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 June 30, 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
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(I.R.S. Employer Identification No.) |
organization) |
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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 August 2, 2010, the registrant had 22,505,594 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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June 30, |
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December 31, |
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(Dollars in thousands) |
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2010 |
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2009 |
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ASSETS
|
Cash and due from banks |
|
$ |
71,387 |
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$ |
9,010 |
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Federal funds sold |
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228 |
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10,956 |
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Total cash and cash equivalents |
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71,615 |
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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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344,837 |
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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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4,851 |
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955 |
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Loans |
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1,184,031 |
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822,542 |
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Less allowance for loan losses |
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(11,265 |
) |
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(9,242 |
) |
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Loans, net |
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1,172,766 |
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813,300 |
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Bank-owned life insurance |
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33,239 |
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23,721 |
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Foreclosed real estate, net |
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4,221 |
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2,869 |
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Investment in affiliate bank |
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11,181 |
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11,005 |
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Premises and equipment, net |
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32,968 |
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23,195 |
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Accrued interest receivable |
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7,625 |
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6,231 |
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Prepaid deposit insurance |
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4,113 |
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5,114 |
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Deferred tax asset, net |
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11,631 |
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1,523 |
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Goodwill |
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11,230 |
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Other assets |
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2,313 |
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2,535 |
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Total assets |
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$ |
1,728,228 |
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$ |
1,211,386 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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Deposits: |
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Non interest-bearing |
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$ |
106,529 |
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$ |
63,606 |
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Interest-bearing |
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1,247,545 |
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858,869 |
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Total deposits |
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1,354,074 |
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922,475 |
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Short-term borrowings affiliate bank |
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6,362 |
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3,102 |
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Short-term borrowings other |
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10,025 |
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22,108 |
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Long-term debt |
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135,715 |
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50,200 |
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Accrued expenses and other liabilities |
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15,584 |
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13,086 |
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Total liabilities |
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1,521,760 |
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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; 22,505,594 and 22,098,565 shares
outstanding at June 30, 2010 and December 31, 2009,
respectively |
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Additional paid-in capital |
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96,728 |
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100,972 |
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Retained earnings |
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115,291 |
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109,189 |
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Accumulated other comprehensive income |
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6,055 |
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5,583 |
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Treasury stock, at cost, 113,091 and 517,500 shares
at June 30, 2010 and December 31, 2009, respectively |
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(1,266 |
) |
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(4,535 |
) |
Unearned compensation ESOP, 724,500 and 745,200 shares
at June 30, 2010 and December 31, 2009, respectively |
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(7,245 |
) |
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(7,452 |
) |
Unearned compensation restricted shares, 381,315 and 383,935
shares at June 30, 2010 and December 31, 2009, respectively |
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(3,095 |
) |
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(3,342 |
) |
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Total stockholders equity |
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206,468 |
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200,415 |
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Total liabilities and stockholders equity |
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$ |
1,728,228 |
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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 June 30, |
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Six Months Ended June 30, |
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(Dollars in thousands, except per share amounts) |
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2010 |
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2009 |
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2010 |
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2009 |
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Interest and dividend income: |
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Interest and fees on loans |
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$ |
16,829 |
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$ |
11,046 |
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$ |
33,039 |
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$ |
21,691 |
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Interest on debt securities |
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3,389 |
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2,554 |
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6,830 |
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5,009 |
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Dividends on equity securities |
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228 |
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|
299 |
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|
433 |
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592 |
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Interest on certificates of deposit |
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17 |
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14 |
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34 |
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56 |
|
Interest on other interest-earning assets |
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36 |
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6 |
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48 |
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18 |
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|
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Total interest and dividend income |
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20,499 |
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|
13,919 |
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40,384 |
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27,366 |
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Interest expense: |
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Interest on deposits |
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4,310 |
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4,938 |
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8,509 |
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|
10,201 |
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Interest on short-term borrowings |
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15 |
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7 |
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44 |
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42 |
|
Interest on long-term debt |
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895 |
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|
502 |
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1,781 |
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|
999 |
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Total interest expense |
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5,220 |
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|
5,447 |
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|
10,334 |
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|
11,242 |
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|
|
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Net interest income |
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15,279 |
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|
8,472 |
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30,050 |
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16,124 |
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Provision for loan losses |
|
|
794 |
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|
568 |
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2,168 |
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|
1,114 |
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|
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|
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|
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Net interest income, after provision
for loan losses |
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14,485 |
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|
7,904 |
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27,882 |
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|
15,010 |
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Non-interest income: |
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|
|
|
|
|
|
|
|
|
|
|
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Customer service fees |
|
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1,490 |
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|
799 |
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|
2,904 |
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|
1,496 |
|
Loan fees |
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|
140 |
|
|
|
127 |
|
|
|
298 |
|
|
|
277 |
|
Gain on sales of loans, net |
|
|
199 |
|
|
|
116 |
|
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|
764 |
|
|
|
299 |
|
Other-than-temporary impairment losses |
|
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|
(249 |
) |
|
|
|
|
|
|
(373 |
) |
Income from bank-owned life insurance |
|
|
287 |
|
|
|
240 |
|
|
|
579 |
|
|
|
454 |
|
Equity income (loss) on investment in
affiliate bank |
|
|
106 |
|
|
|
2 |
|
|
|
176 |
|
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
|
2,222 |
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|
|
1,035 |
|
|
|
4,721 |
|
|
|
2,128 |
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|
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Non-interest expenses: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
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Salaries and employee benefits |
|
|
6,446 |
|
|
|
4,101 |
|
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|
12,613 |
|
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|
10,415 |
|
Occupancy and equipment |
|
|
1,377 |
|
|
|
697 |
|
|
|
2,861 |
|
|
|
1,561 |
|
Data processing |
|
|
749 |
|
|
|
474 |
|
|
|
1,503 |
|
|
|
912 |
|
Marketing and advertising |
|
|
580 |
|
|
|
313 |
|
|
|
1,046 |
|
|
|
547 |
|
Professional services |
|
|
755 |
|
|
|
416 |
|
|
|
1,475 |
|
|
|
1,068 |
|
Foreclosed real estate expense, net |
|
|
122 |
|
|
|
223 |
|
|
|
276 |
|
|
|
478 |
|
Deposit insurance |
|
|
577 |
|
|
|
830 |
|
|
|
1,092 |
|
|
|
1,140 |
|
Other general and administrative |
|
|
1,131 |
|
|
|
630 |
|
|
|
2,220 |
|
|
|
1,240 |
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|
|
|
|
|
|
|
|
|
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|
Total non-interest expenses |
|
|
11,737 |
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|
|
7,684 |
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|
|
23,086 |
|
|
|
17,361 |
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|
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|
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|
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Income (loss) before income taxes |
|
|
4,970 |
|
|
|
1,255 |
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|
|
9,517 |
|
|
|
(223 |
) |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
|
1,728 |
|
|
|
293 |
|
|
|
3,415 |
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|
(77 |
) |
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|
|
|
|
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|
|
|
|
|
|
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|
Net income (loss) |
|
$ |
3,242 |
|
|
$ |
962 |
|
|
$ |
6,102 |
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|
$ |
(146 |
) |
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Income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
Basic |
|
$ |
0.15 |
|
|
$ |
0.04 |
|
|
$ |
0.28 |
|
|
$ |
(0.01 |
) |
Diluted |
|
$ |
0.15 |
|
|
$ |
0.04 |
|
|
$ |
0.28 |
|
|
$ |
(0.01 |
) |
|
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Weighted average shares: |
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Basic |
|
|
22,124,539 |
|
|
|
22,024,179 |
|
|
|
22,128,822 |
|
|
|
21,991,924 |
|
Diluted |
|
|
22,140,597 |
|
|
|
22,024,179 |
|
|
|
22,136,851 |
|
|
|
21,991,924 |
|
See accompanying notes to unaudited consolidated financial statements.
