e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal
Year Ended December 31, 2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-33898
Meridian Interstate Bancorp,
Inc.
(Exact name of registrant as
specified in its charter)
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Massachusetts
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20-4652200
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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10 Meridian Street,
East Boston, Massachusetts
(Address of Principal
Executive Offices)
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02128
Zip Code
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(617) 567-1500
(Registrants telephone
number, including area code)
Securities Registered Pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, no par value
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The NASDAQ Global Select Stock Market, LLC
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Securities Registered Pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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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
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the common stock held by
non-affiliates of the Registrant, computed by reference to the
closing price of such stock on June 30, 2010 was
approximately $89.5 million. As of March 1, 2011, there
were 22,470,643 outstanding shares of the Registrants
common stock, the majority of which are owned by the
Registrants mutual holding company parent, Meridian
Financial Services, Incorporated.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2011 Annual Meeting of
Stockholders of the Registrant are incorporated by reference in
Part III of this
Form 10-K.
MERIDIAN
INTERSTATE BANCORP
2010
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
2
PART I
Forward
Looking Statements
This report contains certain forward-looking
statements, which can be identified by the use of such
words as estimate, project, believe, intend, anticipate, plan,
seek and similar expressions. These forward looking statements
include:
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statements of our goals, intentions and expectations;
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statements regarding our business plans, prospects, growth and
operating strategies;
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statements regarding the quality of our loan and investment
portfolios; and
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estimates of our risks and future costs and benefits.
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These forward-looking statements are subject to significant
risks and uncertainties. Actual results may differ materially
from those contemplated by the forward-looking statements due
to, among others, the following factors:
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general economic conditions, either nationally or in our market
area, that are worse than expected;
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inflation and changes in the interest rate environment that
reduce our interest margins or reduce the fair value of
financial instruments;
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increased competitive pressures among financial services
companies;
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changes in consumer spending, borrowing and savings habits;
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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;
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legislative or regulatory changes that adversely affect our
business;
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adverse changes in the securities markets;
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changes in accounting policies and practices, as may be adopted
by the bank regulatory agencies, the Financial Accounting
Standards Board or the Securities and Exchange Commission;
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inability of third-party providers to perform their obligations
to us; and
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changes in our organization, compensation and benefit plans.
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Any of the forward-looking statements that we make in this
report and in other public statements we make may later prove
incorrect because of inaccurate assumptions we might make, the
factors illustrated above or other factors that we cannot
foresee. Because of these and other uncertainties, our actual
future results may be materially different from the results
indicated by these forward-looking statements and you should not
rely on such statements. In addition, please see
Item 1A. Risk Factors.
Meridian
Interstate Bancorp, Inc.
Meridian Interstate Bancorp, Inc. (the Company) is a
Massachusetts mid-tier stock holding company that was formed in
2006 by East Boston Savings Bank to be its holding company.
Meridian Interstate Bancorp owns all of East Boston Savings
Banks capital stock and directs, plans and coordinates
East Boston Savings Banks business activities. In
addition, Meridian Interstate Bancorp owns 40% of the capital
stock of Hampshire First Bank, a New Hampshire chartered bank,
organized in 2006 and headquartered in Manchester, New
Hampshire. At December 31, 2010, Hampshire First Bank had
assets of $235.5 million. At December 31, 2010,
Meridian Interstate Bancorp had total assets of
$1.8 billion, deposits of $1.5 billion and
stockholders equity of $215.6 million.
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Meridian
Financial Services, Incorporated
Meridian Financial Services, Incorporated is our
Massachusetts-chartered mutual holding company parent. As a
mutual holding company, Meridian Financial Services is a
non-stock company. Meridian Financial Services owns 58.6% of
Meridian Interstate Bancorps common stock. So long as
Meridian Financial Services exists, it will own a majority of
the voting stock of Meridian Interstate Bancorp and, through its
Board of Trustees, will be able to exercise voting control over
most matters put to a vote of stockholders. Of the
14 directors of Meridian Interstate Bancorp, 12 are also
members of the Board of Trustees of Meridian Financial Services,
which is composed of 34 members. Meridian Financial Services
does not currently intend to engage in any business activity
other than those relating to owning a majority of the common
stock of Meridian Interstate Bancorp.
East
Boston Savings Bank
East Boston Savings Bank (the Bank) is a
Massachusetts-chartered stock savings bank that operates from 21
full-service locations and two loan centers in the greater
Boston metropolitan area. East Boston Savings Bank was
originally founded in 1848. We offer a variety of deposit and
loan products to individuals and businesses located in our
primary market, which consists of Suffolk, Middlesex and Essex
Counties, Massachusetts.
We operate as a community-oriented financial institution
offering financial services to consumers and businesses in our
market area. We attract deposits from the general public and use
those funds to originate one- to four-family real estate,
multi-family and commercial real estate, construction,
commercial business and consumer loans which we primarily hold
for investment. Our lending business also involves the purchase
and sale of loan participation interests. We also offer
non-deposit financial products through a third-party network
arrangement. On January 4, 2010, East Boston Savings Bank
completed its acquisition of Mt. Washington
Co-operative
Bank (Mt. Washington). As of December 31, 2009,
Mt. Washington had total assets of $496.2 million, deposits
of 385.7 million and equity of $31.6 million. Refer to
Item 8 Financial Statements and Supplementary Data,
Note 2 to the consolidated financial statements for
information regarding the transaction.
Available
Information
Meridian Interstate Bancorp is a public company and files
interim, quarterly and annual reports with the Securities and
Exchange Commission. These respective reports are on file and a
matter of public record with the Securities and Exchange
Commission and may be read and copied at the Securities and
Exchange Commissions Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room
by calling the Securities and Exchange Commission at
1-800-SEC-0330.
The Securities and Exchange Commission maintains an Internet
site that contains reports, proxy and information statements,
and other information regarding issuers that file electronically
with the SEC
(http://www.sec.gov).
Our website address is www.ebsb.com. Information on
our website should not be considered a part of this report.
Market
Area
We consider the greater Boston metropolitan area to be our
primary market area. While our primary deposit-gathering area is
concentrated in the greater Boston metropolitan area, our
lending area encompasses a broader market that includes most of
eastern Massachusetts east of Route 93, including Cape Cod, and
portions of south-eastern New Hampshire and Maine. We conduct
our operations through our 21 full service offices and two loan
centers located in the following counties, all of which are
located in the greater Boston metropolitan area: Essex (four
offices and one loan center), Middlesex (five offices) and
Suffolk (12 offices and one loan center) Counties. The greater
Boston metropolitan area is the 11th largest metropolitan
area in the United States. Located adjacent to major
transportation corridors, the Boston metropolitan area provides
a highly diversified economic base, with major employment
sectors ranging from services, manufacturing and wholesale
retail trade, to finance, technology and medical care. Based on
data from the Federal Reserve Bank of Boston, the unemployment
rates for Massachusetts and New Hampshire decreased to 8.2% and
5.5%, respectively, for December 2010 from 9.3% and 6.9%,
respectively, from the prior year earlier period. Home prices in
Massachusetts and New Hampshire
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declined at annual rates of 2.0% and 5.4%, respectively, in the
third quarter of 2010 compared to declines of 7.1% and 12.3%,
respectively, for the prior year period.
Competition
We face significant competition for the attraction of deposits
and origination of loans. Our most direct competition for
deposits has historically come from the many financial
institutions operating in our market area and, to a lesser
extent, from other financial service companies such as brokerage
firms and insurance companies. Several large holding companies
operate banks in our market area, including Bank of America
Corporation, Banco Santander (Sovereign Bank), TD Bank Financial
Group, Citizens Financial Group, Eastern Bank and Peoples
United Financial. These institutions are significantly larger
than us and, therefore, have greater resources. We also face
competition for investors funds from money market funds,
mutual funds and other corporate and government securities.
Based on data from the Federal Deposit Insurance Corporation
(the FDIC) as of June 30, 2010, East Boston
Savings Bank had 0.80% of the deposit market share within the
Boston-Cambridge-Quincy, Massachusetts New Hampshire
metropolitan statistical area.
Our competition for loans comes from financial institutions in
our market area and from other financial service providers, such
as mortgage companies and mortgage brokers. Competition for
loans also comes from the increasing number of non-depository
financial service companies entering the mortgage market, such
as insurance companies, securities companies and specialty
finance companies.
We expect competition to remain intense in the future as a
result of legislative, regulatory and technological changes and
the continuing trend of consolidation in the financial services
industry. Technological advances, for example, have lowered
barriers to entry, allowed banks to expand their geographic
reach by providing services over the internet and made it
possible for non-depository institutions to offer products and
services that traditionally have been provided by banks. Changes
in federal law permit affiliation among banks, securities firms
and insurance companies, which promotes a competitive
environment in the financial services industry.
Lending
Activities
Commercial
Real Estate Loans
At December 31, 2010, commercial real estate loans were
$433.5 million, or 36.6%, respectively, of our total loan
portfolio. The commercial real estate loan portfolio consisted
of $63.6 million of fixed-rate loans and
$369.9 million of adjustable-rate loans at
December 31, 2010. We currently target new individual
commercial real estate loan originations to small- and mid-size
owner occupants and investors in our market area and can, by
policy, originate loans to one borrower up to
$20.0 million. Our commercial real estate loans are
generally secured by properties used for business purposes such
as office buildings, industrial facilities and retail
facilities. We intend to continue to grow our commercial real
estate loan portfolio while maintaining prudent underwriting
standards. In addition to originating these loans, we also
participate in loans with other financial institutions.
We originate a variety of fixed- and adjustable-rate commercial
real estate loans for terms up to 30 years. Interest rates
and payments on our adjustable-rate loans adjust every three or
five years and generally are adjusted to a rate equal to a
percentage above the corresponding U.S. Treasury rate or
Federal Home Loan Bank borrowing rate. Most of our
adjustable-rate commercial real estate loans adjust every five
years and amortize over terms of 20 to 25 years. The
maximum amount by which the interest rate may be increased or
decreased is generally 2.5% per adjustment period, with a
lifetime interest rate cap of 5% over the initial interest rate
of the loan. Loan amounts generally do not exceed 75% to 80% of
the propertys appraised value at the time the loan is
originated.
At December 31, 2010, loan participations purchased totaled
$66.6 million, including $22.0 million with Hampshire
First Bank, in which the Company owns 40% of the outstanding
common stock. The properties securing these loans are located
primarily in eastern Massachusetts and southern New Hampshire.
Our underwriting practices with respect to loan participations
generally do not differ from loans that we originate.
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One-
to Four-Family Residential Loans
Our one- to four-family residential loan portfolio consists of
mortgage loans that enable borrowers to purchase or refinance
existing homes, most of which serve as the primary residence of
the owner. At December 31, 2010, one- to four-family
residential loans were $402.9 million, or 34.0% of our
total loan portfolio, consisting of $202.2 million and
$200.7 million of fixed-rate and adjustable-rate loans,
respectively. We generally offer fixed-rate loans with terms up
to 30 years and adjustable-rate loans with terms up to
40 years. Generally, our fixed-rate loans conform to Fannie
Mae and Freddie Mac underwriting guidelines and those with
longer terms (more than 15 years) are originated with the
intention to sell. Our adjustable-rate mortgage loans generally
adjust annually or every three years after an initial fixed
period that ranges from three to seven years. East Boston
Savings Bank also offers fixed-rate bi-weekly loans (loan
payments are made every two weeks) and such loans were
$67.7 million at December 31, 2010. During the first
quarter of 2010, the Company reduced its exposure to
interest-rate risk, by selling fixed-rate bi-weekly one- to
four-family residential loans with an aggregate principal
balance of $34.1 million for a gain of $352,000. Management
has the intent and ability to hold the remaining fixed-rate
bi-weekly loans in the Companys loan portfolio for the
foreseeable future or until maturity or pay-off. Interest rates
and payments on our adjustable-rate loans generally are adjusted
to a rate equal to a percentage above the one or three year
U.S. Treasury index. Depending on the loan type, the
maximum amount by which the interest rate may be increased or
decreased is generally 2% per adjustment period and the lifetime
interest rate caps range from 2% to 4% over the initial interest
rate of the loan. Our residential loans generally do not have
prepayment penalties.
Borrower demand for adjustable-rate compared to fixed-rate loans
is a function of the level of interest rates, the expectations
of changes in the level of interest rates, and the difference
between the interest rates and loan fees offered for fixed-rate
mortgage loans as compared to the interest rates and loan fees
for adjustable-rate loans. The relative amount of fixed-rate and
adjustable-rate mortgage loans that can be originated at any
time is largely determined by the demand for each in a
competitive environment. The loan fees, interest rates and other
provisions of mortgage loans are determined by us on the basis
of our own pricing criteria and competitive market conditions.
While one- to four-family residential real estate loans are
normally originated with up to
30-year
terms, such loans typically remain outstanding for substantially
shorter periods because borrowers often prepay their loans in
full either upon sale of the property pledged as security or
upon refinancing the original loan. Therefore, average loan
maturity is a function of, among other factors, the level of
purchase and sale activity in the real estate market, prevailing
interest rates and the interest rates payable on outstanding
loans. We do not offer loans with negative amortization and
generally do not offer interest-only one- to four-family
residential real estate loans. Additionally, our current
practice is generally (1) to sell to the secondary market
newly originated longer term (more than 15 year terms)
fixed-rate one- to four-family residential real estate loans,
and (2) to hold in our portfolio shorter-term fixed-rate
loans, bi-weekly amortization loans and adjustable-rate loans.
We sell residential real estate loans in the secondary market,
primarily with servicing released beginning in 2010. We also
sell loans to Fannie Mae, the Federal Home Loan Bank Mortgage
Partnership Finance Program and other investors with servicing
retained.
We will make loans with
loan-to-value
ratios up to 95% (100% for first time home buyers) with such
value measured at origination; however, we generally require
private mortgage insurance for loans with a
loan-to-value
ratio over 80%. We require all properties securing mortgage
loans to be appraised by a licensed real estate appraiser. We
generally require title insurance on all first mortgage loans.
Borrowers must obtain hazard insurance, and flood insurance is
required for loans on properties located in a flood zone.
In an effort to provide financing for first-time buyers, we
offer five-year adjustable-rate, bi-weekly and fixed-rate
30-year
residential real estate loans through the Massachusetts Housing
Finance Agency First Time Home Buyer Program. We offer mortgage
loans through this program to qualified individuals and
originate the loans using modified underwriting guidelines,
reduced interest rates and loan conditions.
We also offer loans secured by one-to four-family properties
that are not owner-occupied. These loans consist primarily of
bi-weekly fixed-rate loans with terms up to 30 years and
adjustable-rate loans which adjust annually after an initial
fixed period of three years or adjust every three years after an
initial fixed period of five years. Non-owner-occupied one-to
four-family residential loans generally can be made with a
loan-to-value
ratio of up to 80% with such value measured at origination. At
December 31, 2010, these loans totaled $55.8 million.
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To a lesser extent we also originate land loans primarily to
local contractors and developers for making improvements on
approved one- to four- family building lots. Such loans are
generally written with a maximum 75%
loan-to-value
ratio based upon the appraised value or purchase price,
whichever is less, for a term of up to three years. Interest
rates on our land loans are fixed for three years. At
December 31, 2010, land loans totaled $1.7 million.
Multi-Family
Real Estate Loans
At December 31, 2010, multi-family real estate loans were
$135.3 million, or 11.4%, of our total loan portfolio. The
multi-family loan portfolio consisted of $7.9 million of
fixed-rate loans and $127.4 million of adjustable-rate
loans at December 31, 2010. We currently target new
individual multi-family real estate loan originations to small-
and mid-size owner occupants and investors in our market area
and can, by policy, originate loans to one borrower up to
$20.0 million. Our multi-family real estate loans are
generally secured by apartment buildings. We intend to continue
to grow our multi-family loan portfolio, while maintaining
prudent underwriting standards. In addition to originating these
loans, we also participate in loans with other financial
institutions.
We originate a variety of fixed- and adjustable-rate
multi-family real estate loans for terms up to 30 years.
Interest rates and payments on our adjustable-rate loans adjust
every three or five years and generally are adjusted to a rate
equal to a percentage above the corresponding U.S. Treasury
rate or Federal Home Loan Bank borrowing rate. Most of our
adjustable-rate multi-family real estate loans adjust every five
years and amortize over terms of 20 to 25 years. The
maximum amount by which the interest rate may be increased or
decreased is generally 2.5% per adjustment period, with a
lifetime interest rate cap of 5% over the initial interest rate
of the loan. Loan amounts generally do not exceed 75% to 80% of
the propertys appraised value at the time the loan is
originated.
Construction
Loans
At December 31, 2010, construction loans were
$113.1 million, or 9.6% of our total loan portfolio. We
expect to continue some level of construction lending, when
appropriate, while maintaining a guarded, disciplined approach
given the current decline in demand in the local real estate
market. We remain focused on a strong credit culture and
underwriting standards, as described below. In addition, we
continue to carefully monitor the existing construction
portfolio for performance and project completion, with a goal of
moving completed commercial projects to the commercial real
estate portfolio and reviewing sales based projects for tracking
toward construction goals.
We primarily make construction loans for commercial development
projects, including apartment buildings, small industrial
buildings and retail and office buildings. We also originate
adjustable and bi-weekly loans to individuals and to builders to
finance the construction of residential dwellings. Most of our
construction loans are interest-only loans that provide for the
payment of only interest during the construction phase, which is
usually up to 12 to 24 months, although some construction
loans are renewed, generally for one or two additional years. At
the end of the construction phase, the loan may convert to a
permanent mortgage loan or the loan may be paid in full. Loans
generally can be made with a maximum
loan-to-value
ratio of 80% of the appraised market value upon completion of
the project. As appropriate to the underwriting, a
discounted cash flow analysis is utilized. Before
making a commitment to fund a construction loan, we require an
appraisal of the property by an independent licensed appraiser.
We also will generally require an inspection of the property
before disbursement of funds during the term of the construction
loan.
We also originate construction and site development loans to
contractors and builders to finance the construction of
single-family homes and subdivisions. While we may originate
these loans whether or not the collateral property underlying
the loan is under contract for sale, we consider each project
carefully in light of the current slow-down in the residential
real estate market. Residential real estate construction loans
include single-family tract construction loans for the
construction of entry level residential homes. Loans to finance
the construction of single-family homes and subdivisions are
generally offered to experienced builders in our primary market
areas. The maximum
loan-to-value
limit applicable to these loans is generally 75% to 80% of the
appraised market value upon completion of the project.
Development plans are required from builders prior to making the
loan. Our loan officers are required to personally visit the
proposed site of the development and the sites
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of competing developments. We require that builders maintain
adequate insurance coverage. While maturity dates for
residential construction loans are largely a function of the
estimated construction period of the project, and generally do
not exceed one year, land development loans generally are for 18
to 24 months. Substantially all of our residential
construction loans have adjustable rates of interest based on
U.S. Treasury rates, Federal Home Loan Bank rates or The
Wall Street Journal prime rate, and during the term of
construction, the accumulated interest is added to the principal
of the loan through an interest reserve. Construction loan
proceeds are disbursed periodically in increments as
construction progresses and as inspection by our approved
inspectors warrant.
At December 31, 2010, we had $52.6 million in
construction loans for one- to four-family residential
properties that will convert to permanent loans. Also at that
date, we had $60.5 million in construction loans on
commercial and multi-family real estate consisting of mixed-use
and non-residential loans.
Home
Equity Lines of Credit
We offer home equity lines of credit, which are secured by
owner-occupied one- to four-family residences. At
December 31, 2010, the outstanding balance owed on home
equity lines of credit amounted to $62.8 million, or 5.3%
of our total loan portfolio. Home equity lines of credit have
adjustable rates of interest with ten-year draws amortized over
15 years that are indexed to the Prime Rate as published by
The Wall Street Journal on the last business day of the
month. Our home equity lines either have a monthly variable
interest rate or an interest rate that is fixed for five years
and that adjusts in years six and 11. We offer home equity lines
of credit with cumulative
loan-to-value
ratios generally up to 80%, when taking into account both the
balance of the home equity loans and first mortgage loan.
The procedures for underwriting home equity lines of credit
include an assessment of the applicants payment history on
other debts and ability to meet existing obligations and
payments on the proposed loan. Although the applicants
creditworthiness is a primary consideration, the underwriting
process also includes a comparison of the value of the
collateral to the proposed loan amount. The procedures for
underwriting one- to four-family residential real estate loans
apply equally to home equity loans.
Commercial
Business Loans
We make commercial business loans primarily in our market area
to a variety of professionals, sole proprietorships and small
businesses. At December 31, 2010, commercial business loans
were $30.2 million, or 2.6% of our total loan portfolio,
and we intend to increase the commercial business loans that we
originate. Commercial lending products include term loans and
revolving lines of credit. Commercial loans and lines of credit
are made with either variable or fixed rates of interest.
Variable rates are based on the prime rate as published in
The Wall Street Journal, plus a margin. Initial rates on
fixed-rate business loans are generally based on a corresponding
U.S. Treasury or Federal Home Loan Bank rate, plus a
margin. Commercial business loans typically have shorter
maturity terms and higher interest spreads than real estate
loans, but generally involve more credit risk because of the
type and nature of the collateral. We are focusing our efforts
on small- to medium-sized, privately-held companies with local
or regional businesses that operate in our market area.
When making commercial loans, we consider the financial
statements of the borrower, our lending history with the
borrower, the debt service capabilities of the borrower, the
projected cash flows of the business and the value of the
collateral, primarily accounts receivable, inventory and
equipment. Depending on the collateral used to secure the loans,
commercial loans are made in amounts of up to 80% of the value
of the collateral securing the loan. All of these loans are
secured by assets of the respective borrowers.
Consumer
Loans
We occasionally make automobile loans, loans secured by passbook
or certificate accounts and overdraft loans. At
December 31, 2010, consumer loans were $6.0 million,
or 0.5% of total loans. The procedures for underwriting consumer
loans include an assessment of the applicants payment
history on other debts and ability to meet existing obligations
and payments on the proposed loan. Although the applicants
creditworthiness is a primary consideration, the underwriting
process also includes a comparison of the value of the
collateral, if any, to the proposed loan amount.
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Loan
Underwriting Risks
Adjustable-Rate
Loans
While we anticipate that adjustable-rate loans will better
offset the adverse effects of an increase in interest rates as
compared to fixed-rate mortgages, an increased monthly mortgage
payment required of adjustable-rate loan borrowers in a rising
interest rate environment could cause an increase in
delinquencies and defaults. The marketability of the underlying
property also may be adversely affected in a high interest rate
environment. In addition, although adjustable-rate mortgage
loans make our asset base more responsive to changes in interest
rates, the extent of this interest sensitivity is limited by the
annual and lifetime interest rate adjustment limits.
Commercial
and Multi-Family Real Estate Loans
Loans secured by commercial and multi-family real estate
generally have larger balances and involve a greater degree of
risk than one- to four-family residential mortgage loans. Of
primary concern in commercial and multi-family real estate
lending is the borrowers creditworthiness and the
feasibility and cash flow potential of the project. Payments on
loans secured by income properties often depend on successful
operation and management of the properties. As a result,
repayment of such loans may be subject to a greater extent than
residential real estate loans, to adverse conditions in the real
estate market or the economy. To monitor cash flows on income
properties, we require borrowers and loan guarantors, if any, to
provide annual financial statements on commercial and
multi-family real estate loans. In reaching a decision on
whether to make a commercial or multi-family real estate loan,
we consider and review a global cash flow analysis of the
borrower and consider the net operating income of the property,
the borrowers expertise, credit history and profitability
and the value of the underlying property. We have generally
required that the properties securing these real estate loans
have debt service coverage ratios (the ratio of earnings before
debt service to debt service) of at least 1.20x. An
environmental phase one report is obtained when the possibility
exists that hazardous materials may have existed on the site, or
the site may have been impacted by adjoining properties that
handled hazardous materials. Land loans secured by improved lots
generally involve greater risks than residential mortgage
lending because land loans are more difficult to evaluate. If
the estimate of value proves to be inaccurate, in the event of
default and foreclosure, we may be confronted with a property
the value of which is insufficient to assure full payment.
Construction
Loans
Our construction loans are based upon estimates of costs and
values associated with the completed project. Construction
lending involves additional risks when compared with permanent
residential lending because funds are advanced upon the security
of the project, which is of uncertain value prior to its
completion. Because of the uncertainties inherent in estimating
construction costs, as well as the market value of the completed
project and the effects of governmental regulation of real
property, it is relatively difficult to evaluate accurately the
total funds required to complete a project and the related
loan-to-value
ratio. This type of lending also typically involves higher loan
principal amounts and is often concentrated with a small number
of builders. In addition, generally during the term of a
construction loan, interest may be funded by the borrower or
disbursed from an interest reserve set aside from the
construction loan budget. These loans often involve the
disbursement of substantial funds with repayment substantially
dependent on the success of the ultimate project and the ability
of the borrower to sell or lease the property or obtain
permanent take-out financing, rather than the ability of the
borrower or guarantor to repay principal and interest. If our
appraisal of the value of a completed project proves to be
overstated, we may have inadequate security for the repayment of
the loan upon completion of construction of the project and may
incur a loss. A discounted cash flow analysis is utilized for
determining the value of any construction project of five or
more units. Our ability to continue to originate a significant
amount of construction loans is dependent on the strength of the
housing market in our market areas.
Commercial
Business Loans
Unlike residential mortgage loans, which generally are made on
the basis of the borrowers ability to make repayment from
his or her employment or other income, and which are secured by
real property whose value tends to be more easily ascertainable,
commercial business loans are of higher risk and typically are
made on the basis of
9
the borrowers ability to make repayment from the cash flow
of the borrowers business and the collateral securing
these loans may fluctuate in value. Our commercial business
loans are originated primarily based on the identified cash flow
of the borrower and secondarily on the underlying collateral
provided by the borrower. Most often, this collateral consists
of accounts receivable, inventory or equipment. Credit support
provided by the borrower for most of these loans and the
probability of repayment is based on the liquidation of the
pledged collateral and enforcement of a personal guarantee, if
any. As a result, the availability of funds for the repayment of
commercial business loans may depend substantially on the
success of the business itself. Further, any collateral securing
such loans may depreciate over time, may be difficult to
appraise and may fluctuate in value.
Consumer
Loans
Consumer loans may entail greater risk than do residential
mortgage loans, particularly in the case of consumer loans that
are unsecured or secured by assets that depreciate rapidly, such
as motor vehicles. Repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment
for the outstanding loan and a small remaining deficiency often
does not warrant further substantial collection efforts against
the borrower. Consumer loan collections depend on the
borrowers continuing financial stability, and therefore
are likely to be adversely affected by various factors,
including job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may
limit the amount that can be recovered on such loans.
Loan
Originations, Purchase and Sales
Loan originations come from a number of sources. The primary
sources of loan originations are current customers, walk-in
traffic, our website, advertising and referrals from customers
as well as our directors, trustees and corporators. We advertise
in newspapers that are widely circulated throughout our market
area and on local radio. We also participate in loans with
others to supplement our origination efforts. We generally do
not purchase whole loans.
We generally originate loans for our portfolio; however, we
generally sell, prior to funding, to the secondary market all
newly originated conforming fixed-rate, 16- to
30-year one-
to four-family residential real estate loans. Our decision to
sell loans is based on prevailing market interest rate
conditions and interest rate risk management. We sell
residential real estate loans in the secondary market, primarily
with servicing released beginning in 2010. We also sell loans to
Fannie Mae, the Federal Home Loan Bank Mortgage Partnership
Finance Program and other investors with servicing retained. In
addition, we sell participation interests in commercial real
estate loans to local financial institutions, primarily on the
portion of loans exceeding our borrowing limits, or as is
prudent in concert with recognition of credit risk. For the
years ended December 31, 2010 and December 31, 2009,
we originated $173.8 million and $299.5 million of
loans, respectively, and sold $138.7 million and
$36.8 million of loans, respectively. At December 31,
2010, we were servicing $134.4 million of loans for others.
Loan
Approval Procedures and Authority
Our lending activities follow written, non-discriminatory,
underwriting standards and loan origination procedures
established by the Banks Board of Directors and
management. The Banks Board of Directors has granted loan
approval authority to certain officers up to prescribed limits,
depending on the officers experience, the type of loan and
whether the loan is secured or unsecured. All loans in excess of
$100,000 require a second authorized officers approval.
Loans in excess of $1.0 million generally must be
authorized by the Banks Executive Committee.
Loans-to-One
Borrower Limit and Loan Category Concentration
The maximum amount that we may lend to one borrower and the
borrowers related entities is generally limited, by
statute, to 20% of our capital, which is defined under
Massachusetts law as the sum of our capital stock, surplus
account and undivided profits. At December 31, 2010, our
regulatory limit on
loans-to-one
borrower was $43.1 million. At that date, our largest
lending relationship consisted of three loans totaling
$28.5 million and was
10
secured by commercial real estate. These loans were performing
in accordance with their original repayment terms at
December 31, 2010.
