Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
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o |
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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)
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Massachusetts
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20-4652200 |
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.) |
10 Meridian Street, East Boston, Massachusetts 02128
(Address of principal executive offices)
(
617) 567-1500
(Registrants 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 (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
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 definition of large accelerated filer
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer o
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Accelerated Filer þ
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Non-accelerated Filer o
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
At May 3, 2010, the registrant had 22,615,294 shares of no par value common stock outstanding.
MERIDIAN INTERSTATE BANCORP, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
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March 31, |
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December 31, |
|
(Dollars in thousands) |
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2010 |
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2009 |
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ASSETS
|
Cash and due from banks |
|
$ |
83,585 |
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|
$ |
9,010 |
|
Federal funds sold |
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|
2,929 |
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|
10,956 |
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Total cash and cash equivalents |
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86,514 |
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19,966 |
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Certificates of deposit affiliate bank |
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3,100 |
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3,000 |
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Securities available for sale, at fair value |
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350,054 |
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293,367 |
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Federal Home Loan Bank stock, at cost |
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12,538 |
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4,605 |
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Loans held for sale |
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4,032 |
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955 |
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Loans |
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1,153,404 |
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822,542 |
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Less allowance for loan losses |
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(10,629 |
) |
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(9,242 |
) |
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Loans, net |
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1,142,775 |
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|
813,300 |
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Bank-owned life insurance |
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32,953 |
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23,721 |
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Foreclosed real estate, net |
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5,077 |
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2,869 |
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Investment in affiliate bank |
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11,075 |
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|
11,005 |
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Premises and equipment, net |
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33,332 |
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23,195 |
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Accrued interest receivable |
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7,075 |
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|
6,231 |
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Prepaid deposit insurance |
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4,793 |
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|
5,114 |
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Deferred tax asset, net |
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11,426 |
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|
1,523 |
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Goodwill |
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12,374 |
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Other assets |
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2,165 |
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2,535 |
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Total assets |
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$ |
1,719,283 |
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$ |
1,211,386 |
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LIABILITIES AND STOCKHOLDERS EQUITY
|
Deposits: |
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Non interest-bearing |
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$ |
101,257 |
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$ |
63,606 |
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Interest-bearing |
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1,233,627 |
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858,869 |
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Total deposits |
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1,334,884 |
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922,475 |
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Short-term borrowings affiliate bank |
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6,556 |
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3,102 |
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Short-term borrowings other |
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10,016 |
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22,108 |
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Long-term debt |
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139,674 |
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50,200 |
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Accrued expenses and other liabilities |
|
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22,741 |
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|
13,086 |
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|
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Total liabilities |
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1,513,871 |
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1,010,971 |
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Stockholders equity: |
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Common stock, no par value 50,000,000 shares authorized;
23,000,000 shares issued; 22,615,294 and 22,098,565 shares
outstanding at March 31, 2010 and December 31, 2009, respectively |
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Additional paid-in capital |
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96,585 |
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100,972 |
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Retained earnings |
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112,049 |
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109,189 |
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Accumulated other comprehensive income |
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7,379 |
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|
5,583 |
|
Treasury stock, at cost, 3,391 and 517,500 shares
at March 31, 2010 and December 31, 2009, respectively |
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(30 |
) |
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(4,535 |
) |
Unearned compensation ESOP, 734,850 and 745,200 shares
at March 31, 2010 and December 31, 2009, respectively |
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|
(7,349 |
) |
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(7,452 |
) |
Unearned compensation restricted shares, 381,315 and 383,935
shares at March 31, 2010 and December 31, 2009, respectively |
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(3,222 |
) |
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(3,342 |
) |
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Total stockholders equity |
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205,412 |
|
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|
200,415 |
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Total liabilities and stockholders equity |
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$ |
1,719,283 |
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$ |
1,211,386 |
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See accompanying notes to unaudited consolidated financial statements.
1
MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
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Three Months Ended March 31, |
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(Dollars in thousands, except per share amounts) |
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2010 |
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2009 |
|
Interest and dividend income: |
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Interest and fees on loans |
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$ |
16,210 |
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$ |
10,645 |
|
Interest on debt securities |
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3,441 |
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|
2,455 |
|
Dividends on equity securities |
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|
205 |
|
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|
293 |
|
Interest on certificates of deposit |
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17 |
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42 |
|
Interest on other interest-earning assets |
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12 |
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12 |
|
|
|
|
|
|
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Total interest and dividend income |
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|
19,885 |
|
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|
13,447 |
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|
|
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Interest expense: |
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|
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Interest on deposits |
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4,199 |
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|
5,263 |
|
Interest on short-term borrowings |
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29 |
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|
35 |
|
Interest on long-term debt |
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|
886 |
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|
497 |
|
|
|
|
|
|
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Total interest expense |
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5,114 |
|
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|
5,795 |
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|
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Net interest income |
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14,771 |
|
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|
7,652 |
|
Provision for loan losses |
|
|
1,374 |
|
|
|
546 |
|
|
|
|
|
|
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Net interest income, after provision
for loan losses |
|
|
13,397 |
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|
7,106 |
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|
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|
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Non-interest income: |
|
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Customer service fees |
|
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1,414 |
|
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|
697 |
|
Loan fees |
|
|
158 |
|
|
|
150 |
|
Gain on sales of loans, net |
|
|
565 |
|
|
|
183 |
|
Loss on securities, net |
|
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|
|
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|
(124 |
) |
Income from bank-owned life insurance |
|
|
292 |
|
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|
214 |
|
Equity income (loss) on investment in affiliate bank |
|
|
70 |
|
|
|
(27 |
) |
|
|
|
|
|
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Total non-interest income |
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|
2,499 |
|
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|
1,093 |
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|
|
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Non-interest expenses: |
|
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|
|
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Salaries and employee benefits |
|
|
6,167 |
|
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|
6,314 |
|
Occupancy and equipment |
|
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1,484 |
|
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|
864 |
|
Data processing |
|
|
754 |
|
|
|
438 |
|
Marketing and advertising |
|
|
466 |
|
|
|
234 |
|
Professional services |
|
|
720 |
|
|
|
652 |
|
Foreclosed real estate expense, net |
|
|
154 |
|
|
|
255 |
|
Deposit insurance |
|
|
515 |
|
|
|
310 |
|
Other general and administrative |
|
|
1,089 |
|
|
|
610 |
|
|
|
|
|
|
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Total non-interest expenses |
|
|
11,349 |
|
|
|
9,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income (loss) before income taxes |
|
|
4,547 |
|
|
|
(1,478 |
) |
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
|
1,687 |
|
|
|
(370 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
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Net income (loss) |
|
$ |
2,860 |
|
|
$ |
(1,108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income (loss) per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.13 |
|
|
$ |
(0.05 |
) |
Diluted |
|
$ |
0.13 |
|
|
$ |
(0.05 |
) |
|
|
|
|
|
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|
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|
Weighted average shares: |
|
|
|
|
|
|
|
|
Basic |
|
|
22,133,155 |
|
|
|
22,050,960 |
|
Diluted |
|
|
22,133,155 |
|
|
|
22,050,960 |
|
See accompanying notes to unaudited consolidated financial statements.
