Income
     Treasury
Stock
    Unearned
Compensation -
ESOP
    Unearned
Compensation -
Restricted Shares
    Total  
     (Dollars in thousands)  

Three Months Ended March 31, 2012

                  

Balance at December 31, 2011

     22,149,409      $ 97,669      $ 134,533       $ 3,985       $ (7,317   $ (6,624   $ (2,302   $ 219,944   

Net income

     —          —          2,156         —           —          —          —          2,156   

Other comprehensive income

     —          —          —           2,214         —          —          —          2,214   

Stock option exercise

     1,000        (4     —           —           12        —          —          8   

Purchase of treasury stock

     (10,327     —          —           —           (134     —          —          (134

ESOP shares earned (10,350 shares)

     —          32        —           —           —          104        —          136   

Share-based compensation expense

     5,260        147        —           —           —          —          142        289   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

     22,145,342      $ 97,844      $ 136,689       $ 6,199       $ (7,439   $ (6,520   $ (2,160   $ 224,613   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2013

                  

Balance at December 31, 2012

     22,135,855      $ 98,338      $ 146,959       $ 4,915       $ (8,331   $ (6,210   $ (1,728   $ 233,943   

Net income

     —          —          3,068         —           —          —          —          3,068   

Other comprehensive income

     —          —          —           1,654         —          —          —          1,654   

Stock option exercise

     3,674        (41     —           —           46        —          —          5   

Purchase of treasury stock

     (3,184     —          —           —           (57     —          —          (57

ESOP shares earned (10,350 shares)

     —          81        —           —           —          104        —          185   

Share-based compensation expense

     5,060        153        —           —           —          —          146        299   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

     22,141,405      $ 98,531      $ 150,027       $ 6,569       $ (8,342   $ (6,106   $ (1,582   $ 239,097   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended March 31,  
     2013     2012  
     (In thousands)  

Cash flows from operating activities:

    

Net income

   $ 3,068      $ 2,156   

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

    

Accretion of acquisition fair value adjustments

     (75     (193

Earned ESOP shares

     185        136   

Provision for loan losses

     1,260        1,264   

Amortization (accretion) of net deferred loan origination fees/costs

     31        (21

Net (accretion) amortization of securities available for sale

     (15     130   

Capitalization of mortgage servicing rights

     (63     (154

Amortization of mortgage servicing rights

     100        72   

Depreciation and amortization expense

     553        532   

Gain on sales of securities, net

     (2,273     (1,083

Loss and provision for foreclosed real estate, net

     6        65   

Deferred income tax benefit

     (23     (6

Income from bank-owned life insurance

     (291     (301

Equity income on investment in affiliate bank

     —          (243

Share-based compensation expense

     299        289   

Net changes in:

    

Loans held for sale

     4,889        1,925   

Accrued interest receivable

     (62     636   

Prepaid deposit insurance

     —          402   

Other assets

     (308     1,398   

Accrued expenses and other liabilities

     (1,237     6,615   
  

 

 

   

 

 

 

Net cash provided by operating activities

     6,044        13,619   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Activity in securities available for sale:

    

Proceeds from maturities, calls and principal payments

     15,453        54,032   

Redemption of mutual funds, net

     4,018        315   

Proceeds from sales

     19,754        7,810   

Purchases

     (7,447     (45,774

Redemption of Federal Home Loan Bank stock

     157        474   

Loans originated, net of principal payments received

     (64,385     (71,442

Purchases of premises and equipment

     (1,740     (2,158

Proceeds from sales of foreclosed real estate

     718        922   
  

 

 

   

 

 

 

Net cash used in investing activities

     (33,472     (55,821
  

 

 

   

 

 

 

 

(continued)

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended March 31,  
     2013     2012  
     (In thousands)  

Cash flows from financing activities:

    

Net increase in deposits

     92,083        41,286   

Net change in borrowings with maturities less than three months

     —          (2,994

Proceeds from Federal Home Loan Bank advances with maturities of three months or more

     30,000        27,500   

Repayment of Federal Home Loan Bank advances with maturities of three months or more

     (4,431     (17,500

Stock option exercise

     5        8   

Purchase of treasury stock

     (57     (134
  

 

 

   

 

 

 

Net cash provided by financing activities

     117,600        48,166   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     90,172        5,964   

Cash and cash equivalents at beginning of period

     93,192        156,685   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 183,364      $ 162,649   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid on deposits

   $ 3,929      $ 4,063   

Interest paid on borrowings

     924        1,029   

Income taxes paid, net of refunds

     1,225        286   

Non-cash investing and financing activities:

    

Transfers from loans to foreclosed real estate

     200        157   

See accompanying notes to unaudited consolidated financial statements.

 

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MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Meridian Interstate Bancorp, Inc., a 59.5%-owned subsidiary of Meridian Financial Services, Incorporated (“Meridian”), a mutual holding company, and all other entities in which it has a controlling financial interest (collectively referred to as the “Company”). The Company was formed in a corporate reorganization in 2006 and owns East Boston Savings Bank and its subsidiaries (the “Bank”) and Meridian Interstate Funding Corporation, which was established in 2008 to fund a loan to the Company’s Employee Stock Ownership Plan (“ESOP”). The Bank’s subsidiaries include Prospect, Inc., which engages in securities transactions on its own behalf, EBOSCO, LLC and Berkeley Riverbend Estates LLC, both of which hold foreclosed real estate; and East Boston Investment Services, Inc., which is authorized for third-party investment sales and is currently inactive. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company held a 43% share in Hampshire First Bank, a New Hampshire chartered bank, organized and headquartered in Manchester, New Hampshire, which was accounted for using the equity method, under which the Company’s share of the net income or loss of the affiliate was recognized as income or loss in the Company’s consolidated statement of income. On November 16, 2011, Hampshire First Bank entered into an Agreement and Plan of Merger with NBT Bancorp, Inc. (“NBTB”) and NBT Bank, N.A. which merger was completed on June 8, 2012, with the Company recognizing a pre-tax gain of $4.8 million and receiving $6.6 million of cash and 547,481 NBTB shares with a fair value of $11.1 million as proceeds from the sale.

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Such adjustments were of a normal recurring nature. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the entire year or any other interim period. For additional information, refer to the financial statements and footnotes thereto of the Company included in the Company’s Form 10-K for the year ended December 31, 2012 which was filed with the Securities and Exchange Commission (“SEC”) on March 15, 2013, and is available through the SEC’s website at www.sec.gov.