Loan
Commitments
We issue commitments for fixed- and adjustable-rate mortgage
loans conditioned upon the occurrence of certain events.
Commitments to originate mortgage loans are legally binding
agreements to lend to our customers. Generally, our loan
commitments expire after 30 days.
Investment
Activities
We have legal authority to invest in various types of liquid
assets, including U.S. Treasury obligations, securities of
various government-sponsored enterprises, residential
mortgage-backed securities and municipal governments, deposits
at the Federal Home Loan Bank of Boston, certificates of deposit
of federally insured institutions, investment grade corporate
bonds and investment grade marketable equity securities,
including common stock and money market mutual funds. Our equity
securities generally pay dividends. We also are required to
maintain an investment in Federal Home Loan Bank of Boston
stock, which investment is based on the level of our FHLB
borrowings. While we have the authority under applicable law to
invest in derivative securities, we had no investments in
derivative securities at December 31, 2010.
At December 31, 2010, our investment portfolio consisted
primarily of corporate bonds, municipal bonds, investment-grade
marketable equity securities, money market mutual fund
investments, short-term obligations of government-sponsored
enterprises and mortgage-backed securities.
Our investment objectives are to provide and maintain liquidity,
to establish an acceptable level of interest rate and credit
risk, to provide a use of funds when demand for loans is weak
and to generate a favorable return. Our Board of Directors has
the overall responsibility for the investment portfolio,
including approval of our investment policy. The Executive
Committee of the Board of Directors and management are
responsible for implementation of the investment policy and
monitoring our investment performance. Our Executive Committee
reviews the status of our investment portfolio monthly.
Each reporting period, the Company evaluates all securities with
a decline in fair value below the amortized cost of the
investment to determine whether or not the impairment is deemed
to be
other-than-temporary
(OTTI). OTTI is required to be recognized
(1) if the Company intends to sell the security;
(2) if it is more likely than not that the
Company will be required to sell the security before recovery of
its amortized cost basis; or (3) for debt securities, the
present value of expected cash flows is not sufficient to
recover the entire amortized cost basis. Marketable equity
securities are evaluated for OTTI based on the severity and
duration of the impairment and, if deemed to be other than
temporary, the declines in fair value are reflected in earnings
as realized losses. For impaired debt securities that the
Company intends to sell, or more likely than not will be
required to sell, the full amount of the depreciation is
recognized as OTTI through earnings. For all other impaired debt
securities, credit-related OTTI is recognized through earnings
and non-credit related OTTI is recognized in other comprehensive
income/loss, net of applicable taxes.
Deposit
Activities and Other Sources of Funds
General
Deposits, borrowings and loan repayments are the major sources
of our funds for lending and other investment purposes.
Scheduled loan repayments are a relatively stable source of
funds, while deposit inflows and outflows and loan prepayments
are significantly influenced by general interest rates and
market conditions.
Deposit
Accounts
The substantial majority of our depositors reside in our market
area. Deposits are attracted by advertising and through our
website, primarily from within our market area through the
offering of a broad selection of deposit instruments, including
non-interest-bearing demand deposits (such as checking
accounts), interest-bearing demand accounts (such as NOW and
money market accounts), savings accounts and certificates of
deposit. In addition to
11
accounts for individuals, we also offer several commercial
checking accounts designed for the businesses operating in our
market area.
Deposit account terms vary according to the minimum balance
required, the time period that funds must remain on deposit, and
the interest rate, among other factors. In determining the terms
of our deposit accounts, we consider the rates offered by our
competition, our liquidity needs, profitability, and customer
preferences and concerns. We generally review our deposit mix
and pricing on a weekly basis. Our deposit pricing strategy has
generally been to offer competitive rates and to periodically
offer special rates in order to attract deposits of a specific
type or term.
Borrowings
We may utilize advances from the Federal Home Loan Bank of
Boston to supplement our supply of investable funds. The Federal
Home Loan Bank functions as a central reserve bank providing
credit for its member financial institutions. As a member, we
are required to own capital stock in the Federal Home Loan Bank
and are authorized to apply for advances on the security of such
stock and certain of our whole first mortgage loans and other
assets (principally securities which are obligations of, or
guaranteed by, the United States), provided certain standards
related to creditworthiness have been met. Advances are made
under several different programs, each having its own interest
rate and range of maturities. Depending on the program,
limitations on the amount of advances are based either on a
fixed percentage of an institutions net worth or on the
Federal Home Loan Banks assessment of the
institutions creditworthiness. As of December 31,
2010, we had $66.5 million of available borrowing capacity
with the Federal Home Loan Bank of Boston, including an
available line of credit of $9.4 million at an interest
rate that adjusts daily. All of our borrowings from the Federal
Home Loan Bank are secured by a blanket lien on qualified
collateral, defined principally as 75% of the carrying value of
certain first mortgage loans on owner-occupied residential
property.
In addition, at December 31, 2010 the Bank has federal
funds purchased of $12.0 million, including
$1.9 million from Hampshire First Bank. These purchases are
currently a source of low-cost funds for the Bank, at a rate of
0.20% at December 31, 2010.
Financial
Services
We offer customers a range of non-deposit products, including
mutual funds, annuities, stocks and bonds which are offered and
cleared by a third-party broker-dealer. We receive a portion of
the commissions generated by our sales to our customers. We also
offer customers long-term care insurance through a third-party
insurance company which generates commissions for us. Our
non-deposit products generated $302,000, $211,000 and $146,000
of non-interest income during the years ended December 31,
2010, 2009 and 2008, respectively.
Personnel
As of December 31, 2010, we had 272 full-time and
88 part-time employees, none of whom is represented by a
collective bargaining unit. We believe our working relationship
with our employees is excellent.
Subsidiaries
and Affiliates
In addition to East Boston Savings Bank, Meridian Interstate
Bancorp has another wholly-owned subsidiary, Meridian Interstate
Funding Corporation, a Massachusetts corporation established in
2008 to loan funds to the Companys Employee Stock
Ownership Plan (ESOP) to purchase stock in our
initial public offering. At December 31, 2010, Meridian
Interstate Funding Corporation had total assets of
$9.3 million and total equity of $9.2 million.
Meridian Interstate Bancorp also owns 40.0% of the capital stock
of Hampshire First Bank, a New Hampshire chartered bank,
organized in 2006 and headquartered in Manchester, New
Hampshire. In connection with the organization of Hampshire
First Bank, Meridian Interstate Bancorp also received non-voting
warrants to purchase an additional 60,000 shares of capital
stock of Hampshire First Bank (currently representing 2% of the
outstanding shares of Hampshire First Bank). At
December 31, 2010, our directors and executive officers
also own
12
approximately 1% in the aggregate of the capital stock of
Hampshire First Bank and owned non-voting warrants to purchase
in the aggregate less than 1% of the capital stock. None of our
directors and executive officers has any agreements or contracts
with each other or with Meridian Interstate Bancorp regarding
voting their shares of Hampshire First Bank stock. We also have
no additional agreements or contracts to purchase shares of
voting securities of Hampshire First Bank. In addition, any
future acquisition by Meridian Interstate Bancorp of the voting
securities of Hampshire First Bank, either common stock or
warrants, would require prior approval of the Federal Reserve
Board and the Massachusetts Commissioner of Banks.
Hampshire First Banks bylaws provide that Meridian
Interstate Bancorp may nominate or appoint 40% of the Directors
of Hampshire First Bank for as long as it holds 40% or more of
the outstanding common stock of Hampshire First Bank. In
addition, the Hampshire First Bank bylaws require that all
matters requiring a vote of the Board of Directors be approved
by a two-thirds vote. The members of the Hampshire First Bank
Board appointed by Meridian Interstate Bancorp also will appoint
the Chairman of the Board. As a result, three of the ten current
directors of Hampshire First Bank also currently serve as
directors of Meridian Interstate Bancorp
(Messrs. Gavegnano, Lynch and Fernandez) and
Mr. Gavegnano, our Chairman of the Board and Chief
Executive Officer, also serves as Chairman of the Board of
Hampshire First Bank. None of these individuals has any
agreements or contracts with Meridian Interstate Bancorp
regarding their duties or actions as directors of Hampshire
First Bank. We believe Hampshire First Bank is led by a
qualified and experienced executive management team. Although we
have no current intention to sell our investment, we may
possibly realize gains from the sale of this investment in the
future.
In addition, Hampshire First Bank provides us with a source of
loans via loan participations. Hampshire First Banks loan
portfolio consists primarily of multi-family and commercial real
estate, commercial business and construction loans. At
December 31, 2010, Hampshire First Bank had assets of
$235.5 million, deposits of $189.0 million and equity
of $27.2 million. Meridian Interstate Bancorp accounts for
its investment in Hampshire First Bank by the equity method of
accounting, under which Meridian Interstate Bancorps share
of the net income or loss of Hampshire First Bank is recognized
as income or loss in the Companys consolidated financial
statements. At December 31, 2010, Meridian Interstate
Bancorp had an $11.5 million investment in Hampshire First
Bank and recorded equity income of $492,000, $629,000 and a loss
of $396,000, respectively, during the years ended
December 31, 2010, 2009 and 2008, from this investment.
The Banks subsidiaries include Prospect, Inc., which
engages in securities transactions on its own behalf, EBOSCO,
LLC and Berkeley Riverbend Estates, LLC, both of which hold
foreclosed real estate; and East Boston Investment Services,
Inc. which is authorized for third-party investment sales and is
currently inactive.
Regulation
and Supervision
General
East Boston Savings Bank is currently a Massachusetts-charted
stock savings bank, and is the wholly-owned subsidiary of
Meridian Interstate Bancorp, a Massachusetts corporation and
registered bank holding company, which is a 58.6% owned
subsidiary of Meridian Financial Services, a Massachusetts
mutual holding company and registered bank holding company. East
Boston Savings Banks deposits are insured up to applicable
limits by the Federal Deposit Insurance Corporation and by the
Depositors Insurance Fund for amounts in excess of the Federal
Deposit Insurance Corporation insurance limits. East Boston
Savings Bank is subject to extensive regulation by the
Massachusetts Commissioner of Banks, as its chartering agency,
and by the Federal Deposit Insurance Corporation, as its deposit
insurer. East Boston Savings Bank is required to file reports
with, and is periodically examined by, the Federal Deposit
Insurance Corporation and the Massachusetts Commissioner of
Banks concerning its activities and financial condition and must
obtain regulatory approvals prior to entering into certain
transactions, including, but not limited to, mergers with or
acquisitions of other financial institutions. East Boston
Savings Bank is a member of the Federal Home Loan Bank of
Boston. Meridian Interstate Bancorp and Meridian Financial
Services are regulated as bank holding companies by the Federal
Reserve Board and the Massachusetts Commissioner of Banks.
The regulation and supervision of East Boston Savings Bank
establish a comprehensive framework of activities in which an
institution can engage and is intended primarily for the
protection of depositors and borrowers and, for purposes of the
Federal Deposit Insurance Corporation, the protection of the
insurance fund. The regulatory
13
structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with
respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change
in such regulatory requirements and policies, whether by the
applicable state legislature, the Federal Deposit Insurance
Corporation or Congress, could have a material adverse impact on
Meridian Financial Services, Meridian Interstate Bancorp or East
Boston Savings Bank and their operations.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (the Dodd-Frank Act) made extensive changes in
the regulation of depository institutions and their holding
companies. Certain provisions of the Dodd-Frank Act are expected
to have a near term impact on East Boston Savings Bank and
Meridian Interstate Bancorp, Inc. For example, the Dodd-Frank
Act creates a new Consumer Financial Protection Bureau as an
independent bureau of the Federal Reserve Board. The Consumer
Financial Protection Bureau will assume responsibility for the
implementation of the federal financial consumer protection and
fair lending laws and regulations, a function currently assigned
to prudential regulators, and will have authority to impose new
requirements. However, institutions of less than
$10 billion in assets, such as East Boston Savings Bank,
will continue to be examined for compliance with consumer
protection and fair lending laws and regulations by, and be
subject to the enforcement authority of, their prudential
regulator, although the Consumer Financial Protection Bureau
will have
back-up
authority to examine and enforce consumer protection laws
against all institutions, including institutions with less than
$10 billion in assets.
In addition to creating the Consumer Financial Protection
Bureau, the Dodd-Frank Act, among other things, directs changes
in the way that institutions are assessed for deposit insurance,
mandates the imposition of tougher consolidated capital
requirements on holding companies, requires originators of
securitized loans to retain a percentage of the risk for the
transferred loans, imposes regulatory rate-setting for certain
debit card interchange fees, repeals restrictions on the payment
of interest on commercial demand deposits and contains a number
of reforms related to mortgage originations. Many of the
provisions of the Dodd-Frank Act are subject to delayed
effective dates
and/or
require the issuance of implementing regulations. Their impact
on operations cannot yet be fully assessed. However, there is
significant possibility that the Dodd-Frank Act will, at a
minimum, result in increased regulatory burden, compliance costs
and interest expense for East Boston Savings Bank and Meridian
Interstate Bancorp, Inc.
Certain regulatory requirements applicable to East Boston
Savings Bank, Meridian Interstate Bancorp and Meridian Financial
Services are referred to below or elsewhere herein. The
description of statutory provisions and regulations applicable
to savings banks and their holding companies set forth below and
elsewhere in this document does not purport to be a complete
description of such statutes and regulations and their effects
on East Boston Savings Bank, Meridian Interstate Bancorp and
Meridian Financial Services and is qualified in its entirety by
reference to the actual laws and regulations involved.
Massachusetts
Banking Laws and Supervision
East Boston Savings Bank, as a Massachusetts savings bank, is
regulated and supervised by the Massachusetts Commissioner of
Banks. The Massachusetts Commissioner of Banks is required to
regularly examine each state-chartered bank. The approval of the
Massachusetts Commissioner of Banks is required to establish or
close branches, to merge with another bank, to form a holding
company, to issue stock or to undertake many other activities.
Any Massachusetts bank that does not operate in accordance with
the regulations, policies and directives of the Massachusetts
Commissioner of Banks may be sanctioned. The Massachusetts
Commissioner of Banks may suspend or remove directors or
officers of a bank who have violated the law, conducted a
banks business in a manner that is unsafe, unsound or
contrary to the depositors interests, or been negligent in
the performance of their duties. In addition, the Massachusetts
Commissioner of Banks has the authority to appoint a receiver or
conservator if it is determined that the bank is conducting its
business in an unsafe or unauthorized manner, and under certain
other circumstances.
All Massachusetts-chartered savings banks are required to be
members of the Depositors Insurance Fund, a private deposit
insurer, which insures all deposits in member banks in excess of
FDIC deposit insurance limits. Member banks are required to pay
the assessments of the fund.
14
The powers that Massachusetts-chartered savings banks can
exercise under these laws are summarized as follows:
Lending
Activities
A Massachusetts-chartered savings bank may make a wide variety
of mortgage loans including fixed-rate loans, adjustable-rate
loans, variable-rate loans, participation loans, graduated
payment loans, construction and development loans, condominium
and co-operative loans, second mortgage loans and other types of
loans that may be made in accordance with applicable
regulations. Commercial loans may be made to corporations and
other commercial enterprises with or without security. Consumer
and personal loans may also be made with or without security.
Insurance
Sales
Massachusetts banks may engage in insurance sales activities if
the Massachusetts Commissioner of Banks has approved a plan of
operation for insurance activities and the bank obtains a
license from the Massachusetts Division of Insurance. A bank may
be licensed directly or indirectly through an affiliate or a
subsidiary corporation established for this purpose. Customers
of East Boston Savings Bank are offered certain insurance
products through a third party. East Boston Savings Bank has not
been approved for insurance sales activities.
Investment
Activities
In general, Massachusetts-chartered savings banks may invest in
preferred and common stock of any corporation organized under
the laws of the United States or any state provided such
investments do not involve control of any corporation and do
not, in the aggregate, exceed 4.0% of the banks deposits.
Massachusetts-chartered savings banks may in addition invest an
amount equal to 1.0% of their deposits in stocks of
Massachusetts corporations or companies with substantial
employment in the Commonwealth which have pledged to the
Massachusetts Commissioner of Banks that such monies will be
used for further development within the Commonwealth. At the
present time, East Boston Savings Bank has the authority to
invest in equity securities. However, such investment authority
is constrained by federal law. See - Federal Bank
Regulation Investment Activities for such
federal restrictions.
Dividends
A Massachusetts stock bank may declare from net profits cash
dividends not more frequently than quarterly and non-cash
dividends at any time. No dividends may be declared, credited or
paid if the banks capital stock is impaired. The approval
of the Massachusetts Commissioner of Banks is required if the
total of all dividends declared in any calendar year exceeds the
total of its net profits for that year combined with its
retained net profits of the preceding two years. Net profits for
this purpose means the remainder of all earnings from current
operations plus actual recoveries on loans and investments and
other assets after deducting from the total thereof all current
operating expenses, actual losses, accrued dividends on
preferred stock, if any, and all federal and state taxes.
Protection
of Personal Information
Massachusetts has adopted regulatory requirements intended to
protect personal information. The requirements, which are
similar to existing federal laws such as the Gramm-Leach-Bliley
Act, discussed below under Federal
Regulations Privacy Regulations, that require
organizations to establish written information security programs
to prevent identity theft. The Massachusetts regulation also
contains technology system requirements, especially for the
encryption of personal information sent over wireless or public
networks or stored on portable devices.
Parity
Regulation
A Massachusetts bank may engage in any activity or offer any
product or service if the activity, product or service is
engaged in or offered in accordance with regulations promulgated
by the Massachusetts Commissioner of Banks and has been
authorized for national banks, federal thrifts or state banks in
a state other than Massachusetts;
15
provided that the activity is permissible under applicable
federal and Massachusetts law and subject to the same
limitations and restrictions imposed on the national bank,
federal thrift or
out-of-state
bank that had previously been granted the power.
Loans
to One Borrower Limitations
Massachusetts banking law grants broad lending authority.
However, with certain limited exceptions, total obligations of
one borrower to a bank may not exceed 20.0% of the total of the
banks capital, which is defined under Massachusetts law as
the sum of the banks capital stock, surplus account and
undivided profits.
Loans
to a Banks Insiders
The Massachusetts banking laws prohibit any executive officer,
director or trustee from borrowing, otherwise becoming indebted,
or becoming liable for a loan or other extension of credit by
such bank to any other person, except for any of the following
loans or extensions of credit: (i) loans or extension of
credit, secured or unsecured, to an officer of the bank in an
amount not exceeding $100,000; (ii) loans or extensions of
credit intended or secured for educational purposes to an
officer of the bank in an amount not exceeding $200,000;
(iii) loans or extensions of credit secured by a mortgage
on residential real estate to be occupied in whole or in part by
the officer to whom the loan or extension of credit is made, in
an amount not exceeding $750,000; and (iv) loans or
extensions of credit to a director or trustee of the bank who is
not also an officer of the bank in an amount permissible under
the banks loan to one borrower limit. Massachusetts
banking laws also prohibit officers and directors from receiving
a preferential interest rate or terms on loans or extensions of
credit.
Loans to insiders as described above require approval of the
majority of the members of East Boston Savings Banks Board
of Directors, excluding any member involved in the loan or
extension of credit. No such loan or extension of credit may be
granted with an interest rate or other terms that are
preferential in comparison to loans granted to persons not
affiliated with the savings bank.
Regulatory
Enforcement Authority
Any Massachusetts bank that does not operate in accordance with
the regulations, policies and directives of the Massachusetts
Commissioner of Banks may be subject to sanctions for
non-compliance, including seizure of the property and business
of the bank and suspension or revocation of its charter. The
Massachusetts Commissioner of Banks may under certain
circumstances suspend or remove officers or directors who have
violated the law, conducted the banks business in a manner
which is unsafe, unsound or contrary to the depositors interests
or been negligent in the performance of their duties. In
addition, upon finding that a bank has engaged in an unfair or
deceptive act or practice, the Massachusetts Commissioner of
Banks may issue an order to cease and desist and impose a fine
on the bank concerned. Finally, Massachusetts consumer
protection and civil rights statutes applicable to East Boston
Savings Bank permit private individual and class action law
suits and provide for the rescission of consumer transactions,
including loans, and the recovery of statutory and punitive
damage and attorneys fees in the case of certain
violations of those statutes.
Depositors
Insurance Fund
All Massachusetts-chartered savings banks are required to be
members of the Depositors Insurance Fund, a corporation that
insures savings bank deposits in excess of federal deposit
insurance coverage. The Depositors Insurance Fund is authorized
to charge savings banks a risk-based assessment on deposits
balances in excess of the amounts insured by the Federal Deposit
Insurance Corporation.
Massachusetts has other statutes and regulations that are
similar to the federal provisions discussed below.
Federal
Bank Regulation
Capital
Requirements
Under FDIC regulations, federally insured state-chartered banks
that are not members of the Federal Reserve System (state
non-member banks), such as East Boston Savings Bank, are
required to comply with minimum
16
leverage capital requirements. For an institution determined by
the FDIC to not be anticipating or experiencing significant
growth and to be, in general, a strong banking organization
rated composite 1 under the Uniform Financial Institutions
Ranking System established by the Federal Financial Institutions
Examination Council, the minimum capital leverage requirement is
a ratio of Tier 1 capital to total assets of 3.0%. For all
other institutions, the minimum leverage capital ratio is not
less than 4.0%. Tier 1 capital is the sum of common
stockholders equity, noncumulative perpetual preferred
stock (including any related surplus) and minority investments
in certain subsidiaries, less intangible assets (except for
certain servicing rights and credit card relationships) and
certain other specified items.
The FDIC regulations require state non-member banks to maintain
certain levels of regulatory capital in relation to regulatory
risk-weighted assets. The ratio of regulatory capital to
regulatory risk-weighted assets is referred to as a banks
risk-based capital ratio. Risk-based capital ratios
are determined by allocating assets and specified off-balance
sheet items (including recourse obligations, direct credit
substitutes and residual interests) to four risk-weighted
categories ranging from 0.0% to 100.0%, with higher levels of
capital being required for the categories perceived as
representing greater risk.
State non-member banks must maintain a minimum ratio of total
capital to risk-weighted assets of at least 8.0%, of which at
least one-half must be Tier 1 capital. Total capital
consists of Tier 1 capital plus Tier 2 or
supplementary capital items, which include allowances for loan
losses in an amount of up to 1.25% of risk-weighted assets,
cumulative preferred stock and certain other capital
instruments, and a portion of the net unrealized gain on equity
securities. The includable amount of Tier 2 capital cannot
exceed the amount of the institutions Tier 1 capital.
Banks that engage in specified levels of trading activities are
subject to adjustments in their risk based capital calculation
to ensure the maintenance of sufficient capital to support
market risk.
The Federal Deposit Insurance Corporation Improvement Act (the
FDICIA) required each federal banking agency to
revise its risk-based capital standards for insured institutions
to ensure that those standards take adequate account of
interest-rate risk, concentration of credit risk, and the risk
of nontraditional activities, as well as to reflect the actual
performance and expected risk of loss on multi-family
residential loans. The FDIC, along with the other federal
banking agencies, has adopted a regulation providing that the
agencies will take into account the exposure of a banks
capital and economic value to changes in interest rate risk in
assessing a banks capital adequacy. The FDIC also has
authority to establish individual minimum capital requirements
in appropriate cases upon determination that an
institutions capital level is, or is likely to become,
inadequate in light of the particular circumstances.
Standards
for Safety and Soundness
As required by statute, the federal banking agencies adopted
final regulations and Interagency Guidelines Establishing
Standards for Safety and Soundness to implement safety and
soundness standards. The guidelines set forth the safety and
soundness standards that the federal banking agencies use to
identify and address problems at insured depository institutions
before capital becomes impaired. The guidelines address internal
controls and information systems, internal audit system, credit
underwriting, loan documentation, interest rate exposure, asset
growth, asset quality, earnings and compensation, fees and
benefits. Most recently, the agencies have established standards
for safeguarding customer information. If the appropriate
federal banking agency determines that an institution fails to
meet any standard prescribed by the guidelines, the agency may
require the institution to submit to the agency an acceptable
plan to achieve compliance with the standard.
Investment
Activities
All state-chartered FDIC insured banks, including savings banks,
are generally limited in their investment activities to
principal and equity investments of the type and in the amount
authorized for national banks, notwithstanding state law,
subject to certain exceptions. For example, state chartered
banks may, with FDIC approval, continue to exercise state
authority to invest in common or preferred stocks listed on a
national securities exchange or the NASDAQ Global Market and in
the shares of an investment company registered under the
Investment Company Act of 1940, as amended. The maximum
permissible investment is 100.0% of Tier 1 Capital, as
specified by the FDICs regulations, or the maximum amount
permitted by Massachusetts law, whichever is less. East Boston
Savings Bank received approval from the FDIC to retain and
acquire such equity instruments equal to
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the lesser of 100% of East Boston Savings Banks
Tier 1 capital or the maximum permissible amount specified
by Massachusetts law. Any such grandfathered authority may be
terminated upon the FDICs determination that such
investments pose a safety and soundness risk. In addition, the
FDIC is authorized to permit such institutions to engage in
state authorized activities or investments not permissible for
national banks (other than non-subsidiary equity investments) if
they meet all applicable capital requirements and it is
determined that such activities or investments do not pose a
significant risk to the Bank Insurance Fund. The FDIC has
adopted revisions to its regulations governing the procedures
for institutions seeking approval to engage in such activities
or investments. In addition, a nonmember bank may control a
subsidiary that engages in activities as principal that would
only be permitted for a national bank to conduct in a
financial subsidiary if a bank meets specified
conditions and deducts its investment in the subsidiary for
regulatory capital purposes.
Interstate
Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994, or the Interstate Banking Act, permits adequately
capitalized bank holding companies to acquire banks in any state
subject to specified concentration limits and other conditions.
The Interstate Banking Act also authorizes the interstate merger
of banks. In addition, among other things, the Interstate
Banking Act, as amended by the Dodd-Frank Act, permits banks to
establish new branches on an interstate basis provided that
branching is authorized by the law of the host state for the
banks chartered by that state.
Prompt
Corrective Regulatory Action
Federal law requires, among other things, that federal bank
regulatory authorities take prompt corrective action
with respect to banks that do not meet minimum capital
requirements. For these purposes, the law establishes five
capital categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized.
The FDIC has adopted regulations to implement the prompt
corrective action legislation. An institution is deemed to be
well capitalized if it has a total risk-based
capital ratio of 10.0% or greater, a Tier 1 risk-based
capital ratio of 6.0% or greater and a leverage ratio of 5.0% or
greater. An institution is adequately capitalized if
it has a total risk-based capital ratio of 8.0% or greater, a
Tier 1 risk-based capital ratio of 4.0% or greater, and
generally a leverage ratio of 4.0% or greater. An institution is
undercapitalized if it has a total risk-based
capital ratio of less than 8.0%, a Tier 1 risk-based capital
ratio of less than 4.0%, or generally a leverage ratio of less
than 4.0%. An institution is deemed to be significantly
undercapitalized if it has a total risk-based capital
ratio of less than 6.0%, a Tier 1 risk-based capital ratio
of less than 3.0%, or a leverage ratio of less than 3.0%. An
institution is considered to be critically
undercapitalized if it has a ratio of tangible equity (as
defined in the regulations) to total assets that is equal to or
less than 2.0%. As of December 31, 2010, East Boston
Savings Bank was classified as a well capitalized
institution.
Undercapitalized banks must adhere to growth,
capital distribution (including dividend) and other limitations
and are required to submit a capital restoration plan. A
banks compliance with such a plan is required to be
guaranteed by any company that controls the undercapitalized
institution in an amount equal to the lesser of 5.0% of the
institutions total assets when deemed undercapitalized or
the amount necessary to achieve the status of adequately
capitalized. If an undercapitalized bank fails to
submit an acceptable plan, it is treated as if it is
significantly undercapitalized. Significantly
undercapitalized banks must comply with one or more of a
number of additional restrictions, including but not limited to
an order by the FDIC to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets,
cease receipt of deposits from correspondent banks or dismiss
directors or officers, and restrictions on interest rates paid
on deposits, compensation of executive officers and capital
distributions by the parent holding company. Critically
undercapitalized institutions are subject to additional
measures including, subject to a narrow exception, the
appointment of a receiver or conservator within 270 days
after it obtains such status.