2
MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Three Months Ended March 31, 2010 and 2009
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Shares of No |
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Unearned |
|
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|
Par Common |
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Additional |
|
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Accumulated Other |
|
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|
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Unearned |
|
|
Compensation |
|
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|
|
|
|
Stock |
|
|
Paid-in |
|
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Retained |
|
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Comprehensive |
|
|
Treasury |
|
|
Compensation |
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Restricted |
|
|
|
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(Dollars in thousands) |
|
Outstanding |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Stock |
|
|
ESOP |
|
|
Shares |
|
|
Total |
|
Three Months Ended March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
22,750,000 |
|
|
$ |
100,684 |
|
|
$ |
105,426 |
|
|
$ |
(6,205 |
) |
|
$ |
|
|
|
$ |
(7,866 |
) |
|
$ |
(2,199 |
) |
|
$ |
189,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net loss |
|
|
|
|
|
|
|
|
|
|
(1,108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,108 |
) |
Change in net unrealized loss on securities available for
sale, net of reclassification adjustment and tax effects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(518 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(518 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,626 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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ESOP shares earned (10,350 shares) |
|
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104 |
|
|
|
|
|
|
|
87 |
|
Purchase of 164,000 shares
for restricted share plan |
|
|
(164,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,468 |
) |
|
|
(1,468 |
) |
Share-based compensation expense |
|
|
|
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101 |
|
|
|
213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009 |
|
|
22,586,000 |
|
|
$ |
100,779 |
|
|
$ |
104,318 |
|
|
$ |
(6,723 |
) |
|
$ |
|
|
|
$ |
(7,762 |
) |
|
$ |
(3,566 |
) |
|
$ |
187,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
22,098,565 |
|
|
$ |
100,972 |
|
|
$ |
109,189 |
|
|
$ |
5,583 |
|
|
$ |
(4,535 |
) |
|
$ |
(7,452 |
) |
|
$ |
(3,342 |
) |
|
$ |
200,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
2,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,860 |
|
Change in net unrealized gain on securities available
for sale, net of reclassification adjustment and tax
effects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,694 |
|
Change in prior service costs and
actuarial losses, net of tax effects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP shares earned (10,350 shares) |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
100 |
|
Share-based compensation expense |
|
|
2,620 |
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120 |
|
|
|
241 |
|
Issuance of 514,109 shares to Meridian Financial Services,
Incorporated, the mutual holding company |
|
|
514,109 |
|
|
|
(4,505 |
) |
|
|
|
|
|
|
|
|
|
|
4,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010 |
|
|
22,615,294 |
|
|
$ |
96,585 |
|
|
$ |
112,049 |
|
|
$ |
7,379 |
|
|
$ |
(30 |
) |
|
$ |
(7,349 |
) |
|
$ |
(3,222 |
) |
|
$ |
205,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
3
MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
2,860 |
|
|
$ |
(1,108 |
) |
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Amortization of acquisition fair value adjustments |
|
|
(533 |
) |
|
|
|
|
Earned ESOP shares |
|
|
100 |
|
|
|
87 |
|
Provision for loan losses |
|
|
1,374 |
|
|
|
546 |
|
Amortization of net deferred loan origination fees |
|
|
(672 |
) |
|
|
(57 |
) |
Net amortization of securities available for sale |
|
|
309 |
|
|
|
302 |
|
Depreciation and amortization expense |
|
|
591 |
|
|
|
329 |
|
Loss on securities, net |
|
|
|
|
|
|
124 |
|
Gains on sales of loans held in portfolio, net |
|
|
(352 |
) |
|
|
|
|
Gain (loss) and provision for foreclosed real estate |
|
|
(26 |
) |
|
|
148 |
|
Deferred income tax provision (benefit) |
|
|
(1,996 |
) |
|
|
14 |
|
Income from bank-owned life insurance |
|
|
(292 |
) |
|
|
(214 |
) |
Equity (income) loss on investment in affiliate bank |
|
|
(70 |
) |
|
|
27 |
|
Share-based compensation expense |
|
|
241 |
|
|
|
213 |
|
Net changes in: |
|
|
|
|
|
|
|
|
Loans held for sale |
|
|
1,842 |
|
|
|
|
|
Accrued interest receivable |
|
|
706 |
|
|
|
621 |
|
Prepaid deposit insurance |
|
|
321 |
|
|
|
|
|
Other assets |
|
|
3,968 |
|
|
|
814 |
|
Accrued expenses and other liabilities |
|
|
3,913 |
|
|
|
4,066 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
12,284 |
|
|
|
5,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Cash provided by business combination |
|
|
14,422 |
|
|
|
|
|
Maturities of certificates of deposit |
|
|
|
|
|
|
5,000 |
|
Activity in securities available for sale: |
|
|
|
|
|
|
|
|
Proceeds from maturities, calls and principal payments |
|
|
15,619 |
|
|
|
17,751 |
|
Purchases |
|
|
(24,270 |
) |
|
|
(45,292 |
) |
Loans originated, net of principal payments received |
|
|
(19,088 |
) |
|
|
(34,632 |
) |
Proceeds from sales of fixed rate loans held in portfolio |
|
|
34,488 |
|
|
|
|
|
Purchases of premises and equipment |
|
|
(78 |
) |
|
|
(206 |
) |
Capitalized cost on foreclosed real estate |
|
|
(197 |
) |
|
|
(180 |
) |
Proceeds from sales of foreclosed real estate |
|
|
667 |
|
|
|
512 |
|
|
|
|
|
|
|
|
Net cash provided by (used) in investing activities |
|
|
21,563 |
|
|
|
(57,047 |
) |
|
|
|
|
|
|
|
(continued)
4
MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
32,389 |
|
|
|
62,408 |
|
Purchase of stock for equity incentive plan |
|
|
|
|
|
|
(1,468 |
) |
Net change in borrowings with maturities
less than three months |
|
|
(8,638 |
) |
|
|
(265 |
) |
Proceeds from Federal Home Loan Bank advances
with maturities of three months or more |
|
|
15,000 |
|
|
|
|
|
Repayment of Federal Home Loan Bank advances
with maturities of three months or more |
|
|
(6,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
32,701 |
|
|
|
60,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
66,548 |
|
|
|
9,540 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
19,966 |
|
|
|
20,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
86,514 |
|
|
$ |
29,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Interest paid on deposits |
|
$ |
4,087 |
|
|
$ |
5,332 |
|
Interest paid on borrowings |
|
|
607 |
|
|
|
532 |
|
Income taxes paid |
|
|
15 |
|
|
|
170 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Transfers from loans to foreclosed real estate |
|
|
978 |
|
|
|
325 |
|
In conjunction with the purchase acquisition detailed
in Note 6 to
the Consolidated Financial Statements, assets were
acquired and
liabilities were assumed as follows: |
|
|
|
|
|
|
|
|
Fair value of assets acquired, net of cash acquired |
|
|
453,031 |
|
|
|
|
|
Fair value of liabilities assumed |
|
|
467,453 |
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Meridian Interstate Bancorp, Inc. (the Company or Meridian Interstate) is a Massachusetts
mid-tier stock holding company that was formed in 2006 by East Boston Savings Bank (the Bank) to
be its holding company. Meridian Interstate owns all of East Boston Savings Banks capital stock
and directs, plans and coordinates East Boston Savings Banks business activities. In addition,
Meridian Interstate owns 40% of the capital stock of Hampshire First Bank, a New Hampshire
chartered bank, organized in 2006 and headquartered in Manchester, New Hampshire. Meridian
Financial Services, Incorporated (Meridian Financial Services) is the mutual holding company for
Meridian Interstate and holds 13,164,109 shares or 58% of Meridian Interstates outstanding common
stock.
The accompanying unaudited interim consolidated financial statements of Meridian Interstate
Bancorp, Inc. 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,
2010 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 Meridian Interstate included in Meridian Interstates Form 10-K for the year ended
December 31, 2009 which was filed with the Securities and Exchange Commission (SEC) on March 16,
2010, and is available through the SECs website at
www.sec.gov.
In preparing financial statements in conformity with U. S. generally accepted accounting
principles, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and income and expenses during the reporting period. Actual
results could differ significantly from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to determination of the allowance for
loan losses, other-than-temporary impairment of securities, foreclosed real estate, and income
taxes.
2. Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued guidance changing the
accounting principles and disclosures requirements related to securitizations and special-purpose
entities. Specifically, this guidance eliminates the concept of a qualifying special-purpose
entity, changes the requirements for derecognizing financial assets and changes how a company
determines when an entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. This guidance also expands existing disclosure
requirements to include more information about transfers of financial assets, including
securitization transactions, and where companies have continuing exposure to the risks related to
transferred financial assets. This guidance is effective as of the beginning of each reporting
entitys first annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period and for interim and annual reporting periods thereafter.
Earlier application is prohibited. The recognition and measurement provisions regarding transfers
of financial assets shall be applied to transfers that occur on or after the effective date. The
adoption of this guidance on January 1, 2010 did not have a significant impact on the Companys
consolidated financial statements.
3. Fair Value Hierarchy
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 a financial instrument
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 Companys various financial instruments. 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 instrument.
6
The Company groups its financial assets and financial 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.
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.
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.
Certificates of deposit Fair values of certificates of deposit are estimated using
discounted cash flow analyses based on current market rates for similar types of deposits.
Securities available for sale Securities available for sale are recorded at fair value on
a recurring basis. Fair value measurement is based on quoted prices, when available. If quoted
prices are not available, fair values are measured using pricing models. The Company utilizes a
third-party pricing service to obtain fair values for securities.
Marketable equity securities are measured at fair value utilizing quoted market prices (Level 1).
Corporate bonds, obligations of government-sponsored enterprises, mortgage-backed securities and
other debt 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). The Company does not currently have any securities in its
portfolio that are measured using Level 3 inputs.
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 determined using market prices currently being
offered for loans with similar terms to borrowers of similar credit quality.
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-performing 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
Companys current incremental borrowing rates for similar types of borrowing arrangements.
Accrued interest The carrying amounts of accrued interest approximate fair value.
7
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.
Assets Measured at Fair Value on a Recurring Basis:
Assets measured at fair value on a recurring basis are summarized as follows.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair |
|
(In thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Value |
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
|
|
|
$ |
226,265 |
|
|
$ |
|
|
|
$ |
226,265 |
|
Government sponsored enterprises |
|
|
|
|
|
|
6,435 |
|
|
|
|
|
|
|
6,435 |
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises |
|
|
|
|
|
|
42,827 |
|
|
|
|
|
|
|
42,827 |
|
Private label |
|
|
|
|
|
|
16,062 |
|
|
|
|
|
|
|
16,062 |
|
Other debt securities |
|
|
|
|
|
|
761 |
|
|
|
|
|
|
|
761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
|
|
|
|
292,350 |
|
|
|
|
|
|
|
292,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
32,601 |
|
|
|
|
|
|
|
|
|
|
|
32,601 |
|
Money market mutual funds |
|
|
25,103 |
|
|
|
|
|
|
|
|
|
|
|
25,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities |
|
|
57,704 |
|
|
|
|
|
|
|
|
|
|
|
57,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
$ |
57,704 |
|
|
$ |
292,350 |
|
|
$ |
|
|
|
$ |
350,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair |
|
(In thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Value |
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
|
|
|
$ |
220,007 |
|
|
$ |
|
|
|
$ |
220,007 |
|
Government-sponsored
residential mortgage-backed securities |
|
|
|
|
|
|
23,778 |
|
|
|
|
|
|
|
23,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
|
|
|
|
243,785 |
|
|
|
|
|
|
|
243,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
28,878 |
|
|
|
|
|
|
|
|
|
|
|
28,878 |
|
Money market mutual funds |
|
|
20,704 |
|
|
|
|
|
|
|
|
|
|
|
20,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities |
|
|
49,582 |
|
|
|
|
|
|
|
|
|
|
|
49,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
$ |
49,582 |
|
|
$ |
243,785 |
|
|
$ |
|
|
|
$ |
293,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no significant transfers in or out of Levels 1 and 2 for the quarter ended March
31, 2010. There were no liabilities measured at fair value on a recurring basis.