2
MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Six Months Ended June 30, 2010 and 2009
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Shares of No |
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Accumulated |
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Unearned |
|
|
|
|
|
|
Par Common |
|
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Additional |
|
|
|
|
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|
Other |
|
|
|
|
|
|
Unearned |
|
|
Compensation - |
|
|
|
|
|
|
Stock |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
Compensation - |
|
|
Restricted |
|
|
|
|
(Dollars in thousands) |
|
Outstanding |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Stock |
|
|
ESOP |
|
|
Shares |
|
|
Total |
|
Six Months Ended June 30, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
Net loss |
|
|
|
|
|
|
|
|
|
|
(146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(146 |
) |
Change in net unrealized loss on securities available for
sale, net of reclassification adjustment and tax effects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,968 |
|
Change in prior service costs and
actuarial losses, net of tax effects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
(228,451 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,971 |
) |
|
|
|
|
|
|
|
|
|
|
(1,971 |
) |
ESOP shares earned (20,700 shares) |
|
|
|
|
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207 |
|
|
|
|
|
|
|
171 |
|
Purchase of 164,000 shares
for restricted share plan |
|
|
(164,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,468 |
) |
|
|
(1,468 |
) |
Share-based compensation expense |
|
|
|
|
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183 |
|
|
|
377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009 |
|
|
22,357,549 |
|
|
$ |
100,842 |
|
|
$ |
105,280 |
|
|
$ |
(255 |
) |
|
$ |
(1,971 |
) |
|
$ |
(7,659 |
) |
|
$ |
(3,484 |
) |
|
$ |
192,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 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 |
|
|
|
|
|
|
|
|
|
|
6,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,102 |
|
Change in net unrealized gain on securities available
for sale, net of reclassification adjustment and tax
effects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370 |
|
Change in prior service costs and
actuarial losses, net of tax effects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP shares earned (20,700 shares) |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207 |
|
|
|
|
|
|
|
217 |
|
Share-based compensation expense |
|
|
2,620 |
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
247 |
|
|
|
498 |
|
Purchase of treasury stock |
|
|
(109,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,236 |
) |
|
|
|
|
|
|
|
|
|
|
(1,236 |
) |
Issuance of 514,109 shares to Meridian Financial Services,
Incorporated, the mutual holding company |
|
|
514,109 |
|
|
|
(4,505 |
) |
|
|
|
|
|
|
|
|
|
|
4,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
|
22,505,594 |
|
|
$ |
96,728 |
|
|
$ |
115,291 |
|
|
$ |
6,055 |
|
|
$ |
(1,266 |
) |
|
$ |
(7,245 |
) |
|
$ |
(3,095 |
) |
|
$ |
206,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
3
MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
6,102 |
|
|
$ |
(146 |
) |
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Amortization of acquisition fair value adjustments |
|
|
(744 |
) |
|
|
|
|
Earned ESOP shares |
|
|
217 |
|
|
|
171 |
|
Provision for loan losses |
|
|
2,168 |
|
|
|
1,114 |
|
Amortization of net deferred loan origination fees |
|
|
(781 |
) |
|
|
(53 |
) |
Net amortization of securities available for sale |
|
|
85 |
|
|
|
616 |
|
Depreciation and amortization expense |
|
|
1,229 |
|
|
|
661 |
|
Other-than-temporary impairment losses |
|
|
|
|
|
|
373 |
|
Gains on sales of loans held in portfolio, net |
|
|
(352 |
) |
|
|
|
|
(Gain) loss and provision for foreclosed real estate |
|
|
(29 |
) |
|
|
322 |
|
Deferred income tax benefit |
|
|
(2,178 |
) |
|
|
(40 |
) |
Income from bank-owned life insurance |
|
|
(579 |
) |
|
|
(454 |
) |
Equity (income) loss on investment in affiliate bank |
|
|
(176 |
) |
|
|
25 |
|
Share-based compensation expense |
|
|
498 |
|
|
|
377 |
|
Net changes in: |
|
|
|
|
|
|
|
|
Loans held for sale |
|
|
1,023 |
|
|
|
(5,911 |
) |
Accrued interest receivable |
|
|
(21 |
) |
|
|
(153 |
) |
Prepaid deposit insurance |
|
|
1,001 |
|
|
|
|
|
Other assets |
|
|
3,822 |
|
|
|
1,142 |
|
Accrued expenses and other liabilities |
|
|
(774 |
) |
|
|
2,465 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
10,511 |
|
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
29,030 |
|
|
|
29,878 |
|
Proceeds from redemption of mutual funds |
|
|
5,254 |
|
|
|
5,257 |
|
Purchases |
|
|
(40,030 |
) |
|
|
(75,421 |
) |
Loans originated, net of principal payments received |
|
|
(50,400 |
) |
|
|
(58,917 |
) |
Proceeds from sales of fixed rate loans held in portfolio |
|
|
34,488 |
|
|
|
|
|
Purchases of premises and equipment |
|
|
(318 |
) |
|
|
(1,463 |
) |
Purchase of Federal Home Loan Bank stock |
|
|
|
|
|
|
(91 |
) |
Capitalized costs on foreclosed real estate |
|
|
(322 |
) |
|
|
(776 |
) |
Proceeds from sales of foreclosed real estate |
|
|
1,603 |
|
|
|
643 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(6,273 |
) |
|
|
(95,890 |
) |
|
|
|
|
|
|
|
(continued)
See accompanying notes to unaudited consolidated financial statements.
4
MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
52,044 |
|
|
|
116,927 |
|
Net change in borrowings with maturities
less than three months |
|
|
(8,822 |
) |
|
|
(2,008 |
) |
Proceeds from Federal Home Loan Bank advances
with maturities of three months or more |
|
|
15,475 |
|
|
|
|
|
Repayment of Federal Home Loan Bank advances
with maturities of three months or more |
|
|
(10,050 |
) |
|
|
(475 |
) |
Purchase of stock for equity incentive plan |
|
|
|
|
|
|
(1,468 |
) |
Purchase of treasury stock |
|
|
(1,236 |
) |
|
|
(1,971 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
47,411 |
|
|
|
111,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
51,649 |
|
|
|
15,624 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
19,966 |
|
|
|
20,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
71,615 |
|
|
$ |
35,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Interest paid on deposits |
|
$ |
8,452 |
|
|
$ |
10,398 |
|
Interest paid on borrowings |
|
|
1,545 |
|
|
|
1,048 |
|
Income taxes paid |
|
|
2,820 |
|
|
|
190 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Transfers from loans to foreclosed real estate |
|
|
951 |
|
|
|
635 |
|
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 |
|
|
450,561 |
|
|
|
|
|
Fair value of liabilities assumed |
|
|
464,983 |
|
|
|
|
|
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 and six months ended
June 30, 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 which changed
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.
In July 2010, the FASB issued Accounting Standards Update (ASU) 2010-20, Receivables,
Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.
This ASU requires an entity to provide disclosures that facilitate financial statement users
evaluation of (1) the nature of credit risk inherent in the entitys loan portfolio (2) how that
risk is analyzed and assessed in arriving at the allowance for loan and lease losses and (3) the
changes and reasons for those changes in the allowance for loan and lease losses. For public
entities, the disclosures as of the end of a reporting period are effective for interim and annual
reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs
during a reporting period are effective for interim and annual reporting periods beginning on or
after December 15, 2010. The adoption of this ASU will have a significant impact on the
disclosures in the Companys December 31, 2010 consolidated financial statements.
6
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 assets and liabilities
is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Fair value is best determined
based upon quoted market prices. However, in many instances, there are no quoted market prices for
the Companys various assets and liabilities. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used including the discount rate and
estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument.
The Company groups its assets and liabilities measured at fair value in three levels, based on
the markets in which the assets and liabilities are traded and the reliability of the assumptions
used to determine fair value.
Level 1 Valuation is based on quoted prices in active markets for identical assets or
liabilities. Valuations are obtained from readily available pricing sources for market transactions
involving identical assets or liabilities.
Level 2 Valuation is based on observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilities.
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. Marketable equity securities are measured at fair value utilizing quoted market
prices (Level 1). Corporate bonds, obligations of government-sponsored enterprises, municipal
bonds, 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. The Company
utilizes a third-party pricing service to obtain fair values for securities.
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.
7
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.
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.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair |
|
(In thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Value |
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
|
|
|
$ |
230,167 |
|
|
$ |
|
|
|
$ |
230,167 |
|
Government-sponsored enterprises |
|
|
|
|
|
|
10,925 |
|
|
|
|
|
|
|
10,925 |
|
Municipal bonds |
|
|
|
|
|
|
4,396 |
|
|
|
|
|
|
|
4,396 |
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises |
|
|
|
|
|
|
41,180 |
|
|
|
|
|
|
|
41,180 |
|
Private label |
|
|
|
|
|
|
15,617 |
|
|
|
|
|
|
|
15,617 |
|
Other debt securities |
|
|
|
|
|
|
666 |
|
|
|
|
|
|
|
666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
|
|
|
|
302,951 |
|
|
|
|
|
|
|
302,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
30,132 |
|
|
|
|
|
|
|
|
|
|
|
30,132 |
|
Money market mutual funds |
|
|
11,754 |
|
|
|
|
|
|
|
|
|
|
|
11,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities |
|
|
41,886 |
|
|
|
|
|
|
|
|
|
|
|
41,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
$ |
41,886 |
|
|
$ |
302,951 |
|
|
$ |
|
|
|
$ |
344,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
rmortgage-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 transfers in or out of Levels 1 and 2 for the six months ended June 30, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2010 |
|
|
June 30, 2010 |
|
|
June 30, 2010 |
|
(In thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total Losses |
|
|
Total Losses |
|
Impaired loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
9,222 |
|
|
$ |
(358 |
) |
|
$ |
(752 |
) |
Foreclosed real esate |
|
|
|
|
|
|
|
|
|
|
4,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
13,443 |
|
|
$ |
(358 |
) |
|
$ |
(752 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, 2009 |
|
|
June 30, 2009 |
|
|
June 30, 2009 |
|
(In thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total Losses |
|
|
Total Losses |
|
Impaired loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,700 |
|
|
$ |
(195 |
) |
|
$ |
(304 |
) |
Foreclosed real esate |
|
|
|
|
|
|
|
|
|
|
2,869 |
|
|
|
(226 |
) |
|
|
(286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,569 |
|
|
$ |
(421 |
) |
|
$ |
(590 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2010 and December 31, 2009, the fair value of foreclosed real estate is based on
appraised value of the collateral, considering discounting factors and adjusted for selling costs.