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Transaction
with Affiliates and Regulation W of the Federal Reserve
Regulations
Transactions between banks and their affiliates are governed by
Sections 23A and 23B of the Federal Reserve Act. An
affiliate of a bank is any company or entity that controls, is
controlled by or is under common control with the bank. In a
holding company context, the parent bank holding company and any
companies which are controlled by such parent holding company
are affiliates of the bank. Generally, Sections 23A and 23B
of the Federal Reserve Act and Regulation W (i) limit
the extent to which the bank or its subsidiaries may engage in
covered transactions with any one affiliate to an
amount equal to 10.0% of such institutions capital stock
and surplus, and contain an aggregate limit on all such
transactions with all affiliates to an amount equal to 20.0% of
such institutions capital stock and surplus and
(ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the
institution or subsidiary as those provided to a non-affiliate.
The term covered transaction includes the making of
loans, purchase of assets, issuance of a guarantee and other
similar transactions. In addition, loans or other extensions of
credit by the financial institution to the affiliate are
required to be collateralized in accordance with the
requirements set forth in Section 23A of the Federal
Reserve Act.
Financial subsidiaries of banks are treated as
affiliates for purposes of Sections 23A and 23B of the
Federal Reserve Act. However, (i) the 10.0% capital limit
on transactions between the bank and such financial subsidiary
as an affiliate is not applicable, and (ii) the investment
by the bank in the financial subsidiary does not include
retained earnings in the financial subsidiary. Certain
anti-evasion provisions have been included that relate to the
relationship between any financial subsidiary of a bank and
sister companies of the bank: (1) any purchase of, or
investment in, the securities of a financial subsidiary by any
affiliate of the parent bank is considered a purchase or
investment by the bank; or (2) if the Federal Reserve Board
determines that such treatment is necessary, any loan made by an
affiliate of the parent bank to the financial subsidiary is to
be considered a loan made by the parent bank.
In addition, Sections 22(h) and (g) of the Federal
Reserve Act place restrictions on loans to executive officers,
directors and principal stockholders. Under Section 22(h)
of the Federal Reserve Act, loans to a director, an executive
officer and to a greater than 10.0% stockholder of a financial
institution, and certain affiliated interests of these, may not
exceed, together with all other outstanding loans to such person
and affiliated interests, the financial institutions loans
to one borrower limit, generally equal to 15.0% of the
institutions unimpaired capital and surplus.
Section 22(h) of the Federal Reserve Act also requires that
loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered
in comparable transactions to other persons and also requires
prior board approval for certain loans. In addition, the
aggregate amount of extensions of credit by a financial
institution to insiders cannot exceed the institutions
unimpaired capital and surplus. Furthermore, Section 22(g)
of the Federal Reserve Act places additional restrictions on
loans to executive officers.
Enforcement
The FDIC has extensive enforcement authority over insured state
savings banks, including East Boston Savings Bank. This
enforcement authority includes, among other things, the ability
to assess civil money penalties, issue cease and desist orders
and remove directors and officers. In general, these enforcement
actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices. The FDIC has
authority under federal law to appoint a conservator or receiver
for an insured bank under limited circumstances. The FDIC is
required, with certain exceptions, to appoint a receiver or
conservator for an insured state non-member bank if that bank
was critically undercapitalized on average during
the calendar quarter beginning 270 days after the date on
which the institution became critically
undercapitalized. The FDIC may also appoint itself as
conservator or receiver for an insured state non-member
institution under specific circumstances on the basis of the
institutions financial condition or upon the occurrence of
other events, including: (1) insolvency;
(2) substantial dissipation of assets or earnings through
violations of law or unsafe or unsound practices;
(3) existence of an unsafe or unsound condition to transact
business; and (4) insufficient capital, or the incurring of
losses that will deplete substantially all of the
institutions capital with no reasonable prospect of
replenishment without federal assistance.
Insurance
of Deposit Accounts
East Boston Savings Banks deposits are insured up to
applicable limits by the Deposit Insurance Fund of the Federal
Deposit Insurance Corporation.
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Under the Federal Deposit Insurance Corporations
risk-based assessment system, insured institutions are assigned
to one of four risk categories based on supervisory evaluations,
regulatory capital levels and certain other factors, with less
risky institutions paying lower assessments. An
institutions assessment rate depends upon the category to
which it is assigned, and certain adjustment specified by
Federal Deposit Insurance Corporation regulations. Assessment
rates currently range from seven to 77.5 basis points of
assessable deposits. The Federal Deposit Insurance Corporation
may adjust the scale uniformly except that no adjustment can
deviate more than three basis points from the base scale without
notice and comment. No institution may pay a dividend if in
default of the federal deposit insurance assessment.
The Dodd-Frank Act requires the Federal Deposit Insurance
Corporation to revise its procedures to base its assessments
upon total assets less tangible equity instead of deposits. The
Federal Deposit Insurance Corporation recently issued a final
rule that will implement that change beginning April 1,
2011.
The Federal Deposit Insurance Corporation imposed on all insured
institutions a special emergency assessment of five basis points
of total assets minus Tier 1 capital, as of June 30,
2009, (capped at ten basis points of an institutions
deposit assessment base), in order to cover losses to the
Deposit Insurance fund. That special assessment was collected on
September 30, 2009.
In lieu of further special assessments, however, the Federal
Deposit Insurance Corporation required insured institutions to
prepay estimated quarterly risk-based assessments for the fourth
quarter of 2009 through the fourth quarter of 2012. The
estimated assessments, which included an assumed annual
assessment base increase of 5%, were recorded as a prepaid
expense asset as of December 30, 2009. As of
December 31, 2009, and each quarter thereafter, a charge to
earnings is recorded for each regular assessment with an
offsetting credit to the prepaid asset. East Bostons
Savings Banks prepayment amounted to $5.1 million.
The Dodd-Frank Act increased the minimum target Deposit
Insurance Fund ratio from 1.15% of estimated insured deposits to
1.35% of estimated insured deposits. The Federal Deposit
Insurance Corporation must seek to achieve the 1.35% ratio by
September 30, 2020. Insured institutions with assets of
$10 billion or more are supposed to fund the increase. The
Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead
leaving it to the discretion of the Federal Deposit Insurance
Corporation and the Federal Deposit Insurance Corporation has
recently exercised that discretion by establishing a long range
fund of 2%.
The Federal Deposit Insurance Corporation has authority to
increase insurance assessments. A significant increase in
insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank. We
cannot predict what insurance assessment rates will be in the
future.
Insurance of deposits may be terminated by the Federal Deposit
Insurance Corporation upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any
applicable law, regulation, rule order or regulatory condition
imposed in writing. We do not know of any practice, condition or
violation that might lead to termination of deposit insurance.
In addition to the Federal Deposit Insurance Corporation
assessments, the Financing Corporation (FICO) is
authorized to impose and collect, with the approval of the
Federal Deposit Insurance Corporation, assessments for
anticipated payments, issuance costs and custodial fees on bonds
issued by the FICO in the 1980s to recapitalize the former
Federal Savings and Loan Insurance Corporation. The bonds issued
by the FICO are due to mature in 2017 through 2019. For the
quarter ended December 31, 2010, the annualized FICO
assessment was equal to 1.04 basis points of domestic
deposits maintained at an institution.
Temporary
Liquidity Guarantee Program.
On October 14, 2008, the Federal Deposit Insurance
Corporation announced a new program the Temporary
Liquidity Guarantee Program. This program has two components.
One guarantees newly issued senior unsecured debt of a
participating organization, up to certain limits established for
each institution, issued between October 14, 2008 and
June 30, 2009, later extended to October 30, 2009. The
Federal Deposit Insurance Corporation will pay the unpaid
principal and interest on a Federal Deposit Insurance
Corporation-guaranteed debt instrument upon the uncured failure
of the participating entity to make a timely payment of
principal or interest in accordance with the terms of the
instrument. The guarantee will remain in effect until
June 30, 2012, later extended to December 31,
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2012. In return for the Federal Deposit Insurance
Corporations guarantee, participating institutions will
pay the Federal Deposit Insurance Corporation a fee based on the
amount and maturity of the debt. East Boston Savings Bank opted
not to participate in this component of the Temporary Liquidity
Guarantee Program.
The other component of the program provides full federal deposit
insurance coverage for non-interest bearing transaction deposit
accounts, regardless of dollar amount, until June 30, 2010,
later extended to December 31, 2010. Through
December 31, 2009, an annualized 10 basis point
assessment on balances in noninterest-bearing transaction
accounts that exceed $250,000 was assessed to insured depository
institutions that have not opted out of this component of the
Temporary Liquidity Guarantee Program. Beginning January 1,
2010, the fees were based on the institutions risk
category rating assigned with respect to regular Federal Deposit
Insurance Corporation assessments. Institutions in Risk Category
I (generally well-capitalized institutions with composite CAMELS
1 or 2 ratings) paid an annualized assessment rate of
15 basis points. Institutions in Risk Category II
(generally adequately capitalized institutions with composite
CAMELS 3 or better) paid an annualized assessment rate of
20 basis points. Institutions in Risk Category III
or IV (generally under capitalized or composite CAMELS 4 or
5) paid an annualized assessment rate of 25 basis
points. East Boston Savings Bank opted not to participate in
this component of the Temporary Liquidity Guarantee Program.
However, the Dodd-Frank Act provided unlimited deposit insurance
coverage for certain noninterest bearing transaction accounts
from January 1, 2011 through December 31, 2012 without
opportunity for opt out. There will be no separate fee for such
coverage.
U.S.
Treasurys Troubled Asset Relief Program Capital Purchase
Program
The Emergency Economic Stabilization Act of 2008 provides the
U.S. Secretary of the Treasury with broad authority to
implement certain actions to help restore stability and
liquidity to U.S. markets. One of the provisions resulting
from the legislation is the Troubled Asset Relief Program
Capital Purchase Program (CPP), which provides
direct equity investment in perpetual preferred stock by the
U.S. Treasury Department in qualified financial
institutions. The program is voluntary and requires an
institution to comply with a number of restrictions and
provisions, including limits on executive compensation, stock
redemptions and declaration of dividends. East Boston Savings
Bank opted not to participate in the CPP.
Privacy
Regulations
Pursuant to the Gramm-Leach-Bliley Financial Modernization Act
of 1999, FDIC regulations generally require that East Boston
Savings Bank disclose its privacy policy, including identifying
with whom it shares a customers non-public personal
information, to customers at the time of establishing the
customer relationship and annually thereafter. In addition, East
Boston Savings Bank is required to provide its customers with
the ability to opt-out of having their personal
information shared with unaffiliated third parties and not to
disclose account numbers or access codes to non-affiliated third
parties for marketing purposes. East Boston Savings Bank
currently has a privacy protection policy in place and believes
that such policy is in compliance with the regulations. The
privacy provisions of the Act affect how consumer information is
transmitted through diversified financial companies and conveyed
to outside vendors.
Community
Reinvestment Act
Under the Community Reinvestment Act, or CRA, as amended and as
implemented by FDIC regulations, a bank has a continuing and
affirmative obligation, consistent with its safe and sound
operation, to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs
for financial institutions nor does it limit an
institutions discretion to develop the types of products
and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA does require the
FDIC, in connection with its examination of a bank, to assess
the institutions record of meeting the credit needs of its
community and to take such record into account in its evaluation
of certain applications by such institution, including
applications to acquire branches and other financial
institutions. The CRA requires the FDIC to provide a written
evaluation of an institutions CRA performance utilizing a
four-tiered descriptive rating system. East Boston Savings
Banks latest FDIC CRA rating was Outstanding.
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Massachusetts has its own statutory counterpart to the CRA which
is also applicable to East Boston Savings Bank. The
Massachusetts version is generally similar to the CRA but
utilizes a five-tiered descriptive rating system. Massachusetts
law requires the Massachusetts Commissioner of Banks to
consider, but not be limited to, a banks record of
performance under Massachusetts law in considering any
application by the bank to establish a branch or other
deposit-taking facility, to relocate an office or to merge or
consolidate with or acquire the assets and assume the
liabilities of any other banking institution. East Boston
Savings Banks most recent rating under Massachusetts law
was Satisfactory.
Consumer
Protection and Fair Lending Regulations
Massachusetts savings banks are subject to a variety of federal
and Massachusetts statutes and regulations that are intended to
protect consumers and prohibit discrimination in the granting of
credit. These statutes and regulations provide for a range of
sanctions for non-compliance with their terms, including
imposition of administrative fines and remedial orders, and
referral to the Attorney General for prosecution of a civil
action for actual and punitive damages and injunctive relief.
Certain of these statutes authorize private individual and class
action lawsuits and the award of actual, statutory and punitive
damages and attorneys fees for certain types of violations.
USA
Patriot Act
East Boston Savings Bank is subject to the USA PATRIOT Act,
which gives the federal government new powers to address
terrorist threats through enhanced domestic security measures,
expanded surveillance powers, increased information sharing, and
broadened anti-money laundering requirements. By way of
amendments to the Bank Secrecy Act, Title III of the USA
PATRIOT Act takes measures intended to encourage information
sharing among bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose
affirmative obligations on a broad range of financial
institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents, and parties registered under the
Commodity Exchange Act.
Other
Regulations
Interest and other charges collected or contracted for by East
Boston Savings Bank are subject to state usury laws and federal
laws concerning interest rates. Loan operations are also subject
to state and federal laws applicable to credit transactions,
such as the:
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Home Mortgage Disclosure Act of 1975, requiring financial
institutions to provide information to enable the public and
public officials to determine whether a financial institution is
fulfilling its obligation to help meet the housing needs of the
community it serves;
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Equal Credit Opportunity Act, prohibiting discrimination on the
basis of race, creed or other prohibited factors in extending
credit;
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Fair Credit Reporting Act of 1978, governing the use and
provision of information to credit reporting agencies;
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Massachusetts Debt Collection Regulations, establishing
standards, by defining unfair or deceptive acts or practices,
for the collection of debts from persons within the Commonwealth
of Massachusetts and the General Laws of Massachusetts,
Chapter 167E, which governs East Boston Savings Banks
lending powers; and
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Rules and regulations of the various federal and state agencies
charged with the responsibility of implementing such federal and
state laws.
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The deposit operations of East Boston Savings Bank also are
subject to, among others, the:
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Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes
procedures for complying with administrative subpoenas of
financial records;
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Check Clearing for the 21st Century Act (also known as
Check 21), which gives substitute
checks, such as digital check images and copies made from
that image, the same legal standing as the original paper check;
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Electronic Funds Transfer Act and Regulation E promulgated
thereunder, and, as to East Boston Savings Bank
Chapter 167B of the General Laws of Massachusetts, which
govern automatic deposits to and withdrawals from deposit
accounts and customers rights and liabilities arising from
the use of automated teller machines and other electronic
banking services; and
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General Laws of Massachusetts, Chapter 167D, which governs
East Boston Savings Banks deposit powers.
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Federal
Reserve System
The Federal Reserve Board regulations require depository
institutions to maintain non-interest-earning reserves against
their transaction accounts (primarily NOW and regular checking
accounts). The Federal Reserve Board regulations generally
require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction
accounts aggregating $58.8 million or less (which may be
adjusted by the Federal Reserve Board) the reserve requirement
is 3.0%; and the amounts greater than $55.8 million require
a 10.0% reserve (which may be adjusted by the Federal Reserve
Board between 8.0% and 14.0%). The first $10.7 million of
otherwise reservable balances (which may be adjusted by the
Federal Reserve Board) are exempted from the reserve
requirements. East Boston Savings Bank is in compliance with
these requirements.
Federal
Home Loan Bank System
East Boston Savings Bank is a member of the Federal Home Loan
Bank System, which consists of 12 regional Federal Home Loan
Banks. The Federal Home Loan Bank provides a central credit
facility primarily for member institutions. Members of the
Federal Home Loan Bank are required to acquire and hold shares
of capital stock in the Federal Home Loan Bank. East Boston
Savings Bank was in compliance with this requirement with an
investment in stock of the Federal Home Loan Bank of Boston
(FHLB-Boston) at December 31, 2010 of
$12.5 million. Based on redemption provisions of the
FHLB-Boston, the stock has no quoted market value and is carried
at cost. In 2008, due to sustained losses, the FHLB-Boston
announced a moratorium on redemption of members excess
stock. The Bank reviews for impairment based on the ultimate
recoverability of the cost basis of the FHLB-Boston stock. As of
December 31, 2010, no impairment has been recognized.
At its discretion, the FHLB-Boston may declare dividends on the
stock. The Federal Home Loan Banks are required to provide funds
for certain purposes including the resolution of insolvent
thrifts in the late 1980s and to contributing funds for
affordable housing programs. These requirements could reduce the
amount of dividends that the Federal Home Loan Banks pay to
their members and result in the Federal Home Loan Banks imposing
a higher rate of interest on advances to their members. As a
result of losses incurred, the FHLB-Boston suspended and did not
pay dividends in 2009 and 2010. However, the FHLB-Boston
declared a dividend in the first quarter of 2011 equal to an
annual yield of 0.30% per share to be paid on March 2,
2011. There can be no assurance that such dividends will
continue in the future. Further, there can be no assurance that
the impact of recent or future legislation on the Federal Home
Loan Banks also will not cause a decrease in the value of the
FHLB-Boston stock held by East Boston Savings Bank.
Holding
Company Regulation
Meridian Interstate Bancorp and Meridian Financial Services are
subject to examination, regulation, and periodic reporting under
the Bank Holding Company Act of 1956, as amended, as
administered by the Federal Reserve Board. Meridian Interstate
Bancorp and Meridian Financial Services are required to obtain
the prior approval of the Federal Reserve Board to acquire all,
or substantially all, of the assets of any bank or bank holding
company. Prior Federal Reserve Board approval would be required
for Meridian Interstate Bancorp or Meridian Financial Services
to acquire direct or indirect ownership or control of any voting
securities of any bank or bank holding company if, after such
acquisition, it would, directly or indirectly, own or control
more than 5% of any class of voting shares of the bank or bank
holding company. In addition to the approval of the Federal
Reserve Board,
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prior approval may also be necessary from other agencies having
supervisory jurisdiction over the bank to be acquired before any
bank acquisition can be completed.
A bank holding company is generally prohibited from engaging in
non-banking activities, or acquiring, direct or indirect control
of more than 5% of the voting securities of any company engaged
in non-banking activities. One of the principal exceptions to
this prohibition is for activities found by the Federal Reserve
Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Some of
the principal activities that the Federal Reserve Board has
determined by regulation to be so closely related to banking
are: (i) making or servicing loans; (ii) performing
certain data processing services; (iii) providing discount
brokerage services; (iv) acting as fiduciary, investment or
financial advisor; (v) leasing personal or real property;
(vi) making investments in corporations or projects
designed primarily to promote community welfare; and
(vii) acquiring a savings and loan association whose direct
and indirect activities are limited to those permitted for bank
holding companies.
The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding
company that meets specified conditions, including being
well capitalized and well managed, to
opt to become a financial holding company and
thereby engage in a broader array of financial activities than
previously permitted. Such activities can include insurance
underwriting and investment banking.
Meridian Interstate Bancorp and Meridian Financial Services are
subject to the Federal Reserve Boards capital adequacy
guidelines for bank holding companies (on a consolidated basis)
substantially similar to those of the Federal Deposit Insurance
Corporation for East Boston Savings Bank.
The Dodd-Frank Act, however, requires the Federal Reserve Board
to promulgate consolidate capital requirements for depository
institution holding companies that are no less stringent, both
quantitatively and in terms of components of capital, than those
applicable to institutions themselves. Instruments such as
cumulative preferred stock and trust preferred securities will
no longer be includable as Tier 1 capital, as is currently
the case with bank holding companies. Instruments issued by
May 19, 2010 were grandfathered for mutual holding
companies.
A bank holding company is generally required to give the Federal
Reserve Board prior written notice of any purchase or redemption
of then outstanding equity securities if the gross consideration
for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during
the preceding 12 months, is equal to 10% or more of the
companys consolidated net worth. The Federal Reserve Board
may disapprove such a purchase or redemption if it determines
that the proposal would constitute an unsafe and unsound
practice, or would violate any law, regulation, Federal Reserve
Board order or directive, or any condition imposed by, or
written agreement with, the Federal Reserve Board. The Federal
Reserve Board has adopted an exception to this approval
requirement for well-capitalized bank holding companies that
meet certain other conditions.
The Federal Reserve Board has issued a policy statement
regarding the payment of dividends by bank holding companies. In
general, the Federal Reserve Boards policies provide that
dividends should be paid only out of current earnings and only
if the prospective rate of earnings retention by the bank
holding company appears consistent with the organizations
capital needs, asset quality and overall financial condition.
The Federal Reserve Boards policies also require that a
bank holding company serve as a source of financial strength to
its subsidiary banks by standing ready to use available
resources to provide adequate capital funds to those banks
during periods of financial stress or adversity and by
maintaining the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its
subsidiary banks where necessary. The Dodd-Frank Act codifies
the source of strength doctrine and requires the issuance of
implementing regulations. Under the prompt corrective action
laws, the ability of a bank holding company to pay dividends may
be restricted if a subsidiary bank becomes undercapitalized.
These regulatory policies could affect the ability of Meridian
Interstate Bancorp or Meridian Financial Services to pay
dividends or otherwise engage in capital distributions.
Under the Federal Deposit Insurance Act, depository institutions
are liable to the Federal Deposit Insurance Corporation for
losses suffered or anticipated by the Federal Deposit Insurance
Corporation in connection with the
24
default of a commonly controlled depository institution or any
assistance provided by the Federal Deposit Insurance Corporation
to such an institution in danger of default.
The status of Meridian Interstate Bancorp and Meridian Financial
Services as registered bank holding companies under the Bank
Holding Company Act does not exempt them from certain federal
and state laws and regulations applicable to corporations
generally, including, without limitation, certain provisions of
the federal securities laws.
Meridian Interstate Bancorp, Meridian Financial Services and
East Boston Savings Bank will be affected by the monetary and
fiscal policies of various agencies of the United States
Government, including the Federal Reserve System. In view of
changing conditions in the national economy and in the money
markets, it is impossible for management to accurately predict
future changes in monetary policy or the effect of such changes
on the business or financial condition of Meridian Interstate
Bancorp, Meridian Financial Services or East Boston Savings Bank.
Massachusetts
Holding Company Regulation
Under the Massachusetts banking laws, a company owning or
controlling two or more banking institutions, including a
savings bank, is regulated as a bank holding company. The term
company is defined by the Massachusetts banking laws
similarly to the definition of company under the
Bank Holding Company Act. Each Massachusetts bank holding
company: (i) must obtain the approval of the Massachusetts
Board of Bank Incorporation before engaging in certain
transactions, such as the acquisition of more than 5% of the
voting stock of another banking institution; (ii) must
register, and file reports, with the Division; and (iii) is
subject to examination by the Division. In addition, a
Massachusetts mutual holding company: (i) may invest in the
stock of one or more banking institutions; (ii) may merge
with or acquire a mutual banking institution; (iii) may
merge with or acquire another bank holding company provided that
any such holding company has a subsidiary banking institution;
(iv) may invest in a corporation; (v) must register,
and file reports, with the Division; (vi) may engage
directly or indirectly only in activities permitted by law for a
Massachusetts bank holding company; and (vii) may take any
action with respect to any securities of any subsidiary banking
institution which are held by such mutual holding company.
Meridian Interstate Bancorp and Meridian Financial Services are
registered Massachusetts bank holding companies.
Federal
Securities Laws
Our common stock is registered with the Securities and Exchange
Commission under Section 12(b) of the Securities Exchange
Act of 1934, as amended. We are subject to information, proxy
solicitation, insider trading restrictions, and other
requirements under the Exchange Act.
Sarbanes-Oxley
Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues,
corporate governance, auditing and accounting, executive
compensation, and enhanced and timely disclosure of corporate
information. As directed by the Sarbanes-Oxley Act of 2002,
Meridian Interstate Bancorps Chief Executive Officer and
Chief Financial Officer each are required to certify that
Meridian Interstate Bancorps quarterly and Annual Reports
do not contain any untrue statement of a material fact. The
rules adopted by the Securities and Exchange Commission under
the Sarbanes-Oxley Act of 2002 have several requirements,
including having these officers certify that: they are
responsible for establishing, maintaining and regularly
evaluating the effectiveness of our internal controls; they have
made certain disclosures to our auditors and the audit committee
of the Board of Directors about our internal controls; and they
have included information in our quarterly and Annual Reports
about their evaluation and whether there have been significant
changes in our internal controls or in other factors that could
significantly affect internal controls.
25
Federal
Income Taxation
General
Meridian Interstate Bancorp reports its income on a calendar
year basis using the accrual method of accounting. The federal
income tax laws apply to Meridian Interstate Bancorp in the same
manner as to other corporations with some exceptions, including
the reserve for bad debts discussed below. The following
discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules
applicable to Meridian Interstate Bancorp. Meridian Interstate
Bancorps federal income tax returns have been either
audited or closed under the statute of limitations through
December 31, 2006. For its 2010 tax year, Meridian
Interstate Bancorps federal income tax rate was 34%.
Bad
Debt Reserves
For taxable years beginning before January 1, 1996, thrift
institutions that qualified under certain definitional tests and
other conditions of the Internal Revenue Code were permitted to
use certain favorable provisions to calculate their deductions
from taxable income for annual additions to their bad debt
reserve. A reserve could be established for bad debts on
qualifying real property loans, generally secured by interests
in real property improved or to be improved, under the
percentage of taxable income method or the experience method.
The reserve for non-qualifying loans was computed using the
experience method. Federal legislation enacted in 1996 repealed
the reserve method of accounting for bad debts and the
percentage of taxable income method for tax years beginning
after 1995 and required savings institutions to recapture or
take into income certain portions of their accumulated bad debt
reserves. However, those bad debt reserves accumulated prior to
1988 (Base Year Reserves) were not required to be
recaptured unless the savings institution failed certain tests.
At December 31, 2010, $9.8 million of East Boston
Savings Banks accumulated bad debt reserves would not be
recaptured into taxable income unless East Boston Savings Bank
makes a non-dividend distribution to Meridian
Interstate Bancorp as described below.
Distributions
If East Boston Savings Bank makes non-dividend
distributions to Meridian Interstate Bancorp, the
distributions will be considered to have been made from East
Boston Savings Banks un-recaptured tax bad debt reserves,
including the balance of its Base Year Reserves as of
December 31, 1987, to the extent of the non-dividend
distributions, and then from East Boston Savings
Banks supplemental reserve for losses on loans, to the
extent of those reserves, and an amount based on the amount
distributed, but not more than the amount of those reserves,
will be included in East Boston Savings Banks taxable
income. Non-dividend distributions include distributions in
excess of East Boston Savings Banks current and
accumulated earnings and profits, as calculated for federal
income tax purposes, distributions in redemption of stock and
distributions in partial or complete liquidation. Dividends paid
out of East Boston Savings Banks current or accumulated
earnings and profits will not be so included in Meridian
Interstate Bancorps taxable income.
The amount of additional taxable income triggered by a
non-dividend is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the
distribution. Therefore, if East Boston Savings Bank makes a
non-dividend distribution to Meridian Interstate Bancorp,
approximately one and one-half times the amount of the
distribution not in excess of the amount of the reserves would
be includable in income for federal income tax purposes,
assuming a 34% federal corporate income tax rate. East Boston
Savings Bank does not intend to pay dividends that would result
in a recapture of any portion of its bad debt reserves.
State
Taxation
Financial institutions in Massachusetts are required to file
combined income tax returns beginning with the year ended
December 31, 2009. Starting in 2010, decreasing over a
three year period, the Massachusetts excise tax rate for savings
banks is changing from 10.5% to 9.0% of federal taxable income,
adjusted for certain items. Taxable income includes gross income
as defined under the Internal Revenue Code, plus interest from
bonds, notes and evidences of indebtedness of any state,
including Massachusetts, less deductions, but not the credits,
allowable under the provisions of the Internal Revenue Code,
except for those deductions relating to dividends received and
income or franchise taxes imposed by a state or political
subdivision. Carryforwards and carrybacks of net operating
26
losses and capital losses are not allowed. Meridian Interstate
Bancorps state tax returns, as well as those of its
subsidiaries, are not currently under audit.
A financial institution or business corporation is generally
entitled to special tax treatment as a security
corporation under Massachusetts law provided that:
(a) its activities are limited to buying, selling, dealing
in or holding securities on its own behalf and not as a broker;
and (b) it has applied for, and received, classification as
a security corporation by the Commissioner of the
Massachusetts Department of Revenue. A security corporation that
is also a bank holding company under the Internal Revenue Code
must pay a tax equal to 0.33% of its gross income. A security
corporation that is not a bank holding company under the
Internal Revenue Code must pay a tax equal to 1.32% of its gross
income. Prospect, Inc. is qualified as a security corporation.
As such, it has received security corporation classification by
the Massachusetts Department of Revenue; and does not conduct
any activities deemed impermissible under the governing statutes
and the various regulations, directives, letter rulings and
administrative pronouncements issued by the Massachusetts
Department of Revenue.
Risks
Related to Our Business
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. 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
27
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.
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.
Government
responses to economic conditions may adversely affect our
operations, financial condition and earnings.