8
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.
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 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2010 |
|
(In thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total Losses |
|
Impaired loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
8,265 |
|
|
$ |
(239 |
) |
Foreclosed real esate |
|
|
|
|
|
|
|
|
|
|
5,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
13,342 |
|
|
$ |
(239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
December 31, 2009 |
|
|
March 31, 2009 |
|
(In thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total Losses |
|
Impaired loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,700 |
|
|
$ |
(109 |
) |
Foreclosed real esate |
|
|
|
|
|
|
|
|
|
|
2,869 |
|
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,569 |
|
|
$ |
(169 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010 and December 31, 2009, the amount of foreclosed real estate in Level 3
represents the carrying value and related charge-offs for which adjustments are based on appraised
value of the collateral, considering discounting factors and adjusted for selling costs. The loss
on foreclosed real estate represents the adjustment in valuation recorded during the time periods
indicated, and not for losses incurred on the sale of the property. At March 31, 2010 and December
31, 2009, the amount of impaired loans in Level 3 represents the carrying value and related
allocated reserves on impaired loans for which adjustments are based on the appraised value of the
underlying collateral, considering discounting factors and adjusted for selling costs. The loss on
impaired loans is not recorded directly as an adjustment to current earnings or comprehensive
income, but rather as a component in determining the overall adequacy of the allowance for loan
losses. Adjustments to the estimated fair value of impaired loans may result in increases or
decreases to the provision for loan losses.
Carrying amounts and fair value of financial assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
(In thousands) |
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
86,514 |
|
|
$ |
86,514 |
|
|
$ |
19,966 |
|
|
$ |
19,966 |
|
Certificates of deposit |
|
|
3,100 |
|
|
|
3,117 |
|
|
|
3,000 |
|
|
|
3,028 |
|
Securities available for sale |
|
|
350,054 |
|
|
|
350,054 |
|
|
|
293,367 |
|
|
|
293,367 |
|
Federal Home Loan Bank stock |
|
|
12,538 |
|
|
|
12,538 |
|
|
|
4,605 |
|
|
|
4,605 |
|
Loans and loans held for sale, net |
|
|
1,146,807 |
|
|
|
1,151,162 |
|
|
|
814,255 |
|
|
|
813,393 |
|
Accrued interest receivable |
|
|
7,075 |
|
|
|
7,075 |
|
|
|
6,231 |
|
|
|
6,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
1,334,884 |
|
|
|
1,338,826 |
|
|
|
922,475 |
|
|
|
927,385 |
|
Borrowings |
|
|
156,246 |
|
|
|
161,702 |
|
|
|
75,410 |
|
|
|
76,782 |
|
Accrued interest payable |
|
|
1,148 |
|
|
|
1,148 |
|
|
|
728 |
|
|
|
728 |
|
9
4. Earnings Per Share
Basic earnings per share (EPS) excludes dilution and is calculated by dividing net income
available to common stockholders by the weighted-average number of shares of common stock
outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS
except that the weighted-average number of common shares outstanding is increased to include the
number of incremental common shares (computed using the treasury stock method) that would have been
outstanding if all potentially dilutive common stock equivalents (such as stock 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 EPS calculations. At March 31, 2010 and 2009, options for
889,440 and 587,600 shares, respectively, were not included in the calculation of diluted
EPS because to do so would have been antidilutive.
The following table is the reconciliation of basic and diluted earnings per share for the
three months ended March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(Dollars in thousands, except per share amounts) |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common
stockholders |
|
$ |
2,860 |
|
|
$ |
(1,108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
22,133,155 |
|
|
|
22,050,960 |
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
22,133,155 |
|
|
|
22,050,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.13 |
|
|
$ |
(0.05 |
) |
Diluted |
|
$ |
0.13 |
|
|
$ |
(0.05 |
) |
5. Securities
All securities held by the Company as of March 31, 2010 and December 31, 2009 were classified
as available for sale and are carried at fair value. Unrealized gains and losses, net of tax, are
excluded from earnings and reported as a separate component of stockholders equity. Gains or
losses on the sale of available-for-sale securities are determined using the specific
identification method. Premiums and discounts are recognized in interest income using the effective
interest method over the period to maturity.
At March 31, 2010, the securities portfolio was $350.1 million, or 20.4% of total assets. At
that date, 64.6% of the securities portfolio, or $226.3 million, was invested in corporate bonds.
The amortized cost and fair value of corporate bonds in the financial services sector was $64.6
million and $66.6 million, respectively. The remainder of the corporate bond portfolio includes
companies from a variety of industries. The portfolio also includes debt securities issued by
government-sponsored enterprises, mortgage backed securities issued by government-sponsored
enterprises and private companies, other debt securities and marketable equity securities.
Included in marketable equity securities are money market mutual funds and equity securities.
10
The amortized cost and fair values of securities available for sale, with gross unrealized
gains and losses follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
(In thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
$ |
64,620 |
|
|
$ |
2,046 |
|
|
$ |
(101 |
) |
|
$ |
66,565 |
|
Industry and manufacturing |
|
|
56,946 |
|
|
|
2,200 |
|
|
|
(188 |
) |
|
|
58,958 |
|
Consumer products and services |
|
|
46,359 |
|
|
|
2,332 |
|
|
|
(3 |
) |
|
|
48,688 |
|
Other |
|
|
49,612 |
|
|
|
2,491 |
|
|
|
(49 |
) |
|
|
52,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate bonds |
|
|
217,537 |
|
|
|
9,069 |
|
|
|
(341 |
) |
|
|
226,265 |
|
Government-sponsored enterprises |
|
|
6,434 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
6,435 |
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises |
|
|
42,655 |
|
|
|
217 |
|
|
|
(45 |
) |
|
|
42,827 |
|
Private label |
|
|
15,841 |
|
|
|
439 |
|
|
|
(218 |
) |
|
|
16,062 |
|
Other debt securities |
|
|
761 |
|
|
|
|
|
|
|
|
|
|
|
761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
283,228 |
|
|
|
9,727 |
|
|
|
(605 |
) |
|
|
292,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
28,886 |
|
|
|
4,353 |
|
|
|
(638 |
) |
|
|
32,601 |
|
Money market mutual funds |
|
|
25,108 |
|
|
|
|
|
|
|
(5 |
) |
|
|
25,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities |
|
|
53,994 |
|
|
|
4,353 |
|
|
|
(643 |
) |
|
|
57,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
$ |
337,222 |
|
|
$ |
14,080 |
|
|
$ |
(1,248 |
) |
|
$ |
350,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
$ |
59,219 |
|
|
$ |
1,786 |
|
|
$ |
(282 |
) |
|
$ |
60,723 |
|
Industry and manufacturing |
|
|
54,522 |
|
|
|
2,106 |
|
|
|
(481 |
) |
|
|
56,147 |
|
Consumer products and services |
|
|
50,402 |
|
|
|
2,205 |
|
|
|
|
|
|
|
52,607 |
|
Other |
|
|
48,136 |
|
|
|
2,394 |
|
|
|
|
|
|
|
50,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate bonds |
|
|
212,279 |
|
|
|
8,491 |
|
|
|
(763 |
) |
|
|
220,007 |
|
Government-sponsored
residential mortgage-backed securities |
|
|
23,659 |
|
|
|
148 |
|
|
|
(29 |
) |
|
|
23,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
235,938 |
|
|
|
8,639 |
|
|
|
(792 |
) |
|
|
243,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
26,698 |
|
|
|
3,001 |
|
|
|
(821 |
) |
|
|
28,878 |
|
Money market mutual funds |
|
|
20,704 |
|
|
|
|
|
|
|
|
|
|
|
20,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities |
|
|
47,402 |
|
|
|
3,001 |
|
|
|
(821 |
) |
|
|
49,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
$ |
283,340 |
|
|
$ |
11,640 |
|
|
$ |
(1,613 |
) |
|
$ |
293,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
The amortized cost and fair value of debt securities by contractual maturity at March 31, 2010
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 |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
(In thousands) |
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Corporate bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
$ |
13,559 |
|
|
$ |
13,763 |
|
|
$ |
47,645 |
|
|
$ |
49,418 |
|
|
$ |
3,416 |
|
|
$ |
3,384 |
|
|
$ |
64,620 |
|
|
$ |
66,565 |
|
Industry and manufacturing |
|
|
16,174 |
|
|
|
16,588 |
|
|
|
38,755 |
|
|
|
40,364 |
|
|
|
2,017 |
|
|
|