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the evaluation of goodwill for impairment, other-than-temporary impairment of securities and the valuation of deferred tax assets.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, Intangibles – Goodwill and Other (Topic 350); Testing Indefinite – Lived Intangible Assets for Impairment. ASU No. 2012-02 simplifies the guidance for testing the decline in the realizable value of indefinite-lived intangible assets other than goodwill. This amendment allows an organization the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An organization electing to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment, that is “more likely than not” that the asset is impaired. The amendments in ASU 2012-02 are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company adopted this pronouncement and it had no effect on the Company’s consolidated financial statements.

 

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In October 2012, the FASB issued ASU No. 2012-04, Technical Corrections and Improvements. ASU No. 2012-04 clarifies the FASB Accounting Standards Codification (the “Codification”) or corrects unintended application of guidance and includes amendments identifying when the use of fair value should be linked to the definition of fair value in Fair Value Measurement (Topic 820). Amendments to the Codification without transition guidance are effective upon issuance; amendments subject to transitions guidance will be effective the fiscal periods beginning after December 15, 2012. The adoption did not have a material impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220), Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. The update generally requires the Company to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income, effective prospectively for reporting periods beginning after December 15, 2012. The update had no material impact on the Company’s consolidated financial statements for the three months ended March 31, 2013.

3. EARNINGS PER SHARE

Basic earnings per share excludes dilution and is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. If rights to dividends on unvested stock awards are non-forfeitable, these unvested stock awards are considered outstanding in the computation of basic earnings per share. Diluted earnings per share is computed in a manner similar to that of basic earnings per share except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury method) that would have been outstanding if all potentially dilutive common stock equivalents (such as options) were issued during the period. Unallocated common shares held by the ESOP are shown as a reduction in stockholders’ equity and are not included in the weighted-average number of common shares outstanding for either basic or diluted earnings per share calculations.

Basic and diluted earnings per share have been computed based on the following:

 

     Three Months Ended March 31,  
     2013      2012  
     (Dollars in thousands, except per share amounts)  

Net income available to common stockholders

   $ 3,068       $ 2,156   
  

 

 

    

 

 

 

Average number of common shares outstanding

     21,521,944         21,490,691   

Effect of unvested stock awards

     117,178         171,780   
  

 

 

    

 

 

 

Basic weighted average shares outstanding

     21,639,122         21,662,471   

Effect of dilutive stock options

     313,485         163,836   
  

 

 

    

 

 

 

Diluted weighted average shares outstanding

     21,952,607         21,826,307   
  

 

 

    

 

 

 

Earnings per share:

     

Basic

   $ 0.14       $ 0.10   

Diluted

   $ 0.14       $ 0.10   

Options for the exercise of 58,600 shares for the three months ended March 31, 2012 were not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive. There were no anti-dilutive options for the three months ended March 31, 2013.

 

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4. SECURITIES

The following table sets forth the amortized cost and fair value of securities available for sale.

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
     (In thousands)  

March 31, 2013

          

Debt securities:

          

Corporate bonds:

          

Financial services

   $ 66,414       $ 1,836       $ (23   $ 68,227   

Industry and manufacturing

     13,858         415         (2     14,271   

Consumer products and services

     12,255         277         —          12,532   

Technology

     2,506         19         —          2,525   

Healthcare

     11,034         417         —          11,451   

Other

     1,016         64         —          1,080   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total corporate bonds

     107,083         3,028         (25     110,086   

Government-sponsored enterprises

     38,581         27         (69     38,539   

Municipal bonds

     7,235         216         —          7,451   

Residential mortgage-backed securities:

          

Government-sponsored enterprises

     15,059         957         —          16,016   

Private label

     2,929         132         —          3,061   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     170,887         4,360         (94     175,153   
  

 

 

    

 

 

    

 

 

   

 

 

 

Marketable equity securities:

          

Common stocks:

          

Financial services

     11,882         1,704         (16     13,570   

Industry and manufacturing

     13,317         1,884         (118     15,083   

Consumer products and services

     9,919         2,295         (22     12,192   

Technology

     2,430         129         (25     2,534   

Healthcare

     3,293         958         —          4,251   

Other

     2,677         785         —          3,462   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total common stocks

     43,518         7,755         (181     51,092   

Money market mutual funds

     9,815         —           (21     9,794   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total marketable equity securities

     53,333         7,755         (202     60,886   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 224,220       $ 12,115       $ (296   $ 236,039   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2012

          

Debt securities:

          

Corporate bonds:

          

Financial services

   $ 76,044       $ 2,480       $ (71   $ 78,453   

Industry and manufacturing

     14,846         449         —          15,295   

Consumer products and services

     12,259         355         —          12,614   

Technology

     2,506         —           (29     2,477   

Healthcare

     11,041         461         —          11,502   

Other

     1,018         61         —          1,079   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total corporate bonds

     117,714         3,806         (100     121,420   

Government-sponsored enterprises

     53,084         94         (29     53,149   

Municipal bonds

     7,236         225         —          7,461   

Residential mortgage-backed securities:

          

Government-sponsored enterprises

     16,280         1,019         (1     17,298   

Private label

     3,169         140         —          3,309   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     197,483         5,284         (130     202,637   
  

 

 

    

 

 

    

 

 

   

 

 

 

Marketable equity securities:

          

Common stocks:

          

Financial services

     11,354         622         (67     11,909   

Industry and manufacturing

     10,922         1,329         (157     12,094   

Consumer products and services

     11,849         1,284         (59     13,074   

Technology

     1,847         11         (8     1,850   

Healthcare

     3,757         560         (9     4,308   

Other

     2,677         422         —          3,099   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total common stocks

     42,406         4,228         (300     46,334   

Money market mutual funds

     13,833         —           (19     13,814   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total marketable equity securities

     56,239         4,228         (319     60,148   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 253,722       $ 9,512       $ (449   $ 262,785   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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At March 31, 2013, securities with an amortized cost of $30.9 million and $3.5 million, respectively, were pledged as collateral for Federal Home Loan Bank of Boston borrowings and Federal Reserve Bank discount window borrowings.

The amortized cost and fair value of debt securities by contractual maturity at March 31, 2013 are as follows. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties.