The losses on foreclosed real estate represent the adjustment in valuation recorded during the time
periods indicated, and not for losses incurred on the sale of the property. At June 30, 2010 and
December 31, 2009, the amount of impaired loans 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 losses on impaired
loans are 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
(In thousands) |
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
71,615 |
|
|
$ |
71,615 |
|
|
$ |
19,966 |
|
|
$ |
19,966 |
|
Certificates of deposit |
|
|
3,100 |
|
|
|
3,107 |
|
|
|
3,000 |
|
|
|
3,028 |
|
Securities available for sale |
|
|
344,837 |
|
|
|
344,837 |
|
|
|
293,367 |
|
|
|
293,367 |
|
Federal Home Loan Bank stock |
|
|
12,538 |
|
|
|
12,538 |
|
|
|
4,605 |
|
|
|
4,605 |
|
Loans and loans held for sale, net |
|
|
1,177,617 |
|
|
|
1,192,988 |
|
|
|
814,255 |
|
|
|
813,393 |
|
Accrued interest receivable |
|
|
7,625 |
|
|
|
7,625 |
|
|
|
6,231 |
|
|
|
6,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
1,354,074 |
|
|
|
1,359,412 |
|
|
|
922,475 |
|
|
|
927,385 |
|
Borrowings |
|
|
152,102 |
|
|
|
158,681 |
|
|
|
75,410 |
|
|
|
76,782 |
|
Accrued interest payable |
|
|
1,065 |
|
|
|
1,065 |
|
|
|
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 June 30, 2010 and 2009, options for
306,840 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 and six months ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Dollars in thousands, except per share amounts) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income (loss) available to common stockholders |
|
$ |
3,242 |
|
|
$ |
962 |
|
|
$ |
6,102 |
|
|
$ |
(146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
22,124,539 |
|
|
|
22,024,179 |
|
|
|
22,128,822 |
|
|
|
21,991,924 |
|
Effect of dilutive securities |
|
|
16,058 |
|
|
|
|
|
|
|
8,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
22,140,597 |
|
|
|
22,024,179 |
|
|
|
22,136,851 |
|
|
|
21,991,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.15 |
|
|
$ |
0.04 |
|
|
$ |
0.28 |
|
|
$ |
(0.01 |
) |
Diluted |
|
$ |
0.15 |
|
|
$ |
0.04 |
|
|
$ |
0.28 |
|
|
$ |
(0.01 |
) |
5. Securities
All securities held by the Company as of June 30, 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 June 30, 2010, the securities portfolio was $344.8 million, or 20.0% of total assets. At
that date, 66.7% of the securities portfolio, or $230.2 million, was invested in corporate bonds.
The amortized cost and fair value of corporate bonds in the financial services sector was $65.7
million and $66.9 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, municipal bonds, 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 common
stocks.
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 |
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
$ |
65,669 |
|
|
$ |
1,937 |
|
|
$ |
(660 |
) |
|
$ |
66,946 |
|
Industry and manufacturing |
|
|
46,042 |
|
|
|
2,178 |
|
|
|
|
|
|
|
48,220 |
|
Consumer products and services |
|
|
46,790 |
|
|
|
2,530 |
|
|
|
|
|
|
|
49,320 |
|
Other |
|
|
62,852 |
|
|
|
2,845 |
|
|
|
(16 |
) |
|
|
65,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate bonds |
|
|
221,353 |
|
|
|
9,490 |
|
|
|
(676 |
) |
|
|
230,167 |
|
Government-sponsored enterprises |
|
|
10,901 |
|
|
|
57 |
|
|
|
(33 |
) |
|
|
10,925 |
|
Municipal bonds |
|
|
4,382 |
|
|
|
21 |
|
|
|
(7 |
) |
|
|
4,396 |
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises |
|
|
40,073 |
|
|
|
1,114 |
|
|
|
(7 |
) |
|
|
41,180 |
|
Private label |
|
|
15,044 |
|
|
|
828 |
|
|
|
(255 |
) |
|
|
15,617 |
|
Other debt securities |
|
|
666 |
|
|
|
|
|
|
|
|
|
|
|
666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
292,419 |
|
|
|
11,510 |
|
|
|
(978 |
) |
|
|
302,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
30,086 |
|
|
|
1,849 |
|
|
|
(1,803 |
) |
|
|
30,132 |
|
Money market mutual funds |
|
|
11,756 |
|
|
|
|
|
|
|
(2 |
) |
|
|
11,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities |
|
|
41,842 |
|
|
|
1,849 |
|
|
|
(1,805 |
) |
|
|
41,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
$ |
334,261 |
|
|
$ |
13,359 |
|
|
$ |
(2,783 |
) |
|
$ |
344,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
rmortgage-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 June 30, 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 |
|
$ |
11,543 |
|
|
$ |
11,718 |
|
|
$ |
48,559 |
|
|
$ |
49,606 |
|
|
$ |
5,567 |
|
|
$ |
5,622 |
|
|
$ |
65,669 |
|
|
$ |
66,946 |
|
Industry and manufacturing |
|
|
10,055 |
|
|
|
10,234 |
|
|
|
33,972 |
|
|
|
35,902 |
|
|
|
2,015 |
|
|
|
2,084 |
|
|
|
46,042 |
|
|
|
48,220 |
|
Consumer products and services |
|
|
15,293 |
|
|
|
15,594 |
|
|
|
31,497 |
|
|
|
33,726 |
|
|
|
|
|
|
|
|
|
|
|
46,790 |
|
|
|
49,320 |
|
Other |
|
|
18,078 |
|
|
|
18,359 |
|
|
|
43,741 |
|
|
|
46,270 |
|
|
|
1,033 |
|
|
|
1,052 |
|
|
|
62,852 |
|
|
|
65,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate bonds |
|
|
54,969 |
|
|
|
55,905 |
|
|
|
157,769 |
|
|
|
165,504 |
|
|
|
8,615 |
|
|
|
8,758 |
|
|
|
221,353 |
|
|
|
230,167 |
|
Government-sponsored
enterprises |
|
|
|
|
|
|
|
|
|
|
7,168 |
|
|
|
7,158 |
|
|
|
3,733 |
|
|
|
3,767 |
|
|
|
10,901 |
|
|
|
10,925 |
|
Municipal bonds |
|
|
1,368 |
|
|
|
1,382 |
|
|
|
500 |
|
|
|
502 |
|
|
|
2,514 |
|
|
|
2,512 |
|
|
|
4,382 |
|
|
|
4,396 |
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored
enterprises |
|
|
|
|
|
|
|
|
|
|
146 |
|
|
|
147 |
|
|
|
39,927 |
|
|
|
41,033 |
|
|
|
40,073 |
|
|
|
41,180 |
|
Private label |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,044 |
|
|
|
15,617 |
|
|
|
15,044 |
|
|
|
15,617 |
|
Other debt securities |
|
|
|
|
|
|
|
|
|
|
140 |
|
|
|
140 |
|
|
|
526 |
|
|
|
526 |
|
|
|
666 |
|
|
|
666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
56,337 |
|
|
$ |
57,287 |
|
|
$ |
165,723 |
|
|
$ |
173,451 |
|
|
$ |
70,359 |
|
|
$ |
72,213 |
|
|
$ |
292,419 |
|
|
$ |
302,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
$ |
451 |
|
|
$ |
4,701 |
|
|
$ |
209 |
|
|
$ |
6,792 |
|
Other |
|
|
16 |
|
|
|
3,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate bonds |
|
|
467 |
|
|
|
8,666 |
|
|
|
209 |
|
|
|
6,792 |
|
Government-sponsored enterprises |
|
|
33 |
|
|
|
3,235 |
|
|
|
|
|
|
|
|
|
Municipal bonds |
|
|
7 |
|
|
|
1,507 |
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises |
|
|
7 |
|
|
|
567 |
|
|
|
|
|
|
|
|
|
Private label |
|
|
255 |
|
|
|
3,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
769 |
|
|
|
17,460 |
|
|
|
209 |
|
|
|
6,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
1,383 |
|
|
|
12,764 |
|
|
|
420 |
|
|
|
2,892 |
|
Money market mutual funds |
|
|
2 |
|
|
|
1,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities |
|
|
1,385 |
|
|
|
14,088 |
|
|
|
420 |
|
|
|
2,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,154 |
|
|
$ |
31,548 |
|
|
$ |
629 |
|
|
$ |
9,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
rmortgage-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 six
months ended June 30, 2010. Management evaluates securities for other-than-temporary impairment on
a quarterly basis, with more frequent evaluation for selected issuers.