2,006 |
|
|
|
56,946 |
|
|
|
58,958 |
|
Consumer products and
services |
|
|
10,031 |
|
|
|
10,298 |
|
|
|
36,328 |
|
|
|
38,390 |
|
|
|
|
|
|
|
|
|
|
|
46,359 |
|
|
|
48,688 |
|
Other |
|
|
11,103 |
|
|
|
11,542 |
|
|
|
37,475 |
|
|
|
39,491 |
|
|
|
1,034 |
|
|
|
1,021 |
|
|
|
49,612 |
|
|
|
52,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate bonds |
|
|
50,867 |
|
|
|
52,191 |
|
|
|
160,203 |
|
|
|
167,663 |
|
|
|
6,467 |
|
|
|
6,411 |
|
|
|
217,537 |
|
|
|
226,265 |
|
Government-sponsored
enterprises |
|
|
147 |
|
|
|
146 |
|
|
|
4,540 |
|
|
|
4,540 |
|
|
|
1,747 |
|
|
|
1,749 |
|
|
|
6,434 |
|
|
|
6,435 |
|
Residential mortgage-
backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored
enterprises |
|
|
119 |
|
|
|
118 |
|
|
|
168 |
|
|
|
165 |
|
|
|
42,368 |
|
|
|
42,544 |
|
|
|
42,655 |
|
|
|
42,827 |
|
Private label |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,841 |
|
|
|
16,062 |
|
|
|
15,841 |
|
|
|
16,062 |
|
Other debt securities |
|
|
|
|
|
|
|
|
|
|
147 |
|
|
|
147 |
|
|
|
614 |
|
|
|
614 |
|
|
|
761 |
|
|
|
761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
51,133 |
|
|
$ |
52,455 |
|
|
$ |
165,058 |
|
|
$ |
172,515 |
|
|
$ |
67,037 |
|
|
$ |
67,380 |
|
|
$ |
283,228 |
|
|
$ |
292,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information pertaining to securities available for sale, 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 |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
(In thousands) |
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
$ |
50 |
|
|
$ |
6,980 |
|
|
$ |
51 |
|
|
$ |
3,950 |
|
Industry and manufacturing |
|
|
35 |
|
|
|
6,997 |
|
|
|
153 |
|
|
|
2,847 |
|
Consumer products and services |
|
|
3 |
|
|
|
1,005 |
|
|
|
|
|
|
|
|
|
Other |
|
|
49 |
|
|
|
5,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate bonds |
|
|
137 |
|
|
|
19,991 |
|
|
|
204 |
|
|
|
6,797 |
|
Government-sponsored enterprises |
|
|
1 |
|
|
|
147 |
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises |
|
|
45 |
|
|
|
3,138 |
|
|
|
|
|
|
|
|
|
Private label |
|
|
218 |
|
|
|
2,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
401 |
|
|
|
26,049 |
|
|
|
204 |
|
|
|
6,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
104 |
|
|
|
1,163 |
|
|
|
534 |
|
|
|
5,565 |
|
Money market mutual funds |
|
|
5 |
|
|
|
1,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities |
|
|
109 |
|
|
|
2,278 |
|
|
|
534 |
|
|
|
5,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
510 |
|
|
$ |
28,327 |
|
|
$ |
738 |
|
|
$ |
12,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than Twelve Months |
|
|
Over Twelve Months |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
(In thousands) |
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
$ |
24 |
|
|
$ |
6,059 |
|
|
$ |
258 |
|
|
$ |
6,736 |
|
Industry and manufacturing |
|
|
|
|
|
|
|
|
|
|
481 |
|
|
|
5,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate bonds |
|
|
24 |
|
|
|
6,059 |
|
|
|
739 |
|
|
|
12,255 |
|
Government-sponsored residential mortgage-backed
securities |
|
|
26 |
|
|
|
8,163 |
|
|
|
3 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
50 |
|
|
|
14,222 |
|
|
|
742 |
|
|
|
12,264 |
|
Common stock |
|
|
|
|
|
|
|
|
|
|
821 |
|
|
|
6,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
50 |
|
|
$ |
14,222 |
|
|
$ |
1,563 |
|
|
$ |
19,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company determined no securities were other-than-temporarily impaired during the three
months ended March 31, 2010. Management evaluates securities for other-than-temporary impairment on
a quarterly basis, with more frequent evaluation for selected issues. Consideration is given to
(1) the length of time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
As of March 31, 2010, the net unrealized gain on the total debt securities portfolio was $9.1
million. At March 31, 2010, 26 debt securities had unrealized losses with an aggregate depreciation
of 1.8% from the Companys cost basis. In analyzing a debt issuers 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 Companys debt portfolio,
spread differentials between the effective rates on instruments in the portfolio compared to
risk-free rates. Management evaluates securities for other-than-temporary impairment at least on a
quarterly basis, and more frequently when economic or market concerns warrant such evaluation. 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, 2010.
As of March 31, 2010, the net unrealized gain on the total equity portfolio was $3.7 million.
At March 31, 2010, 16 marketable equity securities had unrealized losses with an aggregate
depreciation of 8.7% from the Companys cost basis. Three equity securities had market value
declines of 15.0% or more, with net unrealized losses of $105,000. 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 issuers financial condition, management considers industry
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.
13
6. Acquisition
In an effort to expand and diversify its market area, the Company completed its acquisition of
Mt. Washington Cooperative Bank, a Massachusetts-chartered mutual bank (Mt. Washington), on
January 4, 2010 through the merger of Mt. Washington with and into the Bank. Each Mt. Washington
branch office has become a branch office of East Boston Savings Bank, and such branch offices now
operate under the name Mt. Washington Bank, A Division of East Boston Savings Bank. Pursuant to
the merger agreement related to the merger, Meridian Interstate issued 514,109 shares of its common
stock to Meridian Financial Services, Incorporated, Meridian Interstates top-tier mutual holding
company. The shares issued reflect the value of Mt. Washington as determined by two independent
appraisals. The shares were issued in a private placement exempt from registration under Section
4(2) of the Securities Act of 1933, as amended. In addition, Meridian Interstate contributed $15
million of capital to East Boston Savings Bank.
The Company accounted for the acquisition using the acquisition method. Accordingly, the
Company recorded merger and acquisition expenses of $168,000 during the quarter ended March 31,
2010 and $449,000 during the year ended December 31, 2009. The acquisition method also requires an
acquirer to recognize the assets acquired and the liabilities assumed at their fair values as of
the acquisition date.
The following table summarizes the estimated fair value of the assets acquired and liabilities
assumed as of the date of the acquisition:
|
|
|
|
|
|
|
(In thousands) |
|
Assets acquired and liabilities assumed: |
|
|
|
|
Cash and cash equivalents |
|
$ |
14,422 |
|
Certificates of deposit |
|
|
100 |
|
Securities available for sale |
|
|
45,516 |
|
Federal Home Loan Bank Stock, at cost |
|
|
7,933 |
|
Loans held for sale |
|
|
4,919 |
|
Loans, net |
|
|
346,323 |
|
Foreclosed real estate, net |
|
|
1,674 |
|
Premises and equipment, net |
|
|
10,618 |
|
Deferred tax asset, net |
|
|
9,486 |
|
Goodwill |
|
|
12,374 |
|
Other assets |
|
|
14,088 |
|
|
|
|
|
Total assets acquired |
|
$ |
467,453 |
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
380,550 |
|
FHLB Borrowings |
|
|
80,932 |
|
Accrued expenses and other liabilities |
|
|
5,971 |
|
|
|
|
|
Total liabilities assumed |
|
$ |
467,453 |
|
|
|
|
|
As noted above, the Company acquired loans at fair value of $346.3 million. Included in this
amount was $20.9 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 Companys evaluation of loans
with evidence of loan deterioration as of the acquisition date resulted in a nonaccretable
difference of $6.6 million, which is defined as the loans 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 loans credit quality at the acquisition date.
As of March 31, 2010, the carrying amount of these loans with evidence of loan deterioration at the
acquisition date was $21.3 million, and the remaining nonaccretable difference was $6.5 million.
14
The following table summarizes the unaudited pro forma financial results of operations as if
the Company acquired Mt. Washington on January 1, 2010 (2009 amounts represent combined results for
the Company and Mt. Washington):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In thousands, except per share amounts) |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
14,928 |
|
|
$ |
11,661 |
|
Net income (loss) |
|
|
3,069 |
|
|
|
(958 |
) |
Income (loss) per share Basic |
|
$ |
0.14 |
|
|
$ |
(0.04 |
) |
Income (loss) per share Diluted |
|
|
0.14 |
|
|
|
(0.04 |
) |
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Managements 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. The following discussion should be read in conjunction with the consolidated financial
statements, notes and tables included in the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2009, filed with the Securities and Exchange Commission.