 

     Within 1 year      Over 1 year to 5 years      Over 5 years      Total  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (In thousands)  

Corporate bonds:

                       

Financial services

   $ 8,765       $ 8,890       $ 53,649       $ 55,318       $ 4,000       $ 4,019       $ 66,414       $ 68,227   

Industry and manufacturing

     —           —           13,858         14,271         —           —           13,858         14,271   

Consumer products and services

     7,512         7,698         4,743         4,834         —           —           12,255         12,532   

Technology

     —           —           2,506         2,525         —           —           2,506         2,525   

Healthcare

     5,020         5,170         6,014         6,281         —           —           11,034         11,451   

Other

     —           —           1,016         1,080         —           —           1,016         1,080   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate bonds

     21,297         21,758         81,786         84,309         4,000         4,019         107,083         110,086   

Government-sponsored enterprises

     —           —           86         89         38,495         38,450         38,581         38,539   

Municipal bonds

     1,460         1,463         4,376         4,510         1,399         1,478         7,235         7,451   

Residential mortgage-backed securities:

                       

Government-sponsored enterprises

     —           —           4         4         15,055         16,012         15,059         16,016   

Private label

     —           —           —           —           2,929         3,061         2,929         3,061   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22,757       $ 23,221       $ 86,252       $ 88,912       $ 61,878       $ 63,020       $ 170,887       $ 175,153   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended March 31, 2013 and 2012, proceeds from sales of securities available for sale amounted to $19.8 million and $7.8 million, respectively. Gross gains of $2.3 million and $1.1 million and gross losses of $10,000 and $0, respectively, were realized on those sales.

Information pertaining to securities available for sale as of March 31, 2013 and December 31, 2012, with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

     Less Than Twelve Months      Over Twelve Months  
     Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
 
     (In thousands)  

March 31, 2013

           

Debt securities:

           

Corporate bonds:

           

Financial services

   $ 8       $ 1,992       $ 15       $ 6,485   

Industry and manufacturing

     2         998         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate bonds

     10         2,990         15         6,485   

Government-sponsored enterprises

     69         18,927         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     79         21,917         15         6,485   
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities:

           

Common stocks:

           

Financial services

     10         561         6         229   

Industry and manufacturing

     63         2,124         55         256   

Consumer products and services

     22         729         —           —     

Technology

     25         422         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total common stocks

     120         3,836         61         485   

Money market mutual funds

     —           —           21         1,006   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable equity securities

     120         3,836         82         1,491   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 199       $ 25,753       $ 97       $ 7,976   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Less Than Twelve Months      Over Twelve Months  
     Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
 
     (In thousands)  

December 31, 2012

           

Debt securities:

           

Corporate bonds:

           

Financial services

   $ 14       $ 2,986       $ 57       $ 4,442   

Technology

     29         2,477         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate bonds

     43         5,463         57         4,442   

Government-sponsored enterprises

     29         8,962         —           —     

Residential mortgage-backed securities:

           

Government-sponsored enterprises

     1         8         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     73         14,433         57         4,442   
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities:

           

Common stocks:

           

Financial services

     46         7,193         21         217   

Industry and manufacturing

     157         2,654         —           —     

Consumer products and services

     59         1,077         —           —     

Technology

     8         936         —           —     

Healthcare

     9         612         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total common stocks

     279         12,472         21         217   

Money market mutual funds

     —           —           19         1,004   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable equity securities

     279         12,472         40         1,221   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 352       $ 26,905       $ 97       $ 5,663   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company determined no securities were other-than-temporarily impaired for the three months ended March 31, 2013. Management evaluates securities for other-than-temporary impairment on a quarterly basis, with more frequent evaluation for selected issuers or when economic or market concerns warrant such evaluations.

As of March 31, 2013, the net unrealized gain on the total debt securities portfolio was $4.3 million. At March 31, 2013, 22 debt securities had unrealized losses with aggregate depreciation of 0.3% from the Company’s amortized cost basis. In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, industry analysts’ reports and, to a lesser extent given the relatively insignificant levels of depreciation in the Company’s debt portfolio, spread differentials between the effective rates on instruments in the portfolio compared to risk-free rates. The unrealized losses are primarily caused by (a) recent declines in profitability and near-term profit forecasts by industry analysts resulting from a decline in the level of business activity and (b) recent downgrades by several industry analysts. The contractual terms of these investments do not permit the companies to settle the security at a price less than the par value of the investment. The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments. Therefore, it is expected that the bonds would not be settled at a price less than the par value of the investment. Because (1) the Company does not intend to sell the securities; (2) the Company does not believe it is “more likely than not” that the Company will be required to sell the securities before recovery of its amortized cost basis; and (3) the present value of expected cash flows is sufficient to recover the entire amortized cost basis of the securities, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2013.

As of March 31, 2013, the net unrealized gain on the total marketable equity portfolio was $7.6 million. At March 31, 2013, 11 marketable equity securities have unrealized losses with aggregate depreciation of 3.7% from the Company’s cost basis. One equity security had a market value decline of 15.0% or more for more than twelve months, with a net unrealized loss of $55,000. Although the issuers have shown declines in earnings as a result of the weakened economy, no credit issues have been identified that cause management to believe the decline in market value is other than temporary, and the Company has the ability and intent to hold these investments until a recovery of fair value. In analyzing an equity issuer’s financial condition, management considers industry

 

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Table of Contents

analysts’ reports, financial performance and projected target prices of investment analysts within a one-year time frame. A decline of 10% or more in the value of an acquired equity security is generally the triggering event for management to review individual securities for liquidation and/or classification as other-than-temporarily impaired. Impairment losses are recognized when management concludes that declines in the value of equity securities are other than temporary, or when they can no longer assert that they have the intent and ability to hold depreciated equity securities for a period of time sufficient to allow for any anticipated recovery in fair value. Unrealized losses on marketable equity securities that are in excess of 25% of cost and that have been sustained for more than twelve months are generally considered-other-than temporary and charged to earnings as impairment losses, or realized through sale of the security.