Newly enacted financial reform legislation will change the bank
regulatory framework, create an independent consumer protection
bureau that will assume the consumer protection responsibilities
of the various federal banking agencies, and establish more
stringent capital standards for banks and bank holding
companies. The legislation will also result in new regulations
affecting the lending, funding, trading and investment
activities of banks and bank holding companies. Bank regulatory
agencies also have been responding aggressively to concerns and
adverse trends identified in examinations. Ongoing uncertainty
and adverse developments in the financial services industry and
the domestic and international credit markets, and the effect of
new legislation and regulatory actions in response to these
conditions, may adversely affect our operations by restricting
our business activities, including our ability to originate or
sell loans, modify loan terms, or foreclose on property securing
loans. These measures are likely to increase our costs of doing
business and may have a significant adverse effect on our
lending activities, financial performance and operating
flexibility. In addition, these risks could affect the
performance and value of our loan and investment securities
portfolios, which also would negatively affect our financial
performance.
Furthermore, the Board of Governors of the Federal Reserve
System, in an attempt to help the overall economy, has, among
other things, kept interest rates low through its targeted
federal funds rate and the purchase of mortgage-backed
securities. If the Federal Reserve Board increases the federal
funds rate, overall interest rates will likely rise, which may
negatively impact the housing markets and the U.S. economic
recovery. In addition, deflationary pressures, while possibly
lowering our operating costs, could have a significant negative
effect on our borrowers, especially our business borrowers, and
the values of underlying collateral securing loans, which could
negatively affect our financial performance.
We
have been negatively affected by current market and economic
conditions. A continuation or worsening of these conditions
could adversely affect our operations, financial condition and
earnings.
The severe economic recession of 2008 and 2009 and the weak
economic recovery since then have resulted in continued
uncertainty in the financial markets and the expectation of weak
general economic conditions continuing through 2011.
Unemployment remains at very high levels and is expected to
improve at a slow rate in the near future. Our lending business
is tied, in large part, to the housing market and real estate
markets in general. The continuing housing slump has resulted in
reduced demand for the construction of new housing, declines in
home prices, and could ultimately result in increased
delinquencies on our residential, commercial, multi-family and
construction mortgage loans. Further, the ongoing concern about
the stability of the financial markets in general has caused
many lenders to reduce or cease providing funding to borrowers.
These conditions may also cause a further reduction in loan
demand, and increases in our non-performing assets, net
charge-offs and provisions for loan losses. Continued negative
developments in the financial services industry and the domestic
and international credit markets may significantly affect the
markets in which we do business, the market for and value of our
loans and investments, and our ongoing operations, costs and
profitability. Moreover, continued declines in the stock market
in general, or stock values of financial institutions and their
holding companies specifically, could adversely affect our stock
performance.
The
Federal Deposit Insurance Corporation actions to recapitalize
the Deposit Insurance Fund could hurt our profits.
The Federal Deposit Insurance Corporation adopted a rule
pursuant to which all insured depository institutions prepaid on
December 30, 2009 their estimated assessments for all of
2010, 2011 and 2012. The assessment rate for the fourth quarter
of 2009 and for 2010 is based on each institutions total
base assessment rate for the third quarter
28
of 2009, modified to assume that the assessment rate in effect
on September 30, 2009 had been in effect for the entire
third quarter, and the assessment rate for 2011 and 2012 will be
equal to the modified third quarter assessment rate plus an
additional three basis points. In addition, each
institutions base assessment rate for each period will be
calculated using its third quarter assessment base, adjusted
quarterly for an estimated 5% annual growth rate in the
assessment base through the end of 2012. We recorded the
pre-payment as a prepaid expense, which will be amortized to
expense over three years. Based on our deposits and assessment
rate as of September 30, 2009, our prepayment amount was
$5.1 million which was paid during the quarter ended
December 31, 2009.
The Dodd-Frank Act increased the minimum target Deposit
Insurance Fund ratio from 1.15% of estimated insured deposits to
1.35% of estimated insured deposits. The Federal Deposit
Insurance Corporation must seek to achieve the 1.35% ratio by
September 30, 2020. Insured institutions with assets of
$10 billion or more are supposed to fund the increase. The
Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead
leaving it to the discretion of the Federal Deposit Insurance
Corporation and the Federal Deposit Insurance Corporation has
recently exercised that discretion by establishing a long range
fund ratio of 2%. The Federal Deposit Insurance Corporation has
authority to increase insurance assessments. A significant
increase in insurance premiums would likely have an adverse
effect on our operating expenses and results of operations. We
cannot predict what insurance assessment rates will be in the
future.
Our
emphasis on commercial real estate, multi-family, commercial
business and construction lending involves risks.
In recent years, the Company has focused on shifting its asset
mix to reduce the one- to four-family residential loan portfolio
and increase commercial real estate, multi-family, commercial
business and construction loans. As of December 31, 2010,
our commercial real estate, multi-family, commercial business
and construction loans totaled $712.1 million, or 60.2% of
our loan portfolio. As a result, our credit risk profile is
higher than traditional savings institutions that have higher
concentrations of one- to four-family residential loans. Also,
these types of commercial lending activities, while potentially
more profitable than one- to four-family residential lending,
are generally more sensitive to regional and local economic
conditions, making loss levels more difficult to predict.
Collateral evaluation and financial statement analysis in these
types of loans requires a more detailed analysis at the time of
loan underwriting and on an ongoing basis. A further decline in
real estate values would reduce the value of the real estate
collateral securing our loans and increase the risk that we
would incur losses if borrowers defaulted on their loans. In
addition, the repayment of commercial real estate and
multi-family loans generally is dependent, in large part, on the
successful operation of the property securing the loan or the
business conducted on the property securing the loan. In
addition, loan balances for commercial real estate, multi-family
and construction loans are typically larger than those for
permanent single-family and consumer loans. Accordingly, when
there are defaults and losses on these types of loans, they are
often larger on a per loan basis than those for permanent one-
to four-family residential and consumer loans. Commercial
business loans expose us to additional risks since they
typically are made on the basis of the borrowers ability
to make repayments from the cash flow of the borrowers
business and are secured by non-real estate collateral that may
depreciate over time. A secondary market for most types of
commercial real estate, multi-family, commercial business and
construction loans is not readily liquid, so we have less
opportunity to mitigate credit risk by selling part or all of
our interest in these loans.
Our construction loans are based upon estimates of costs and
values associated with the completed project. These estimates
may be inaccurate. Construction lending involves additional
risks when compared with permanent residential lending because
funds are advanced upon the security of the project, which is of
uncertain value prior to its completion. Because of the
uncertainties inherent in estimating construction costs, as well
as the market value of the completed project and the effects of
governmental regulation of real property, it is relatively
difficult to evaluate accurately the total funds required to
complete a project and the related
loan-to-value
ratio. This type of lending also typically involves higher loan
principal amounts and is often concentrated with a small number
of builders. In addition, generally during the term of a
construction loan, interest may be funded by the borrower or
disbursed from an interest reserve set aside from the
construction loan budget. These loans often involve the
disbursement of substantial funds with repayment substantially
dependent on the success of the ultimate project and the ability
of the borrower to sell or lease the property or obtain
permanent take-out financing, rather than the ability of the
borrower or guarantor to repay principal and interest. If our
appraisal of the value of a completed project proves to be
29
overstated, we may have inadequate security for the repayment of
the loan upon completion of construction of the project and may
incur a loss. A discounted cash flow analysis is
utilized for determining the value of any construction project
of five or more units. Our ability to continue to originate a
significant amount of construction loans is dependent on the
recovery of the strength of the housing market in our market
areas.
The credit risk related to commercial real estate and
multi-family loans is considered to be greater than the risk
related to one- to four-family residential or consumer loans
because the repayment of commercial real estate loans and
multi-family typically is dependent on the income stream of the
real estate securing the loan as collateral and the successful
operation of the borrowers business, which can be
significantly affected by conditions in the real estate markets
or in the economy. For example, if the cash flow from the
borrowers project is reduced as a result of leases not
being obtained or renewed, the borrowers ability to repay
the loan may be impaired. In addition, some of our commercial
real estate loans are not fully amortizing and contain large
balloon payments upon maturity. These balloon payments may
require the borrower to either sell or refinance the underlying
property in order to make the balloon payment.
Further, if we foreclose on a commercial real estate and
multi-family or construction loan, our holding period for the
collateral may be longer than for one- to four-family
residential mortgage loans because there are fewer potential
purchasers of the collateral. These loans also generally have
relatively large balances to single borrowers or related groups
of borrowers. Accordingly, if we make any errors in judgment in
the collectibility of our commercial real estate loans, any
resulting charge-offs may be larger on a per loan basis than
those incurred with our residential or consumer loan portfolios.
The
Companys recent business acquisition could have an impact
on our earnings and results of operations that may negatively
impact the value of the Companys stock.
The Company completed its acquisition of Mt. Washington on
January 4, 2010 and successfully integrated Mt.
Washingtons operations and converted Mt. Washingtons
accounts to the Companys data servicing during 2010. The
acquisition materially increased the size and complexity of our
operations. Although the acquisition did not have an adverse
effect upon the Companys operating results during 2010,
the acquired operations may not achieve levels of profitability
comparable to those achieved by the Companys existing
operations, or otherwise perform as expected. Such adverse
effects on the Companys earnings and results of operations
may have a negative impact on the value of the Companys
stock.
Legislative
or regulatory actions responding to financial and market
weakness could affect us adversely. There can be no assurance
that actions of the U.S. government, Federal Reserve and other
governmental and regulatory bodies for the purpose of
stabilizing the financial markets will achieve the intended
effect.
The potential exists for additional federal or state laws and
regulations regarding lending and funding practices and
liquidity standards, and bank regulatory agencies are expected
to be active in responding to concerns and trends identified in
examinations, including the expected issuance of many formal
enforcement orders. Actions taken to date, as well as potential
actions, may not have the beneficial effects that are intended,
particularly with respect to the extreme levels of volatility
and limited credit availability currently being experienced. In
addition, new laws, regulations, and other regulatory changes
will increase our costs of regulatory compliance and of doing
business, and otherwise affect our operations. Our FDIC
insurance premiums have increased, and may continue to increase,
because market developments have significantly depleted the
insurance fund of the FDIC and reduced the ratio of reserves to
insured deposits. New laws, regulations, and other regulatory
changes, along with negative developments in the financial
services industry and the credit markets, may significantly
affect the markets in which we do business, the markets for and
value of our loans and investments, and our ongoing operations,
costs and profitability.
We
operate in a highly regulated environment and we may be
adversely affected by changes in laws and
regulations.
The Company is subject to extensive regulation, supervision and
examination by the Massachusetts Commissioner of Banks, the
Federal Deposit Insurance Corporation and the Federal Reserve
Board. Such regulation and supervision governs the activities in
which an institution and its holding company may engage
30
and are intended primarily for the protection of the insurance
fund and the depositors and borrowers of East Boston Savings
Bank rather than for holders of Meridian Interstate Bancorp
common stock. Regulatory authorities have extensive discretion
in their supervisory and enforcement activities, including the
imposition of restrictions on our operations, the classification
of our assets and determination of the level of our allowance
for loan losses. Any change in such regulation and oversight,
whether in the form of regulatory policy, regulations,
legislation or supervisory action, may have a material impact on
our operations.
Our
business strategy includes the continuation of significant
growth plans, and our financial condition and results of
operations could be negatively affected if we fail to grow or
fail to manage our growth effectively.
We expect to continue to experience growth in the amount of our
assets, the level of our deposits and the scale of our
operations. Achieving our growth targets requires us to attract
customers that currently bank at other financial institutions in
our market, thereby increasing our share of the market. Our
ability to successfully grow will depend on a variety of
factors, including our ability to attract and retain experienced
bankers, the continued availability of desirable business
opportunities, the competitive responses from other financial
institutions in our market areas and our ability to manage our
growth. While we believe we have the management resources and
internal systems in place to successfully manage our future
growth, there can be no assurance growth opportunities will be
available or that we will successfully manage our growth. If we
do not manage our growth effectively, we may not be able to
achieve our business plan, and our business could be harmed.
Economic
conditions may adversely affect our liquidity.
In recent years, significant declines in the values of
mortgage-backed securities and derivative securities issued by
financial institutions, government sponsored entities, and major
commercial and investment banks has led to decreased confidence
in financial markets among borrowers, lenders, and depositors,
as well as disruption and extreme volatility in the capital and
credit markets and the failure of some entities in the financial
sector. As a result, many lenders and institutional investors
have reduced or ceased to provide funding to borrowers.
Continued turbulence in the capital and credit markets may
adversely affect our liquidity and financial condition and the
willingness of certain counterparties and customers to do
business with us.
Future
legislative or regulatory actions responding to perceived
financial and market problems could impair our rights against
borrowers.
As a result of the recent financial crisis, the potential exists
for the promulgation of new federal or state laws and
regulations regarding lending and funding practices and
liquidity standards, and bank regulatory agencies are expected
to be active in responding to concerns and trends identified in
examinations, which are expected to result in the issuance of
many formal enforcement orders. Negative developments in the
financial services industry and the credit markets, and the
impact of new legislation in response to these developments, may
negatively affect our operations by restricting our business
operations, including our ability to originate or sell loans and
pursue business opportunities. Compliance with such regulation
also will likely increase our costs.
There have been proposals made by members of Congress and others
that would reduce the amount distressed borrowers are otherwise
contractually obligated to pay under their mortgage loans and
limit an institutions ability to foreclose on mortgage
collateral. Were proposals such as these, or other proposals
limiting our rights as a creditor, to be implemented, we could
experience increased credit losses or increased expense in
pursuing our remedies as a creditor.
A
downturn in the local economy or a decline in local real estate
values could hurt our profits.
Unlike larger financial institutions that are more
geographically diversified, our profitability depends on the
general economic conditions in the Boston metropolitan area.
Local economic conditions have a significant impact on our
commercial real estate and construction and consumer loans, the
ability of the borrowers to repay these loans and the value of
the collateral securing these loans. Almost all of our loans are
to borrowers or secured by collateral located in Massachusetts.
As a result of this concentration, the downturn in the local
economy has resulted in an
31
increase in non-performing loans, which can result in higher
levels of loan loss provision expense. Moreover, a significant
decline in general economic conditions, caused by inflation,
recession, acts of terrorism, an outbreak of hostilities or
other international or domestic calamities, unemployment or
other factors beyond our control could further impact these
local economic conditions and could further negatively affect
the financial results of our banking operations. A decline in
real estate values in our market area may have caused some of
our mortgage loans to become inadequately collateralized, which
would expose us to a greater risk of loss on defaulted loans
which would negatively impact our net income. The Company
experienced increased levels of non-performing loans and
provision for loan losses in 2009 and 2010 as a result of a
downturn in the local real estate market; refer to
Managements Discussion and Analysis of Results of
Operations and Financial Condition Analysis of
Non-performing and Classified Assets.
If our
allowance for loan losses is not sufficient to cover actual loan
losses, our earnings could decrease.
The Company maintains an allowance for loan losses, which is
established through a provision for loan losses that represents
managements best estimate of probable losses within the
existing portfolio of loans. The Company makes various
assumptions and judgments about the collectibility of its loan
portfolio, including the creditworthiness of borrowers and the
value of the real estate and other assets serving as collateral
for the repayment of loans. In determining the adequacy of the
allowance for loan losses, the Company relies on its experience
and its evaluation of economic conditions. If its assumptions
prove to be incorrect, its current allowance for loan losses may
not be sufficient to cover losses inherent in its loan portfolio
and adjustment may be necessary to allow for different economic
conditions or adverse developments in its loan portfolio.
Consequently, a problem with one or more loans could require the
Company to significantly increase the level of its provision for
loan losses. In addition, federal and state regulators
periodically review the Companys allowance for loan losses
and may require it to increase its provision for loan losses or
recognize further loan charge-offs. Material additions to the
allowance would materially decrease the Companys net
income.
Changes
in interest rates could hurt our profits.
Our profitability, like most financial institutions, depends to
a large extent upon our net interest income, which is the
difference between our interest income on interest-earning
assets, such as loans and securities, and our interest expense
on interest-bearing liabilities, such as deposits and borrowed
funds. Accordingly, our results of operations depend largely on
movements in market interest rates and our ability to manage our
interest-rate-sensitive assets and liabilities in response to
these movements. Factors such as inflation, recession and
instability in financial markets, among other factors beyond the
Companys control, may affect interest rates.
If interest rates rise, and if rates on our deposits reprice
upwards faster than the rates on our long-term loans and
investments, we would experience compression of our interest
rate spread, which would have a negative effect on our
profitability. Decreases in interest rates can result in
increased prepayments of loans and mortgage-related securities,
as borrowers refinance to reduce their borrowing costs. Under
these circumstances, we are subject to reinvestment risk as we
may have to redeploy such loan or securities proceeds into
lower-yielding assets, which might also negatively impact our
income.
While the Company pursues an asset/liability strategy designed
to mitigate its risk from changes in interest rates, changes in
interest rates can still have a material adverse effect on the
Companys financial condition and results of operations.
Changes in the level of interest rates also may negatively
affect our ability to originate real estate loans, the value of
our assets and our ability to realize gains from the sale of our
assets, all of which ultimately affect our earnings. For further
discussion of how changes in interest rates could impact us, see
Managements Discussion and Analysis of Results of
Operations and Financial Condition Risk
Management Interest Rate Risk Management.
The
financial services sector represents a significant concentration
within our investment portfolio.
Within the investment portfolio, the Company has a significant
amount of marketable equity securities and corporate debt
securities, including mortgage-backed securities, issued by
companies in the financial services sector. Given the current
market conditions, this sector has an enhanced level of credit
risk.
32
Changes
in the valuation of our securities portfolio could hurt our
profits.
Management evaluates securities for
other-than-temporary
impairment on a monthly basis, with more frequent evaluation for
selected issues. 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. 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. Market valuation levels
of the securities portfolio have improved as of
December 31, 2010 compared to December 31, 2009. A
decline in the market for the securities portfolio could result
in further impairment charges on some issues. Refer to
Managements Discussion and Analysis of Results of
Operations and Financial Condition Securities
Portfolio.
Impairment
of goodwill could require charges to earnings, which could
result in a negative impact on our results of
operations.
Goodwill arises when a business is purchased for an amount
greater than the net fair value of its assets. The Company
recognized goodwill as an asset on the balance sheet in
connection with its acquisition of Mt. Washington. The
Company evaluates goodwill for impairment at least annually.
Although the Company determined that goodwill was not impaired
during 2010, a significant and sustained decline in our stock
price and market capitalization, a significant decline in our
expected future cash flows, a significant adverse change in the
business climate, slower growth rates or other factors could
result in impairment of goodwill. If the Company were to
conclude that a future write-down of the goodwill was necessary,
then the Company would record the appropriate charge to
earnings, which could be materially adverse to the results of
operations and financial position. For further discussion of the
Companys methodology of evaluating and impairing goodwill,
refer to Managements Discussion and Analysis of
Results of Operations and Financial Condition
Critical Accounting Policies Evaluation of Goodwill
and Analysis for Impairment..
The
suspension of dividends by the Federal Home Loan Bank of Boston
will negatively affect our earnings.
After suspending dividends in the fourth quarter of 2008, the
Federal Home Loan Bank of Boston declared a dividend in the
first quarter 2011 equal to an annual yield of 0.30% per share
to be paid on March 2, 2011. We received $138,000 in
dividends from the Federal Home Loan Bank of Boston during the
year ended December 31, 2008 and, as a result of the
moratorium, we did not receive any such dividends in 2009 and
2010. The inconsistency of the Federal Home Loan Bank of Boston
to pay dividends will reduce our earnings during such periods of
nonpayment.
If our
investment in stock of the Federal Home Loan Bank of Boston is
classified as
other-than-temporarily
impaired, our earnings and stockholders equity would
decrease.
We own common stock of the Federal Home Loan Bank of Boston. We
hold this stock to qualify for membership in the Federal Home
Loan Bank System and to be eligible to borrow funds under the
Federal Home Loan Bank of Bostons advance program. The
aggregate cost and fair value of our Federal Home Loan Bank of
Boston common stock as of December 31, 2010 was
$12.5 million based on its par value. There is no market
for our Federal Home Loan Bank of Boston common stock. Recent
published reports indicate that certain member banks of the
Federal Home Loan Bank System may be subject to accounting rules
and asset quality risks that could result in materially lower
regulatory capital levels. In an extreme situation, it is
possible that the capitalization of a Federal Home Loan Bank,
including the Federal Home Loan Bank of Boston, could be
substantially diminished. Consequently, we believe that there is
a risk that our investment in Federal Home Loan Bank of Boston
common stock could be impaired at some time in the future. If
this occurs, it would cause our earnings and stockholders
equity to decrease by the after-tax amount of the impairment
charge.
33
The
building of market share through de novo branching could cause
our expenses to increase faster than revenues.
We intend to continue to build market share in the greater
Boston metropolitan area through de novo branching. Since 2002,
we have opened eight de novo branches including the two most
recent branches opened in January 2011. There are considerable
costs involved in opening branches and new branches generally
require a period of time to generate the necessary revenues to
offset their costs, especially in areas in which we do not have
an established presence. Accordingly, any new branch can be
expected to negatively impact our earnings for some period of
time until the branch reaches certain economies of scale. Our
expenses could be further increased if we encounter delays in
the opening of any of our new branches. Finally, we have no
assurance our new branches will be successful after they have
been established.
Recent
health care legislation could increase our expenses or require
us to pass further costs on to our employees, which could
adversely affect our operations, financial condition and
earnings.
Legislation enacted in 2010 requires companies to provide
expanded health care coverage to their employees, such as
affordable coverage to part-time employees and coverage to
dependent adult children of employees. Companies will also be
required to enroll new employees automatically into one of their
health plans. Compliance with these and other new requirements
of the health care legislation will increase our employee
benefits expense, and may require us to pass these costs on to
our employees, which could give us a competitive disadvantage in
hiring and retaining qualified employees.
Our
funding sources may prove insufficient to replace deposits at
maturity and support our future growth.
We must maintain sufficient funds to respond to the needs of
depositors and borrowers. As a part of our liquidity management,
we use a number of funding sources in addition to core deposit
growth and repayments and maturities of loans and investments.
As we continue to grow, we are likely to become more dependent
on these sources, which include Federal Home Loan Bank advances,
proceeds from the sale of loans; federal funds purchased and
brokered certificates of deposit. Adverse operating results or
changes in industry conditions could lead to difficulty or an
inability to access these additional funding sources. Our
financial flexibility will be severely constrained if we are
unable to maintain our access to funding or if adequate
financing is not available to accommodate future growth at
acceptable interest rates. Finally, if we are required to rely
more heavily on more expensive funding sources to support future
growth, our revenues may not increase proportionately to cover
our costs. In this case, our operating margins and profitability
would be adversely affected.
Strong
competition within our market area could hurt our profits and
slow growth.
We face intense competition in making loans and attracting
deposits. Price competition for loans and deposits sometimes
results in us charging lower interest rates on our loans and
paying higher interest rates on our deposits and may reduce our
net interest income. Competition also makes it more difficult
and costly to attract and retain qualified employees. Many of
the institutions with which we compete have substantially
greater resources and lending limits than we have and may offer
services that we do not provide. We expect competition to
increase in the future as a result of legislative, regulatory
and technological changes and the continuing trend of
consolidation in the financial services industry. If we are not
able to effectively compete in our market area, our
profitability may be negatively affected, potentially limiting
our ability to pay dividends. The greater resources and broader
offering of deposit and loan products of some of our competitors
may also limit our ability to increase our interest-earning
assets. For more information about our market area and the
competition we face, see Item 1
Business Market Area and
Item 1 Business
Competition.
The
success of the Company is dependent on hiring and retaining
certain key personnel.
The Companys performance is largely dependent on the
talents and efforts of highly skilled individuals. The Company
relies on key personnel to manage and operate its business,
including major revenue generating functions such as loan and
deposit generation. The loss of key staff may adversely affect
the Companys ability to maintain and manage these
functions effectively, which could negatively affect the
Companys revenues. In addition, loss of key personnel
could result in increased recruiting and hiring expenses, which
could cause a decrease in the Companys net income. The
Companys continued ability to compete effectively depends
on its ability to attract new employees and
34
to retain and motivate its existing employees. In January 2010,
the Company hired a new Chief Financial Officer and retained and
integrated Mt. Washingtons senior management team into the
Companys senior management team.
We
could incur losses from our equity investment in Hampshire First
Bank, a de novo institution.
We own 40% of the capital stock of Hampshire First Bank, a New
Hampshire chartered bank, organized in 2006 and headquartered in
Manchester, New Hampshire. We account for our investment in
Hampshire First Bank by the equity method of accounting under
which our share of the net income or loss of Hampshire First
Bank is recognized as income or loss in our consolidated
financial statements. While Hampshire First Bank earned income
during 2009 and 2010, it incurred operating losses during its
initial years of operation and could record additional losses in
the future. We cannot guarantee that these losses may not
significantly affect our profitability.
|
|
Item 1b.
|
unresolved
staff comments
|
Not applicable.
At December 31, 2010, we conducted business through our 19
full service offices and two loan centers located in East
Boston, Revere, South Boston, Dorchester, Jamaica Plan, West
Roxbury, Everett, Medford, Melrose, Wakefield, Winthrop, Lynn,
Lynnfield, Peabody and Saugus, Massachusetts. In January 2011,
we opened two full service offices located in Revere and West
Roxbury, Massachusetts and we are planning to open our 22nd full
service office in Boston, Massachusetts in mid-2011. We own 17
and lease six of our offices. At December 31, 2010, the
total net book value of our land, buildings, furniture, fixtures
and equipment was $34.4 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
Size
|
|
Owned or
|
|
Lease
|
Location
|
|
(Square Feet)
|
|
Leased
|
|
Expiration Date
|
|
Offices:
|
|
|
|
|
|
|
|
|
|
|
Suffolk County:
|
|
|
|
|
|
|
|
|
|
|
10 Meridian Street, East Boston, MA 02128
|
|
|
6,900
|
|
|
|
Owned
|
|
|
Not Applicable
|
1 Bennington Street, East Boston, MA 02128
|
|
|
3,285
|
|
|
|
Owned
|
|
|
Not Applicable
|
856 Bennington Street, East Boston, MA 02128
|
|
|
6,900
|
|
|
|
Owned
|
|
|
Not Applicable
|
575 Broadway, Revere, MA 02151
|
|
|
4,400
|
|
|
|
Owned
|
|
|
Not Applicable
|
126 Squire Road, Revere, MA 02151
|
|
|
2,500
|
|
|
|
Owned
|
|
|
Not Applicable
|
430 West Broadway, South Boston, MA 02127
|
|
|
6,100
|
|
|
|
Owned
|
|
|
Not Applicable
|
455 West Broadway, South Boston, MA 02127
|
|
|
13,474
|
|
|
|
Owned
|
|
|
Not Applicable
|
708 East Broadway, South Boston, MA 02127
|
|
|
3,542
|
|
|
|
Owned
|
|
|
Not Applicable
|
501 Southampton Street, South Boston, MA 02127
|
|
|
3,100
|
|
|
|
Leased
|
|
|
01/31/2031
|
489 Gallivan Boulevard, Dorchester, MA 02124
|
|
|
3,000
|
|
|
|
Leased
|
|
|
08/31/2023
|
305 Talbot Avenue, Dorchester, MA 02124
|
|
|
4,478
|
|
|
|
Owned
|
|
|
Not Applicable
|
515 Centre Street, Jamaica Plain, MA 02130
|
|
|
3,061
|
|
|
|
Owned
|
|
|
Not Applicable
|
1985 Centre Street, West Roxbury, MA 02132
|
|
|
2,420
|
|
|
|
Leased
|
|
|
07/31/2030
|
Middelesex County:
|
|
|
|
|
|
|
|
|
|
|
1755 Revere Beach Parkway, Everett, MA 02149
|
|
|
8,800
|
|
|
|
Owned
|
|
|
Not Applicable
|
410 Riverside Avenue, Medford, MA 02155
|
|
|
3,200
|
|
|
|
Leased
|
|
|
06/01/2018
|
108 Main Street, Melrose, MA 02176
|
|
|
6,052
|
|
|
|
Owned
|
|
|
Not Applicable
|
381 Main Street, Wakefield, MA 01880
|
|
|
2,200
|
|
|
|
Leased
|
|
|
03/01/2013
|
15 Barlett Road, Winthrop, MA 02152
|
|
|
2,600
|
|
|
|
Owned
|
|
|
Not Applicable
|
Essex County:
|
|
|
|
|
|
|
|
|
|
|
335 Broadway, Lynn, MA 01904
|
|
|
6,000
|
|
|
|
Owned
|
|
|
Not Applicable
|
220 Broadway, Suite 401, Lynnfield, MA 01940
|
|
|
1,760
|
|
|
|
Owned
|
|
|
Not Applicable
|
67 Prospect Street, Peabody, MA 01960
|
|
|
108,000
|
|
|
|
Owned
|
|
|
Not Applicable
|
320 Central Street, Saugus, MA 01906
|
|
|
14,860
|
|
|
|
Owned
|
|
|
Not Applicable
|
317 Main Street, Saugus, MA 01906
|
|
|
3,870
|
|
|
|
Leased
|
|
|
01/31/2012
|
Planned Offices:
|
|
|
|
|
|
|
|
|
|
|
1134 Washington Street, Boston, MA 02118
|
|
|
2,507
|
|
|
|
Leased
|
|
|
05/31/2021
|
35
|
|
Item 3.
|
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.