Forward-Looking Statements
Forward-Looking Statements
This report contains forward-looking statements that are based on assumptions and may describe
future plans, strategies and expectations of Meridian Interstate Bancorp. These forward-looking
statements are generally identified by use of the words believe, expect, intend,
anticipate, estimate, project or similar expressions. Meridian Interstate Bancorps 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 Meridian Interstate Bancorp
and its subsidiaries include, but are not limited to:
|
|
|
significantly increased competition among depository and other financial
institutions; |
|
|
|
inflation and changes in the interest rate environment or other changes that reduce
our interest margins or reduce the fair value of financial instruments; |
|
|
|
general economic conditions, either nationally or in our market areas, that are
worse than expected; |
|
|
|
adverse changes in the securities markets; |
|
|
|
legislative or regulatory changes that adversely affect our business; |
|
|
|
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; |
|
|
|
changes in consumer spending, borrowing and savings habits; |
|
|
|
changes in accounting policies and practices, as may be adopted by bank regulatory
agencies, the Financial Accounting Standards Board, the Public Company Accounting
Oversight Board and other promulgating authorities; |
|
|
|
inability of third-party providers to perform their obligations to us; |
|
|
|
changes in our organization, compensation and benefit plans; |
|
|
|
changes in real estate values in our market areas; |
|
|
|
the effect of the current governmental effort to restructure the U.S. financial and
regulatory system; |
|
|
|
the effect of developments in the secondary market affecting our loan pricing; |
|
|
|
the level of future deposit premiums; and |
|
|
|
the effect of the current financial crisis on our loan portfolio and our investment
portfolio, and our deposit and other customers. |
Managements 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 Meridian Interstate Bancorps 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, 2009 filed with the Securities and Exchange Commission on March 16, 2010, under
Risk Factors, which is available through the SECs
website at www.sec.gov. 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,
Meridian Interstate Bancorp 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.
16
Critical Accounting Policies
The Companys significant accounting policies are described in Note 1 to the consolidated
financial statements included in the 2009 Annual Report on Form 10-K. 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, other-than-temporary impairment of securities,
foreclosed real estate and income taxes as the Companys most critical accounting policies. The
Companys critical accounting policies have not changed since December 31, 2009.
Comparison of Financial Condition at March 31, 2010 and December 31, 2009
Total assets increased $507.9 million, or 41.9%, to $1.7 billion at March 31, 2010 from $1.2
billion at December 31, 2009, reflecting $467.5 million of assets acquired in the Mt. Washington
merger. Cash and cash equivalents increased $66.5 million to $86.5 million at March 31, 2010 from
$20.0 million at December 31, 2009, including $14.4 million of cash acquired in the Mt. Washington
merger. Securities available for sale increased $56.7 million, or 19.3%, to $350.1 million at
March 31, 2010 from $293.4 million at December 31, 2009, including $45.6 million of securities
acquired in Mt. Washington merger. Net loans increased $329.5 million, or 40.5%, to $1.1 billion at
March 31, 2010 from $813.3 million at December 31, 2009, primarily due to $346.3 million of loans
acquired in the Mt. Washington merger, partially offset by sales of fixed-rate bi-weekly mortgage
loans totaling $34.1 million.
Total deposits increased $412.4 million, or 44.7%, to $1.3 billion at March 31, 2010 from
$922.5 million at December 31, 2009, reflecting $380.6 million of deposits acquired in the Mt.
Washington merger along with organic deposit growth of $31.9 million. Total borrowings increased
$80.8 million, or 107.2%, to $156.2 million at March 31, 2010 from $75.4 million at December 31,
2009, reflecting $80.9 million of Federal Home Loan Bank advances acquired in the Mt. Washington
merger.
Total stockholders equity increased $5.0 million, or 2.5%, to $205.4 million at March 31,
2010, from $200.4 million at December 31, 2009. The increase was due primarily to $2.9 million in
net income and a $1.8 million increase in accumulated other comprehensive income reflecting an
increase in the fair value of available for sale securities, net of tax. Stockholders equity to
assets was 11.95% at March 31, 2010, compared to 16.54% at December 31, 2009. Book value per share
increased to $9.08 at March 31, 2010 from $9.07 at December 31, 2009. Tangible book value per
share decreased to $8.54 at March 31, 2010 from $9.07 at December 31, 2009, primarily due to
goodwill resulting from the Mt. Washington merger.
17
Loan Portfolio Analysis
Our loan portfolio consists primarily of residential, multi-family and commercial real estate,
construction and land development, commercial, and consumer loans and home equity lines of credit
originated primarily in our market area. 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.
Loan detail by category as of March 31, 2010 and December 31, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
(Dollars in thousands) |
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family |
|
$ |
426,336 |
|
|
|
36.9 |
% |
|
$ |
276,122 |
|
|
|
33.5 |
% |
Multi-family |
|
|
121,867 |
|
|
|
10.6 |
|
|
|
53,402 |
|
|
|
6.5 |
|
Commercial real estate |
|
|
374,796 |
|
|
|
32.5 |
|
|
|
350,648 |
|
|
|
42.6 |
|
Construction |
|
|
121,165 |
|
|
|
10.5 |
|
|
|
94,102 |
|
|
|
11.4 |
|
Home equity lines
of credit |
|
|
72,897 |
|
|
|
6.3 |
|
|
|
29,979 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans |
|
|
1,117,061 |
|
|
|
96.8 |
|
|
|
804,253 |
|
|
|
97.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business loans |
|
|
28,821 |
|
|
|
2.5 |
|
|
|
18,029 |
|
|
|
2.2 |
|
Consumer loans |
|
|
7,795 |
|
|
|
0.7 |
|
|
|
1,205 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
1,153,677 |
|
|
|
100.0 |
% |
|
|
823,487 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan origination fees |
|
|
(273 |
) |
|
|
|
|
|
|
(945 |
) |
|
|
|
|
Allowance for loan losses |
|
|
(10,629 |
) |
|
|
|
|
|
|
(9,242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
$ |
1,142,775 |
|
|
|
|
|
|
$ |
813,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Analysis of Loan Loss Experience
The allowance for loan losses is maintained at levels considered adequate by management to
provide for probable loan losses as of the consolidated balance sheet reporting dates. The
allowance for loan losses is based on managements assessment of various factors affecting the loan
portfolio, including portfolio composition, delinquent and non-accrual loans, national and local
business conditions and loss experience, and an overall evaluation of the quality of the underlying
collateral. Changes in the allowance for loan losses during the three months ended March 31, 2010
and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
Beginning balance |
|
$ |
9,242 |
|
|
$ |
6,912 |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
1,374 |
|
|
|
546 |
|
|
|
|
|
|
|
|
Charge offs: |
|
|
|
|
|
|
|
|
Real estate loans |
|
|
1 |
|
|
|
|
|
Commercial business loans |
|
|
|
|
|
|
|
|
Consumer loans |
|
|
21 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
22 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
Real estate loans |
|
|
23 |
|
|
|
|
|
Commercial business |
|
|
|
|
|
|
|
|
Consumer loans |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
Net recoveries (charge-offs) |
|
|
13 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
10,629 |
|
|
$ |
7,456 |
|
|
|
|
|
|
|
|
Allowance to non-accrual loans |
|
|
31.45 |
% |
|
|
47.27 |
% |
Allowance to total loans outstanding |
|
|
0.92 |
% |
|
|
1.00 |
% |
Net recovery (charge-offs) to
average loans outstanding |
|
|
0.00 |
% |
|
|
0.00 |
% |
18
Provision for Loan Losses
The Companys provision for loan losses was $1.4 million for the quarter ended March 31, 2010
compared to $546,000 for the quarter ended March 31, 2009. This increase was based primarily on
managements assessment of loan portfolio growth and composition changes, an ongoing evaluation of
credit quality and current economic conditions. The allowance for loan losses was $10.6 million or
0.92% of total loans outstanding at March 31, 2010, compared to $9.2 million, or 1.12% of total
loans outstanding at December 31, 2009. The decrease in the ratio of the allowance for loan losses
to total loans outstanding was primarily due to the $346.3 million of loans acquired in the Mt.
Washington merger at fair value. The Company continues to assess the adequacy of its allowance for
loan losses in accordance with established policies.
Managements Assessment of Asset Quality
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. 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. Payments
received at the time a loan is on non-accrual status are applied to principal. Interest income is
not recognized until the loan is returned to 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.
The following table summarizes the non-performing assets at March 31, 2010 and December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
Loans accounted for on a non-accrual basis: |
|
|
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
|
|
One-to four-family |
|
$ |
9,995 |
|
|
$ |
4,098 |
|
Multi-family |
|
|
2,873 |
|
|
|
850 |
|
Commercial real estate |
|
|
7,578 |
|
|
|
7,388 |
|
Home equity lines of credit |
|
|
645 |
|
|
|
|
|
Construction |
|
|
12,635 |
|
|
|
9,224 |
|
|
|
|
|
|
|
|
Total real estate loans |
|
|
33,726 |
|
|
|
21,560 |
|
|
|
|
|
|
|
|
Commercial business loans |
|
|
64 |
|
|
|
|
|
Consumer loans |
|
|
4 |
|
|
|
138 |
|
|
|
|
|
|
|
|
Total non-accrual loans |
|
|
33,794 |
|
|
|
21,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed assets |
|
|
5,077 |
|
|
|
2,869 |
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
38,871 |
|
|
$ |
24,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans to total loans |
|
|
2.93 |
% |
|
|
2.63 |
% |
Non-accrual loans to total assets |
|
|
1.97 |
% |
|
|
1.79 |
% |
Non-performing assets to total assets |
|
|
2.26 |
% |
|
|
2.03 |
% |
Non-performing loans increased to $33.8 million, or 2.93% of total loans outstanding at March
31, 2010, from $21.7 million, or 2.63% of total loans outstanding at December 31, 2009.