5. LOANS

The Company’s loan portfolio consists primarily of residential real estate, commercial real estate, construction, commercial business and consumer segments. The residential real estate loans include classes for one-to four-family, multi-family and home equity lines of credit. There are no foreign loans outstanding. Interest rates charged on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and the rates offered by our competitors. A summary of loans follows:

 

     March 31, 2013     December 31, 2012  
     Amount     %     Amount     %  
     (Dollars in thousands)  

Real estate loans:

        

Residential real estate:

        

One-to four-family

   $ 429,875        22.8   $ 443,228        24.5

Multi-family

     175,987        9.4        178,948        9.9   

Home equity lines of credit

     59,058        3.2        60,907        3.4   

Commercial real estate

     833,353        44.6        795,642        44.0   

Construction

     208,621        11.2        173,255        9.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

     1,706,894        91.2        1,651,980        91.4   

Commercial business loans

     156,899        8.4        147,814        8.2   

Consumer

     6,579        0.4        7,143        0.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     1,870,372        100.0     1,806,937        100.0
    

 

 

     

 

 

 

Allowance for loan losses

     (20,883       (20,504  

Net deferred loan origination fees

     (301       (94  
  

 

 

     

 

 

   

Loans, net

   $ 1,849,188        $ 1,786,339     
  

 

 

     

 

 

   

The Company has transferred a portion of its originated commercial real estate loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying balance sheets. The Company and participating lenders share ratably in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments to participating lenders and disburses required escrow funds to relevant parties. At March 31, 2013 and December 31, 2012, the Company was servicing loans for participants aggregating $40.3 million and $41.1 million, respectively.

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

 

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Table of Contents

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

 

     March 31,
2013
    December 31,
2012
 
     (In thousands)  

Real estate loans:

    

Residential real estate:

    

One-to four-family

   $ 7,524      $ 7,581   

Multi-family

     1,182        1,280   

Home equity lines of credit

     567        568   

Commercial real estate

     739        1,646   
  

 

 

   

 

 

 

Total real estate loans

     10,012        11,075   

Commercial business loans

     78        78   

Consumer

     4        4   
  

 

 

   

 

 

 

Outstanding principal balance

     10,094        11,157   

Discount

     (2,514     (2,595
  

 

 

   

 

 

 

Carrying amount

   $ 7,580      $ 8,562   
  

 

 

   

 

 

 

A rollforward of accretable yield follows:

 

     Three Months Ended March 31,  
     2013     2012  
     (In thousands)  

Beginning balance

   $ 1,047      $ 1,181   

Accretion

     (7     (19
  

 

 

   

 

 

 

Ending balance

   $ 1,040      $ 1,162   
  

 

 

   

 

 

 

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

 

     For the Three Months Ended March 31, 2013  
     One-to
four-family
    Multi-
family
    Home
equity lines
of credit
    Commercial
real estate
    Construction     Commercial
business
    Consumer     Unallocated      Total  
     (In thousands)  

Beginning balance

   $ 2,507      $ 1,431      $ 226      $ 10,405      $ 3,656      $ 2,174      $ 105      $ —         $ 20,504   

Provision (credit) for loan loss

     (281     (26     (49     215        1,425        (99     75        —           1,260   

Charge-offs

     (108     (90     —          —          (627     —          (132     —           (957

Recoveries

     32        —          —          —          5        3        36        —           76   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 2,150      $ 1,315      $ 177      $ 10,620      $ 4,459      $ 2,078      $ 84      $ —         $ 20,883   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     For the Three Months Ended March 31, 2012  
     One-to
four-family
    Multi-
family
    Home
equity lines
of credit
    Commercial
real estate
    Construction     Commercial
business
    Consumer     Unallocated      Total  
     (In thousands)  

Beginning balance

   $ 1,861      $ 1,361      $ 245      $ 6,980      $ 1,430      $ 1,061      $ 115      $ —         $ 13,053   

Provision (credit) for loan loss

     420        150        (35     (73     730        66        6        —           1,264   

Charge-offs

     (199     (72     (52     (9     (80     —          (59     —           (471

Recoveries

     8        —          —          227        2        4        10        —           251   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 2,090      $ 1,439      $ 158      $ 7,125      $ 2,082      $ 1,131      $ 72      $ —         $ 14,097   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents
    At March 31, 2013  
    One-to
four-family
    Multi-
family
    Home
equity lines
of credit
    Commercial
real estate
    Construction     Commercial
business
    Consumer     Unallocated     Total  
    (In thousands)  

Amount of allowance for loan losses for loans deemed to be impaired

  $ 237      $ —        $ —        $ 284      $ 239      $ —        $ —        $ —        $ 760   

Amount of allowance for loan losses for loans not deemed to be impaired

    1,913        1,315        177        10,336        4,220        2,078        84        —          20,123   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 2,150      $ 1,315      $ 177      $ 10,620      $ 4,459      $ 2,078      $ 84      $ —        $ 20,883   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amount of allowance for loan losses for loans acquired with deteriorated credit quality included above

  $ 42      $ —        $ —        $ 21      $ —        $ —        $ —        $ —        $ 63   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 4,733      $ 5,647      $ 22      $ 10,788      $ 17,367      $ 401      $ —          $ 38,958   

Loans not deemed to be impaired

    425,142        170,340        59,036        822,565        191,254        156,498        6,579          1,831,414   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
  $ 429,875      $ 175,987      $ 59,058      $ 833,353      $ 208,621      $ 156,899      $ 6,579        $ 1,870,372   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
    At December 31, 2012  
    One-to
four-family
    Multi-
family
    Home
equity lines
of credit
    Commercial
real estate
    Construction     Commercial
business
    Consumer     Unallocated     Total  
    (In thousands)  

Amount of allowance for loan losses for loans deemed to be impaired

  $ 128      $ 90      $ —        $ 204      $ 227      $ —        $ —        $ —        $ 649   

Amount of allowance for loan losses for loans not deemed to be impaired

    2,379        1,341        226        10,201        3,429        2,174        105        —          19,855   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 2,507      $ 1,431      $ 226      $ 10,405      $ 3,656      $ 2,174      $ 105      $ —        $ 20,504   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amount of allowance for loan losses for loans acquired with deteriorated credit quality included above

  $ 31      $ 90      $ —        $ 9      $ —        $ —        $ —        $ —        $ 130   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 4,486      $ 5,784      $ 22      $ 12,146      $ 18,319      $ 424      $ —          $ 41,181   

Loans not deemed to be impaired

    438,742        173,164        60,885        783,496        154,936        147,390        7,143          1,765,756   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
  $ 443,228      $ 178,948      $ 60,907      $ 795,642      $ 173,255      $ 147,814      $ 7,143        $ 1,806,937   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

 

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Table of Contents

The following table provides information about the Company’s past due and non-accrual loans at the dates indicated.