Part
ii
|
|
Item 5.
|
market
for registrants common equity, related stockholder matters
and issuer purchases of equity securities
|
Market
Information and Holders
Our shares of common stock are traded on the NASDAQ Global
Select Market under the symbol EBSB. The approximate
number of shareholders of record of Meridian Interstate Bancorp,
Inc.s common stock as of March 1, 2011 was 1,005.
Certain shares of Meridian Interstate Bancorp, Inc. are held in
nominee or street name and accordingly,
the number of beneficial owners of such shares is not known or
included in the foregoing number.
The following table sets forth for each quarter of 2010 and 2009
the
intra-day
high and low sales prices per share of common stock as reported
by Nasdaq. No cash dividends were declared in either year. On
March 1, 2011, the closing market price of the
Companys common stock was $12.95.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
2010
|
|
High
|
|
Low
|
|
Declared
|
|
Fourth quarter
|
|
$
|
11.86
|
|
|
$
|
10.25
|
|
|
$
|
|
|
Third quarter
|
|
|
11.30
|
|
|
|
9.85
|
|
|
|
|
|
Second quarter
|
|
|
12.30
|
|
|
|
10.00
|
|
|
|
|
|
First quarter
|
|
|
10.70
|
|
|
|
8.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
2009
|
|
High
|
|
Low
|
|
Declared
|
|
Fourth quarter
|
|
$
|
9.49
|
|
|
$
|
8.20
|
|
|
$
|
|
|
Third quarter
|
|
|
9.67
|
|
|
|
7.39
|
|
|
|
|
|
Second quarter
|
|
|
9.00
|
|
|
|
7.10
|
|
|
|
|
|
First quarter
|
|
|
9.65
|
|
|
|
6.34
|
|
|
|
|
|
Dividends
Meridian Interstate Bancorp has not yet determined whether it
will pay a dividend on the common stock. The Board of Directors
will consider a policy of paying regular cash dividends. The
Board of Directors may declare and pay periodic special cash
dividends in addition to, or in lieu of, regular cash dividends.
In determining whether to declare or pay any dividends, whether
regular or special, the Board of Directors will take into
account our financial condition and results of operations, tax
considerations, capital requirements, industry standards and
economic conditions. The regulatory restrictions that affect the
payment of dividends by East Boston Savings Bank to us discussed
below also will be considered. We cannot guarantee that we will
pay dividends or that, if paid, we will not reduce or eliminate
dividends in the future.
If Meridian Interstate Bancorp pays dividends to its
stockholders, it will be required to pay dividends to Meridian
Financial Services. The Federal Reserve Boards current
policy prohibits the waiver of dividends by mutual holding
companies. In addition, Massachusetts banking regulations
prohibit Meridian Financial Services from waiving dividends
declared and paid by Meridian Interstate Bancorp unless the
Massachusetts Commissioner of Banks does not object to the
waiver and provided the waiver is not detrimental to the safe
and sound operation of
36
East Boston Savings Bank. Accordingly, we do not currently
anticipate that Meridian Financial Services will be permitted to
waive dividends paid by Meridian Interstate Bancorp.
Meridian Interstate Bancorp is subject to Massachusetts law,
which prohibits distributions to stockholders if, after giving
effect to the distribution, the Company would not be able to pay
its debts as they become due in the usual course of business or
the Companys total assets would be less than the sum of
its total liabilities plus the amount that would be needed, if
the Company were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon
dissolution of stockholders whose preferential rights are
superior to those receiving the distribution.
Dividends from Meridian Interstate Bancorp may depend, in part,
upon receipt of dividends from East Boston Savings Bank because
Meridian Interstate Bancorp will have no source of income other
than dividends from East Boston Savings Bank and earnings from
investment of net proceeds from the offering retained by
Meridian Interstate Bancorp. Massachusetts banking law and
Federal Deposit Insurance Corporation regulations limit
distributions from East Boston Savings Bank to Meridian
Interstate Bancorp. For example, East Boston Savings Bank could
not pay dividends if it were not in compliance with applicable
regulatory capital requirements. See Regulation and
Supervision State Bank Regulation
Dividends and Federal Bank
Regulation Prompt Corrective Regulatory
Action. In addition, Meridian Interstate Bancorp is
subject to the Federal Reserve Boards policy that
dividends should be paid only out of current earnings and only
if the prospective rate of earnings retention by Meridian
Interstate Bancorp appears consistent with its capital needs,
asset quality and overall financial condition. See
Regulation and Supervision Holding Company
Regulation.
Any payment of dividends by East Boston Savings Bank to Meridian
Interstate Bancorp that would be deemed to be drawn out of East
Boston Savings Banks bad debt reserves would require East
Boston Savings Bank to pay federal income taxes at the
then-current income tax rate on the amount deemed distributed.
See Federal and State Taxation Federal
Income Taxation and Note 11, Income Taxes
in the Notes to Consolidated Financial Statements included in
Item 8, Financial Statements and Supplementary Data
within this report. Meridian Interstate Bancorp does not
contemplate any distribution by East Boston Savings Bank that
would result in this type of tax liability.
Recent
Sales of Unregistered Securities; Use of Proceeds from
Registered Securities
Not Applicable.
Securities
Authorized for Issuance under Equity Compensation
Plans
Information regarding stock-based compensation awards
outstanding and available for future grants as of
December 31, 2010, represents stock-based compensation
plans approved by stockholders. There are no plans that have not
been approved by stockholders. Additional information is
presented in Note 13, Employee Benefits, in the
Notes to Consolidated Financial Statements included in
Item 8, Financial Statements and Supplementary Data,
within this report. Additional information regarding the
Companys equity compensation plans is included in
Part III, Item 12(d) of this
Form 10-K.
37
Purchases
of Equity Securities by the Issuer and Affiliated
Purchases
The following table sets forth information with respect to any
purchase made by or on behalf of the Company during the
indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
Number (or
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
Shares (or Units)
|
|
|
Dollar Value) of
|
|
|
|
(a)
|
|
|
|
|
|
Purchased as
|
|
|
Shares (or Units)
|
|
|
|
Total Number
|
|
|
(b)
|
|
|
Part of Publicly
|
|
|
that May Yet Be
|
|
|
|
of Shares (or
|
|
|
Average Price
|
|
|
Announced
|
|
|
Purchased Under
|
|
|
|
Units)
|
|
|
Paid per Share
|
|
|
Plans or
|
|
|
the Plans or
|
|
Period
|
|
Purchased
|
|
|
(or Unit)
|
|
|
Programs(1)
|
|
|
Programs
|
|
|
October 1 - 31, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
319,061
|
|
November 1 - 30, 2010
|
|
|
20,460
|
|
|
$
|
10.66
|
|
|
|
20,460
|
|
|
|
298,601
|
|
December 1 - 31, 2010
|
|
|
15,000
|
|
|
$
|
10.88
|
|
|
|
15,000
|
|
|
|
283,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
35,460
|
|
|
$
|
10.75
|
|
|
|
35,460
|
|
|
|
283,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
38
Performance
Graph
Our shares of common stock began trading on the NASDAQ Global
Select Market on January 23, 2008. Accordingly, no
comparative stock performance information is available for
periods ending prior to this date. The performance graph below
compares the Companys cumulative shareholder return on its
common stock since the inception of trading on January 23,
2008 to the cumulative total return of the Nasdaq Composite and
the SNL Bank and Thrift Composite. Total shareholder return is
measured by dividing total dividends (assuming dividend
reinvestment) for the measurement period plus share price change
for the period from the share price at the beginning of the
measurement period. The return is based on an initial investment
of $100.00.
Total
Return Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending
|
|
Index
|
|
|
01/22/08
|
|
|
|
06/30/08
|
|
|
|
12/31/08
|
|
|
|
06/30/09
|
|
|
|
12/31/09
|
|
|
|
06/30/10
|
|
|
|
12/31/10
|
|
Meridian Interstate Bancorp, Inc.
|
|
|
|
100.00
|
|
|
|
|
97.20
|
|
|
|
|
92.50
|
|
|
|
|
74.50
|
|
|
|
|
87.00
|
|
|
|
|
109.00
|
|
|
|
|
117.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SNL Bank and Thrift
|
|
|
|
100.00
|
|
|
|
|
77.44
|
|
|
|
|
63.90
|
|
|
|
|
54.93
|
|
|
|
|
63.04
|
|
|
|
|
62.32
|
|
|
|
|
70.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NASDAQ Composite
|
|
|
|
100.00
|
|
|
|
|
100.44
|
|
|
|
|
69.43
|
|
|
|
|
81.22
|
|
|
|
|
100.93
|
|
|
|
|
94.25
|
|
|
|
|
119.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
Item 6.
|
selected
financial data
|
The following table sets forth selected financial data for the
Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Financial Condition Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,835,830
|
|
|
$
|
1,211,386
|
|
|
$
|
1,065,352
|
|
|
$
|
1,003,226
|
|
|
$
|
899,563
|
|
Securities available for sale
|
|
|
360,602
|
|
|
|
293,367
|
|
|
|
252,529
|
|
|
|
267,058
|
|
|
|
281,662
|
|
Loans, net
|
|
|
1,173,562
|
|
|
|
813,300
|
|
|
|
704,104
|
|
|
|
568,104
|
|
|
|
529,650
|
|
Deposits
|
|
|
1,455,215
|
|
|
|
922,475
|
|
|
|
796,852
|
|
|
|
774,446
|
|
|
|
736,989
|
|
Borrowings
|
|
|
148,683
|
|
|
|
75,410
|
|
|
|
65,486
|
|
|
|
36,527
|
|
|
|
40,589
|
|
Total stockholders equity
|
|
|
215,611
|
|
|
|
200,415
|
|
|
|
189,840
|
|
|
|
115,684
|
|
|
|
110,275
|
|
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
$
|
82,059
|
|
|
$
|
56,667
|
|
|
$
|
52,897
|
|
|
$
|
49,175
|
|
|
$
|
45,235
|
|
Interest expense
|
|
|
21,040
|
|
|
|
20,392
|
|
|
|
27,044
|
|
|
|
28,096
|
|
|
|
21,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
61,019
|
|
|
|
36,275
|
|
|
|
25,853
|
|
|
|
21,079
|
|
|
|
23,407
|
|
Provision for loan losses
|
|
|
3,181
|
|
|
|
4,082
|
|
|
|
5,638
|
|
|
|
465
|
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, after provision for loan losses
|
|
|
57,838
|
|
|
|
32,193
|
|
|
|
20,215
|
|
|
|
20,614
|
|
|
|
22,973
|
|
Non-interest income
|
|
|
11,721
|
|
|
|
5,295
|
|
|
|
8,373
|
|
|
|
4,652
|
|
|
|
3,342
|
|
Non-interest expenses
|
|
|
48,804
|
|
|
|
31,566
|
|
|
|
31,966
|
|
|
|
22,620
|
|
|
|
21,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
20,755
|
|
|
|
5,922
|
|
|
|
(3,378
|
)
|
|
|
2,646
|
|
|
|
4,421
|
|
Provision (benefit) for income taxes
|
|
|
7,381
|
|
|
|
2,159
|
|
|
|
(1,270
|
)
|
|
|
380
|
|
|
|
1,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,374
|
|
|
$
|
3,763
|
|
|
$
|
(2,108
|
)
|
|
$
|
2,266
|
|
|
$
|
3,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Performance Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return (loss) on average assets
|
|
|
0.77
|
%
|
|
|
0.32
|
%
|
|
|
(0.20
|
)%
|
|
|
0.25
|
%
|
|
|
0.38
|
%
|
Return (loss) on average equity
|
|
|
6.38
|
|
|
|
1.94
|
|
|
|
(1.09
|
)
|
|
|
2.01
|
|
|
|
3.12
|
|
Interest rate spread(1)
|
|
|
3.62
|
|
|
|
2.95
|
|
|
|
2.01
|
|
|
|
1.97
|
|
|
|
2.60
|
|
Net interest margin(2)
|
|
|
3.80
|
|
|
|
3.34
|
|
|
|
2.61
|
|
|
|
2.47
|
|
|
|
2.92
|
|
Non-interest expense to average assets
|
|
|
2.81
|
|
|
|
2.71
|
|
|
|
2.99
|
|
|
|
2.47
|
|
|
|
2.55
|
|
Efficiency ratio(3)
|
|
|
65.00
|
|
|
|
74.88
|
|
|
|
107.29
|
|
|
|
88.94
|
|
|
|
81.72
|
|
Average interest-earning assets to average interest-bearing
liabilities
|
|
|
114.06
|
|
|
|
120.76
|
|
|
|
122.16
|
|
|
|
115.31
|
|
|
|
111.47
|
|
Capital Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average equity to average assets
|
|
|
12.05
|
%
|
|
|
16.65
|
%
|
|
|
18.17
|
%
|
|
|
12.32
|
%
|
|
|
12.26
|
%
|
Total capital to risk weighted assets(4)
|
|
|
11.37
|
|
|
|
14.17
|
|
|
|
15.26
|
|
|
|
12.97
|
|
|
|
13.44
|
|
Tier I capital to risk weighted assets(4)
|
|
|
10.49
|
|
|
|
13.17
|
|
|
|
14.50
|
|
|
|
11.93
|
|
|
|
12.39
|
|
Tier I capital to average assets(4)
|
|
|
8.50
|
|
|
|
11.20
|
|
|
|
12.82
|
|
|
|
10.21
|
|
|
|
10.46
|
|
Asset Quality Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses/total loans
|
|
|
0.86
|
%
|
|
|
1.12
|
%
|
|
|
0.97
|
%
|
|
|
0.63
|
%
|
|
|
0.63
|
%
|
Allowance for loan losses/ non-performing loans
|
|
|
23.54
|
|
|
|
42.59
|
|
|
|
48.57
|
|
|
|
73.00
|
|
|
|
126.06
|
|
Net charge-offs/average loans outstanding
|
|
|
0.19
|
|
|
|
0.23
|
|
|
|
0.38
|
|
|
|
0.03
|
|
|
|
|
|
Non-performing loans/total loans
|
|
|
3.64
|
|
|
|
2.63
|
|
|
|
2.00
|
|
|
|
0.87
|
|
|
|
0.50
|
|
Non-performing assets/total assets
|
|
|
2.57
|
|
|
|
2.03
|
|
|
|
1.58
|
|
|
|
0.55
|
|
|
|
0.30
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.61
|
|
|
$
|
0.17
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Diluted earnings per share
|
|
|
0.61
|
|
|
|
0.17
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Book value per share
|
|
|
9.59
|
|
|
|
9.07
|
|
|
|
8.34
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Tangible book value per share
|
|
|
8.98
|
|
|
|
9.07
|
|
|
|
8.34
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Market value per share
|
|
|
11.79
|
|
|
|
8.70
|
|
|
|
9.25
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Number of shares outstanding at end of period
|
|
|
22,480,877
|
|
|
|
22,098,565
|
|
|
|
22,750,000
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Other data: Number of offices
|
|
|
19
|
|
|
|
13
|
|
|
|
12
|
|
|
|
11
|
|
|
|
11
|
|
|
|
|
(1) |
|
Represents the difference between the weighted average yield on
average interest-earning assets and the weighted average cost of
interest-bearing liabilities. |
|
(2) |
|
Represents net interest income as a percent of average
interest-earning assets. |
|
(3) |
|
Represents non-interest expense excluding data processing
contract termination costs, divided by the sum of net interest
income and non-interest income excluding gains or losses on
securities. |
|
(4) |
|
Ratios are for East Boston Savings Bank only. |
40
|
|
Item 7.
|
managements
discussion and analysis of financial condition and results of
operations
|
The objective of this section is to help readers understand our
views on our results of operations and financial condition. You
should read this discussion in conjunction with the consolidated
financial statements and notes to the consolidated financial
statements that appear elsewhere in the Annual Report.
Critical
Accounting Policies
The Companys summary of significant accounting policies
are described in Note 1 to the Consolidated Financial
Statements included in this Annual Report on
Form 10-K
for the year ended December 31, 2010. Critical accounting
estimates are necessary in the application of certain accounting
policies and procedures and are particularly susceptible to
significant change. Critical accounting policies are defined as
those involving significant judgments and assumptions by
management that could have a material impact on the carrying
value of certain assets or on income under different assumptions
or conditions. Management believes that the most critical
accounting policies, which involve the most complex or
subjective decisions or assessments, are as follows:
Allowance
for Loan Losses
The determination of the allowance for loan losses is considered
critical due to the high degree of judgment involved, the
subjectivity of the underlying assumptions used, and the
potential for changes in the economic environment that could
result in material changes in the amount of the allowance for
loan losses considered necessary. The allowance for loan losses
is utilized to absorb losses inherent in the loan portfolio. The
allowance represents managements estimate of losses as of
the date of the financial statements. The allowance includes an
allocated component for impaired loans and a general component
for pools of non-impaired loans.
The adequacy of the allowance for loan losses is evaluated on a
regular basis by management and is based upon managements
periodic review of the collectibility of the loans in light of
historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the
borrowers ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information
becomes available.
While management believes that it uses the best information
available to establish the allowance for loan losses, future
adjustments to the allowance may be necessary and results of
operations could be adversely affected if circumstances differ
substantially from the assumptions used in making its
determinations. Because the estimation of inherent losses cannot
be made with certainty, there can be no assurance that the
existing allowance for loan losses is adequate or that increases
will not be necessary should the quality of any loan deteriorate
as a result of the factors noted above. Any material increase in
the allowance for loan losses may adversely affect the financial
condition and results of operations and will be recorded in the
period in which the circumstances become known.
Valuation
of Goodwill and Analysis for Impairment
The Companys goodwill resulted from the acquisition of
another financial institution accounted for under the
acquisition method of accounting. The amount of goodwill
recorded at acquisition is impacted by the recorded fair value
of the assets acquired and liabilities assumed, which is an
estimate determined by the use of internal or other valuation
techniques.
Goodwill is subject to ongoing periodic impairment tests and is
evaluated using a two step impairment approach. Step one of the
impairment test compares the book value of the Company or the
reporting unit to the fair value of the Company, or to the fair
value of the reporting unit. If test one is failed, a more
detailed analysis is performed, which involves measuring the
excess of the fair value of the reporting unit, as determined in
step one, over the aggregate fair value of the individual
assets, liabilities, and identifiable intangibles by utilizing a
comparable analysis of relevant price multiples in recent market
transactions. In the event of future changes in fair value, the
Company may be exposed to an impairment charge that could be
material.
41
Other-than-temporary
Impairment of Securities
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.
From time to time, managements intent to hold depreciated
debt securities to recovery or maturity may change as a result
of prudent portfolio management. If managements intent
changes, unrealized losses are recognized either as impairment
charges to the consolidated income statement or as realized
losses if a sale has been executed. In most instances,
management sells the securities at the time their intent changes.
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.
Foreclosed
Real Estate
Assets acquired through, or in lieu of, loan foreclosure are
held for sale and are initially recorded at fair value less
costs to sell at the date of foreclosure, establishing a new
cost basis. The excess, if any, of the loan balance over the
fair value of the asset at the time of transfer from loans to
foreclosed assets is charged to the allowance for loan losses.
Subsequent to foreclosure, valuations are periodically performed
by management and the assets are carried at the lower of
carrying amount or fair value less costs to sell. Revenue and
expenses from operations, changes in the valuation allowance and
any direct write-downs are included in foreclosed real estate
expense. While the Company utilizes certified appraisers, the
valuation of these estimates is subject to change, especially in
a period of rapidly changing real estate market values.
Income
Taxes
The Company reduces deferred tax assets by a valuation allowance
if, based on the weight of available evidence, it is not
more likely than not that some portion or all of the
deferred tax assets will be realized. The Company assesses the
realizability of its deferred tax assets by assessing the
likelihood of the Company generating federal and state tax
income, as applicable, in future periods in amounts sufficient
to offset the deferred tax charges in the periods they are
expected to reverse. Based on this assessment, management
concluded that a valuation allowance was not required as of
December 31, 2010. A valuation allowance of $441,000 and
$500,000 was required as of December 31, 2009 and 2008,
respectively, due primarily to the limited future taxable income
projected for federal and state tax purposes that can be
utilized to offset a charitable contribution carryforward of
$2.4 million, which will expire in 2013.
42
Operating
Strategies
Our mission is to operate and grow a profitable
community-oriented financial institution. We plan to achieve
this by executing our strategies of:
1. Managing credit risk to maintain a low level of
nonperforming assets, and interest rate risk to optimize our net
interest margin;
2. Expanding our franchise through the opening of
additional branch offices and the possible acquisition of
existing financial service companies or their assets;
3. Increasing core deposits through aggressive marketing
and offering new deposit products; and
4. Continuing to grow and diversify our sources of
non-interest income.
Managing
credit risk to maintain a low level of nonperforming assets, and
interest rate risk to optimize our net interest
margin
Managing risk is an essential part of successfully managing a
financial institution. Credit risk and interest rate risk are
two prominent risk exposures that we face. Credit risk is the
risk of not collecting the interest
and/or the
principal balance of a loan or investment when it is due. Our
strategy for credit risk management focuses on having
well-defined credit policies and uniform underwriting criteria
and providing prompt attention to potential problem loans. We
believe that high asset quality is a key to long-term financial
success. We have sought to grow and diversify the loan
portfolio, while maintaining a high level of asset quality and
moderate credit risk, using underwriting standards that we
believe are conservative, as well as diligent monitoring of the
portfolio and loans in non-accrual status and on-going
collection efforts. Although we will continue to originate
commercial real estate, commercial business and construction
loans, we intend to continue our philosophy of managing large
loan exposures through our experienced, risk-based approach to
lending. In addition, we intend to remain focused on lending
within the Banks immediate market area, with a specific
focus on commercial customers disaffected by their relationships
with larger banks as a result of turmoil in the industry.
We continually monitor the investment portfolio for credit risk,
with a monthly formal review by the Companys Executive
Committee of any issuers that have heightened credit risk
factors such as rating agency and analyst downgrades and
declines in market valuation. In addition, the Executive
Committee reviews new investments for credit-worthiness before
purchase. The Company generally purchases marketable equity
securities in lots over time, while debt securities are
purchased individually. We intend to replace maturing
investments in 2011 as determined to be appropriate in
accordance with our risk management policies and our funding
needs. The Company also invests in money market mutual fund
accounts which it utilizes as an alternative to investing excess
cash in federal funds.
Interest rate risk is the potential reduction of net interest
income as a result of changes in interest rates. 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. 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;
promoting core deposit products; and gradually extending the
maturity of funding sources, as borrowing and term deposit rates
are historically low.
In order to improve our risk management, we utilize a Risk
Management Officer to oversee the bank-wide risk management
process. These responsibilities include the implementation of an
overall risk program and strategy, determining risks and
implementing risk mitigation strategies in the following areas:
interest rates, operational/compliance, liquidity, strategic,
reputation, credit and legal/regulatory. This position provides
counsel to members of our senior management team on all issues
that effect our risk positions.
43
Expanding
our franchise through the opening of additional branch offices
and the possible acquisition of existing financial service
companies or their assets
We are always looking to expand our franchise in the greater
Boston metropolitan area. Since 2002, we have opened eight de
novo branches, the most recent in January 2011. East Boston
Savings Bank has leased a location in Boston, Massachusetts with
the intention of opening a new branch during the second quarter
of 2011. We have already obtained the necessary regulatory
approvals and we are in process of obtaining proposals to design
and build the branch. We intend to continue our geographic
expansion in the greater Boston metropolitan area by opening de
novo branches in communities contiguous to those currently
served by East Boston Savings Bank, as opportunities present
themselves in favorable locations. In the short-term, we
anticipate relocating staff from existing branches for new
locations instead of hiring additional employees.
On January 4, 2010, the Company completed its acquisition
of Mt. Washington. The combination of Mt. Washington and East
Boston resulted in a community bank with 19 full service branch
offices located throughout the Boston metropolitan area. The
transaction increased the Companys deposits from
$922.5 million to $1.3 billion as of January 4,
2010. We hope to continue to increase our franchise by pursuing
expansion through the acquisition of existing financial service
companies or their assets, although we currently have no
specific plans or agreements regarding any acquisitions.
In addition to branching and acquisitions, we are focusing on
upgrading existing facilities in an effort to better serve our
customers. The new branches and the renovations to our existing
branches are expected to be funded by cash generated by our
business. Consequently, we do not currently expect to borrow
funds for these expansion projects.
We have also diversified our market area through our acquisition
in 2006 of 40% of the capital stock of Hampshire First Bank, a
de novo New Hampshire chartered bank headquartered in
Manchester, New Hampshire. We account for our investment in
Hampshire First Bank by the equity method of accounting under
which our share of the net income or loss of Hampshire First
Bank is recognized as a component of non-interest income in our
consolidated financial statements. During the years ended
December 31, 2010 and 2009, Meridian Interstate Bancorp
recorded equity income of $492,000 and $629,000, respectively,
on this investment.
Increasing
core deposits through aggressive marketing and the offering of
new deposit products
Retail deposits are our primary source of funds for investing
and lending. Core deposits, which include all deposit account
types except certificates of deposit, comprised 52.1% of our
total deposits at December 31, 2010. We value our core
deposits because they represent a lower cost of funding and are
generally less sensitive to withdrawal when interest rates
fluctuate as compared to certificate of deposit accounts. We
market core deposits through the internet, in-branch and local
mail, print and television advertising, as well as programs that
link various accounts and services together, minimizing service
fees. We will continue to customize existing deposit products
and introduce new products to meet the needs of our customers.
Continuing
to grow and diversify our sources of non-interest
income
Our profits rely heavily on the spread between the interest
earned on loans and securities and interest paid on deposits and
borrowings. In order to decrease our reliance on interest rate
spread income, we have pursued initiatives to increase
non-interest income. We generated income from customer service
fees of $5.8 million, $3.2 million and
$2.7 million in 2010, 2009 and 2008, respectively. The
increase in customer service fees during 2010 was primarily due
to service charges on deposit relationships acquired in the Mt.
Washington merger and additional growth in deposits. We offer
reverse mortgages, which generated $135,000, $43,000 and
$168,000 of loan fee income in 2010, 2009 and 2008,
respectively. We also offer non-deposit investment products,
including mutual funds, annuities, stocks, bonds, life insurance
and long-term care. Our non-deposit financial products generated
$302,000, $211,000 and $146,000 of non-interest income during
the years ended December 31, 2010, 2009 and 2008,
respectively.
44
Balance
Sheet Analysis
Assets
The Companys total assets increased $624.4 million,
or 51.5%, to $1.8 billion at December 31, 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 $135.5 million
to $155.5 million at December 31, 2010 from
$20.0 million at December 31, 2009, including
$14.4 million of cash acquired in the Mt. Washington
merger. Securities available for sale increased
$67.2 million, or 22.9%, to $360.6 million at
December 31, 2010 from $293.4 million at
December 31, 2009, including $45.5 million of
securities acquired in the Mt. Washington merger. Net loans
increased $360.3 million, or 44.3%, to $1.2 billion at
December 31, 2010 from $813.3 million at
December 31, 2009, primarily due to $345.3 million of
loans acquired in the Mt. Washington merger, partially offset by
sales of fixed-rate bi-weekly mortgage loans totaling
$34.1 million in the first quarter of 2010.
Total deposits increased $532.7 million, or 57.8%, to
$1.5 billion at December 31, 2010 from
$922.5 million at December 31, 2009, reflecting
$380.4 million of deposits acquired in the Mt. Washington
merger along with organic deposit growth of $152.3 million.
Total borrowings increased $73.3 million, or 97.2%, to
$148.7 million at December 31, 2010 from
$75.4 million at December 31, 2009, reflecting
$80.9 million of Federal Home Loan Bank advances acquired
in the Mt. Washington merger.
Loans
At December 31, 2010, net loans were $1.2 billion, or
63.9% of total assets. During the year ended December 31,
2010, the gross loan portfolio increased $361.2 million, or
43.9%, including $345.3 million of loans acquired in the
Mt. Washington merger partially offset by sales of fixed-rate
bi-weekly mortgage loans totaling $34.1 million.