Non-performing assets increased to $38.9 million, or 2.26% of total assets, at March 31, 2010, from
$24.6 million, or 2.03% of total assets, at December 31, 2009. Non-performing assets at March 31,
2010 were comprised of $12.6 million of construction loans, $7.6 million of commercial real estate loans, $10.0 million of one-to four-family mortgage loans,
$2.9 million of multi-family mortgage loans, $713,000 of other loans and foreclosed real estate of
$5.1 million. Non-performing assets at March 31, 2010 include $11.1 million acquired in the Mt.
Washington merger comprised of $9.4 million of non-performing loans and $1.7 million of foreclosed
real estate. Interest income that would have been recorded for the quarter ended March 31, 2010 had
nonaccruing loans and accruing loans past due 90 days or more been current according to their
original terms amounted to $734,000. At March 31, 2010, the Company did not have any accruing
loans past due 90 days or more.
19
The Company had impaired loans totaling $33.9 million and $29.3 million as of March 31, 2010
and December 31, 2009, respectively. At March 31, 2010, impaired loans totaling $10.0 million had
a valuation allowance of $1.2 million. Impaired loans totaling $2.2 million had a valuation
allowance of $472,000 at December 31, 2009. The Companys average investment in impaired loans was
$32.8 million and $14.0 million for the quarters ended March 31, 2010 and 2009, respectively.
Troubled debt restructure loans totaled $10.1 million at March 31, 2010 compared to $1.9 million at
December 31, 2009.
Deposits
Deposits are a major source of our funds for lending and other investment purposes. Deposit
inflows and outflows are significantly influenced by general interest rates and money market
conditions.
The following table summarizes the period end balance and the composition of deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
(Dollars in thousands) |
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
NOW and demand deposits |
|
$ |
216,273 |
|
|
|
16.2 |
% |
|
$ |
102,386 |
|
|
|
11.1 |
% |
Money market deposits |
|
|
305,076 |
|
|
|
22.9 |
|
|
|
247,006 |
|
|
|
26.8 |
|
Regular and other deposits |
|
|
184,741 |
|
|
|
13.8 |
|
|
|
128,016 |
|
|
|
13.9 |
|
Certificates of deposit |
|
|
628,794 |
|
|
|
47.1 |
|
|
|
445,067 |
|
|
|
48.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,334,884 |
|
|
|
100.0 |
% |
|
$ |
922,475 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
Total borrowings increased $80.8 million, or 107.2%, to $156.2 million at March 31, 2010 from
$75.4 million at December 31, 2009, reflecting $80.9 million of Federal Home Loan Bank advances
acquired in the Mt. Washington merger. At March 31, 2010 and December 31, 2009, FHLB advances
totaling $139.7 million and $62.3 million, respectively, with a weighted average rate of 2.60% and
2.77%, respectively. At March 31, 2010 and December 31, 2009, federal funds purchased totaled
$16.6 million and $13.1 million, respectively, with a weighted average rate of 0.35%.
Results of Operations for the Three Months Ended March 31, 2010 and March 31, 2009
Overview
We recorded net income of $2.9 million, or $0.13 per share (basic and diluted), for the
quarter ended March 31, 2010, compared to a net loss of $1.1 million, or $0.05 per share (basic and
diluted), for the quarter ended March 31, 2009. The quarter ended March 31, 2010 includes results
from Mt. Washington Cooperative Bank (Mt. Washington), which was acquired on January 4, 2010.
Income before income tax expense increased $6.0 million to $4.5 million, the net result of
increases in net interest income before provision for loan losses of $7.1 million and non-interest
income of $1.4 million, partially offset by increases in provision for loan losses of $828,000 and
non-interest expense of $1.7 million.
Return on average stockholders equity increased to 5.62% for the quarter ended March 31, 2010
compared to a loss on average stockholders equity of (2.34)% for the quarter ended March 31, 2009.
Return on average assets increased to 0.69% for the quarter ended March 31, 2010 compared to a
loss on average assets of (0.40)% for the quarter ended March 31, 2009.
Net Interest Income
Net interest income before provision for loan losses increased $7.1 million, or 93.0%, to
$14.8 million for the quarter ended March 31, 2010 from $7.7 million for the quarter ended March
31, 2009. The net interest rate spread and net interest margin were 3.75% and 3.92%, respectively,
for the quarter ended March 31, 2010, compared to 2.55% and 3.04%, respectively, for the quarter
ended March 31, 2009.
The increase in net interest income was due primarily to loan growth along with continuing
declines in interest costs of deposits and borrowings. The average balance of the Companys loan
portfolio, which is principally comprised of real estate loans, increased by $424.5 million, or
58.4%, to $1.2 million, which was only
partially offset by the decline in the yield on loans of 23 basis points to 5.71% for the
quarter ended March 31, 2010 compared to the quarter ended March 31, 2009.
20
The Companys cost of deposits declined by 135 basis points to 1.42%, which was only partially
offset by the increase in the average balance of interest-bearing deposits of $428.9 million, or
55.7%, to $1.2 million for the quarter ended March 31, 2010 compared to the quarter ended March 31,
2009. The Companys yield on interest-earning assets declined by only seven basis points to 5.28%
for the quarter ended March 31, 2010 compared to 5.35% for the quarter ended March 31, 2009, while
the cost of interest-bearing liabilities declined 127 basis points to 1.53% for the quarter ended
March 31, 2010 compared to 2.80% for the quarter ended March 31, 2009.
The following table sets forth average balance sheets, average yields and costs, and certain
other information at and for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Average |
|
|
Interest |
|
|
Yield/ |
|
|
Average |
|
|
Interest |
|
|
Yield/ |
|
(Dollars in thousands) |
|
Balance |
|
|
Earned/Paid |
|
|
Cost (4) |
|
|
Balance |
|
|
Earned/Paid |
|
|
Cost (4) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1) |
|
$ |
1,151,328 |
|
|
$ |
16,210 |
|
|
|
5.71 |
% |
|
$ |
726,851 |
|
|
$ |
10,645 |
|
|
|
5.94 |
% |
Securities and certificates of deposit |
|
|
341,330 |
|
|
|
3,663 |
|
|
|
4.35 |
|
|
|
262,955 |
|
|
|
2,790 |
|
|
|
4.30 |
|
Other interest-earning assets |
|
|
35,279 |
|
|
|
12 |
|
|
|
0.14 |
|
|
|
30,361 |
|
|
|
12 |
|
|
|
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
1,527,937 |
|
|
|
19,885 |
|
|
|
5.28 |
|
|
|
1,020,167 |
|
|
|
13,447 |
|
|
|
5.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets |
|
|
138,229 |
|
|
|
|
|
|
|
|
|
|
|
75,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,666,166 |
|
|
|
|
|
|
|
|
|
|
$ |
1,095,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits |
|
$ |
107,768 |
|
|
|
128 |
|
|
|
0.48 |
% |
|
$ |
36,610 |
|
|
|
46 |
|
|
|
0.51 |
% |
Money market deposits |
|
|
300,778 |
|
|
|
893 |
|
|
|
1.20 |
|
|
|
183,199 |
|
|
|
1,027 |
|
|
|
2.27 |
|
Savings and other deposits |
|
|
178,937 |
|
|
|
246 |
|
|
|
0.56 |
|
|
|
122,990 |
|
|
|
302 |
|
|
|
1.00 |
|
Certificates of deposit |
|
|
611,717 |
|
|
|
2,932 |
|
|
|
1.94 |
|
|
|
427,534 |
|
|
|
3,888 |
|
|
|
3.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
1,199,200 |
|
|
|
4,199 |
|
|
|
1.42 |
|
|
|
770,333 |
|
|
|
5,263 |
|
|
|
2.77 |
|
FHLB advances and other borrowings |
|
|
156,537 |
|
|
|
915 |
|
|
|
2.37 |
|
|
|
67,752 |
|
|
|
532 |
|
|
|
3.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,355,737 |
|
|
|
5,114 |
|
|
|
1.53 |
|
|
|
838,085 |
|
|
|
5,795 |
|
|
|
2.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
|
95,943 |
|
|
|
|
|
|
|
|
|
|
|
58,705 |
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities |
|
|
10,970 |
|
|
|
|
|
|
|
|
|
|
|
9,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,462,650 |
|
|
|
|
|
|
|
|
|
|
|
905,868 |
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
203,516 |
|
|
|
|
|
|
|
|
|
|
|
189,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders
equity |
|
$ |
1,666,166 |
|
|
|
|
|
|
|
|
|
|
$ |
1,095,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets |
|
$ |
172,200 |
|
|
|
|
|
|
|
|
|
|
$ |
182,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
14,771 |
|
|
|
|
|
|
|
|
|
|
$ |
7,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (2) |
|
|
|
|
|
|
|
|
|
|
3.75 |
% |
|
|
|
|
|
|
|
|
|
|
2.55 |
% |
Net interest margin (3) |
|
|
|
|
|
|
|
|
|
|
3.92 |
% |
|
|
|
|
|
|
|
|
|
|
3.04 |
% |
Average interest-earning assets to
average interest-bearing liabilities |
|
|
|
|
|
|
112.70 |
% |
|
|
|
|
|
|
|
|
|
|
121.73 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans on non-accrual status are included in average balances. |
|
(2) |
|
Interest rate spread represents the difference between the yield on interest-earning assets and
the cost of interest-bearing liabilities. |
|
(3) |
|
Net interest margin represents net interest income divided by average interest-earning assets. |
|
(4) |
|
Annualized. |
21
Non-interest Income
Non-interest income increased $1.4 million, or 128.6%, to $2.5 million for the quarter ended
March 31, 2010 from $1.1 million for the quarter ended March 31, 2009, primarily due to increases
of $717,000 in service charges on deposit accounts and $382,000 in gain on sales of loans. The
increase in gain on sales of loans was due to gains totaling $352,000 on sales of fixed-rate
bi-weekly mortgage loans during the quarter ended March 31, 2010. The increase in service charges
on deposit accounts for the quarter ended March 31, 2010 was due primarily to deposit relationships
acquired in the Mt. Washington merger and additional growth in deposits.