 

     March 31, 2013  
     30-59
Days
Past Due
     60-89
Days
Past Due
     90 Days
or Greater
Past Due
     Total
Past Due
     Loans on
Non-accrual
 
     (In thousands)  

Real estate loans:

              

Residential real estate:

              

One-to four-family

   $ 5,161       $ 1,812       $ 6,951       $ 13,924       $ 18,298   

Multi-family

     —           —           274         274         879   

Home equity lines of credit

     1,526         796         741         3,063         2,754   

Commercial real estate

     2,208         1,069         3,460         6,737         8,082   

Construction

     502         —           6,553         7,055         15,770   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     9,397         3,677         17,979         31,053         45,783   

Commercial business loans

     15         —           315         330         401   

Consumer

     428         249         —           677         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,840       $ 3,926       $ 18,294       $ 32,060       $ 46,184   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2012  
     30-59
Days
Past Due
     60-89
Days
Past Due
     90 Days
or Greater
Past Due
     Total
Past Due
     Loans on
Non-accrual
 
     (In thousands)  

Real estate loans:

              

Residential real estate:

              

One-to four-family

   $ 3,996       $ 2,476       $ 8,990       $ 15,462       $ 18,870   

Multi-family

     —           —           364         364         976   

Home equity lines of credit

     767         674         754         2,195         2,674   

Commercial real estate

     1,722         379         3,671         5,772         8,844   

Construction

     496         —           6,553         7,049         7,785   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     6,981         3,529         20,332         30,842         39,149   

Commercial business loans

     201         —           318         519         424   

Consumer

     479         132         —           611         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,661       $ 3,661       $ 20,650       $ 31,972       $ 39,573   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2013 and December 31, 2012, the Company did not have any accruing loans past due 90 days or more. Delinquent loans at March 31, 2013 and December 31, 2012 included $1.6 million and $2.3 million of loans acquired with evidence of credit deterioration. At March 31, 2013 and December 31, 2012, non-accrual loans included $3.0 million and $3.9 million of loans acquired with evidence of credit deterioration.

 

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Table of Contents

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

 

     March 31, 2013      December 31, 2012  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 
     (In thousands)  

Impaired loans without a valuation allowance:

                 

One-to four-family

   $ 2,075       $ 2,284          $ 2,157       $ 2,465      

Multi-family

     5,647         6,329            5,419         5,893      

Home equity lines of credit

     22         22            22         22      

Commercial real estate

     7,823         8,050            9,752         10,054      

Construction

     15,774         17,493            16,726         17,818      

Commercial business loans

     401         480            424         502      
  

 

 

    

 

 

       

 

 

    

 

 

    

Total

     31,742         34,658            34,500         36,754      
  

 

 

    

 

 

       

 

 

    

 

 

    

Impaired loans with a valuation allowance:

                 

One-to four-family

     2,658         2,759       $ 237         2,329         2,330       $ 128   

Multi-family

     —           —           —           365         482         90   

Commercial real estate

     2,965         2,965         284         2,394         2,394         204   

Construction

     1,593         1,787         239         1,593         1,787         227   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7,216         7,511         760         6,681         6,993         649   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 38,958       $ 42,169       $ 760       $ 41,181       $ 43,747       $ 649   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended March 31, 2013      Three Months Ended March, 2012  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Recognized
on Cash Basis
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Recognized
on Cash Basis
 
     (In thousands)  

Impaired loans:

                 

One-to four-family

   $ 4,610       $ 59       $ 48       $ 3,744       $ 56       $ 43   

Multi-family

     5,715         109         109         6,113         135         122   

Home equity lines of credit

     22         —           —           23         —           —     

Commercial real estate

     11,466         165         74         12,051         212         168   

Construction

     17,843         269         158         34,518         610         254   

Commercial business loans

     413         8         5         1,103         23         23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 40,069       $ 610       $ 394       $ 57,552       $ 1,036       $ 610   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2013, additional funds of $2.0 million are committed to be advanced in connection with impaired construction loans.

 

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Table of Contents

The following table summarizes the troubled debt restructurings (“TDRs”) at the dates indicated:

 

     March 31,
2013
     December 31,
2012
 
     (In thousands)  

TDRs on accrual status:

     

One-to four-family

   $ 1,981       $ 1,992   

Multi-family

     110         110   

Home equity lines of credit

     22         22   

Commercial real estate

     1,386         1,393   

Construction

     —           3,319   
  

 

 

    

 

 

 

Total TDRs on accrual status

     3,499         6,836   
  

 

 

    

 

 

 

TDRs on non-accrual status:

     

One-to four-family

     2,752         2,493   

Commercial real estate

     4,428         4,466   

Construction

     7,313         3,838   
  

 

 

    

 

 

 

Total TDRs on non-accrual status

     14,493         10,797   
  

 

 

    

 

 

 

Total TDRs

   $ 17,992       $ 17,633   
  

 

 

    

 

 

 

The following is a summary of troubled debt restructurings during the periods indicated.

 

     Three Months Ended March 31,  
     2013      2012  
     Number of
Loans
     Pre-Modification
Balance
     Post-Modification
Balance
     Number of
Loans
     Pre-Modification
Balance
     Post-Modification
Balance
 
     (Dollars in thousands)  

Real estate loans:

                 

One-to four-family

     1       $ 265       $ 265         2       $ 474       $ 474   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 265       $ 265         2       $ 474       $ 474   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following provides information on how loans were modified as TDRs for the periods indicated.

 

     Three Months Ended March 31,  
     2013      2012  
     (In thousands)  

Adjusted interest rates

   $ 265       $ 474   
  

 

 

    

 

 

 

Total

   $ 265       $ 474   
  

 

 

    

 

 

 

The Company generally places loans modified as TDRs on non-accrual status for a minimum period of six months. Loans modified as TDRs qualify for return to accrual status once they have demonstrated performance with the modified terms of the loan agreement for a minimum of six months and future payments are reasonably assured. TDRs are reported as impaired loans with an allowance established as part of the allocated component of the allowance for loan losses when the discounted cash flows of the impaired loan is lower than the carrying value of that loan. TDRs may be removed from impairment disclosures in the year following the restructure if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring. At March 31, 2013 and 2012, the allowance for loan losses included an allocated component of $62,000 and $230,000, respectively, with no charge-offs related to the TDRs modified during the quarter.