As of June 30, 2010, the net unrealized gain on the total debt securities portfolio was $10.5
million. At June 30, 2010, 22 debt securities had unrealized losses with an aggregate depreciation
of 3.9% 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 June 30, 2010.
As of June 30, 2010, the net unrealized gain on the total equity portfolio was $44,000. At
June 30, 2010, 40 marketable equity securities had unrealized losses with an aggregate depreciation
of 9.6% from the Companys cost basis. Twelve equity securities had market value declines of 15.0%
or more, with net unrealized losses of $936,000. 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 co-operative 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, 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 the average of 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 in connection with the acquisition.
The Company accounted for the acquisition using the acquisition method. Accordingly, the
Company recorded merger and acquisition expenses of $220,000 during the six months ended June 30,
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 |
|
|
345,784 |
|
Bank -owned life insurance |
|
|
8,939 |
|
Foreclosed real estate, net |
|
|
1,653 |
|
Premises and equipment, net |
|
|
10,618 |
|
Accrued interest receivable |
|
|
1,373 |
|
Deferred tax asset, net |
|
|
8,896 |
|
Goodwill |
|
|
11,230 |
|
Other assets |
|
|
3,600 |
|
|
|
|
|
Total assets acquired |
|
$ |
464,983 |
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
380,550 |
|
FHLB Borrowings |
|
|
80,932 |
|
Accrued expenses and other liabilities |
|
|
3,501 |
|
|
|
|
|
Total liabilities assumed |
|
$ |
464,983 |
|
|
|
|
|
As noted above, the Company acquired loans at fair value of $345.8 million. Included in this
amount was $20.4 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 credit deterioration as of the acquisition date resulted in a nonaccretable
difference of $7.1 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 June 30, 2010, the carrying amount of these loans with evidence of credit deterioration at
the acquisition date was $22.1 million, and the remaining nonaccretable difference was $5.7
million.
14
The following table summarizes the unaudited pro forma financial results of operations as if
the Company acquired Mt. Washington on January 1, 2009 (2009 amounts represent combined results for
the Company and Mt. Washington):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands, except per share amounts) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
15,279 |
|
|
$ |
12,312 |
|
|
$ |
30,207 |
|
|
$ |
23,973 |
|
Net income (loss) |
|
|
3,242 |
|
|
|
72 |
|
|
|
6,311 |
|
|
|
(886 |
) |
Income (loss) per share Basic |
|
$ |
0.15 |
|
|
$ |
|
|
|
$ |
0.29 |
|
|
$ |
(0.04 |
) |
Income (loss) per share Diluted |
|
|
0.15 |
|
|
|
|
|
|
|
0.29 |
|
|
|
(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 recent legislation restructuring of 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, as updated by
subsequent filings with the SEC. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such statements. Except as
required by applicable law or regulation, 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 June 30, 2010 and December 31, 2009
Total assets increased $516.8 million, or 42.7%, to $1.7 billion at June 30, 2010 from $1.2
billion at December 31, 2009, reflecting $465.0 million of assets acquired in the Mt. Washington
merger. Cash and cash equivalents increased $51.6 million to $71.6 million at June 30, 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 $51.5 million, or 17.5%, to $344.8 million at June
30, 2010 from $293.4 million at December 31, 2009, including $45.5 million of securities acquired
in Mt. Washington merger. Net loans increased $359.5 million, or 44.2%, to $1.2 billion at June 30,
2010 from $813.3 million at December 31, 2009, primarily due to $345.8 million of loans acquired in
the Mt. Washington merger and organic loan growth of $50.4 million, partially offset by sales of
fixed-rate bi-weekly mortgage loans totaling $34.1 million in the first quarter of 2010.
Total deposits increased $431.6 million, or 46.8%, to $1.4 billion at June 30, 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 $51.0 million. Total borrowings increased
$76.7 million, or 101.7%, to $152.1 million at June 30, 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 $6.1 million, or 3.0%, to $206.5 million at June 30,
2010, from $200.4 million at December 31, 2009. The increase was due primarily to $6.1 million in
net income. Stockholders equity to assets was 11.95% at June 30, 2010, compared to 16.54% at
December 31, 2009. Book value per share increased to $9.17 at June 30, 2010 from $9.07 at December
31, 2009. Tangible book value per share decreased to $8.68 at June 30, 2010 from $9.07 at December
31, 2009, primarily due to goodwill resulting from the Mt. Washington merger.
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 June 30, 2010 and December 31, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
(Dollars in thousands) |
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family |
|
$ |
425,163 |
|
|
|
35.8 |
% |
|
$ |
276,122 |
|
|
|
33.5 |
% |
Multi-family |
|
|
123,876 |
|
|
|
10.5 |
|
|
|
53,402 |
|
|
|
6.5 |
|
Commercial real estate |
|
|
396,265 |
|
|
|
33.4 |
|
|
|
350,648 |
|
|
|
42.6 |
|
Construction |
|
|
127,418 |
|
|
|
10.8 |
|
|
|
94,102 |
|
|
|
11.4 |
|
Home equity lines
of credit |
|
|
72,937 |
|
|
|
6.2 |
|
|
|
29,979 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans |
|
|
1,145,659 |
|
|
|
96.7 |
|
|
|
804,253 |
|
|
|
97.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business loans |
|
|
30,635 |
|
|
|
2.6 |
|
|
|
18,029 |
|
|
|
2.2 |
|
Consumer loans |
|
|
7,901 |
|
|
|
0.7 |
|
|
|
1,205 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
1,184,195 |
|
|
|
100.0 |
% |
|
|
823,487 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan
origination fees |
|
|
(164 |
) |
|
|
|
|
|
|
(945 |
) |
|
|
|
|
Allowance for loan losses |
|
|
(11,265 |
) |
|
|
|
|
|
|
(9,242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
$ |
1,172,766 |
|
|
|
|
|
|
$ |
813,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Asset Quality
Non-Performing Assets. Non-performing assets include loans that are 90 or more days past due
or on non-accrual status and real estate and other loan collateral acquired through foreclosure and
repossession. Loans 90 days or more past due may remain on an accrual basis if adequately
collateralized and in the process of collection. At June 30, 2010, the Company did not have any
accruing loans past due 90 days or more. For non-accrual loans, interest previously accrued but
not collected is reversed and charged against income at the time a loan is placed on non-accrual
status. 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 June 30, 2010 and December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
Loans accounted for on a non-accrual basis: |
|
|
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
|
|
One-to four-family |
|
$ |
11,686 |
|
|
$ |
4,098 |
|
Multi-family |
|
|
3,141 |
|
|
|
850 |
|
Commercial real estate |
|
|
3,050 |
|
|
|
7,388 |
|
Home equity lines of credit |
|
|
1,114 |
|
|
|
|
|
Construction |
|
|
13,104 |
|
|
|
9,224 |
|
|
|
|
|
|
|
|
Total real estate loans |
|
|
32,095 |
|
|
|
21,560 |
|
|
|
|
|
|
|
|
Commercial business loans |
|
|
209 |
|
|
|
|
|
Consumer loans |
|
|
14 |
|
|
|
138 |
|
|
|
|
|
|
|
|
Total non-accrual loans |
|
|
32,318 |
|
|
|
21,698 |
|
|
|
|
|
|
|
|
|
|
Foreclosed assets |
|
|
4,221 |
|
|
|
2,869 |
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
36,539 |
|
|
$ |
24,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans to total loans |
|
|
2.73 |
% |
|
|
2.63 |
% |
Non-accrual loans to total assets |
|
|
1.87 |
% |
|
|
1.79 |
% |
Non-performing assets to total assets |
|
|
2.11 |
% |
|
|
2.03 |
% |
Non-performing loans increased to $32.3 million, or 2.73% of total loans outstanding at June
30, 2010, from $21.7 million, or 2.63% of total loans outstanding at December 31, 2009.
Non-performing assets increased to $36.5 million, or 2.11% of total assets, at June 30, 2010, from
$24.6 million, or 2.03% of total assets, at December 31, 2009. Non-performing assets at June 30,
2010 were comprised of $13.1 million of construction loans, $11.7 million of one-to four-family
mortgage loans, $3.1 million of multi-family mortgage loans, $3.1 million of commercial real estate
loans, $1.1 million of other loans and foreclosed real estate of $4.2 million. Non-performing
assets at June 30, 2010 include $12.8 million acquired in the Mt. Washington merger comprised of
$11.3 million of non-performing loans and $1.5 million of foreclosed real estate. Interest income
that would have been recorded for the six months ended June 30, 2010 had nonaccruing loans and
accruing loans past due 90 days or more been current according to their original terms amounted to
$969,000.