Non-interest Expenses
Non-interest expense increased $1.7 million, or 17.3%, to $11.3 million for the quarter ended
March 31, 2010 from $9.7 million for the quarter ended March 31, 2009. This increase was due
primarily to increases of $620,000 in occupancy and equipment expenses, $316,000 in data processing
costs, $232,000 in marketing and advertising, $205,000 in deposit insurance premiums and $479,000
in other general and administrative expenses, partially offset by decreases of $147,000 in salaries
and employee benefits and $101,000 in foreclosed real estate expenses, net. The increases in
non-interest expenses were primarily due to higher expense levels following the Mt. Washington
merger. The decrease in salaries and benefits expenses reflects pre-tax charges of $2.1 million
during the quarter ended March 31, 2009 associated with the retirement of the Companys CFO and an
Executive Vice President and the settlement of an arbitration agreement with a former employee. The
Companys efficiency ratio was 65.72% for the quarter ended March 31, 2010 as compared to 109.11%
for the quarter ended March 31, 2009.
Income Tax
The Company recorded a provision for income taxes of $1.7 million for the quarter ended March
31, 2010, reflecting an effective tax rate of 37.1%, compared to an income tax benefit of $370,000,
or 25.0%, for the quarter ended March 31, 2009. The increase in the income tax provision is
primarily due to increased income before income taxes. After an analysis of the components of the
deferred tax asset, the Company recorded a decrease of $110,000 to the valuation allowance against
the deferred tax asset during the first quarter of 2010. As of March 31, 2010, the total valuation
allowance against the deferred tax asset was $331,000.
Liquidity and Capital Management
Liquidity Management. Liquidity is the ability to meet current and future financial
obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan
repayments, maturities of and payments on investment securities and borrowings from the Federal
Home Loan Bank of Boston. While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by
general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our assessment of (1) expected
loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and
securities and (4) the objectives of our asset/liability management policy.
Our most liquid assets are cash and cash equivalents. The levels of these assets depend on
our operating, financing, lending and investing activities during any given period. At March 31,
2010, cash and cash equivalents totaled $86.5 million. In addition, at March 31, 2010, we had
$84.7 million of available borrowing capacity with the Federal Home Loan Bank of Boston, including
a $9.4 million line of credit. On March 31, 2010, we had $136.2 million of advances outstanding.
22
A significant use of our liquidity is the funding of loan originations. At March 31, 2010 and
December 31, 2009, we had total loan commitments outstanding, as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Unadvanced portion of existing loans: |
|
|
|
|
|
|
|
|
Construction |
|
$ |
68,010 |
|
|
$ |
72,218 |
|
Home equity line of credit |
|
|
46,193 |
|
|
|
25,623 |
|
Other lines and letters of credit |
|
|
11,744 |
|
|
|
4,038 |
|
Commitments to originate: |
|
|
|
|
|
|
|
|
One- to four-family |
|
|
3,165 |
|
|
|
1,844 |
|
Commercial real estate |
|
|
45,273 |
|
|
|
18,711 |
|
Construction |
|
|
13,370 |
|
|
|
27,460 |
|
Other loans |
|
|
8,389 |
|
|
|
4,457 |
|
|
|
|
|
|
|
|
Total loan commitments outstanding |
|
$ |
196,144 |
|
|
$ |
154,351 |
|
|
|
|
|
|
|
|
Historically, many of the commitments expire without being fully drawn; therefore, the total
amount of commitment does not necessarily represent future cash requirements. The Bank provides
participating checking accounts with overdraft account protection covering $7.6 million of balances
as of March 31, 2010. We have a seven year contract with our core data processing provider with an
outstanding commitment of approximately $4.9 million as of March 31, 2010, and an annual payment of
approximately $1.3 million. In addition, we have an outstanding commitment of approximately $2
million for the remaining two years of Mt. Washingtons contract with its core data processing
provider.
Another significant use of our liquidity is the funding of deposit withdrawals. Certificates
of deposit due within one year of March 31, 2010 totaled $384.9 million, or 61.2% of total
certificates of deposit. If these maturing deposits do not remain with us, we will be required to
utilize other sources of funds. Historically, a significant portion of certificates of deposit
that mature have remained at the Company. We have the ability to attract and retain deposits by
adjusting the interest rates offered, and total certificates of deposit have increased in 2010.
Our primary investing activities are the origination of loans and the purchase of securities.
Our primary financing activities consist of activity in deposit accounts and Federal Home Loan Bank
advances. Deposit flows are affected by the overall level of interest rates, the interest rates
and products offered by us and our local competitors and other factors. We generally manage the
pricing of our deposits to be competitive. Occasionally, we offer promotional rates on certain
deposit products to attract deposits.
Capital Management. Both Meridian Interstate Bancorp and East Boston Savings Bank are subject
to various regulatory capital requirements administered by the Federal Reserve Board and Federal
Deposit Insurance Corporation, respectively, including a risk-based capital measure. The
risk-based capital guidelines include both a definition of capital and a framework for calculating
risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk
categories. At March 31, 2010, both Meridian Interstate Bancorp and East Boston Savings Bank
exceeded all of their respective regulatory capital requirements. East Boston Savings Bank is
considered well capitalized under regulatory guidelines.
We may use capital management tools such as cash dividends and common share repurchases.
However, Massachusetts Commissioner of Banks regulations restrict stock repurchases by Meridian
Interstate Bancorp within three years of the stock offering unless the repurchase: (i) is part of a
general repurchase made on a pro rata basis pursuant to an offering approved by the Commissioner of
the Banks and made to all stockholders of Meridian Interstate Bancorp (other than Meridian
Financial Services with the approval of the Commissioner of Banks); (ii) is limited to the
repurchase of qualifying shares of a director; (iii) is purchased in the open market by a
tax-qualified or nontax-qualified employee stock benefit plan of Meridian Interstate Bancorp or
East Boston Savings Bank in an amount reasonable and appropriate to fund the plan; or (iv) is
limited to stock repurchases of no greater than 5% of the outstanding capital stock of Meridian
Interstate Bancorp where compelling and valid business reasons are established to the satisfaction
of the Commissioner of Banks. In addition, pursuant to Federal Reserve Board approval conditions
imposed in connection with the formation of Meridian Interstate Bancorp, Meridian Interstate
Bancorp has committed (i) to seek the Federal Reserve Boards prior approval before repurchasing
any equity securities from Meridian Financial Services and (ii) that any repurchases of equity
securities from stockholders other
than Meridian Financial Services will be at the current market price for such stock repurchases.
Meridian Interstate Bancorp will also be subject to the Federal Reserve Boards notice provisions
for stock repurchases.
23
The Company did not purchase any shares of its common stock during the quarter ended March 31,
2010. In April 2010, the Commonwealth of Massachusetts Office of the Commissioner of Banks approved
the Companys application to repurchase up to 5% of its outstanding common stock not held by its
mutual holding company parent, or 472,428 shares of its common stock.
Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of
financial transactions that, in accordance with generally accepted accounting principles are not
recorded in our financial statements. These transactions involve, to varying degrees, elements of
credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers
requests for funding and take the form of loan commitments and lines of credit. We had no
investment in derivative securities at March 31, 2010.
For the three months ended March 31, 2010, we engaged in no off-balance sheet transactions
reasonably likely to have a material effect on our financial condition, results of operations or
cash flows.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk Management. Our earnings and the market value of our assets and
liabilities are subject to fluctuations caused by changes in the level of interest rates. We
manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning
assets in an effort to minimize the adverse effects of changes in the interest rate environment.
Deposit accounts typically react more quickly to changes in market interest rates than mortgage
loans because of the shorter maturities of deposits. As a result, sharp increases in interest
rates may adversely affect our earnings while decreases in interest rates may beneficially affect
our earnings. To reduce the potential volatility of our earnings, we have sought to improve the
match between asset and liability maturities and rates, while maintaining an acceptable interest
rate spread. Our strategy for managing interest rate risk emphasizes: originating loans with
adjustable interest rates; selling the residential real estate fixed-rate loans with terms greater
than 15 years that we originate; and promoting core deposit products and short-term time deposits.