 

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Table of Contents

The following table is a summary of TDRs that defaulted or became 90 days past due in the first twelve months after restructure during the periods presented:

 

     Three Months Ended March 31,  
     2013      2012  
     Number of
Loans
     Recorded
Investment
     Number of
Loans
     Recorded
Investment
 
     (Dollars in thousands)  

Real estate loans:

           

One-to four-family

     2       $ 469         2       $ 435   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 469         2       $ 435   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans modified as TDRs with payment defaults are considered in the allocated component of the allowance for loan losses for each of the Company’s loan portfolio segments. The Company’s historical loss experience factors include charge-offs on loans modified as TDRs, if any, as adjusted for additional qualitative factors such as levels/trends in delinquent and non-accrual loans.

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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

The following tables provide information with respect to the Company’s risk rating at the dates indicated.

 

     March 31, 2013  
     Multi-family
residential
real estate
     Commercial
real estate
     Construction      Commercial
business
 
     (In thousands)  

Loans rated 1 - 4A

   $ 170,249       $ 822,797       $ 191,284       $ 156,327   

Loans rated 5

     5,738         10,556         17,337         572   

Loans rated 6

     —           —           —           —     

Loans rated 7

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 175,987       $ 833,353       $ 208,621       $ 156,899   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents
     December 31, 2012  
     Multi-family
residential
real estate
     Commercial
real estate
     Construction      Commercial
business
 
     (In thousands)  

Loans rated 1 - 4A

   $ 172,825       $ 784,060       $ 154,969       $ 147,258   

Loans rated 5

     6,123         11,582         18,286         556   

Loans rated 6

     —           —           —           —     

Loans rated 7

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 178,948       $ 795,642       $ 173,255       $ 147,814   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

6. COMMITMENTS AND DERIVATIVES

In the normal course of business, there are outstanding commitments which are not reflected in the accompanying consolidated financial statements.

Loan Commitments

The Company is party to financial instruments with off-balance sheet risk 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. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the accompanying consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.

A summary of outstanding financial instruments whose contract amounts represent credit risk is as follows:

 

     March 31,
2013
     December 31,
2012
 
     (In thousands)  

Unadvanced portion of existing loans:

     

Construction

   $ 116,951       $ 166,482   

Home equity line of credit

     36,953         39,698   

Other lines and letters of credit

     38,384         56,174   

Commitments to originate:

     

One-to four-family

     21,617         17,752   

Commercial real estate

     40,864         51,540   

Construction

     46,553         83,078   

Commercial business loans

     36,745         24,355   

Other loans

     1,064         205   
  

 

 

    

 

 

 

Total loan commitments outstanding

   $ 339,131       $ 439,284   
  

 

 

    

 

 

 

 

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Table of Contents

Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments are expected to expire without being drawn upon, the total commitments do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the Company for the extension of credit, is based upon management’s credit evaluation of the borrower. Collateral held includes, but is not limited to, residential real estate and deposit accounts.

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. These lines of credit are collateralized if deemed necessary and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Derivative Loan Commitments

Residential real estate loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential real estate loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market. A residential loan commitment requires the Company to originate a loan at a specific interest rate upon the completion of various underwriting requirements. Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from the exercise of the loan commitment might decline from the inception of the rate lock to funding of the loan due to increases in loan interest rates. If interest rates increase, the value of these commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increase. Derivative loan commitments with a notional amount of $39.2 million and $35.9 million were outstanding at March 31, 2013 and December 31, 2012, respectively. The fair value of such commitments was an asset of $239,000 and $288,000 at March 31, 2013 and December 31, 2012, respectively, and is included in other assets.

Forward Loan Sale Commitments

To protect against the price risk inherent in derivative loan commitments, the Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Under a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay the investor a “pair-off” fee, based then-current market prices, to compensate the investor for the shortfall. Under a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor and the investor commits to a price that it will purchase the loan from the Company if the loan to the underlying borrower closes. The Company generally enters into forward sale contracts on the same day it commits to lend funds to a potential borrower. The Company expects that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments. Forward loan sale commitments with a notional amount of $34.4 million and $44.4 million were outstanding at March 31, 2013 and December 31, 2012, respectively. The fair value of such commitments was a liability of $20,000 and $12,000 at March 31, 2013 and December 31, 2012, respectively, and is included in other liabilities.

The following table presents the fair values of derivative instruments in the balance sheet.

 

     March 31, 2013  
     Assets      Liabilities  
     Balance Sheet
Location
     Fair
Value
     Balance Sheet
Location
     Fair
Value
 
     (In thousands)  

Derivative loan commitments

     Other assets       $ 353         Other liabilities       $ 134   

Forward loan sale commitments

     Other assets         99         Other liabilities         119   
     

 

 

       

 

 

 

Total

      $ 452          $ 253   
     

 

 

       

 

 

 

 

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Table of Contents
     December 31, 2012  
     Assets      Liabilities  
     Balance Sheet
Location
   Fair
Value
     Balance Sheet
Location
   Fair
Value
 
     (In thousands)  

Derivative loan commitments

   Other assets    $ 288       N/A    $ —     

Forward loan sale commitments

   N/A      —         Other liabilities      12   
     

 

 

       

 

 

 

Total

      $ 288          $ 12   
     

 

 

       

 

 

 

The following table presents information pertaining to the Company’s derivative instruments included in the consolidated statement of net income:

 

            Amount of Gain/(Loss)  
            For the Three Months Ended March 31,  

Derivative Instrument

   Location of Gain/(Loss)      2013     2012  
            (In thousands)  

Derivative loan commitments

     Mortgage banking gains, net       $ (69   $ (214

Forward loan sale commitments

     Mortgage banking gains, net         (8     82   
     

 

 

   

 

 

 

Total

      $ (77   $ (132
     

 

 

   

 

 

 

For the three months ended March 31, 2013, the Company recognized net mortgage banking gains of $155,000, consisting of $232,000 in net gains on sale of loans and $77,000 in net derivative mortgage banking losses. For the three months ended March 31, 2012, the Company recognized net mortgage banking gains of $625,000, consisting of $757,000 in net gains on sale of loans and $132,000 in net derivative mortgage banking losses.