Troubled Debt Restructurings. The following table summarizes the Companys troubled debt
restructurings (TDRs) at June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
TDRs on accrual status: |
|
|
|
|
|
|
|
|
One-to four-family real estate |
|
$ |
185 |
|
|
$ |
189 |
|
Commercial real estate |
|
|
4,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,969 |
|
|
|
189 |
|
|
|
|
|
|
|
|
TDRs on non-accrual status: |
|
|
|
|
|
|
|
|
One-to four-family real estate |
|
|
721 |
|
|
|
1,148 |
|
Construction |
|
|
|
|
|
|
591 |
|
|
|
|
|
|
|
|
|
|
|
721 |
|
|
|
1,739 |
|
|
|
|
|
|
|
|
Total TDRs |
|
$ |
5,690 |
|
|
$ |
1,928 |
|
|
|
|
|
|
|
|
18
The increase in commercial real estate TDRs was due to a $4.8 million loan which was modified
to grant an interest rate reduction of 300 basis points on an interest-only basis for two years.
Modifications of other TDRs consist of either rate reductions of 160 basis points on average or
provisions for interest-only payments for specified periods up to 12 months. The Company has
generally been successful with the concessions it has offered to borrowers to date. The Company
generally returns TDRs to accrual status when they have sustained payments for six months based on
the restructured terms.
Potential Problem Loans. Certain loans are identified during the Companys loan review
process that are currently performing in accordance with their contractual terms and we expect to
receive payment in full of principal and interest, but it is deemed probable that we will be unable
to collect all the scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. This may result from deteriorating conditions such as cash
flows, collateral values or creditworthiness of the borrower. These loans are classified as
impaired but are not accounted for on a non-accrual basis. There were no potential problem loans
identified at June 30, 2010 or December 31, 2009 other than those already classified as
non-performing, impaired or troubled debt restructurings as of those dates.
Allowance for Loan Losses. The allowance for loan losses is maintained at levels considered
adequate by management to provide for probable loan losses inherent in the loan portfolio 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 and six months ended June 30, 2010
and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Beginning balance |
|
$ |
10,629 |
|
|
$ |
7,456 |
|
|
$ |
9,242 |
|
|
$ |
6,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
794 |
|
|
|
568 |
|
|
|
2,168 |
|
|
|
1,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans |
|
|
157 |
|
|
|
164 |
|
|
|
158 |
|
|
|
166 |
|
Commercial business loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
29 |
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
186 |
|
|
|
164 |
|
|
|
208 |
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans |
|
|
23 |
|
|
|
260 |
|
|
|
46 |
|
|
|
260 |
|
Commercial business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
5 |
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
28 |
|
|
|
260 |
|
|
|
63 |
|
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries |
|
|
(158 |
) |
|
|
96 |
|
|
|
(145 |
) |
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
11,265 |
|
|
$ |
8,120 |
|
|
$ |
11,265 |
|
|
$ |
8,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to non-accrual loans |
|
|
34.86 |
% |
|
|
47.61 |
% |
|
|
34.86 |
% |
|
|
47.61 |
% |
Allowance to total loans outstanding |
|
|
0.95 |
% |
|
|
1.06 |
% |
|
|
0.95 |
% |
|
|
1.06 |
% |
Net (charge-offs) recoveries to average
loans outstanding (annualized) |
|
|
(0.05 |
)% |
|
|
0.05 |
% |
|
|
(0.02 |
)% |
|
|
0.03 |
% |
The Companys provision for loan losses was $794,000 for the quarter ended June 30, 2010
compared to $568,000 for the quarter ended June 30, 2009. For
the six months ended June 30, 2010,
the provision for loan losses was $2.2 million compared to $1.1 million for the six months ended
June 30, 2009. These increases were 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 $11.3 million or 0.95% of total loans outstanding at
June 30, 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 $345.8 million of loans acquired in the Mt. Washington merger at fair value and the
application of current accounting guidance that precludes the combination of allowance for loan
loss amounts associated with such loans acquired. The Company continues to assess the adequacy of
its allowance for loan losses in accordance with established policies.
19
The following table sets forth the breakdown of the allowance for loan losses by loan category
at June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
% of |
|
|
Loans in |
|
|
|
|
|
|
% of |
|
|
Loans in |
|
|
|
|
|
|
|
Allowance |
|
|
Category |
|
|
|
|
|
|
Allowance |
|
|
Category |
|
|
|
|
|
|
|
to Total |
|
|
to Total |
|
|
|
|
|
|
to Total |
|
|
to Total |
|
(Dollars in thousands) |
|
Amount |
|
|
Allowance |
|
|
Loans |
|
|
Amount |
|
|
Allowance |
|
|
Loans |
|
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family |
|
$ |
2,328 |
|
|
|
20.7 |
% |
|
|
35.9 |
% |
|
$ |
1,730 |
|
|
|
18.7 |
% |
|
|
33.5 |
% |
Multi-family |
|
|
1,046 |
|
|
|
9.3 |
|
|
|
10.4 |
|
|
|
467 |
|
|
|
5.1 |
|
|
|
6.5 |
|
Commercial real
estate |
|
|
4,877 |
|
|
|
43.3 |
|
|
|
33.5 |
|
|
|
4,435 |
|
|
|
48.0 |
|
|
|
42.6 |
|
Home equity lines
of credit |
|
|
129 |
|
|
|
1.1 |
|
|
|
6.2 |
|
|
|
128 |
|
|
|
1.4 |
|
|
|
3.6 |
|
Construction |
|
|
2,388 |
|
|
|
21.2 |
|
|
|
10.7 |
|
|
|
1,859 |
|
|
|
20.1 |
|
|
|
11.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate
loans |
|
|
10,768 |
|
|
|
95.6 |
|
|
|
96.7 |
|
|
|
8,619 |
|
|
|
93.3 |
|
|
|
97.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
loans |
|
|
345 |
|
|
|
3.1 |
|
|
|
2.6 |
|
|
|
586 |
|
|
|
6.3 |
|
|
|
2.2 |
|
Consumer loans |
|
|
152 |
|
|
|
1.3 |
|
|
|
0.7 |
|
|
|
37 |
|
|
|
0.4 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,265 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
$ |
9,242 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allowance consists of specific and general components. The specific component relates to
loans that are classified as impaired, whereby an allowance is established when the discounted cash
flows, collateral value or observable market price of the impaired loan is lower than the carrying
value of that loan. The general component relates to pools of non-impaired loans and is based on
historical loss experience adjusted for qualitative factors.
The Company had impaired loans totaling $31.5 million and $29.3 million as of June 30, 2010
and December 31, 2009, respectively. At June 30, 2010, impaired loans totaling $10.4 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
$30.4 million and $16.4 million for the six months ended June 30, 2010 and 2009, respectively.
A loan is considered impaired when, based on current information and events, it is probable
that we will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Impairment is measured on a loan by loan basis
by either the present value of expected future cash flows discounted at the loans effective
interest rate, the loans obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.
Accordingly, we do not separately identify individual one-to four-family residential and consumer
loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring.
The Company periodically may agree to modify the contractual terms of loans. When a loan is
modified and a concession is made to a borrower experiencing financial difficulty, the modification
is considered a TDR. All TDRs are initially classified as impaired.
20
We review residential and commercial loans for impairment based on the fair value of
collateral, if collateral-dependent, or expected cash flows. The Companys real estate loans and
commercial business loans are primarily collateral-dependent loans. Management has reviewed the
collateral value for all such impaired and non-accrual loans as of June 30, 2010 and considered any
probable loss in determining the allowance for loan losses. For those loans measured for impairment
based on the collateral value, we will do the following:
Residential loans:
|
|
When a loan becomes seriously delinquent, generally 60 days past due, internal valuations
are completed by the Companys in-house appraiser who is a Massachusetts certified residential
appraiser. The Company obtains third party appraisals, which are generally the basis for
charge-offs when a loss is indicated, prior to the foreclosure sale. The Company generally is
able to complete the foreclosure process within nine to 12 months from receipt of the internal
valuation. |
|
|
The Company makes adjustments to appraisals based on updated economic information, if
necessary, prior to the foreclosure sale. The Company reviews current market factors to
determine whether, in managements opinion, downward adjustments to the most recent appraised
values may be warranted. If so, management uses their best estimate to apply an estimated
discount rate to the appraised values to reflect current market factors. |
|
|
Appraisals received by the Company are based on comparable property sales. |
|
|
Loans that are partially charged off generally remain on nonaccrual status until
foreclosure or such time that they are performing in accordance with the terms of the loan and
have a sustained payment history of at least six months. |
|
|
The accrual of interest is generally discontinued when the contractual payment of principal
or interest has become 90 days past due or management has serious doubts about further
collectibility of principal or interest, even though the loan is currently performing. Loan
losses are charged against the allowance when we believe the uncollectibility of a loan
balance is confirmed; generally when third party appraised values, less estimated costs to
sell, are less than the Companys carrying values. |
Commercial loans:
|
|
The Company obtains a third party appraisal at the time a loan is deemed to be in a workout
situation and there is no indication that the loan will return to performing status, generally
when the loan is 90 days or more past due. One or more updated third party appraisals are
obtained prior to foreclosure depending on the foreclosure timeline. In general the Company
orders new appraisals every 180 days on loans in the process of foreclosure. |
|
|
The Company makes downward adjustments to appraisals when conditions warrant. Adjustments
are made by applying a discount to the appraised value based on occupancy, recent changes in
condition to the property and certain other factors. Adjustments are also made to appraisals
for construction projects involving residential properties based on recent sales of units.