We have an Asset/Liability Management Committee to coordinate all aspects involving
asset/liability management. The committee establishes and monitors the volume, maturities, pricing
and mix of assets and funding sources with the objective of managing assets and funding sources to
provide results that are consistent with liquidity, growth, risk limits and profitability goals.
Net Interest Income Simulation Analysis. We analyze our interest rate sensitivity position to
manage the risk associated with interest rate movements through the use of interest income
simulation. The matching of assets and liabilities may be analyzed by examining the extent to which
such assets and liabilities are interest sensitive. An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or reprice within that time period.
Our goal is to manage asset and liability positions to moderate the effects of interest rate
fluctuations on net interest income. Interest income simulations are completed quarterly and
presented to the Asset/Liability Committee and the board of directors. The simulations provide an
estimate of the impact of changes in interest rates on net interest income under a range of
assumptions. The numerous assumptions used in the simulation process are reviewed by the
Asset/Liability Committee and the Executive Committee on a quarterly basis. Changes to these
assumptions can significantly affect the results of the simulation. The simulation incorporates
assumptions regarding the potential timing in the repricing of certain assets and liabilities when
market rates change and the changes in spreads between different market rates. The simulation
analysis incorporates managements current assessment of the risk that pricing margins will change
adversely over time due to competition or other factors.
Simulation analysis is only an estimate of our interest rate risk exposure at a particular
point in time. We continually review the potential effect changes in interest rates could have on
the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.
The simulation uses projected repricing of assets and liabilities on the basis of contractual
maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a
significant impact on interest income simulation. Because of the large percentage of loans we hold,
rising or falling interest rates have a significant impact on the prepayment speeds of our earning
assets that in turn affect the rate sensitivity position. When interest rates rise, prepayments
tend to slow. When interest rates fall, prepayments tend to rise. Our asset sensitivity would be
reduced if prepayments slow and vice versa. While we believe such assumptions to be
reasonable, there can be no assurance that assumed prepayment rates will approximate actual future
mortgage-backed security and loan repayment activity.
24
The following table reflects changes in estimated net interest income for the Company at April
1, 2010 through March 31, 2011.
Interest Rate Sensitivity
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
in Market Interest |
|
Net Interest Income |
|
Rates (Rate Shock) |
|
Amount |
|
|
Change |
|
|
Percent |
|
|
|
(Dollars in Thousands) |
|
|
|
|
|
300 |
|
$ |
51,117 |
|
|
$ |
(8,643 |
) |
|
|
(14.46 |
)% |
Flat |
|
|
59,760 |
|
|
|
|
|
|
|
|
|
-50 |
|
|
60,343 |
|
|
|
583 |
|
|
|
0.98 |
|
25
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures
Meridian Interstate Bancorps management, including Meridian Interstate Bancorps principal
executive officer and principal financial officer, have evaluated the effectiveness of Meridian
Interstate Bancorps disclosure controls and procedures, as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act).
Based upon their evaluation, the principal executive officer and principal financial officer
concluded that, as of the end of the period covered by this report, Meridian Interstate Bancorps
disclosure controls and procedures were effective for the purpose of ensuring that the information
required to be disclosed in the reports that Meridian Interstate Bancorp files or submits under the
Exchange Act with the Securities and Exchange Commission (the SEC) (1) is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms and (2) is
accumulated and communicated to Meridian Interstate Bancorps management, including its principal
executive and principal financial officers, as appropriate to allow timely decisions regarding
required disclosure.
(b) Internal Control over Financial Reporting
There have not been any changes in Meridian Interstate Bancorps internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, Meridian Interstate Bancorps internal control over
financial reporting.
26
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Periodically, there have been various claims and lawsuits against us, such as claims to
enforce liens, condemnation proceedings on properties in which we hold security interests, claims
involving the making and servicing of real property loans and other issues incident to our
business. We are not a party to any pending legal proceedings that we believe would have a
material adverse effect on our financial condition, results of operations or cash flows.
Item 1A. Risk Factors
For information regarding our risk factors, see Risk Factors, in our 2009 Annual Report on
Form 10-K, filed with the SEC on March 16, 2010, which is available through the SECs website at
www.sec.gov. As of March 31, 2010, the risk factors of Meridian Interstate Bancorp have not
changed materially from those reported in the annual report. The risks described in Meridian
Interstate Bancorps annual report are not the only risks that we face. Additional risks and
uncertainties not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a.) (b.) Not applicable. |
|
(c.) |
|
The Company did not purchase any shares of its common stock during the quarter ended March
31, 2010. In April 2010, the Commonwealth of Massachusetts Office of the Commissioner of Banks
approved the Companys application to repurchase up to 5% of its outstanding common stock not
held by its mutual holding company parent, or 472,428 shares of its common stock. |
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Removed and Reserved
Item 5. Other Information
None.
27
Item 6. Exhibits
|
|
|
|
|
|
3.1 |
|
|
Amended and Restated Articles of Organization of Meridian Interstate Bancorp, Inc.* |
|
3.2 |
|
|
Amended and Restated Bylaws of Meridian Interstate Bancorp, Inc.* |
|
3.3 |
|
|
Articles of Correction of Meridian Interstate Bancorp, Inc.*** |
|
4 |
|
|
Form of Common Stock Certificate of Meridian Interstate Bancorp, Inc.* |
|
10.1 |
|
|
Form of East Boston Savings Bank Employee Stock Ownership Plan* |
|
10.2 |
|
|
Form of East Boston Savings Bank Employee Stock Ownership Plan Trust Agreement* |
|
10.3 |
|
|
East Boston Savings Bank Employee Stock Ownership Plan Loan Agreement, Pledge Agreement and
Promissory Note* |
|
10.4 |
|
|
Form of Amended and Restated Employment Agreement* |
|
10.5 |
|
|
Form of East Boston Savings Bank Employee Severance Compensation Plan* |
|
10.6 |
|
|
Form of Supplemental Executive Retirement Agreements with certain directors* |
|
10.7 |
|
|
Form of Separation Agreement with Robert F. Verdonck incorporated by reference to the Form
8-K filed on June 11, 2008 |
|
10.8 |
|
|
Form of Separation Agreement with Leonard V. Siuda incorporated by reference to the Form 8-K
filed on April 7, 2009 |
|
10.9 |
|
|
Form of Separation Agreement with Philip F. Freehan incorporated by reference to the Form 8-K
filed on April 7, 2009 |
|
10.10 |
|
|
Form of Supplemental Executive Retirement Agreement with Richard J. Gavegnano filed as an
exhibit to Form 10-Q filed on May 14, 2008 |
|
10.11 |
|
|
Form of Employment Agreement with Richard J. Gavegnano incorporated by reference to the Form
8-K filed on January 12, 2009 |
|
10.12 |
|
|
Form of Employment Agreement with Deborah J. Jackson incorporated by reference to the Form
8-K filed on January 22, 2009 |
|
10.13 |
|
|
Form of Supplemental Executive Retirement Agreement with Deborah J. Jackson incorporated by
reference to the Form 8-K filed on January 22, 2009 |
|
10.14 |
|
|
2008 Equity Incentive Plan** |
|
10.15 |
|
|
Amendment to Supplemental Executive Retirement Agreements with Certain Directors
incorporated by
reference to the Form 10-K/A filed on April 8, 2009 |
|
10.16 |
|
|
Agreement and Plan of Merger incorporated by reference to the Form 8-K filed on July 24, 2009 |
|
10.17 |
|
|
Employment Agreement between Edward J. Merritt and East Boston Savings Bank*** |
|
10.18 |
|
|
Supplemental Executive Retirement Agreement between East Boston Savings Bank and
Edward J. Merritt*** |
|
10.19 |
|
|
Joint Beneficiary Designation Agreement between Edward J. Merritt and Mt. Washington
Cooperative Bank*** |
|
10.20 |
|
|
First Amendment to Joint Beneficiary Designation Agreement between Edward J. Merritt and Mt. Washington
Cooperative Bank*** |
|
10.21 |
|
|
Change in Control Agreement between Mark Abbate and East Boston Savings Bank incorporated by reference to the
Form 8-K filed on December 15, 2009 |
|
21 |
|
|
Subsidiaries of Registrant* |
|
31.1 |
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.2 |
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32 |
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
Incorporated by reference to the Registration Statement on Form S-1 of Meridian Interstate
Bancorp, Inc. (File No. 333-146373), originally filed with the Securities and Exchange
Commission on September 28, 2007. |
|
** |
|
Incorporated by reference to Appendix A to the Companys Definitive Proxy Statement for its
2008 Annual Meeting, as filed with the Securities and Exchange Commission on July 11, 2008. |
|
*** |
|
Incorporated by reference to the Companys Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 16, 2010. |
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
MERIDIAN INTERSTATE BANCORP, INC.
(Registrant)
|
|
Dated: May 10, 2010 |
/s/ Richard J. Gavegnano
|
|
|
Richard J. Gavegnano |
|
|
Chairman and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
Dated: May 10, 2010 |
/s/ Mark L. Abbate
|
|
|
Mark L. Abbate Senior Vice
President, Treasurer and Chief Financial Officer |
|
|
(Principal Financial and Accounting Officer) |
|
|
29