Other Commitments

In July 2010, we extended the contract with our core data processing provider through December 2017. This contract extension resulted in an outstanding commitment of $10.6 million as of March 31, 2013, with total annual payments of $2.2 million.

7. FAIR VALUE OF ASSETS AND LIABILITIES

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of assets and liabilities is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various assets and liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the asset or liability.

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

Level 1 — Valuation is based on quoted prices in active markets for identical assets or liabilities. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 — Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

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Table of Contents

Level 3 — Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using unobservable inputs to pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Transfers between levels are recognized at the end of a reporting period, if applicable.

The following methods and assumptions were used by the Company in estimating fair value disclosures:

Cash and cash equivalents — The carrying amounts of cash and short-term instruments approximate fair values, based on the short-term nature of the assets.

Securities available for sale — All fair value measurements are obtained from a third party pricing service and are not adjusted by management. Marketable equity securities are measured at fair value utilizing quoted market prices (Level 1). Corporate bonds, obligations of government-sponsored enterprises, municipal bonds and mortgage-backed securities are determined by pricing models that consider standard input factors such as observable market data, benchmark yields, reported trades, broker/dealer quotes, credit spreads, benchmark securities, as well as new issue data, monthly payment information, and collateral performance, among others (Level 2).

Federal Home Loan Bank stock — The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Loans held for sale — The fair value is based on commitments in effect from investors or prevailing market prices.

Loans — For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-accrual loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposits — The fair values disclosed for non-certificate accounts, by definition, equal to the amount payable on demand at the reporting date which is their carrying amounts. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Borrowings — The fair value is estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

Accrued interest — The carrying amounts of accrued interest approximate fair value.

Forward loan sale commitments and derivative loan commitments — Forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Management judgment and estimation is required in determining these fair value measurements.

Off-balance sheet credit-related instruments — Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these instruments is considered immaterial.

 

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized as follows:

 

     March 31, 2013  
     Level 1      Level 2      Level 3      Total Fair
Value
 
     (In thousands)  

Assets

           

Debt securities

   $ —         $ 175,153       $ —         $ 175,153   

Marketable equity securities

     60,886         —           —           60,886   

Derivative loan commitments

     —           —           353         353   

Forward loan sale commitments

     —           —           99         99   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 60,886       $ 175,153       $ 452       $ 236,491   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative loan commitments

   $ —         $ —         $ 134       $ 134   

Forward loan sale commitments

     —           —           119         119   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —         $ —         $ 253       $ 253   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2012  
     Level 1      Level 2      Level 3      Total Fair
Value
 
     (In thousands)  

Assets

           

Debt securities

   $ —         $ 202,637       $ —         $ 202,637   

Marketable equity securities

     60,148         —           —           60,148   

Derivative loan commitments

     —           —           288         288   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 60,148       $ 202,637       $ 288       $ 263,073   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Forward loan sale commitments

   $ —         $ —         $ 12       $ 12   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —         $ —         $ 12       $ 12   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended March 31, 2013 and 2012, there were no transfers in or out of Levels 1 and 2 and the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis are as follows:

 

     Three Months Ended March 31,  
     2013     2012  
     (In thousands)  

Derivative loan commitments and forward sale commitments, net:

    

Beginning balance

   $ 276      $ 508   

Total realized and unrealized losses included net income

     (77     (132
  

 

 

   

 

 

 

Ending balance

   $ 199      $ 376   
  

 

 

   

 

 

 

Total realized gain relating to instruments still held at period end

   $ 199      $ 376   
  

 

 

   

 

 

 

Assets Measured at Fair Value on a Non-recurring Basis

The Company may also be required, from time to time, to measure certain other assets on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from the application of lower-of-cost-or market accounting or write-downs of individual assets.

 

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Table of Contents

The following tables summarize the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets. The gain/loss represents the amount of write-down, charge-off or specific reserve recorded during the periods noted on the assets held at period end. There were no liabilities measured at fair value on a non-recurring basis.

 

     March 31, 2013      Three Months Ended
March 31, 2013
 
     Level 1      Level 2      Level 3      Total Loss  
     (In thousands)  

Impaired loans

   $ —         $ —         $ 4,509       $ (780

Foreclosed real estate

     —           —           2,080         (16
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ 6,589       $ (796
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2012      Three Months Ended
March 31, 2012
 
     Level 1      Level 2      Level 3      Total Loss  
     (In thousands)  

Impaired loans

   $ —         $ —         $ 7,867       $ (80

Foreclosed real estate

     —           —           2,604         (102
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ 10,471       $ (182
  

 

 

    

 

 

    

 

 

    

 

 

 

Certain impaired loans were adjusted to fair value, less cost to sell, of the underlying collateral securing these loans resulting in losses. The loss is not recorded directly as an adjustment to current earnings, but rather as a component in determining the allowance for loan losses. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties.

Certain properties in foreclosed real estate were adjusted to fair value using appraised values of collateral, less cost to sell, and adjusted as necessary by management based on unobservable inputs for specific properties. The loss on foreclosed assets represents adjustments in valuation recorded during the time period indicated and not for losses incurred on sales.

Summary of Fair Values of Financial Instruments

The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein do not represent the underlying fair value of the Company.

 

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Table of Contents

 

     March 31, 2013  
     Carrying
Amount
     Fair Value  
        Level 1      Level 2      Level 3      Total  
     (In thousands)  

Financial assets:

              

Cash and cash equivalents

   $ 183,364       $ 183,364       $ —         $ —         $ 183,364   

Securities available for sale

     236,039         60,886         175,153         —           236,039   

Federal Home Loan Bank stock

     11,907         —           —           11,907         11,907   

Loans and loans held for sale, net

     1,858,801         —           —           1,895,976         1,895,976   

Accrued interest receivable

     6,807         —           —           6,807         6,807   

Financial liabilities:

              

Deposits

     1,957,507         —           —           1,965,678         1,965,678   

Borrowings

     186,721         —           188,212         —           188,212   

Accrued interest payable

     897         —           —           897         897   

On-balance sheet derivative financial instruments:

              

Derivative loan commitments:

              

Assets

     353         —           —           353         353   

Liabilities

     134         —           —           134         134   

Forward loan sale commitments:

              

Assets

     99         —           —           99         99   

Liabilities

     119         —           —           119         119   
     December 31, 2012  
     Carrying
Amount
     Fair Value  
        Level 1      Level 2      Level 3      Total  
     (In thousands)  