Losses are recognized if the appraised value less estimated costs to sell is less than the
Companys carrying value of the loan. |
|
|
Appraisals received by the Company are generally based on a reconciliation of comparable
property sales and income capitalization approaches. For loans on construction projects
involving residential properties, appraisals are generally based on a discounted cash flow
analysis assuming a bulk sale to a single buyer. |
|
|
Loans that are partially charged off generally remain on nonaccrual status until
foreclosure or such time that they are performing in accordance with the terms of the loan and
have a sustained payment history of at least six months. |
|
|
The accrual of interest is generally discontinued when the contractual payment of principal
or interest has become 90 days past due or management has serious doubts about further
collectibility of principal or interest, even though the loan is currently performing. Loan
losses are charged against the allowance when we believe the uncollectibility of a loan
balance is confirmed, generally when appraised values (as adjusted values, if applicable) less
estimated costs to sell, are less than the Companys carrying values. |
21
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
(Dollars in thousands) |
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
NOW and demand deposits |
|
$ |
227,762 |
|
|
|
16.8 |
% |
|
$ |
102,386 |
|
|
|
11.1 |
% |
Money market deposits |
|
|
303,656 |
|
|
|
22.4 |
|
|
|
247,006 |
|
|
|
26.8 |
|
Regular and other deposits |
|
|
186,232 |
|
|
|
13.8 |
|
|
|
128,016 |
|
|
|
13.9 |
|
Certificates of deposit |
|
|
636,424 |
|
|
|
47.0 |
|
|
|
445,067 |
|
|
|
48.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,354,074 |
|
|
|
100.0 |
% |
|
$ |
922,475 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
Total borrowings increased $76.7 million, or 101.7%, to $152.1 million at June 30, 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 June 30, 2010 and December 31, 2009, FHLB advances
totaled $135.7 million and $62.3 million, respectively, with a weighted average rate of 2.53% and
2.77%, respectively. At June 30, 2010 and December 31, 2009, federal funds purchased totaled $16.4
million and $13.1 million, respectively, with a weighted average rate of 0.35%.
22
Results of Operations for the Three and Six Months Ended June 30, 2010 and June 30, 2009
Overview
We recorded net income of $3.2 million, or $0.15 per share (basic and diluted), for the
quarter ended June 30, 2010, compared to $962,000, or $0.04 per share (basic and diluted), for the
quarter ended June 30, 2009. Income before income tax expense increased $3.7 million to $5.0
million, the net result of increases in net interest income before provision for loan losses of
$6.8 million and non-interest income of $1.2 million, partially offset by increases in provision
for loan losses of $226,000 and non-interest expense of $4.1 million.
For the six months ended June 30, 2010, net income was $6.1 million, or $0.28 per share (basic
and diluted) compared to a net loss of $146,000, or $0.01 per share (basic and diluted), for the
six months ended June 30, 2009. Income before income tax expense increased $9.7 million to $9.5
million, the net result of increases in net interest income before provision for loan losses of
$13.9 million and non-interest income of $2.6 million, partially offset by increases in provision
for loan losses of $1.1 million and non-interest expense of $5.7 million. The six months ended June
30, 2010 reflects combined results following the acquisition of Mt. Washington Cooperative Bank on
January 4, 2010.
Return (loss) on average stockholders equity increased to 6.24% for the for the quarter ended
June 30, 2010 and 5.94% for the six months ended June 30, 2010, compared to 2.03% and (0.15)% for
the respective periods of 2009. Return (loss) on average assets was 0.75% for the quarter ended
June 30, 2010 and 0.72% for the six months ended June 30, 2010, compared to 0.33% and (0.03)% for
the respective periods of 2009.
Net Interest Income
Net interest income before provision for loan losses increased $6.8 million, or 80.3%, to
$15.3 million for the quarter ended June 30, 2010 from $8.5 million for the quarter ended June 30,
2009. The net interest rate spread and net interest margin were 3.67% and 3.85%, respectively, for
the quarter ended June 30, 2010 compared to 2.77% and 3.18%, respectively, for the quarter ended
June 30, 2009. For the six months ended June 30, 2010, net interest income before provision for
loan losses increased $13.9 million, or 86.4%, to $30.1 million from $16.1 million for the six
months ended June 30, 2009. The net interest rate spread and net interest margin were 3.71% and
3.88%, respectively, for the six months ended June 30, 2010 compared to 2.68% and 3.13%,
respectively, for the six months ended June 30, 2009. The increases in net interest income were
due primarily to the Mt. Washington merger and organic 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 $414.1 million, or 54.7%, to $1.2 billion, which was partially offset by
the decline in the yield on loans of nine basis points to 5.76% for the quarter ended June 30, 2010
compared to the quarter ended June 30, 2009. For the six months ended June 30, 2010, the average
balance of the loan portfolio increased by $419.2 million, or 56.5%, to $1.2 billion, which was
partially offset by the decline in the yield on loans of 15 basis points to 5.74% compared to the
six months ended June 30, 2009.
The Companys cost of deposits declined by 101 basis points to 1.39%, which was partially
offset by the increase in the average balance of interest-bearing deposits of $415.2 million, or
50.3%, to $1.2 billion for the quarter ended June 30, 2010 compared to the quarter ended June 30,
2009. For the six months ended June 30, 2010, the cost of deposits declined by 117 basis points to
1.41%, which was partially offset by the increase in the average balance of interest-bearing
deposits of $422.0 million, or 52.9%, to $1.2 billion compared to the six months ended June 30,
2009.
The Companys yield on interest-earning assets declined by five basis points to 5.17% for the
quarter ended June 30, 2010 compared to 5.22% for the quarter ended June 30, 2009, while the cost
of interest-bearing liabilities declined 95 basis points to 1.50% for the quarter ended June 30,
2010 compared to 2.45% for the quarter ended June 30, 2009. For the six months ended June 30,
2010, the yield on interest-earning assets declined by eight basis points to 5.22% compared to
5.30% for the six months ended June 30, 2009, while the cost of interest-bearing liabilities
declined 111 basis points to 1.51% compared to 2.62% for the six months ended June 30, 2009.