Loan
Portfolio Analysis
Our loan portfolio consists primarily of residential real
estate, commercial real estate, construction, commercial and
consumer segments. The residential real estate loans include
classes for one-to four-family, multi-family and home equity
lines of credit. There are no foreign loans outstanding.
Interest rates charged on loans are affected principally by the
demand for such loans, the supply of money available for lending
purposes and the rates offered by our competitors. Loan detail
by category was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family
|
|
$
|
402,887
|
|
|
|
34.0
|
%
|
|
$
|
276,122
|
|
|
|
33.5
|
%
|
|
$
|
274,716
|
|
|
|
38.6
|
%
|
|
$
|
224,109
|
|
|
|
39.1
|
%
|
|
$
|
204,559
|
|
|
|
38.3
|
%
|
Multi-family
|
|
|
135,290
|
|
|
|
11.4
|
|
|
|
53,402
|
|
|
|
6.5
|
|
|
|
31,212
|
|
|
|
4.4
|
|
|
|
26,855
|
|
|
|
4.7
|
|
|
|
26,781
|
|
|
|
5.0
|
|
Home equity lines of credit
|
|
|
62,750
|
|
|
|
5.3
|
|
|
|
29,979
|
|
|
|
3.6
|
|
|
|
28,253
|
|
|
|
4.0
|
|
|
|
21,541
|
|
|
|
3.8
|
|
|
|
20,663
|
|
|
|
3.9
|
|
Commercial real estate
|
|
|
433,504
|
|
|
|
36.6
|
|
|
|
350,648
|
|
|
|
42.6
|
|
|
|
269,454
|
|
|
|
37.7
|
|
|
|
177,233
|
|
|
|
30.9
|
|
|
|
169,422
|
|
|
|
31.7
|
|
Construction
|
|
|
113,142
|
|
|
|
9.6
|
|
|
|
94,102
|
|
|
|
11.4
|
|
|
|
91,652
|
|
|
|
12.9
|
|
|
|
109,635
|
|
|
|
19.1
|
|
|
|
101,495
|
|
|
|
19.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
|
1,147,573
|
|
|
|
96.9
|
|
|
|
804,253
|
|
|
|
97.6
|
|
|
|
695,287
|
|
|
|
97.6
|
|
|
|
559,373
|
|
|
|
97.6
|
|
|
|
522,920
|
|
|
|
97.9
|
|
Commercial business loans
|
|
|
30,189
|
|
|
|
2.6
|
|
|
|
18,029
|
|
|
|
2.2
|
|
|
|
15,355
|
|
|
|
2.2
|
|
|
|
11,859
|
|
|
|
2.1
|
|
|
|
10,220
|
|
|
|
1.9
|
|
Consumer
|
|
|
6,043
|
|
|
|
0.5
|
|
|
|
1,205
|
|
|
|
0.2
|
|
|
|
1,379
|
|
|
|
0.2
|
|
|
|
1,576
|
|
|
|
0.3
|
|
|
|
1,330
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
1,183,805
|
|
|
|
100.0
|
%
|
|
|
823,487
|
|
|
|
100.0
|
%
|
|
|
712,021
|
|
|
|
100.0
|
%
|
|
|
572,808
|
|
|
|
100.0
|
%
|
|
|
534,470
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(10,155
|
)
|
|
|
|
|
|
|
(9,242
|
)
|
|
|
|
|
|
|
(6,912
|
)
|
|
|
|
|
|
|
(3,637
|
)
|
|
|
|
|
|
|
(3,362
|
)
|
|
|
|
|
Net deferred loan origination fees
|
|
|
(88
|
)
|
|
|
|
|
|
|
(945
|
)
|
|
|
|
|
|
|
(1,005
|
)
|
|
|
|
|
|
|
(1,067
|
)
|
|
|
|
|
|
|
(1,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
1,173,562
|
|
|
|
|
|
|
$
|
813,300
|
|
|
|
|
|
|
$
|
704,104
|
|
|
|
|
|
|
$
|
568,104
|
|
|
|
|
|
|
$
|
529,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
The Company has transferred a portion of its originated
commercial real estate loans to participating lenders. The
amounts transferred have been accounted for as sales and are
therefore not included in the Companys accompanying
balance sheets. The Company and participating lenders share
ratably in any gains or losses that may result from a
borrowers lack of compliance with contractual terms of the
loan. The Company continues to service the loans on behalf of
the participating lenders and, as such, collects cash payments
from the borrowers, remits payments to participating lenders and
disburses required escrow funds to relevant parties. At
December 31, 2010 and 2009, the Company was servicing loans
for participants aggregating $22.5 million and
$12.9 million, respectively.
During 2010, the Company sold residential mortgage loans
aggregating $173.2 million. As part of those sales, during
the first quarter of 2010, the Company reduced its exposure to
interest-rate risk by selling fixed-rate bi-weekly one- to
four-family residential loans with an aggregate principal
balance of $34.1 million for a gain of $352,000. Management
has the intent and ability to hold the remaining fixed-rate
bi-weekly loans in the Companys loan portfolio for the
foreseeable future or until maturity or pay-off.
As a result of the Mt. Washington acquisition, the Company
acquired loans at fair value of $345.3 million.
Loan
Maturity
The following tables set forth certain information at
December 31, 2010 regarding the dollar amount of loan
principal repayments becoming due during the periods indicated.
The tables do not include any estimate of prepayments which
significantly shorten the average life of all loans and may
cause our actual repayment experience to differ from that shown
below. Demand loans having no stated schedule of repayments and
no stated maturity are reported as due in one year or less. The
amounts shown below exclude net deferred loan origination fees.
Our adjustable-rate mortgage loans generally do not provide for
downward adjustments below the initial discounted contract rate,
other than declines due to a decline in the index rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Business
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Amounts due in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
241,370
|
|
|
$
|
8,941
|
|
|
$
|
491
|
|
|
$
|
250,802
|
|
More than one to five years
|
|
|
576,374
|
|
|
|
17,990
|
|
|
|
5,403
|
|
|
|
599,767
|
|
More than five to ten years
|
|
|
93,756
|
|
|
|
1,754
|
|
|
|
140
|
|
|
|
95,650
|
|
More than ten years
|
|
|
236,073
|
|
|
|
1,504
|
|
|
|
9
|
|
|
|
237,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,147,573
|
|
|
$
|
30,189
|
|
|
$
|
6,043
|
|
|
$
|
1,183,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate terms on amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
due after one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate loans
|
|
$
|
289,938
|
|
|
$
|
6,226
|
|
|
$
|
5,536
|
|
|
$
|
301,700
|
|
Adjustable-rate loans
|
|
|
616,265
|
|
|
|
15,022
|
|
|
|
16
|
|
|
|
631,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
906,203
|
|
|
$
|
21,248
|
|
|
$
|
5,552
|
|
|
$
|
933,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, our loan portfolio consisted of
$393.9 million of fixed-rate loans and $789.9 million
of adjustable-rate loans.
46
Asset
Quality
Credit
Risk Management
Our strategy for credit risk management focuses on having
well-defined credit policies and uniform underwriting criteria
and providing prompt attention to potential problem loans.
When a borrower fails to make a required loan payment, we take a
number of steps to have the borrower cure the delinquency and
restore the loan to current status, including contacting the
borrower by letter and phone at regular intervals. When the
borrower is in default, we may commence collection proceedings.
If a foreclosure action is instituted and the loan is not
brought current, paid in full, or refinanced before the
foreclosure sale, the real property securing the loan generally
is sold at foreclosure. Management informs the Executive
Committee monthly of the amount of loans delinquent more than
30 days. Management provides detailed information to the
Board of Directors on loans 60 or more days past due and all
loans in foreclosure and repossessed property that we own.
Delinquencies
The following table provides information about delinquencies in
our loan portfolio at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
30-59
|
|
|
60-89
|
|
|
Greater Than
|
|
|
30-59
|
|
|
60-89
|
|
|
Greater Than
|
|
|
30-59
|
|
|
60-89
|
|
|
Greater Than
|
|
|
|
Days
|
|
|
Days
|
|
|
90 Days
|
|
|
Days
|
|
|
Days
|
|
|
90 Days
|
|
|
Days
|
|
|
Days
|
|
|
90 Days
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
|
(In thousands)
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family
|
|
$
|
4,434
|
|
|
$
|
799
|
|
|
$
|
7,400
|
|
|
$
|
1,559
|
|
|
$
|
978
|
|
|
$
|
2,760
|
|
|
$
|
1,352
|
|
|
$
|
842
|
|
|
$
|
1,413
|
|
Multi-family
|
|
|
2,630
|
|
|
|
|
|
|
|
860
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
840
|
|
|
|
|
|
|
|
80
|
|
Home equity lines of credit
|
|
|
1,129
|
|
|
|
322
|
|
|
|
1,769
|
|
|
|
86
|
|
|
|
40
|
|
|
|
100
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
1,265
|
|
|
|
534
|
|
|
|
2,735
|
|
|
|
2,692
|
|
|
|
|
|
|
|
5,870
|
|
|
|
1,193
|
|
|
|
348
|
|
|
|
230
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
6,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
|
9,458
|
|
|
|
1,655
|
|
|
|
19,733
|
|
|
|
4,492
|
|
|
|
1,018
|
|
|
|
8,730
|
|
|
|
3,773
|
|
|
|
1,190
|
|
|
|
1,723
|
|
Commercial business loans
|
|
|
15
|
|
|
|
48
|
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
293
|
|
|
|
245
|
|
|
|
5
|
|
|
|
8
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,766
|
|
|
$
|
1,948
|
|
|
$
|
20,123
|
|
|
$
|
4,500
|
|
|
$
|
1,019
|
|
|
$
|
8,731
|
|
|
$
|
3,774
|
|
|
$
|
1,190
|
|
|
$
|
1,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent loans at December 31, 2010 included
$13.9 million of loans acquired in the Mt. Washington
merger, including $3.5 million that were
30-59 days
past due, $1.8 million that were
60-89 days
past due and $8.5 million that were ninety days or more
past due. At December 31, 2010, non-accrual loans exceed
loans 90 days or more past due primarily to loans which
were placed on non-accrual status based on a determination that
the ultimate collection of all principal and interest due was
not expected.
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
December 31, 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. 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.
47
Real estate that we acquire as a result of foreclosure or by
deed-in-lieu
of foreclosure is classified as foreclosed real estate until it
is sold. When property is acquired, it is initially recorded at
the fair value less costs to sell at the date of foreclosure,
establishing a new cost basis. Holding costs and declines in
fair value after acquisition of the property result in charges
against income. The following table provides information with
respect to our non-performing assets at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Loans accounted for on a non-accrual basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family
|
|
$
|
11,529
|
|
|
$
|
4,098
|
|
|
$
|
3,962
|
|
|
$
|
2,059
|
|
|
$
|
824
|
|
Multi-family
|
|
|
2,246
|
|
|
|
850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit
|
|
|
2,408
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
29
|
|
Commercial real estate
|
|
|
11,290
|
|
|
|
7,388
|
|
|
|
883
|
|
|
|
1,561
|
|
|
|
|
|
Construction
|
|
|
15,326
|
|
|
|
9,224
|
|
|
|
9,387
|
|
|
|
1,218
|
|
|
|
1,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
|
42,799
|
|
|
|
21,560
|
|
|
|
14,232
|
|
|
|
4,936
|
|
|
|
2,667
|
|
Commercial business loans
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
138
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
|
43,134
|
|
|
|
21,698
|
|
|
|
14,232
|
|
|
|
4,982
|
|
|
|
2,667
|
|
Foreclosed assets
|
|
|
4,080
|
|
|
|
2,869
|
|
|
|
2,604
|
|
|
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
47,214
|
|
|
$
|
24,567
|
|
|
$
|
16,836
|
|
|
$
|
5,542
|
|
|
$
|
2,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
3.64
|
%
|
|
|
2.63
|
%
|
|
|
2.00
|
%
|
|
|
0.87
|
%
|
|
|
0.50
|
%
|
Non-performing loans to total assets
|
|
|
2.35
|
%
|
|
|
1.79
|
%
|
|
|
1.34
|
%
|
|
|
0.50
|
%
|
|
|
0.30
|
%
|
Non-performing assets to total assets
|
|
|
2.57
|
%
|
|
|
2.03
|
%
|
|
|
1.58
|
%
|
|
|
0.55
|
%
|
|
|
0.30
|
%
|
Non-performing loans increased to $43.1 million, or 3.64%
of total loans outstanding at December 31, 2010, from
$21.7 million, or 2.63% of total loans outstanding at
December 31, 2009. Non-performing assets increased to
$47.2 million, or 2.57% of total assets, at
December 31, 2010, from $24.6 million, or 2.03% of
total assets, at December 31, 2009, primarily due to assets
acquired in the Mt. Washington acquisition. Non-performing
assets at December 31, 2010 were comprised of
$11.5 million of one-to four-family mortgage loans,
$2.2 million of multi-family mortgage loans,
$2.4 million of home equity loans, $11.3 million of
commercial real estate loans, $15.3 million of construction
loans, $335,000 of commercial business loans and foreclosed real
estate of $4.1 million. Non-performing assets at
December 31, 2010 included $16.8 million acquired in
the Mt. Washington merger, comprised of $14.7 million of
non-performing loans and $2.1 million of foreclosed real
estate. Interest income that would have been recorded for the
year ended December 31, 2010 had nonaccruing loans and
accruing loans past due 90 days or more been current
according to their original terms amounted to $1.3 million.
Troubled
Debt Restructurings
In the course of resolving non-performing loans, the Bank may
choose to restructure the contractual terms of certain loans,
with terms modified to fit the ability of the borrower to repay
in line with its current financial status. A loan is considered
a troubled debt restructure if, for reasons related to the
debtors financial difficulties, a concession is granted to
the debtor that would not otherwise be considered.
48
The following table summarizes the Companys troubled debt
restructurings (TDRs) at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
TDRs on accrual status:
|
|
|
|
|
|
|
|
|
One-to four-family
|
|
$
|
1,289
|
|
|
$
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,289
|
|
|
|
189
|
|
TDRs on non-accrual status:
|
|
|
|
|
|
|
|
|
One-to four-family
|
|
|
288
|
|
|
|
1,148
|
|
Commercial real estate
|
|
|
4,797
|
|
|
|
|
|
Construction
|
|
|
3,487
|
|
|
|
591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,572
|
|
|
|
1,739
|
|
|
|
|
|
|
|
|
|
|
Total TDRs
|
|
$
|
9,861
|
|
|
$
|
1,928
|
|
|
|
|
|
|
|
|
|
|
The increase in commercial real estate TDRs during 2010 was due
to a $4.8 million loan which was modified to grant
provisions for interest-only payments for two years. These
modified payments provisions reflected a reduction to an
interest rate equal to the prime rate posted in the Wall Street
Journal (the WSJ Prime Rate) for the first three
months, an increase to an interest rate of 6.25% with the
deferral of interest amounts equal to the difference between
6.25% and the WSJ Prime Rate for the next nine months, followed
by an increase to payments based on an interest rate of 6.25%
for 12 months. No charge-offs have been incurred on this
loan.
The increase in construction TDRs was due to a $3.5 million
loan which was modified to grant an extension of the maturity
date of six months, interest-only payments and an interest rate
reduction of up to 125 basis points. The Bank incurred
charge-offs totaling $694,000 on this loan relationship in 2010.
Modifications of one-to four-family TDRs consist of either rate
reductions, loan term extensions 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
The Company utilizes a nine grade internal loan rating system
for multi-family, commercial real estate, construction and
commercial loans as follows:
|
|
|
|
|
Loans rated 1, 2, 3 and 3A: Loans in these
categories are considered pass rated loans with low
to average risk.
|
|
|
|
Loans rated 4 and 4A: Loans in this category
are considered special mention. These loans are
starting to show signs of potential weakness and are being
closely monitored by management.
|
|
|
|
Loans rated 5: Loans in this category are
considered substandard. Generally, a loan is
considered substandard if it is inadequately protected by the
current net worth and paying capacity of the obligors
and/or the
collateral pledged. There is a distinct possibility that the
Company will sustain some loss if the weakness is not corrected.
|
|
|
|
Loans rated 6: Loans in this category are
considered doubtful. Loans classified as doubtful
have all the weaknesses inherent in those classified substandard
with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently
existing facts, highly questionable and improbable.
|
|
|
|
Loans rated 7: Loans in this category are
considered uncollectible (loss) and of such little
value that their continuance as loans is not warranted.
|
On an annual basis, or more often if needed, the Company
formally reviews the ratings on all multi-family, commercial
real estate, construction and commercial loans. The Company also
engages an independent third-party
49
to review a significant portion of loans within these segments
on at least an annual basis. Management uses the results of
these reviews as part of its annual review process.
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 December 31,
2010 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 periods
indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Beginning Balance
|
|
$
|
9,242
|
|
|
$
|
6,912
|
|
|
$
|
3,637
|
|
|
$
|
3,362
|
|
|
$
|
2,937
|
|
Provision for loan losses
|
|
|
3,181
|
|
|
|
4,082
|
|
|
|
5,638
|
|
|
|
465
|
|
|
|
434
|
|
Charge offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
2,719
|
|
|
|
1,938
|
|
|
|
2,265
|
|
|
|
207
|
|
|
|
|
|
Commercial business
|
|
|
93
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
199
|
|
|
|
87
|
|
|
|
3
|
|
|
|
63
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
3,011
|
|
|
|
2,025
|
|
|
|
2,366
|
|
|
|
270
|
|
|
|
12
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
646
|
|
|
|
250
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
Commercial business
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
89
|
|
|
|
23
|
|
|
|
3
|
|
|
|
64
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
743
|
|
|
|
273
|
|
|
|
3
|
|
|
|
80
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(2,268
|
)
|
|
|
(1,752
|
)
|
|
|
(2,363
|
)
|
|
|
(190
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
10,155
|
|
|
$
|
9,242
|
|
|
$
|
6,912
|
|
|
$
|
3,637
|
|
|
$
|
3,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to non-accrual loans
|
|
|
23.54
|
%
|
|
|
42.59
|
%
|
|
|
48.57
|
%
|
|
|
73.00
|
%
|
|
|
126.06
|
%
|
Allowance to total loans outstanding
|
|
|
0.86
|
%
|
|
|
1.12
|
%
|
|
|
0.97
|
%
|
|
|
0.63
|
%
|
|
|
0.63
|
%
|
Net charge-offs to average loans outstanding
|
|
|
0.19
|
%
|
|
|
0.23
|
%
|
|
|
0.38
|
%
|
|
|
0.03
|
%
|
|
|
0.00
|
%
|
The Companys provision for loan losses was
$3.2 million for the year ended December 31, 2010
compared to $4.1 million for the year ended
December 31, 2009. These changes 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
$10.2 million or 0.86% of total loans outstanding at
December 31, 2010, compared to $9.2 million, or 1.12%
of total loans outstanding at December 31, 2009. The
decrease in the ratio of the allowance for loan losses to total
loans outstanding was primarily due to $345.3 million of
loans acquired in the Mt. Washington merger at fair value on the
date of acquisition, pursuant to 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.
50
The following table sets forth the breakdown of the allowance
for loan losses by loan category at the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
Loans in
|
|
|
|
|
|
% of
|
|
|
Loans in
|
|
|
|
|
|
% of
|
|
|
Loans in
|
|
|
|
|
|
|
Allowance
|
|
|
Category
|
|
|
|
|
|
Allowance
|
|
|
Category
|
|
|
|
|
|
Allowance
|
|
|
Category
|
|
|
|
|
|
|
to Total
|
|
|
of Total
|
|
|
|
|
|
to Total
|
|
|
of Total
|
|
|
|
|
|
to Total
|
|
|
of Total
|
|
|
|
Amount
|
|
|
Allowance
|
|
|
Loans
|
|
|
Amount
|
|
|
Allowance
|
|
|
Loans
|
|
|
Amount
|
|
|
Allowance
|
|
|
Loans
|
|
|
|
(Dollars in thousands)
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family
|
|
$
|
1,130
|
|
|
|
11.1
|
%
|
|
|
34.0
|
%
|
|
$
|
1,730
|
|
|
|
18.7
|
%
|
|
|
33.5
|
%
|
|
$
|
1,481
|
|
|
|
21.4
|
%
|
|
|
38.6
|
%
|
Multi-family
|
|
|
1,038
|
|
|
|
10.2
|
|
|
|
11.4
|
|
|
|
467
|
|
|
|
5.1
|
|
|
|
6.5
|
|
|
|
259
|
|
|
|
3.8
|
|
|
|
4.4
|
|
Home equity lines of credit
|
|
|
227
|
|
|
|
2.2
|
|
|
|
5.3
|
|
|
|
128
|
|
|
|
1.4
|
|
|
|
3.6
|
|
|
|
110
|
|
|
|
1.6
|
|
|
|
4.0
|
|
Commercial real estate
|
|
|
5,238
|
|
|
|
51.7
|
|
|
|
36.6
|
|
|
|
4,435
|
|
|
|
48.0
|
|
|
|
42.6
|
|
|
|
2,544
|
|
|
|
36.8
|
|
|
|
37.7
|
|
Construction
|
|
|
2,042
|
|
|
|
20.1
|
|
|
|
9.6
|
|
|
|
1,859
|
|
|
|
20.1
|
|
|
|
11.4
|
|
|
|
2,019
|
|
|
|
29.2
|
|
|
|
12.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
|
9,675
|
|
|
|
95.3
|
|
|
|
96.9
|
|
|
|
8,619
|
|
|
|
93.3
|
|
|
|
97.6
|
|
|
|
6,413
|
|
|
|
92.8
|
|
|
|
97.6
|
|
Commercial business loans
|
|
|
448
|
|
|
|
4.4
|
|
|
|
2.6
|
|
|
|
586
|
|
|
|
6.3
|
|
|
|
2.2
|
|
|
|
490
|
|
|
|
7.1
|
|
|
|
2.2
|
|
Consumer
|
|
|
32
|
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
37
|
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
9
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
10,155
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
$
|
9,242
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
$
|
6,912
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allowance consists of general and allocated components. The
general component relates to pools of non-impaired loans and is
based on historical loss experience adjusted for qualitative
factors. The allocated 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 Company had impaired loans totaling $38.5 million and
$29.3 million as of December 31, 2010 and 2009,
respectively. At December 31, 2010, impaired loans totaling
$6.4 million had a valuation allowance of $120,000.
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
$33.6 million and $18.1 million for the years ended
December 31, 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.
We review residential and commercial loans for impairment based
on the fair value of collateral, if collateral-dependent, or
expected cash flows. Management has reviewed the collateral
value for all impaired and non-accrual loans that were
collateral-dependent as of December 31, 2010 and considered
any probable loss in determining the allowance for loan losses.
51
For residential loans measured for impairment based on the
collateral value, we will do the following:
|
|
|
|
|
When a loan becomes seriously delinquent, generally 60 days
past due, internal valuations are completed by our in-house
appraiser who is a Massachusetts certified residential
appraiser. We obtain third party appraisals, which are generally
the basis for charge-offs when a loss is indicated, prior to the
foreclosure sale. We generally are able to complete the
foreclosure process within nine to 12 months from receipt
of the internal valuation.
|
|
|
|
We make adjustments to appraisals based on updated economic
information, if necessary, prior to the foreclosure sale. We
review current market factors to determine whether, in
managements opinion, downward adjustments to the most
recent appraised values may be warranted. If so, we use our best
estimate to apply an estimated discount rate to the appraised
values to reflect current market factors.
|
|
|
|
Appraisals we receive are based on comparable property sales.
|
For commercial loans measured for impairment based on the
collateral value, we will do the following:
|
|
|
|
|
We obtain 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 we order new appraisals
every 180 days on loans in the process of foreclosure.
|
|
|
|
We make 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 our carrying value of the loan.
|
|
|
|
Appraisals we receive 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
non-accrual 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.
Although we believe that we use the best information available
to establish the allowance for loan losses, future adjustments
to the allowance for loan losses may be necessary and our
results of operations could be adversely affected if
circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while we believe we have
established our allowance for loan losses in conformity with
generally accepted accounting principles in the United States of
America, there can be no assurance that regulators, in reviewing
our loan portfolio, will not require us to increase our
allowance for loan losses. In addition, because future events
affecting borrowers and collateral cannot be predicted with
certainty, there can be no assurance that the existing allowance
for loan losses is adequate or that increases will not be
necessary should the quality of any loans deteriorate as a
result of the factors discussed above. Any material increase in
the allowance for loan losses may adversely affect our financial
condition and results of operations.
Securities
Portfolio
At December 31, 2010, the securities portfolio was
$360.6 million, or 19.6% of total assets. At that date,
61.6% of the securities portfolio, or $222.0 million, was
invested in corporate bonds. The amortized cost and fair value
of corporate bonds in the financial services sector was
$79.9 million, and $81.6 million, respectively. The
remainder of the corporate bond portfolio includes companies
from a variety of industries. Refer to Note 4 Securities
Available for Sale in Notes to the Consolidated Financial
Statements included in Item 8 Financial Statements and
52
Supplementary Data within this report for more detail
regarding industry concentrations in the Companys
corporate bond portfolio. 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. The
following table sets forth the amortized cost and fair value of
our securities, all of which at the dates indicated were
available for sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
214,625
|
|
|
$
|
222,038
|
|
|
$
|
212,279
|
|
|
$
|
220,007
|
|
|
$
|
210,079
|
|
|
$
|
203,687
|
|
Government-sponsored enterprises
|
|
|
36,062
|
|
|
|
35,900
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
1,003
|
|
Municipal bonds
|
|
|
6,583
|
|
|
|
6,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises
|
|
|
33,625
|
|
|
|
34,542
|
|
|
|
23,659
|
|
|
|
23,778
|
|
|
|
40
|
|
|
|
40
|
|
Private label
|
|
|
9,737
|
|
|
|
10,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt securities
|
|
|
641
|
|
|
|
641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
301,273
|
|
|
|
309,948
|
|
|
|
235,938
|
|
|
|
243,785
|
|
|
|
211,119
|
|
|
|
204,730
|
|
Marketable equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
31,344
|
|
|
|
36,765
|
|
|
|
26,698
|
|
|
|
28,878
|
|
|
|
26,142
|
|
|
|
22,854
|
|
Money market mutual funds
|
|
|
13,904
|
|
|
|
13,889
|
|
|
|
20,704
|
|
|
|
20,704
|
|
|
|
24,945
|
|
|
|
24,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities
|
|
|
45,248
|
|
|
|
50,654
|
|
|
|
47,402
|
|
|
|
49,582
|
|
|
|
51,087
|
|
|
|
47,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
346,521
|
|
|
$
|
360,602
|
|
|
$
|
283,340
|
|
|
$
|
293,367
|
|
|
$
|
262,206
|
|
|
$
|
252,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, we had no investments in a single
company or entity that had an aggregate book value in excess of
10% of our equity.
The following table sets forth the stated maturities and
weighted average yields of the securities at December 31,
2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More Than One Year
|
|
|
More Than Five Years
|
|
|
|
|
|
|
|
|
|
One Year or Less
|
|
|
to Five Years
|
|
|
to Ten Years
|
|
|
More Than Ten Years
|
|
|
Total
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Amortized
|
|
|
Average
|
|
|
Amortized
|
|
|
Average
|
|
|
Amortized
|
|
|
Average
|
|
|
Amortized
|
|
|
Average
|
|
|
Amortized
|
|
|
Average
|
|
|
|
Cost
|
|
|
Yield
|
|
|
Cost
|
|
|
Yield
|
|
|
Cost
|
|
|
Yield
|
|
|
Cost
|
|
|
Yield
|
|
|
Cost
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
50,821
|
|
|
|
4.77
|
%
|
|
$
|
156,885
|
|
|
|
4.14
|
%
|
|
$
|
6,919
|
|
|
|
3.41
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
214,625
|
|
|
|
4.27
|
%
|
Government-sponsored enterprises
|
|
|
|
|
|
|
|
|
|
|
20,306
|
|
|
|
2.04
|
|
|
|
15,756
|
|
|
|
2.21
|
|
|
|
|
|
|
|
|
|
|
|
36,062
|
|
|
|
2.11
|
|
Municipal bonds
|
|
|
|
|
|
|
|
|
|
|
2,070
|
|
|
|
2.35
|
|
|
|
4,513
|
|
|
|
3.03
|
|
|
|
|
|
|
|
|
|
|
|
6,583
|
|
|
|
2.82
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
12.45
|
|
|
|
22
|
|
|
|
9.22
|
|
|
|
33,595
|
|
|
|
4.36
|
|
|
|
33,625
|
|
|
|
4.36
|
|
Private label
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
574
|
|
|
|
4.99
|
|
|
|
9,163
|
|
|
|
6.46
|
|
|
|
9,737
|
|
|
|
6.38
|
|
Other debt securities
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
$
|
50,821
|
|
|
|
4.77
|
%
|
|
$
|
179,409
|
|
|
|
3.88
|
%
|
|
$
|
28,285
|
|
|
|
2.66
|
%
|
|
$
|
42,758
|
|
|
|
4.81
|
%
|
|
$
|
301,273
|
|
|
|
4.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
The
available-for-sale
securities portfolio increased $67.2 million, or 22.9% to
$360.6 million at December 31, 2010 from
$293.4 million December 31, 2009, including
$45.5 million of securities acquired in the Mt. Washington
merger. Money market mutual funds included in the marketable
equity securities portfolio totaled $13.9 million and
$20.7 million at December 31, 2010 and 2009,
respectively.