Financial assets:

              

Cash and cash equivalents

   $ 93,192       $ 93,192       $ —         $ —         $ 93,192   

Securities available for sale

     262,785         60,148         202,637         —           262,785   

Federal Home Loan Bank stock

     12,064         —           —           12,064         12,064   

Loans and loans held for sale, net

     1,800,841         —           —           1,843,529         1,843,529   

Accrued interest receivable

     6,745         —           —           6,745         6,745   

Financial liabilities:

              

Deposits

     1,865,433         —           —           1,874,226         1,874,226   

Borrowings

     161,254         —           164,176         —           164,176   

Accrued interest payable

     849         —           —           849         849   

On-balance sheet derivative financial instruments:

              

Derivative loan commitments:

              

Assets

     288         —           —           288         288   

Forward loan sale commitments:

              

Liabilities

     12         —           —           12         12   

 

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Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of the financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Meridian Interstate Bancorp, Inc. The following discussion should be read in conjunction with the consolidated financial statements, notes and tables included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission.

Forward Looking Statements

This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to:

 

   

general economic conditions, either nationally or in our market area, that are worse than expected;

 

   

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

 

   

increased competitive pressures among financial services companies;

 

   

changes in consumer spending, borrowing and savings habits;

 

   

our ability to enter new markets successfully and take advantage of growth opportunities, and the possible dilutive effect of potential acquisitions or de novo branches, if any;

 

   

legislative or regulatory changes that adversely affect our business;

 

   

adverse changes in the securities markets;

 

   

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

 

   

inability of third-party providers to perform their obligations to us; and

 

   

changes in our organization, compensation and benefit plans.

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. These factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Company’s loan or investment portfolios. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission on March 15, 2013, under “Risk Factors,” which is available through the SEC’s website at www.sec.gov, as updated by subsequent filings with the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

 

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Table of Contents

Critical Accounting Policies

The Company’s summary of significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in the 2012 Annual Report on Form 10-K for the year ended December 31, 2012. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management has identified accounting for the allowance for loan losses, the valuation of goodwill and analysis for impairment, other-than-temporary impairment of securities and the valuation of deferred tax assets as the Company’s critical accounting policies.

Comparison of Financial Condition at March 31, 2013 and December 31, 2012

Assets

Total assets increased $121.5 million, or 5.3%, to $2.400 billion at March 31, 2013 from $2.279 billion at December 31, 2012. Net loans increased $62.8 million, or 3.5%, to $1.849 billion at March 31, 2013 from $1.786 billion at December 31, 2012. The net increase in loans for the quarter ended March 31, 2013 was primarily due to increases of $37.7 million in commercial real estate loans, $35.4 million in construction loans and $9.1 million in commercial business loans. Cash and cash equivalents increased $90.2 million, or 96.8%, to $183.4 million at March 31, 2013 from $93.2 million at December 31, 2012. Securities available for sale decreased $26.7 million, or 10.2%, to $236.0 million at March 31, 2013 from $262.8 million at December 31, 2012 primarily due to sales, maturities and calls of securities.

Asset Quality

Credit Risk Management

Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans.

When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status, including contacting the borrower by letter and phone at regular intervals. When the borrower is in default, we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Management informs the Executive Committee monthly of the amount of loans delinquent more than 30 days. Management provides detailed information to the Board of Directors on loans 60 or more days past due and all loans in foreclosure and repossessed property that we own.

Delinquencies

Total past due loans increased $88,000, or 0.3%, to $32.1 million at March 31, 2013 from $32.0 million at December 31, 2012, reflecting an increase of $2.4 million in loans 30 to 89 days past due partially offset by a decrease of $2.3 million in loans 90 days or more past due. Delinquent loans at March 31, 2013 included $16.0 million of loans acquired in the Mt. Washington merger, including $4.7 million that were 30 to 59 days past due, $2.9 million that were 60 to 89 days past due and $8.5 million that were 90 days or more past due. At March 31, 2013, non-accrual loans exceed loans 90 days or more past due primarily due to loans which were placed on non-accrual status based on a determination that the ultimate collection of all principal and interest due was not expected and certain loans that remain on non-accrual status until they attain a sustained payment history of six months.

Non-performing Assets

Non-performing assets include loans that are 90 or more days past due or on non-accrual status and real estate and other loan collateral acquired through foreclosure and repossession. Loans 90 days or more past due may remain on an accrual basis if adequately collateralized and in the process of collection. At March 31, 2013, the Company did not have any accruing loans past due 90 days or more. For non-accrual loans, interest previously accrued but not collected is reversed and charged against income at the time a loan is placed on non-accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

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Table of Contents

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until it is sold. When property is acquired, it is initially recorded at the fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value after acquisition of the property result in charges against income.

The following table provides information with respect to our non-performing assets at the dates indicated.

 

     March 31,
2013
    December 31,
2012
 
     (Dollars in thousands)  

Loans accounted for on a non-accrual basis:

    

Real estate loans:

    

Residential real estate:

    

One-to four-family

   $ 18,298      $ 18,870   

Multi-family

     879        976   

Home equity lines of credit

     2,754        2,674   

Commercial real estate

     8,082        8,844   

Construction

     15,770        7,785   
  

 

 

   

 

 

 

Total real estate loans

     45,783        39,149   

Commercial business loans

     401        424   
  

 

 

   

 

 

 

Total non-accrual loans (1)

     46,184        39,573   

Foreclosed assets

     2,080        2,604   
  

 

 

   

 

 

 

Total non-performing assets

   $ 48,264      $ 42,177   
  

 

 

   

 

 

 

Non-accrual loans to total loans

     2.47     2.19

Non-accrual loans to total assets

     1.92     1.74

Non-performing assets to total assets

     2.01     1.85

 

(1) TDRs on accrual status not included above totaled $3.5 million at March 31, 2013 and $6.8 million at December 31, 2012.

Non-accrual loans increased $6.6 million, or 16.7%, to $46.2 million, or 2.47% of total loans outstanding, at March 31, 2013, from $39.6 million, or 2.19% of total loans outstanding, at December 31, 2012, primarily due to a net increase of $8.0 million in non-accrual construction loans. The increase in non-accrual construction loans resulted from two construction loan relationships totaling $9.2 million that were placed on non-accrual loan status due to loan performance changes during t