23
The following tables present information regarding average balances of assets and liabilities,
the total dollar amounts of interest income and dividends from average interest-earning assets, the
total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting
annualized average yields and costs. The yields and costs for the periods indicated are derived by
dividing income or expense by the average balances of assets or liabilities, respectively, for the
periods presented. For purposes of these tables, average balances have been calculated using daily
average balances, and non-accrual loans are included in average balances but are not deemed
material. Loan fees are included in interest income on loans but are not material. None of the
income reflected in the following table is tax-exempt income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
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) |
|
$ |
1,171,274 |
|
|
$ |
16,829 |
|
|
|
5.76 |
% |
|
$ |
757,131 |
|
|
$ |
11,046 |
|
|
|
5.85 |
% |
Securities and certificates of deposit |
|
|
351,891 |
|
|
|
3,634 |
|
|
|
4.14 |
|
|
|
290,433 |
|
|
|
2,867 |
|
|
|
3.96 |
|
Other interest-earning assets |
|
|
67,882 |
|
|
|
36 |
|
|
|
0.21 |
|
|
|
22,125 |
|
|
|
6 |
|
|
|
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
1,591,047 |
|
|
|
20,499 |
|
|
|
5.17 |
|
|
|
1,069,689 |
|
|
|
13,919 |
|
|
|
5.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets |
|
|
134,686 |
|
|
|
|
|
|
|
|
|
|
|
82,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,725,733 |
|
|
|
|
|
|
|
|
|
|
$ |
1,152,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits |
|
$ |
114,469 |
|
|
|
136 |
|
|
|
0.48 |
% |
|
$ |
37,913 |
|
|
|
37 |
|
|
|
0.39 |
% |
Money market deposits |
|
|
307,323 |
|
|
|
888 |
|
|
|
1.16 |
|
|
|
226,777 |
|
|
|
1,074 |
|
|
|
1.90 |
|
Savings and other deposits |
|
|
186,255 |
|
|
|
256 |
|
|
|
0.55 |
|
|
|
128,148 |
|
|
|
293 |
|
|
|
0.92 |
|
Certificates of deposit |
|
|
632,873 |
|
|
|
3,030 |
|
|
|
1.92 |
|
|
|
432,899 |
|
|
|
3,534 |
|
|
|
3.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
1,240,920 |
|
|
|
4,310 |
|
|
|
1.39 |
|
|
|
825,737 |
|
|
|
4,938 |
|
|
|
2.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances and other borrowings |
|
|
156,160 |
|
|
|
910 |
|
|
|
2.34 |
|
|
|
64,212 |
|
|
|
509 |
|
|
|
3.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,397,080 |
|
|
|
5,220 |
|
|
|
1.50 |
|
|
|
889,949 |
|
|
|
5,447 |
|
|
|
2.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
|
104,493 |
|
|
|
|
|
|
|
|
|
|
|
61,772 |
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities |
|
|
16,497 |
|
|
|
|
|
|
|
|
|
|
|
10,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,518,070 |
|
|
|
|
|
|
|
|
|
|
|
962,574 |
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
207,663 |
|
|
|
|
|
|
|
|
|
|
|
189,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,725,733 |
|
|
|
|
|
|
|
|
|
|
$ |
1,152,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets |
|
$ |
193,967 |
|
|
|
|
|
|
|
|
|
|
$ |
179,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
15,279 |
|
|
|
|
|
|
|
|
|
|
$ |
8,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (2) |
|
|
|
|
|
|
|
|
|
|
3.67 |
% |
|
|
|
|
|
|
|
|
|
|
2.77 |
% |
Net interest margin (3) |
|
|
|
|
|
|
|
|
|
|
3.85 |
% |
|
|
|
|
|
|
|
|
|
|
3.18 |
% |
Average interest-earning assets to
average interest-bearing liabilities |
|
|
|
|
|
|
113.88 |
% |
|
|
|
|
|
|
|
|
|
|
120.20 |
% |
|
|
|
|
|
|
|
(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. |
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
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) |
|
$ |
1,161,329 |
|
|
$ |
33,039 |
|
|
|
5.74 |
% |
|
$ |
742,085 |
|
|
$ |
21,691 |
|
|
|
5.89 |
% |
Securities and certificates of deposit |
|
|
346,640 |
|
|
|
7,297 |
|
|
|
4.25 |
|
|
|
272,016 |
|
|
|
5,657 |
|
|
|
4.19 |
|
Other interest-earning assets |
|
|
53,551 |
|
|
|
48 |
|
|
|
0.18 |
|
|
|
26,220 |
|
|
|
18 |
|
|
|
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
1,561,520 |
|
|
|
40,384 |
|
|
|
5.22 |
|
|
|
1,040,321 |
|
|
|
27,366 |
|
|
|
5.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets |
|
|
136,662 |
|
|
|
|
|
|
|
|
|
|
|
83,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,698,182 |
|
|
|
|
|
|
|
|
|
|
$ |
1,124,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits |
|
$ |
111,137 |
|
|
|
265 |
|
|
|
0.48 |
% |
|
$ |
37,265 |
|
|
|
83 |
|
|
|
0.45 |
% |
Money market deposits |
|
|
304,069 |
|
|
|
1,781 |
|
|
|
1.18 |
|
|
|
205,108 |
|
|
|
2,101 |
|
|
|
2.07 |
|
Savings and other deposits |
|
|
182,616 |
|
|
|
502 |
|
|
|
0.55 |
|
|
|
125,584 |
|
|
|
595 |
|
|
|
0.96 |
|
Certificates of deposit |
|
|
622,354 |
|
|
|
5,961 |
|
|
|
1.93 |
|
|
|
430,232 |
|
|
|
7,422 |
|
|
|
3.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
1,220,176 |
|
|
|
8,509 |
|
|
|
1.41 |
|
|
|
798,189 |
|
|
|
10,201 |
|
|
|
2.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances and other borrowings |
|
|
156,040 |
|
|
|
1,825 |
|
|
|
2.36 |
|
|
|
65,973 |
|
|
|
1,041 |
|
|
|
3.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,376,216 |
|
|
|
10,334 |
|
|
|
1.51 |
|
|
|
864,162 |
|
|
|
11,242 |
|
|
|
2.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
|
99,701 |
|
|
|
|
|
|
|
|
|
|
|
60,247 |
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities |
|
|
16,664 |
|
|
|
|
|
|
|
|
|
|
|
9,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,492,581 |
|
|
|
|
|
|
|
|
|
|
|
934,388 |
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
205,601 |
|
|
|
|
|
|
|
|
|
|
|
189,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,698,182 |
|
|
|
|
|
|
|
|
|
|
$ |
1,124,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets |
|
$ |
185,304 |
|
|
|
|
|
|
|
|
|
|
$ |
176,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
30,050 |
|
|
|
|
|
|
|
|
|
|
$ |
16,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (2) |
|
|
|
|
|
|
|
|
|
|
3.71 |
% |
|
|
|
|
|
|
|
|
|
|
2.68 |
% |
Net interest margin (3) |
|
|
|
|
|
|
|
|
|
|
3.88 |
% |
|
|
|
|
|
|
|
|
|
|
3.13 |
% |
Average interest-earning assets to
average interest-bearing liabilities |
|
|
|
|
|
|
113.46 |
% |
|
|
|
|
|
|
|
|
|
|
120.38 |
% |
|
|
|
|
|
|
|
(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. |
25
The following table sets forth the effects of changing rates and volumes on our net interest
income. The rate column shows the effects attributable to changes in rate (changes in rate
multiplied by prior volume). The volume column shows the effects attributable to changes in volume
(changes in volume multiplied by prior rate). The net column represents the sum of the prior
columns. For purposes of this table, changes attributable to changes in both rate and volume that
cannot be segregated have been allocated proportionally based on the changes due to rate and the
changes due to volume:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 Compared to 2009 |
|
|
2010 Compared to 2009 |
|
|
|
Increase (Decrease) Due to |
|
|
Increase (Decrease) Due to |
|
(In thousands) |
|
Volume |
|
|
Rate |
|
|
Net |
|
|
Volume |
|
|
Rate |
|
|
Net |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
5,948 |
|
|
$ |
(165 |
) |
|
$ |
5,783 |
|
|
$ |
11,911 |
|
|
$ |
(563 |
) |
|
$ |
11,348 |
|
Securities |
|
|
630 |
|
|
|
137 |
|
|
|
767 |
|
|
|
1,570 |
|
|
|
70 |
|
|
|
1,640 |
|
Other interest-earning assets |
|
|
21 |
|
|
|
9 |
|
|
|
30 |
|
|
|
23 |
|
|
|
7 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,599 |
|
|
|
(19 |
) |
|
|
6,580 |
|
|
|
13,504 |
|
|
|
(486 |
) |
|
|
13,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
(3,777 |
) |
|
|
3,149 |
|
|
|
(628 |
) |
|
|
(12,033 |
) |
|
|
10,341 |
|
|
|
(1,692 |
) |
Borrowings |
|
|
492 |
|
|
|
(91 |
) |
|
|
401 |
|
|
|
967 |
|
|
|
(183 |
) |
|
|
784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(3,285 |
) |
|
|
3,058 |
|
|
|
(227 |
) |
|
|
(11,066 |
) |
|
|
10,158 |
|
|
|
(908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
|
$ |
9,884 |
|
|
$ |
(3,077 |
) |
|
$ |
6,807 |
|
|
$ |
24,570 |
|
|
$ |
(10,644 |
) |
|
$ |
13,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Income
Non-interest income increased $1.2 million, or 114.7%, to $2.2 million for the quarter ended
June 30, 2010 from $1.0 million for the quarter ended June 30, 2009, primarily due to increases of
$691,000 in customer service fees, $249,000 resulting from other-than-temporary impairment losses
recorded in the prior year quarter and $104,000 in equity income from the Companys Hampshire First
Bank affiliate. For the six months ended June 30, 2010, non-interest income increased $2.6 million,
or 121.9%, to $4.7 million from $2.1 million for the six months ended June 30, 2009, primarily due
to increases of $1.4 million in customer service fees, $465,000 in gain on sales of loans, $373,000
from other-than-temporary impairment losses recorded in the prior year period and $201,000 in
equity income from Hampshire First Bank. The increases in customer service fees were primarily due
to service charges on deposit relationships acquired in the Mt. Washington merger and additional
growth in deposits. The increases in gain on sales of loans reflected higher gains on sales of
loans originated for sale during the first half of 2010 and gains totaling $352,000 on sales of
fixed-rate bi-weekly mortgage loans during the first quarter of 2010.
Non-interest Expense
Non-interest expense increased $4.1 million, or 52.7%, to $11.7 million for the quarter ended
June 30, 2010 from $7.7 million for the quarter ended June 30, 2009, primarily due to increases of
$2.3 million in salaries and employee benefits, $680,000 in occupancy and equipment expenses,
$275,000 in data processing costs, $267,000 in marketing and advertising, $339,000 in professional
services and $501,000 in other general and administrative expenses. For the six months ended June
30, 2010, non-interest expense increased $5.7 million, or 33.0%, to $23.1 million from $17.4
million for the six months ended June 30, 2009, primarily due to increases of $2.2 million in
salaries and employee benefits, $1.3 million in occupancy and equipment expenses, $591,000 in data
processing costs, $499,000 in marketing and advertising, $407,000 in professional services and
$980,000 in other general and administrative expenses. The increases in non-interest expenses were
primarily due to higher expense levels following the Mt. Washington merger. The Companys
efficiency ratio improved to 67.06% for the quarter ended June 30, 2010 from 78.76% for the quarter
ended June 30, 2009. For the six months ended June 30, 2010, the efficiency ratio improved to
66.39% from to 93.21% for the six months ended June 30, 2009.