Each reporting period, the Company evaluates all securities with
a decline in fair value below the amortized cost of the
investment to determine whether or not the impairment is deemed
to be
other-than-temporary.
OTTI is required to be recognized (1) if the Company
intends to sell the security; (2) if it is more
likely than not that the Company will be required to sell
the security before recovery of its amortized cost basis; or
(3) for debt securities, the present value of expected cash
flows is not sufficient to recover the entire amortized cost
basis. Marketable equity securities are evaluated for OTTI based
on the severity and duration of the impairment and, if deemed to
be other than temporary, the declines in fair value are
reflected in earnings as realized losses. For impaired debt
securities that the Company intends to sell, or more likely than
not will be required to sell, the full amount of the
depreciation is recognized as OTTI through earnings. For all
other impaired debt securities, credit-related OTTI is
recognized through earnings and non-credit related OTTI is
recognized in other comprehensive income/loss, net of applicable
taxes. At December 31, 2010, unrealized losses in our debt
portfolio ranged from 0% to 7.0%, and unrealized losses in our
equity portfolio ranged from 0% to 15.3%.
As of December 31, 2010, the net unrealized gain on the
total equity portfolio was $5.4 million. One equity
security had fair value decline of 15.0% or more, with a net
unrealized loss of $52,000. This security represents the most
significant market valuation decrease related to any one equity
security within the portfolio at December 31, 2010.
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.
As of December 31, 2010, the net unrealized gain on the
total debt securities portfolio was $8.7 million. Two
residential mortgage-backed securities, issued by private label
companies, had a market decline of 7.0% and 5.2% from amortized
cost. The aggregate unrealized loss on these securities at
December 31, 2010 was $89,000 and is presently considered
to be temporary. The Company has no indication that the issuers
will be unable to continue to service the obligations, and
management does intend not to sell, and more likely than not
will not be required to sell, such bonds before the earlier of
recovery or maturity. As a result, management considers the
decline in market value to be temporary. No other debt
securities had a market decline greater than 4.0% of amortized
cost.
Refer to Note 4 Securities Available for Sale in
Notes to the Consolidated Financial Statements included in
Item 8 Financial Statements and Supplementary Data
within this report for more detail regarding the
Companys assessment of
other-than-temporary
impairment.
54
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. Our deposit base is comprised of demand, NOW,
money market, regular and other deposits, and certificates of
deposit. We consider demand, NOW, money market, and regular and
other deposits to be core deposits. At December 31, 2010,
core deposits were 52.1% of total deposits. Deposits increased
$532.7 million, or 57.8%, to $1.5 billion at
December 31, 2010, primarily as a result of
$380.4 million of deposits acquired in the Mt. Washington
merger along with organic deposit growth of $152.3 million.
The following table sets forth the average balances of deposits
for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
Average
|
|
|
Average
|
|
|
of Total
|
|
|
Average
|
|
|
Average
|
|
|
of Total
|
|
|
Average
|
|
|
Average
|
|
|
of Total
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Deposits
|
|
|
Balance
|
|
|
Rate
|
|
|
Deposits
|
|
|
Balance
|
|
|
Rate
|
|
|
Deposits
|
|
|
|
(Dollars in thousands)
|
|
|
Demand deposits
|
|
$
|
106,549
|
|
|
|
|
%
|
|
|
7.7
|
%
|
|
$
|
61,342
|
|
|
|
|
%
|
|
|
6.9
|
%
|
|
$
|
54,503
|
|
|
|
|
%
|
|
|
6.7
|
%
|
NOW deposits
|
|
|
117,584
|
|
|
|
0.46
|
|
|
|
9.3
|
|
|
|
37,838
|
|
|
|
0.34
|
|
|
|
4.2
|
|
|
|
39,351
|
|
|
|
0.76
|
|
|
|
4.9
|
|
Money market deposits
|
|
|
308,756
|
|
|
|
1.12
|
|
|
|
22.2
|
|
|
|
231,248
|
|
|
|
1.71
|
|
|
|
25.8
|
|
|
|
149,827
|
|
|
|
2.68
|
|
|
|
18.5
|
|
Regular and other deposits
|
|
|
184,287
|
|
|
|
0.55
|
|
|
|
12.9
|
|
|
|
127,621
|
|
|
|
0.80
|
|
|
|
14.3
|
|
|
|
127,250
|
|
|
|
1.14
|
|
|
|
15.7
|
|
Certificates of deposit
|
|
|
644,181
|
|
|
|
1.93
|
|
|
|
47.9
|
|
|
|
436,341
|
|
|
|
3.04
|
|
|
|
48.8
|
|
|
|
437,183
|
|
|
|
4.41
|
|
|
|
54.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,361,357
|
|
|
|
1.39
|
%
|
|
|
100.0
|
%
|
|
$
|
894,390
|
|
|
|
2.21
|
%
|
|
|
100.0
|
%
|
|
$
|
808,114
|
|
|
|
3.32
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table indicates the amount of certificates of
deposit of $100,000 or more by time remaining until maturity as
of December 31, 2010.
|
|
|
|
|
Maturity Period (In thousands):
|
|
|
|
|
Three months or less
|
|
$
|
33,076
|
|
Over three through six months
|
|
|
29,971
|
|
Over six through twelve months
|
|
|
128,179
|
|
Over twelve months
|
|
|
157,891
|
|
|
|
|
|
|
Total
|
|
$
|
349,117
|
|
|
|
|
|
|
55
Borrowings
We use borrowings from the Federal Home Loan Bank of Boston to
supplement our supply of funds for loans and investments. In
addition, we also purchase federal funds from local banking
institutions as an additional funding source for the Bank. At
December 31, 2010, total borrowings increased
$73.3 million, or 97.2%, to $148.7 million at
December 31, 2010 from $75.4 million at
December 31, 2009, reflecting $80.9 million of Federal
Home Loan Bank advances acquired in the Mt. Washington merger.
At December 31, 2010 and 2009, FHLB advances totaled
$136.7 million and $62.3 million, respectively, with a
weighted average rate of 2.63% and 2.77%, respectively. At
December 31, 2010 and 2009, federal funds purchased totaled
$12.0 million and $13.1 million, respectively, with a
weighted average rate of 0.20% and 0.35%, respectively. At
December 31, 2010, we also had an available line of credit
of $9.4 million with the Federal Home Loan Bank of Boston
at an interest rate that adjusts daily, none of which was
outstanding at that date.
Information relating to borrowings, including the federal funds
purchased, is detailed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(Dollars in thousands)
|
|
Balance outstanding at end of year
|
|
$
|
148,683
|
|
|
$
|
75,410
|
|
|
$
|
65,486
|
|
Average amount outstanding during the year
|
|
$
|
154,123
|
|
|
$
|
65,884
|
|
|
$
|
55,882
|
|
Weighted average interest rate during the year
|
|
|
2.33
|
%
|
|
|
3.04
|
%
|
|
|
3.59
|
%
|
Maximum outstanding at any month end
|
|
$
|
163,336
|
|
|
$
|
75,410
|
|
|
$
|
73,227
|
|
Weighted average interest rate at end of year
|
|
|
2.43
|
%
|
|
|
2.35
|
%
|
|
|
3.15
|
%
|
Stockholders
Equity
Total stockholders equity increased $15.2 million, or
7.6%, to $215.6 million at December 31, 2010, from
$200.4 million at December 31, 2009, due primarily to
$13.4 million in net income and a $2.5 million
increase in accumulated other comprehensive income reflecting an
increase in the fair value of available for sale securities, net
of tax. Stockholders equity to assets was 11.74% at
December 31, 2010, compared to 16.54% at December 31,
2009, reflecting the increase in assets resulting from the Mt.
Washington merger. Book value per share increased to $9.59 at
December 31, 2010 from $9.07 at December 31, 2009.
Tangible book value per share decreased to $8.98 at
December 31, 2010 from $9.07 at December 31, 2009,
primarily due to goodwill resulting from the Mt. Washington
merger. Market price per share increased $3.09, or 35.5%, to
$11.79 at December 31, 2010 from $8.70 at December 31,
2009. At December 31, 2010, the Company and the Bank
continued to exceed all regulatory capital requirements.
56
Average
Balance Sheets and Related Yields and Rates
The following table presents 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Cost
|
|
|
Balance
|
|
|
Interest
|
|
|
Cost
|
|
|
Balance
|
|
|
Interest
|
|
|
Cost
|
|
|
|
(Dollars in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,184,816
|
|
|
$
|
67,459
|
|
|
|
5.69
|
%
|
|
$
|
768,278
|
|
|
$
|
45,050
|
|
|
|
5.86
|
%
|
|
$
|
621,985
|
|
|
$
|
38,781
|
|
|
|
6.24
|
%
|
Securities and certificates of deposits
|
|
|
350,038
|
|
|
|
14,432
|
|
|
|
4.12
|
|
|
|
291,372
|
|
|
|
11,592
|
|
|
|
3.98
|
|
|
|
297,645
|
|
|
|
12,433
|
|
|
|
4.18
|
|
Other interest-earning assets
|
|
|
72,136
|
|
|
|
168
|
|
|
|
0.23
|
|
|
|
25,883
|
|
|
|
25
|
|
|
|
0.10
|
|
|
|
69,275
|
|
|
|
1,683
|
|
|
|
2.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,606,990
|
|
|
|
82,059
|
|
|
|
5.11
|
|
|
|
1,085,533
|
|
|
|
56,667
|
|
|
|
5.22
|
|
|
|
988,905
|
|
|
|
52,897
|
|
|
|
5.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
131,756
|
|
|
|
|
|
|
|
|
|
|
|
78,776
|
|
|
|
|
|
|
|
|
|
|
|
79,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,738,746
|
|
|
|
|
|
|
|
|
|
|
$
|
1,164,309
|
|
|
|
|
|
|
|
|
|
|
$
|
1,068,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits
|
|
$
|
117,584
|
|
|
|
540
|
|
|
|
0.46
|
|
|
$
|
37,838
|
|
|
|
128
|
|
|
|
0.34
|
|
|
$
|
39,351
|
|
|
|
301
|
|
|
|
0.76
|
|
Money market deposits
|
|
|
308,756
|
|
|
|
3,447
|
|
|
|
1.12
|
|
|
|
231,248
|
|
|
|
3,956
|
|
|
|
1.71
|
|
|
|
149,827
|
|
|
|
4,019
|
|
|
|
2.68
|
|
Regular and other deposits
|
|
|
184,287
|
|
|
|
1,011
|
|
|
|
0.55
|
|
|
|
127,621
|
|
|
|
1,026
|
|
|
|
0.80
|
|
|
|
127,250
|
|
|
|
1,445
|
|
|
|
1.14
|
|
Certificates of deposit
|
|
|
644,181
|
|
|
|
12,446
|
|
|
|
1.93
|
|
|
|
436,341
|
|
|
|
13,276
|
|
|
|
3.04
|
|
|
|
437,183
|
|
|
|
19,275
|
|
|
|
4.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
1,254,808
|
|
|
|
17,444
|
|
|
|
1.39
|
|
|
|
833,048
|
|
|
|
18,386
|
|
|
|
2.21
|
|
|
|
753,611
|
|
|
|
25,040
|
|
|
|
3.32
|
|
Borrowings
|
|
|
154,123
|
|
|
|
3,596
|
|
|
|
2.33
|
|
|
|
65,884
|
|
|
|
2,006
|
|
|
|
3.04
|
|
|
|
55,882
|
|
|
|
2,004
|
|
|
|
3.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1,408,931
|
|
|
|
21,040
|
|
|
|
1.49
|
|
|
|
898,932
|
|
|
|
20,392
|
|
|
|
2.27
|
|
|
|
809,493
|
|
|
|
27,044
|
|
|
|
3.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
|
106,549
|
|
|
|
|
|
|
|
|
|
|
|
61,342
|
|
|
|
|
|
|
|
|
|
|
|
54,503
|
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities
|
|
|
13,798
|
|
|
|
|
|
|
|
|
|
|
|
10,149
|
|
|
|
|
|
|
|
|
|
|
|
10,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,529,278
|
|
|
|
|
|
|
|
|
|
|
|
970,423
|
|
|
|
|
|
|
|
|
|
|
|
874,066
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
209,468
|
|
|
|
|
|
|
|
|
|
|
|
193,886
|
|
|
|
|
|
|
|
|
|
|
|
194,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,738,746
|
|
|
|
|
|
|
|
|
|
|
$
|
1,164,309
|
|
|
|
|
|
|
|
|
|
|
$
|
1,068,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets
|
|
$
|
198,059
|
|
|
|
|
|
|
|
|
|
|
$
|
186,601
|
|
|
|
|
|
|
|
|
|
|
$
|
179,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
61,019
|
|
|
|
|
|
|
|
|
|
|
$
|
36,275
|
|
|
|
|
|
|
|
|
|
|
$
|
25,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.62
|
%
|
|
|
|
|
|
|
|
|
|
|
2.95
|
%
|
|
|
|
|
|
|
|
|
|
|
2.01
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.80
|
%
|
|
|
|
|
|
|
|
|
|
|
3.34
|
%
|
|
|
|
|
|
|
|
|
|
|
2.61
|
%
|
Average interest-earning assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average interest-bearing liabilities
|
|
|
|
|
|
|
114.06
|
%
|
|
|
|
|
|
|
|
|
|
|
120.76
|
%
|
|
|
|
|
|
|
|
|
|
|
122.16
|
%
|
|
|
|
|
57
Rate/Volume
Analysis
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Years Ended December 31,
|
|
|
|
2010 Compared to 2009
|
|
|
2009 Compared to 2008
|
|
|
|
Increase (Decrease) Due to
|
|
|
Increase (Decrease) Due to
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
|
(In thousands)
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
23,752
|
|
|
$
|
(1,343
|
)
|
|
$
|
22,409
|
|
|
$
|
8,394
|
|
|
$
|
(2,125
|
)
|
|
$
|
6,269
|
|
Securities and certificates of deposits
|
|
|
2,406
|
|
|
|
434
|
|
|
|
2,840
|
|
|
|
(258
|
)
|
|
|
(583
|
)
|
|
|
(841
|
)
|
Other interest-earning assets
|
|
|
80
|
|
|
|
63
|
|
|
|
143
|
|
|
|
(655
|
)
|
|
|
(1,003
|
)
|
|
|
(1,658
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
26,238
|
|
|
|
(846
|
)
|
|
|
25,392
|
|
|
|
7,481
|
|
|
|
(3,711
|
)
|
|
|
3,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
6,840
|
|
|
|
(7,782
|
)
|
|
|
(942
|
)
|
|
|
3,045
|
|
|
|
(9,699
|
)
|
|
|
(6,654
|
)
|
Borrowings
|
|
|
2,152
|
|
|
|
(562
|
)
|
|
|
1,590
|
|
|
|
13
|
|
|
|
(11
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,992
|
|
|
|
(8,344
|
)
|
|
|
648
|
|
|
|
3,058
|
|
|
|
(9,710
|
)
|
|
|
(6,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income
|
|
$
|
17,246
|
|
|
$
|
7,498
|
|
|
$
|
24,744
|
|
|
$
|
4,423
|
|
|
$
|
5,999
|
|
|
$
|
10,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of Operations for the Years Ended December 31, 2010, 2009
and 2008
Our primary source of income is net interest income. Net
interest income is the difference between interest income, which
is the income that we earn on our loans and investments, and
interest expense, which is the interest that we pay on our
deposits and borrowings. Changes in levels of interest rates
affect our net interest income. A secondary source of income is
non-interest income, which includes revenue that we receive from
providing products and services. The majority of our
non-interest income generally comes from customer service fees,
loan fees, bank-owned life insurance and gains on sales of loans
and securities.
For the year ended December 31, 2010, net income was
$13.4 million, or $0.61 per share (basic and diluted)
compared to net income of $3.8 million, or $0.17 per share
(basic and diluted), for the year ended December 31, 2009.
Income before income tax expense increased $14.8 million to
$20.8 million, the net result of increases in net interest
income of $24.7 million and non-interest income of
$6.4 million, partially offset by an increase in
non-interest expense of $17.2 million. The year ended
December 31, 2010 reflect combined results following the
acquisition of Mt. Washington Co-operative Bank on
January 4, 2010.
The Company recorded a pre-tax charge of $2.7 million
during the year ended December 31, 2010 for costs related
to termination of the contract with Mt. Washingtons data
processing services provider in October 2010. The after-tax
impact of this charge was a reduction to net income of
$1.6 million, or $0.07 per share (basic and diluted), for
the year ended December 31, 2010.
Return on average assets and stockholders equity increased
to 0.77% and 6.38%, respectively, for the year ended
December 31, 2010 compared to 0.32% and 1.94% for the year
ended of 2009.
For the year ended December 31, 2009, the Company recorded
net income of $3.8 million compared to a net loss of
$2.1 million for the year ended December 31, 2008. The
results of 2009 were positively impacted by higher net interest
income, which increased by $10.4 million, or 40.3%, to
$36.3 million. In 2009, the Company recorded a net loss on
sale of securities of $158,000 and other than temporary
impairment losses of $429,000, compared to a gain on sale of
securities of $4.4 million in 2008. In addition, the 2008
results include a non-recurring $3.0 million pre-tax
contribution of stock to the Companys charitable
foundation.
58
Net
Income (Loss)
Net income (loss) information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change 2010/2009
|
|
Change 2009/2008
|
|
|
2010
|
|
2009
|
|
2008
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
(Dollars in thousands)
|
|
|
|
Net interest income
|
|
$
|
61,019
|
|
|
$
|
36,275
|
|
|
$
|
25,853
|
|
|
$
|
24,744
|
|
|
|
68.2
|
%
|
|
$
|
10,422
|
|
|
|
40.3
|
%
|
Provision for loan losses
|
|
|
3,181
|
|
|
|
4,082
|
|
|
|
5,638
|
|
|
|
(901
|
)
|
|
|
(22.1
|
)
|
|
|
(1,556
|
)
|
|
|
(27.6
|
)
|
Non-interest income
|
|
|
11,721
|
|
|
|
5,295
|
|
|
|
8,373
|
|
|
|
6,426
|
|
|
|
121.4
|
|
|
|
(3,078
|
)
|
|
|
(36.8
|
)
|
Non-interest expenses
|
|
|
48,804
|
|
|
|
31,566
|
|
|
|
31,966
|
|
|
|
17,238
|
|
|
|
54.6
|
|
|
|
(400
|
)
|
|
|
(1.3
|
)
|
Net income (loss)
|
|
|
13,374
|
|
|
|
3,763
|
|
|
|
(2,108
|
)
|
|
|
9,611
|
|
|
|
255.4
|
|
|
|
5,871
|
|
|
|
278.5
|
|
Return (loss) on average assets
|
|
|
0.77
|
%
|
|
|
0.32
|
%
|
|
|
(0.20
|
)%
|
|
|
0.45
|
|
|
|
140.6
|
%
|
|
|
0.52
|
|
|
|
260.0
|
%
|
Return (loss) on average equity
|
|
|
6.38
|
%
|
|
|
1.94
|
%
|
|
|
(1.09
|
)%
|
|
|
4.44
|
|
|
|
228.9
|
%
|
|
|
3.03
|
|
|
|
278.0
|
%
|
Net
Interest Income
Net interest income increased $24.7 million, or 68.2%, to
$61.0 million for the year ended December 31, 2010
from $36.3 million for the year ended December 31,
2009. The net interest rate spread and net interest margin were
3.62% and 3.80%, respectively, for the year ended
December 31, 2010 compared to 2.95% and 3.34%,
respectively, for the year ended December 31, 2009. The
increases in net interest income were due primarily to the Mt.
Washington merger and organic loan growth, along with 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
$416.5 million, or 54.2%, to $1.2 billion, which was
partially offset by the decline in the yield on loans of
17 basis points to 5.69% for the year ended
December 31, 2010 compared to the year ended
December 31, 2009. The Companys cost of deposits
declined 82 basis points to 1.39%, which was partially
offset by the increase in the average balance of
interest-bearing deposits of $421.8 million, or 50.6%, to
$1.3 billion for the year ended December 31, 2010
compared to the year ended December 31, 2009. The
Companys yield on interest-earning assets decreased
11 basis points to 5.11% for the year ended
December 31, 2010 compared to 5.22% for the year ended
December 31, 2009, while the cost of interest-bearing
liabilities declined 78 basis points to 1.49% for the year
ended December 31, 2010 compared to 2.27% for the year
ended December 31, 2009.
Net interest income for the year ended December 31, 2009
was $36.3 million, an increase of $10.4 million, or
40.3%, from the year ended December 31, 2008. Loan interest
income increased by $6.3 million, or 16.2%, while deposit
interest expense decreased by $6.7 million, or 26.6%. For
the year ended December 31, 2009, the net interest margin
was 3.34%, compared to 2.61% for 2008. The increase in the
margin in 2009 is due primarily to a decrease in the overall
rate paid on deposits and borrowings, as competition has
lessened due to customers preference for the safety of
insured deposits and the low interest rate environment.
Growth in the loan portfolio resulted in increased interest
income in 2009, from $38.8 million for the year ended
December 31, 2008, to $45.0 million for the year ended
December 31, 2009, as average loan balances increased from
$622.0 million to $768.3 million despite a decline in
yield from 6.24% to 5.86%. The average balance of
interest-bearing deposits increased from $753.6 million to
$833.0 million for the years ended December 31, 2008
and 2009, respectively, while deposit interest expense decreased
$6.7 million, or 26.6%. The average rate paid on all
deposit types declined from 3.32% in 2008 to 2.21% in 2009.
Provision
for Loan Losses
For the year ended December 31, 2010, the provision for
loan losses was $3.2 million compared to $4.1 million
for the year ended December 31, 2009. These changes 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 $10.2 million, 0.86%, of total loans
outstanding as of December 31, 2010, as compared with
$9.2 million, 1.12% of total loans as of December 31,
2009. The decrease in the ratio of the allowance for loan losses
to total loans outstanding was primarily due to
$345.3 million of loans acquired in the Mt. Washington
merger at fair value and the application of current
59
accounting guidance that precludes the combination of allowance
for loan loss amounts associated with such loans acquired. An
analysis of the changes in the allowance for loan losses is
presented under Managements Discussion and
Analysis of Results of Operations and Financial
Condition Allowance for Loan Losses.
The Companys loan loss provision was $4.1 million and
$5.6 million for the years ended December 31, 2009 and
2008, respectively. Changes in the provision relate to loan
growth, specific reserves taken for impaired loans, and
managements assessment of various factors affecting the
portfolio, including, among others, an ongoing evaluation of
credit quality, local real estate market conditions, local and
national economic factors, and changes in delinquent and
non-performing loans. The reduction in the level of provision
expense for 2009 compared to 2008 was due in part to lower
provision expense related to specific reserves recorded for
impaired loans. The Company also experienced lower loan growth
in 2009 than in 2008.
Non-Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Change 2010/2009
|
|
|
Change 2009/2008
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
Customer service fees
|
|
$
|
5,823
|
|
|
$
|
3,219
|
|
|
$
|
2,796
|
|
|
$
|
2,604
|
|
|
|
80.9
|
%
|
|
$
|
423
|
|
|
|
15.1
|
%
|
Loan fees
|
|
|
636
|
|
|
|
584
|
|
|
|
673
|
|
|
|
52
|
|
|
|
8.9
|
|
|
|
(89
|
)
|
|
|
(13.2
|
)
|
Gain on sales of loans, net
|
|
|
1,811
|
|
|
|
560
|
|
|
|
39
|
|
|
|
1,251
|
|
|
|
223.4
|
|
|
|
521
|
|
|
|
1,335.9
|
|
Other-than-temporary
impairment losses on securities
|
|
|
|
|
|
|
(429
|
)
|
|
|
|
|
|
|
429
|
|
|
|
100.0
|
|
|
|
(429
|
)
|
|
|
|
|
Gain (loss) on sales of securities, net
|
|
|
1,790
|
|
|
|
(158
|
)
|
|
|
4,433
|
|
|
|
1,948
|
|
|
|
1,232.9
|
|
|
|
(4,591
|
)
|
|
|
(103.6
|
)
|
Income from bank-owned life insurance
|
|
|
1,169
|
|
|
|
890
|
|
|
|
828
|
|
|
|
279
|
|
|
|
31.3
|
|
|
|
62
|
|
|
|
7.5
|
|
Equity income (loss) on investment in affiliate bank
|
|
|
492
|
|
|
|
629
|
|
|
|
(396
|
)
|
|
|
(137
|
)
|
|
|
(21.8
|
)
|
|
|
1,025
|
|
|
|
258.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
$
|
11,721
|
|
|
$
|
5,295
|
|
|
$
|
8,373
|
|
|
$
|
6,426
|
|
|
|
121.4
|
%
|
|
$
|
(3,078
|
)
|
|
|
(36.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2010, non-interest income
increased $6.4 million, or 121.4%, to $11.7 million
from $5.3 million for the year ended December 31,
2009, primarily due to increases of $2.6 million in
customer service fees, $1.9 million in gain on sales of
securities, $1.3 million in gain on sales of loans and
$429,000 from
other-than-temporary
impairment losses recorded in the prior year. 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
securities reflected sales totaling $4.7 million during the
quarter ended December 31, 2010 of certain securities
acquired in the Mt. Washington merger for a net gain of $953,000
and sales totaling $6.6 million during the year ended
December 31, 2010 of other securities for a net gain of
$485,000. The increases in gain on sales of loans reflected
higher gains on sales of loans originated for sale during the
year ended December 31, 2010 and gains totaling $352,000 on
sales of fixed-rate bi-weekly mortgage loans during the first
quarter of 2010.
Non-interest income for the year ended December 31, 2009
was $5.3 million, compared to $8.4 million for the
year ended December 31, 2008. The Company recorded a loss
on securities determined to be other than temporarily impaired
of $429,000 and a loss on sale of securities of $158,000 in
2009, compared to a net gain on sale of securities of
$4.4 million in 2008. The Company recorded a gain on sale
of loans of $560,000 in 2009, compared to $39,000 in 2008, as
saleable residential loan origination volume increased in 2009
due to lower rates. The Company recorded equity income on its
investment in affiliate bank of $629,000 in 2009, compared to a
loss of $396,000 recorded for 2008, as the affiliate bank
continued to grow, increasing net interest income while
maintaining expense levels.
60
Non-Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Change 2010/2009
|
|
|
Change 2009/2008
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
Salaries and employee benefits
|
|
$
|
25,716
|
|
|
$
|
18,726
|
|
|
$
|
17,678
|
|
|
$
|
6,990
|
|
|
|
37.3
|
%
|
|
$
|
1,048
|
|
|
|
5.9
|
%
|
Occupancy and equipment
|
|
|
5,646
|
|
|
|
3,056
|
|
|
|
2,915
|
|
|
|
2,590
|
|
|
|
84.8
|
|
|
|
141
|
|
|
|
4.8
|
|
Data processing
|
|
|
3,200
|
|
|
|
1,752
|
|
|
|
1,662
|
|
|
|
1,448
|
|
|
|
82.6
|
|
|
|
90
|
|
|
|
5.4
|
|
Data processing contract termination cost
|
|
|
2,689
|
|
|
|
|
|
|
|
|
|
|
|
2,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and advertising
|
|
|
1,968
|
|
|
|
1,241
|
|
|
|
1,214
|
|
|
|
727
|
|
|
|
58.6
|
|
|
|
27
|
|
|
|
2.2
|
|
Professional services
|
|
|
2,443
|
|
|
|
1,997
|
|
|
|
2,300
|
|
|
|
446
|
|
|
|
22.3
|
|
|
|
(303
|
)
|
|
|
(13.2
|
)
|
Contribution to Meridian Charitable Foundation
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
(3,000
|
)
|
|
|
(100.0
|
)
|
Foreclosed real estate expense
|
|
|
488
|
|
|
|
373
|
|
|
|
675
|
|
|
|
115
|
|
|
|
30.8
|
|
|
|
(302
|
)
|
|
|
(44.7
|
)
|
Deposit insurance
|
|
|
2,250
|
|
|
|
1,879
|
|
|
|
507
|
|
|
|
371
|
|
|
|
19.7
|
|
|
|
1,372
|
|
|
|
270.6
|
|
Other general and administrative
|
|
|
4,404
|
|
|
|
2,542
|
|
|
|
2,015
|
|
|
|
1,862
|
|
|
|
73.2
|
|
|
|
527
|
|
|
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
$
|
48,804
|
|
|
$
|
31,566
|
|
|
$
|
31,966
|
|
|
$
|
17,238
|
|
|
|
54.6
|
%
|
|
$
|
(400
|
)
|
|
|
(1.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2010, non-interest expense
increased $17.2 million, or 54.6%, to $48.8 million
from $31.6 million for the year ended December 31,
2009, primarily due to the $2.7 million charge related to
termination of the contract with Mt. Washingtons data
processing services provider and increases of $1.4 million
in recurring data processing costs, $7.0 million in
salaries and employee benefits, $2.6 million in occupancy
and equipment expenses, $727,000 in marketing and advertising,
$446,000 in professional services and $1.9 million 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 Company agreed to revised contract terms with its current
data processing services provider during the year ended
December 31, 2010 that included provisions for the
conversion of Mt. Washingtons accounts from their data
processing services provider as completed in October 2010. As a
result of these revised contract terms and the termination of
Mt. Washingtons prior data processing services contract,
the Company expects to realize significant data processing cost
savings in subsequent periods.