26
Income Tax
The Company recorded a provision for income taxes of $1.7 million for the quarter ended June
30, 2010, reflecting an effective tax rate of 34.8%, compared to $293,000, or 23.3%, for the
quarter ended June 30, 2009. For the six months ended June 30, 2010, the provision for income
taxes was $3.4 million, reflecting an effective tax rate of 35.9%, compared to an income tax
benefit of $77,000, or 34.5%, for the six months ended June 30, 2009. The increases in the income
tax provision are 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 $221,000 to the valuation
allowance against the deferred tax asset during the first six months of 2010. As of June 30, 2010,
the total valuation allowance against the deferred tax asset was $221,000.
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 June 30,
2010, cash and cash equivalents totaled $71.6 million. In addition, at June 30, 2010, we had
$147.9 million of available borrowing capacity with the Federal Home Loan Bank of Boston, including
a $9.4 million line of credit. On June 30, 2010, we had $132.6 million of advances outstanding.
A significant use of our liquidity is the funding of loan originations. At June 30, 2010 and
December 31, 2009, we had total loan commitments outstanding, as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Unadvanced portion of existing loans: |
|
|
|
|
|
|
|
|
Construction |
|
$ |
54,658 |
|
|
$ |
72,218 |
|
Home equity line of credit |
|
|
45,248 |
|
|
|
25,623 |
|
Other lines and letters of credit |
|
|
5,807 |
|
|
|
4,038 |
|
Commitments to originate: |
|
|
|
|
|
|
|
|
One- to four-family |
|
|
9,180 |
|
|
|
1,844 |
|
Commercial real estate |
|
|
63,956 |
|
|
|
18,711 |
|
Construction |
|
|
14,140 |
|
|
|
27,460 |
|
Other loans |
|
|
10,750 |
|
|
|
4,457 |
|
|
|
|
|
|
|
|
Total loan commitments outstanding |
|
$ |
203,739 |
|
|
$ |
154,351 |
|
|
|
|
|
|
|
|
Historically, many of the commitments expire without being fully drawn; therefore, the total
amount of commitments does not necessarily represent future cash requirements. The Bank provides
participating checking accounts with overdraft account protection covering $7.7 million of balances
as of June 30, 2010.
In July 2010, we extended the contract with our core data processing provider through December
2017. This contract extension results in an outstanding commitment of $18.8 million, with total
annual payments of $2.2 million and a one time payment of $709,000. On August 5, 2010, we
terminated Mt. Washingtons contract with its core data processing provider in preparation for a
conversion to the Companys core data processing provider scheduled for October 2010. This contract
termination will result in a charge to operations of approximately $2.4 million in the quarter
ending September 30, 2010. In addition, we have outstanding commitments totaling approximately
$2.4 million for the construction of two new branches in Revere and the West Roxbury area of
Boston, Massachusetts, and $1.1 million for renovations of several existing branch locations.
Another significant use of our liquidity is the funding of deposit withdrawals. Certificates
of deposit due within one year of June 30, 2010 totaled $360.1 million, or 56.6% 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 in
addition to those acquired in the Mt. Washington merger.
27
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 June 30, 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.
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. As of June 30, 2010, the
Company had repurchased 109,700 shares of its stock at an average price of $11.27 per share, or
23.2% of the shares authorized for repurchase under the Companys third stock repurchase program.
The Company has repurchased 1,041,200 shares since December 2008.
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 June 30, 2010.
For the six months ended June 30, 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.
28
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.
The following table reflects changes in estimated net interest income for the Company at July
1, 2010 through June 30, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Sensitivity |
|
Increase (Decrease) |
|
|
|
in Market Interest |
|
Net Interest Income |
|
Rates (Rate Shock) |
|
Amount |
|
|
Change |
|
|
Percent |
|
|
|
(Dollars in Thousands) |
|
300 |
|
$ |
52,795 |
|
|
$ |
(7,495 |
) |
|
|
(12.43) |
% |
Flat |
|
|
60,290 |
|
|
|
|
|
|
|
|
|
-50 |
|
|
60,940 |
|
|
|
650 |
|
|
|
1.08 |
|
29
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.
30
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
In addition to the other information contained this Quarterly Report on Form 10-Q, the
following risk factors represent material updates and additions to the risk factors previously
disclosed in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on
March 16, 2010. Additional risks not presently known to us, or that we currently deem immaterial,
may also adversely affect our business, financial condition or results of operations. Further, to
the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes
forward-looking statements, the risk factor set forth below also is a cautionary statement
identifying important factors that could cause our actual results to differ materially from those
expressed in any forward-looking statements made by or on behalf of us.
Financial reform legislation recently enacted will, among other things, create a new Consumer
Financial Protection Bureau, tighten capital standards and result in new laws and regulations that
are expected to increase our costs of operations.
On July 21, 2010 the President signed the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act). This new law will significantly change the current bank
regulatory structure and affect the lending, deposit, investment, trading and operating activities
of financial institutions and their holding companies. The Dodd-Frank Act requires various federal
agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous
studies and reports for Congress. The federal agencies are given significant discretion in drafting
the implementing rules and regulations, and consequently, many of the details and much of the
impacts of the Dodd-Frank Act may not be known for many months or years.
The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to
supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad
rule-making authority for a wide range of consumer protection laws that apply to all banks and
savings institutions, including the authority to prohibit unfair, deceptive or abusive acts and
practices. The Consumer Financial Protection Bureau has examination and enforcement authority over
all banks with more than $10 billion in assets. Banks with $10 billion or less in assets will
continue to be examined for compliance with the consumer laws by their primary bank regulators. The
Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national
banks and federal savings associations, and gives state attorneys general the ability to enforce
federal consumer protection laws.
The Dodd-Frank Act requires minimum leverage (Tier 1) and risk based capital requirements for
bank and savings and loan holding companies that are no less than those applicable to banks, which
will exclude certain instruments that previously have been eligible for inclusion by bank holding
companies as Tier 1 capital, such as trust preferred securities.
Effective one year after the date of enactment is a provision of the Dodd-Frank Act that
eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses
to have interest bearing checking accounts. Depending on competitive responses, this significant
change to existing law could have an adverse impact on our interest expense.
The Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation deposit
insurance assessments. Assessments will now be based on the average consolidated total assets less
tangible equity capital of a financial institution, rather than deposits. The Dodd-Frank Act also
permanently increases the maximum amount of deposit insurance for banks, savings institutions and
credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing
transaction accounts have unlimited deposit insurance through December 31, 2012. The legislation
also increases the required minimum reserve ratio for the Deposit Insurance Fund, from 1.15% to
1.35% of insured deposits, and directs the FDIC to offset the effects of increased assessments on
depository institutions with less than $10 billion in assets.
31
The Dodd-Frank Act will require publicly traded companies to give stockholders a non-binding
vote on executive compensation and so-called golden parachute payments, and by authorizing the
Securities and
Exchange Commission to promulgate rules that would allow stockholders to nominate their own
candidates using a companys proxy materials. The legislation also directs the Federal Reserve
Board to promulgate rules prohibiting excessive compensation paid to bank holding company
executives, regardless of whether the company is publicly traded or not.
It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to
be written implementing rules and regulations will have on community banks. However, it is expected
that at a minimum they will increase our operating and compliance costs and could increase our
interest expense.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a.) (b.) Not applicable.
|
|
(c.) The following table sets forth information with respect to any purchase made by or on behalf
of the Company during the indicated periods: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(or Approximate |
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
|
Dollar Value) of |
|
|
|
|
|
|
|
|
|
|
|
of Shares (or Units) |
|
|
Shares (or Units) |
|
|
|
|
|
|
|
|
|
|
|
Purchased as Part |
|
|
that May Yet Be |
|
|
|
Total Number |
|
|
Average Price |
|
|
of Publicly |
|
|
Purchased Under |
|
|
|
of Shares (or Units) |
|
|
Paid Per Share |
|
|
Announced Plans |
|
|
the Plans or |
|
Period |
|
Purchased |
|
|
(or Unit) |
|
|
or Programs (1) |
|
|
Programs |
|
April 1 30, 2010 (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
472,428 |
|
May 1 31, 2010 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
472,428 |
|
June 1 30, 2010 |
|
|
109,700 |
|
|
$ |
11.27 |
|
|
|
109,700 |
|
|
|
362,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
109,700 |
|
|
$ |
11.27 |
|
|
|
109,700 |
|
|
|
362,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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.
32
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. |
33
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: August 9, 2010 |
/s/ Richard J. Gavegnano
|
|
|
Richard J. Gavegnano |
|
|
Chairman and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
Dated: August 9, 2010 |
/s/ Mark L. Abbate
|
|
|
Mark L. Abbate |
|
|
Senior Vice President, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
34