Non-interest expense was $31.6 million and
$32.0 million for the years ended December 31, 2009
and 2008, respectively. Salary and employee benefit expenses
increased $1.0 million, or 5.9%, to $18.7 million, for
the year ended December 31, 2009, as a result of expenses
relating to the Companys equity incentive plans.
Consistent with the terms of their employment agreements, the
Bank entered into Separation Agreements with two executives upon
their retirement during 2009 and one executive in 2008, which
provided for the payment of certain benefits. During 2009 and
2008, the Company recorded pre-tax charges of $1.8 million
and $1.5 million, respectively as a result of the
Separation Agreements. In the first quarter of 2008, the Company
made a pre-tax $3.0 million contribution to the
Companys charitable foundation in conjunction with its
stock offering and no such contribution was made in 2009.
Deposit insurance expense increased by $1.4 million, to
$1.9 million in 2009, due to deposit growth and increased
rates levied on all FDIC insured institutions, including a
$502,000 special assessment. Foreclosed real estate expense
decreased to $373,000 from $675,000, due mainly to lower
valuation allowances recorded in 2009, and a net gain on sale of
foreclosed real estate recorded in 2009. Other general and
administrative expense increased by $527,000, or 26.2% primarily
as a result of $429,000 of expenses related to the
Companys acquisition of Mt. Washington.
Income
Tax Provision
The Company recorded a provision for income taxes of
$7.4 million for the year ended December 31, 2010,
reflecting an effective tax rate of 35.6%, compared to
$2.2 million, or 36.5%, for the year ended
December 31, 2009. The increase in the income tax provision
was primarily due to an increase in pre-tax income. For the year
ended December 31, 2008, the Company recorded a tax benefit
of $1.3 million, reflecting a 37.6% effective tax benefit
61
rate. Included in the 2008 net operating loss was the
Companys $3.0 million contribution to the Meridian
Charitable Foundation. This contribution resulted in an increase
in the Companys deferred tax asset and caused the Company
to record a valuation allowance of $500,000. On a yearly basis,
an analysis of the components of the deferred tax was performed
and for the years ended December 31, 2009 and 2010, the
valuation allowance was reduced to $441,000 and $0, respectively.
Risk
Management
Overview
Managing risk is an essential part of successfully managing a
financial institution. Our most prominent risk exposures are
credit risk, interest rate risk and market risk. Credit risk is
the risk of not collecting the interest
and/or the
principal balance of a loan or investment when it is due.
Interest rate risk is the potential reduction of net interest
income as a result of changes in interest rates. Market risk
arises from fluctuations in interest rates that may result in
changes in the values of financial instruments, such as
available-for-sale
securities that are accounted for on a
mark-to-market
basis. Other risks that we face are operational risks, liquidity
risks and reputation risk. Operational risks include risks
related to fraud, regulatory compliance, processing errors, and
technology and disaster recovery. Liquidity risk is the possible
inability to fund obligations to depositors, lenders or
borrowers. Reputation risk is the risk that negative publicity
or press, whether true or not, could cause a decline in our
customer base or revenue.
The Companys Risk Management Officer oversees the risk
management process, with responsibility for the overall risk
program and strategy, determining risks and implementing risk
mitigation strategies in the following risk areas: interest
rates, operational/compliance, liquidity, strategic, reputation,
credit and legal/regulatory. This individual provides counsel to
members of our senior management team on all issues that effect
our risk positions. In addition, this position is responsible
for the following:
|
|
|
|
|
Develops, implements and maintains a risk management program for
the entire Bank to withstand regulatory scrutiny and provides
operational safety and efficiency;
|
|
|
|
Recommends policy to the Board of Directors;
|
|
|
|
Chairs the Risk Management Committee;
|
|
|
|
Participates in developing long-term strategic risk objectives
for the Company;
|
|
|
|
Coordinates and reviews risk assessments and provides
recommendations on risk controls, testing and mitigation
strategies;
|
|
|
|
Reviews and provides recommendations and approvals for all
proposed business initiatives;
|
|
|
|
Implements and maintains the Vendor Management Program;
|
|
|
|
Acts as our Information Security Officer and provides comments
and recommendations in accordance with Gramm-Leach Bliley Act
requirements; and
|
|
|
|
Maintains leading edge knowledge of risk management and
regulatory trends and mitigation strategies.
|
Asset/Liability
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.
62
We have an Asset/Liability Management Committee to coordinate
all aspects of 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.
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 Bank at January 1, 2011 through
December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
|
|
|
in Market Interest
|
|
Net Interest Income
|
Rates (Rate Shock)
|
|
Amount
|
|
Change
|
|
Percent
|
|
|
(Dollars in Thousands)
|
|
300
|
|
$
|
56,077
|
|
|
$
|
(4,002
|
)
|
|
|
(6.66
|
) %
|
Flat
|
|
|
60,079
|
|
|
|
|
|
|
|
|
|
-50
|
|
|
58,739
|
|
|
|
(1,340
|
)
|
|
|
(2.23
|
)
|
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.
63
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
December 31, 2010, cash and cash equivalents totaled
$155.5 million. In addition, at December 31, 2010, we
had $66.5 million of available borrowing capacity with the
Federal Home Loan Bank of Boston, including a $9.4 million
line of credit. On December 31, 2010, we had
$136.7 million of advances outstanding.
A significant use of our liquidity is the funding of loan
originations. At December 31, 2010 and 2009, we had total
loan commitments outstanding, as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Unadvanced portion of existing loans:
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
64,722
|
|
|
$
|
72,218
|
|
Home equity line of credit
|
|
|
39,791
|
|
|
|
25,623
|
|
Other lines and letters of credit
|
|
|
7,095
|
|
|
|
4,038
|
|
Commitments to originate:
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
15,362
|
|
|
|
1,844
|
|
Commercial real estate
|
|
|
65,187
|
|
|
|
18,711
|
|
Construction
|
|
|
12,625
|
|
|
|
27,460
|
|
Other loans
|
|
|
2,783
|
|
|
|
4,457
|
|
|
|
|
|
|
|
|
|
|
Total loan commitments outstanding
|
|
$
|
207,565
|
|
|
$
|
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
provided participating checking accounts with overdraft account
protection covering $14.1 million of balances as of
December 31, 2010.
In July 2010, we extended the contract with our core data
processing provider through December 2017. This contract
extension resulted in an outstanding commitment of
$15.6 million as of December 31, 2010, with total
annual payments of $2.2 million. On August 5, 2010, we
terminated Mt. Washingtons contract with its core data
processing provider in preparation for the conversion to the
Companys core data processing provider during October
2010. This contract termination and related systems conversion
costs resulted in a charge to operations of $2.7 million
for the year ended December 31, 2010. In addition, we had
outstanding commitments as of December 31, 2010 totaling
$347,000 for the construction of two new branches in Revere and
the West Roxbury area of Boston, Massachusetts, and $134,000 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 December 31, 2010 totaled $381.7 million, or 54.7%
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.
64
Contractual
Obligations
The following table presents our contractual obligations as of
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
More Than
|
|
|
More Than
|
|
|
|
|
|
|
|
|
|
Up to One
|
|
|
One Year to
|
|
|
Three Years to
|
|
|
More Than
|
|
|
|
Total
|
|
|
Year
|
|
|
Three Years
|
|
|
Five Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations
|
|
$
|
136,697
|
|
|
$
|
20,538
|
|
|
$
|
88,659
|
|
|
$
|
21,000
|
|
|
$
|
6,500
|
|
Operating lease obligations
|
|
|
6,407
|
|
|
|
515
|
|
|
|
956
|
|
|
|
887
|
|
|
|
4,049
|
|
Other long-term obligations(1)
|
|
|
15,645
|
|
|
|
2,235
|
|
|
|
4,470
|
|
|
|
4,470
|
|
|
|
4,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
158,749
|
|
|
$
|
23,288
|
|
|
$
|
94,085
|
|
|
$
|
26,357
|
|
|
$
|
15,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists entirely of expenses related to obligations under a
data processing agreement. |
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
December 31, 2010, both Meridian Interstate Bancorp and
East Boston Savings Bank exceeded all of their respective
regulatory capital requirements. East Boston Saving Bank is
considered well capitalized under regulatory
guidelines. See Regulation and Supervision
Federal Bank Regulation Capital
Requirements, Regulatory Capital
Compliance and Note 15 Stockholders
Equity Minimum Regulatory Capital Requirements
in Notes to the Consolidated Financial Statements included
in Item 8 Financial Statements and Supplementary Data
within this report.
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
completed in January 2008 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 non tax-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 December 31, 2010, the Company had
repurchased
65
188,827 shares of its stock at an average price of $11.07
per share as included in treasury stock, or 40.0% of the shares
authorized for repurchase under the Companys third stock
repurchase program. The Company has repurchased
1,120,327 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 in the United States of America
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. For information about our
loan commitments and unused lines of credit, see Note 12
Other Commitments and Contingencies in Notes to
Consolidated Financial Statements included in Item 8
Financial Statements and Supplementary Data within this
report.
For the year ended December 31, 2010, we engaged in no
off-balance sheet transactions reasonably likely to have a
material effect on our financial condition, results of
operations or cash flows.
Impact
of Recent Accounting Pronouncements
For a discussion of the impact of recent accounting
pronouncements, see Note 1 Summary of Significant
Accounting Policies in Notes to Consolidated Financial
Statements included in Item 8 Financial Statements and
Supplementary Data within this report.
Effect of
Inflation and Changing Prices
The financial statements and related financial data presented in
this Annual Report have been prepared in accordance with
generally accepted accounting principles in the United States of
America, which require the measurement of financial position and
operating results in terms of historical dollars without
considering the change in the relative purchasing power of money
over time due to inflation. The primary impact of inflation on
our operations is reflected in increased operating costs. Unlike
most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature.
As a result, interest rates generally have a more significant
impact on a financial institutions performance than do
general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices
of goods and services.
|
|
Item 7a.
|
quantitative
and qualitative disclosures about market risk
|
Information regarding quantitative and qualitative disclosures
about market risk appears under Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, under the caption
Asset/Liability Management.
66
|
|
Item 8.
|
financial
statements and supplementary data
|
Index to
Consolidated Financial Statements
|
|
|
|
|
|
|
Page
|
|
|
|
|
68
|
|
|
|
|
69
|
|
|
|
|
71
|
|
|
|
|
72
|
|
|
|
|
73
|
|
|
|
|
74
|
|
|
|
|
76
|
|
67
MANAGEMENTS
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
The management of Meridian Interstate Bancorp, Inc. (the
Company), is responsible for establishing and
maintaining effective internal control over financial reporting.
The internal control process has been designed under our
supervision to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external reporting purposes in
accordance with accounting principles generally accepted in the
United States of America.
Management conducted an assessment of the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2010, utilizing the framework established in
Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment, management has determined that
the Companys internal control over financial reporting as
of December 31, 2010 is effective.
Our internal control over financial reporting includes policies
and procedures that (a) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
Company; (b) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles in the United States of America, and that
receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of
the Company; and (c) provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Companys assets
that could have a material effect on the Companys
financial statements.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems designed to
be effective can provide only reasonable assurance with respect
to financial statement preparation and presentation. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies and procedures may deteriorate.
The effectiveness of the Companys internal control over
financial reporting as of December 31, 2010 has been
audited by Wolf & Company, P.C., an independent
registered public accounting firm, as stated in their report,
which follows. This report expresses an unqualified opinion on
the effectiveness of the Companys internal control over
financial reporting as of December 31, 2010.
|
|
|
|
|
/s/ Mark
L. Abbate
|
Richard J. Gavegnano
Chairman and Chief Executive Officer
|
|
Mark L. AbbateSenior Vice President, Treasurer and Chief
Financial Officer(Principal Financial and Accounting Officer)
|
March 16, 2011
68
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Meridian Interstate Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of
Meridian Interstate Bancorp, Inc., (the Company) as
of December 31, 2010 and 2009, and the related consolidated
statements of operations, changes in stockholders equity
and cash flows for each of the years in the three-year period
ended December 31, 2010. We also have audited Meridian
Interstate Bancorp, Inc.s internal control over financial
reporting as of December 31, 2010, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Meridian Interstate
Bancorp, Inc.s management is responsible for these
consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on these financial statements and an opinion on the
Companys internal control over financial reporting based
on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of
America. Also, because managements assessment and our
audit were conducted to meet the reporting requirements of
Section 112 of the Federal Deposit Insurance Corporation
Improvement Act (FDICIA), our audit of Meridian Interstate
Bancorp, Inc.s internal control over financial reporting
included controls over the preparation of financial statements
in accordance with the instructions to the Consolidated
Financial Statements for Bank Holding Companies (Form FR
Y-9C) and to the Federal Financial Institutions Examination
Council Instructions for Consolidated Reports of Condition and
Income. A companys internal control over financial
reporting includes those policies and procedures that
(a) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(b) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles in the United States of America, and that receipts
and expenditures of the company are being made only in
accordance with authorizations of management and directors of
the company; and (c) provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets
that could have a material effect on the companys
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
69
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Meridian Interstate Bancorp, Inc. and subsidiaries
as of December 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2010 in conformity
with accounting principles generally accepted in the United
States of America. Also in our opinion, Meridian Interstate
Bancorp, Inc. maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2010, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
Boston, Massachusetts
March 16, 2011
70
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Cash and due from banks
|
|
$
|
155,430
|
|
|
$
|
9,010
|
|
Federal funds sold
|
|
|
63
|
|
|
|
10,956
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
155,493
|
|
|
|
19,966
|
|
Certificates of deposit affiliate bank
|
|
|
|
|
|
|
3,000
|
|
Securities available for sale, at fair value
|
|
|
360,602
|
|
|
|
293,367
|
|
Federal Home Loan Bank stock, at cost
|
|
|
12,538
|
|
|
|
4,605
|
|
Loans held for sale
|
|
|
13,013
|
|
|
|
955
|
|
Loans
|
|
|
1,183,717
|
|
|
|
822,542
|
|
Less allowance for loan losses
|
|
|
(10,155
|
)
|
|
|
(9,242
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
1,173,562
|
|
|
|
813,300
|
|
Bank-owned life insurance
|
|
|
33,829
|
|
|
|
23,721
|
|
Foreclosed real estate, net
|
|
|
4,080
|
|
|
|
2,869
|
|
Investment in affiliate bank
|
|
|
11,497
|
|
|
|
11,005
|
|
Premises and equipment, net
|
|
|
34,425
|
|
|
|
23,195
|
|
Accrued interest receivable
|
|
|
7,543
|
|
|
|
6,231
|
|
Prepaid deposit insurance
|
|
|
3,026
|
|
|
|
5,114
|
|
Deferred tax asset, net
|
|
|
5,441
|
|
|
|
1,523
|
|
Goodwill
|
|
|
13,687
|
|
|
|
|
|
Other assets
|
|
|
7,094
|
|
|
|
2,535
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,835,830
|
|
|
$
|
1,211,386
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Deposits:
|
|
|
|
|
|
|
|
|
Non interest-bearing
|
|
$
|
111,423
|
|
|
$
|
63,606
|
|
Interest-bearing
|
|
|
1,343,792
|
|
|
|
858,869
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
1,455,215
|
|
|
|
922,475
|
|
Short-term borrowings affiliate bank
|
|
|
1,949
|
|
|
|
3,102
|
|
Short-term borrowings other
|
|
|
10,037
|
|
|
|
22,108
|
|
Long-term debt
|
|
|
136,697
|
|
|
|
50,200
|
|
Accrued expenses and other liabilities
|
|
|
16,321
|
|
|
|
13,086
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,620,219
|
|
|
|
1,010,971
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 6, 8 and 12)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, no par value, 50,000,000 shares authorized;
23,000,000 shares issued
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
97,005
|
|
|
|
100,972
|
|
Retained earnings
|
|
|
122,563
|
|
|
|
109,189
|
|
Accumulated other comprehensive income
|
|
|
8,038
|
|
|
|
5,583
|
|
Treasury stock, at cost, 192,218 and 517,500 shares at
December 31, 2010 and 2009, respectively
|
|
|
(2,121
|
)
|
|
|
(4,535
|
)
|
Unearned compensation ESOP, 703,800 and
745,200 shares at December 31, 2010 and 2009,
respectively
|
|
|
(7,038
|
)
|
|
|
(7,452
|
)
|
Unearned compensation restricted shares, 326,905 and
383,935 at December 31, 2010 and 2009, respectively
|
|
|
(2,836
|
)
|
|
|
(3,342
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
215,611
|
|
|
|
200,415
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,835,830
|
|
|
$
|
1,211,386
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
71
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
67,459
|
|
|
$
|
45,050
|
|
|
$
|
38,781
|
|
Interest on debt securities
|
|
|
13,467
|
|
|
|
10,432
|
|
|
|
10,460
|
|
Dividends on equity securities
|
|
|
923
|
|
|
|
1,071
|
|
|
|
1,816
|
|
Interest on certificates of deposit
|
|
|
42
|
|
|
|
89
|
|
|
|
157
|
|
Interest on other interest-earning assets
|
|
|
168
|
|
|
|
25
|
|
|
|
1,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
82,059
|
|
|
|
56,667
|
|
|
|
52,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
|
17,444
|
|
|
|
18,386
|
|
|
|
25,040
|
|
Interest on short-term borrowings
|
|
|
63
|
|
|
|
61
|
|
|
|
132
|
|
Interest on long-term debt
|
|
|
3,533
|
|
|
|
1,945
|
|
|
|
1,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
21,040
|
|
|
|
20,392
|
|
|
|
27,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
61,019
|
|
|
|
36,275
|
|
|
|
25,853
|
|
Provision for loan losses
|
|
|
3,181
|
|
|
|
4,082
|
|
|
|
5,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, after provision for loan losses
|
|
|
57,838
|
|
|
|
32,193
|
|
|
|
20,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer service fees
|
|
|
5,823
|
|
|
|
3,219
|
|
|
|
2,796
|
|
Loan fees
|
|
|
636
|
|
|
|
584
|
|
|
|
673
|
|
Gain on sales of loans, net
|
|
|
1,811
|
|
|
|
560
|
|
|
|
39
|
|
Other-than-temporary
impairment losses on equity securities
|
|
|
|
|
|
|
(429
|
)
|
|
|
|
|
Gain (loss) on sales of securities, net
|
|
|
1,790
|
|
|
|
(158
|
)
|
|
|
4,433
|
|
Income from bank-owned life insurance
|
|
|
1,169
|
|
|
|
890
|
|
|
|
828
|
|
Equity income (loss) on investment in affiliate bank
|
|
|
492
|
|
|
|
629
|
|
|
|
(396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
11,721
|
|
|
|
5,295
|
|
|
|
8,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
25,716
|
|
|
|
18,726
|
|
|
|
17,678
|
|
Occupancy and equipment
|
|
|
5,646
|
|
|
|
3,056
|
|
|
|
2,915
|
|
Data processing
|
|
|
3,200
|
|
|
|
1,752
|
|
|
|
1,662
|
|
Data processing contract termination cost
|
|
|
2,689
|
|
|
|
|
|
|
|
|
|
Marketing and advertising
|
|
|
1,968
|
|
|
|
1,241
|
|
|
|
1,214
|
|
Professional services
|
|
|
2,443
|
|
|
|
1,997
|
|
|
|
2,300
|
|
Contribution to Charitable Foundation
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
Foreclosed real estate
|
|
|
488
|
|
|
|
373
|
|
|
|
675
|
|
Deposit insurance
|
|
|
2,250
|
|
|
|
1,879
|
|
|
|
507
|
|
Other general and administrative
|
|
|
4,404
|
|
|
|
2,542
|
|
|
|
2,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
48,804
|
|
|
|
31,566
|
|
|
|
31,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
20,755
|
|
|
|
5,922
|
|
|
|
(3,378
|
)
|
Provision (benefit) for income taxes
|
|
|
7,381
|
|
|
|
2,159
|
|
|
|
(1,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,374
|
|
|
$
|
3,763
|
|
|
$
|
(2,108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.61
|
|
|
$
|
0.17
|
|
|
|
N/A
|
|
Diluted
|
|
$
|
0.61
|
|
|
$
|
0.17
|
|
|
|
N/A
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,072,047
|
|
|
|
21,820,860
|
|
|
|
N/A
|
|
Diluted
|
|
|
22,081,005
|
|
|
|
21,820,860
|
|
|
|
N/A
|
|
See accompanying notes to consolidated financial statements.
72
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of No
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par Common
|
|
|
Additional
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
Unearned
|
|
|
Unearned
|
|
|
|
|
|
|
Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Income
|
|
|
Treasury
|
|
|
Compensation
|
|
|
Compensation
|
|
|
|
|
|
|
Outstanding
|
|
|
Capital
|
|
|
Earnings
|
|
|
(Loss)
|
|
|
Stock
|
|
|
ESOP
|
|
|
Restricted Shares
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
$
|
109,177
|
|
|
$
|
6,507
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
115,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply guidance on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
split dollar life insurance
|
|
|
|
|
|
|
|
|
|
|
(1,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(2,108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,108
|
)
|
Change in net unrealized gain on securities available for sale,
net of reclassification adjustment and tax effects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,384
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,384
|
)
|
Change in defined benefit plan prior service costs and actuarial
losses, net of reclassification adjustments and tax effects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply plan accounting for long-term
health care plan, net of tax effects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(353
|
)
|
Issuance of 12,650,000 shares to the mutual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
holding company
|
|
|
12,650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 10,050,000 shares in the initial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
public offering, net of expenses of $2,867
|
|
|
10,050,000
|
|
|
|
97,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,633
|
|
Issuance and contribution of 300,000 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to the Meridian Charitable Foundation
|
|
|
300,000
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
Purchase of 828,000 shares of common stock by the ESOP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,280
|
)
|
|
|
|
|
|
|
(8,280
|
)
|
ESOP shares earned (41,400 shares)
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
414
|
|
|
|
|
|
|
|
400
|
|
Purchase of 250,000 shares for restricted stock awards
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,262
|
)
|
|
|
(2,262
|
)
|
Share-based compensation expense
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
22,750,000
|
|
|
|
100,684
|
|
|
|
105,426
|
|
|
|
(6,205
|
)
|
|
|
|
|
|
|
(7,866
|
)
|
|
|
(2,199
|
)
|
|
|
189,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
3,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,763
|
|
Change in net unrealized gain on securities available for sale,
net of reclassification adjustment and tax effects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,826
|
|
Change in defined benefit plan prior service costs and actuarial
losses, net of reclassification adjustments and tax effects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(517,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,535
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,535
|
)
|
ESOP shares earned (41,400 shares)
|
|
|
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
414
|
|
|
|
|
|
|
|
355
|
|
Purchase of 164,000 shares for restricted stock awards
|
|
|
(164,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,468
|
)
|
|
|
(1,468
|
)
|
Share-based compensation expense
|
|
|
30,065
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
325
|
|
|
|
672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
13,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,374
|
|
Change in net unrealized gain on securities available for sale,
net of reclassification adjustment and tax effects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,333
|
|
Change in defined benefit plan prior service costs and actuarial
losses, net of reclassification adjustments and tax effects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(188,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,091
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,091
|
)
|
ESOP shares earned (41,400 shares)
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
414
|
|
|
|
|
|
|
|
440
|
|
Issuance of 514,109 shares to Meridian Financial Services,
Incorporated, the mutual holding company
|
|
|
514,109
|
|
|
|
(4,505
|
)
|
|
|
|
|
|
|
|
|
|
|
4,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
57,030
|
|
|
|
512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
506
|
|
|
|
1,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
22,480,877
|
|
|
$
|
97,005
|
|
|
$
|
122,563
|
|
|
$
|
8,038
|
|
|
$
|
(2,121
|
)
|
|
$
|
(7,038
|
)
|
|
$
|
(2,836
|
)
|
|
$
|
215,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
73
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,374
|
|
|
$
|
3,763
|
|
|
$
|
(2,108
|
)
|
Adjustments to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of acquisition fair value adjustments
|
|
|
(3,594
|
)
|
|
|
|
|
|
|
|
|
Earned ESOP shares
|
|
|
440
|
|
|
|
355
|
|
|
|
400
|
|
Contribution of stock to charitable foundation
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
Provision for loan losses
|
|
|
3,181
|
|
|
|
4,082
|
|
|
|
5,638
|
|
Amortization (accretion) of net deferred loan origination fees
|
|
|
84
|
|
|
|
(60
|
)
|
|
|
(286
|
)
|
Net amortization of securities available for sale
|
|
|
1,103
|
|
|
|
1,226
|
|
|
|
1,118
|
|
Depreciation and amortization expense
|
|
|
2,472
|
|
|
|
1,287
|
|
|
|
1,270
|
|
(Gain) loss on sales of securities, net
|
|
|
(1,790
|
)
|
|
|
158
|
|
|
|
(4,433
|
)
|
Other-than-temporary
impairment losses on securities
|
|
|
|
|
|
|
429
|
|
|
|
|
|
Gain on sales of loans held in portfolio, net
|
|
|
(352
|
)
|
|
|
|
|
|
|
|
|
(Gain) loss and provision for foreclosed real estate
|
|
|
(117
|
)
|
|
|
188
|
|
|
|
480
|
|
Deferred income tax provision (benefit)
|
|
|
1,149
|
|
|
|
671
|
|
|
|
(2,463
|
)
|
Income from bank-owned life insurance
|
|
|
(1,169
|
)
|
|
|
(890
|
)
|
|
|
(828
|
)
|
Equity (income) loss on investment in affiliate bank
|
|
|
(492
|
)
|
|
|
(629
|
)
|
|
|
396
|
|
Share-based compensation expense
|
|
|
1,018
|
|
|
|
672
|
|
|
|
128
|
|
Net changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
(7,139
|
)
|
|
|
(955
|
)
|
|
|
|
|
Accrued interest receivable
|
|
|
61
|
|
|
|
(195
|
)
|
|
|
(272
|
)
|
Prepaid deposit insurance
|
|
|
2,088
|
|
|
|
(5,114
|
)
|
|
|
|
|
Other assets
|
|
|
(985
|
)
|
|
|
2
|
|
|
|
1,354
|
|
Accrued expenses and other liabilities
|
|
|
(184
|
)
|
|
|
(141
|
)
|
|
|
(1,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
9,148
|
|
|
|
4,849
|
|
|
|
1,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by business combination
|
|
|
14,422
|
|
|
|
|
|
|
|
|
|
Maturities of certificates of deposit
|
|
|
3,100
|
|
|
|
7,000
|
|
|
|
|
|
Purchases of certificates of deposit
|
|
|
|
|
|
|
(3,000
|
)
|
|
|
(7,000
|
)
|
Activity in securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities, calls and principal payments
|
|
|
68,645
|
|
|
|
49,198
|
|
|
|
121,131
|
|
Proceeds from redemption of mutual funds
|
|
|
8,131
|
|
|
|
31,789
|
|
|
|
57,000
|
|
Proceeds from sales
|
|
|
12,278
|
|
|
|
9,203
|
|
|
|
18,359
|
|
Purchases
|
|
|
(105,380
|
)
|
|
|
(113,137
|
)
|
|
|
(199,867
|
)
|
Purchase of bank-owned life insurance
|
|
|
|
|
|
|
|
|
|
|
(4,000
|
)
|
Loans originated, net of principal payments received
|
|
|
(55,819
|
)
|
|
|
(114,303
|
)
|
|
|
(145,280
|
)
|
Proceeds from sales of fixed-rate loans held in portfolio
|
|
|
34,488
|
|
|
|
|
|
|
|
|
|
Purchases of premises and equipment
|
|
|
(2,977
|
)
|
|
|
(1,772
|
)
|
|
|
(1,164
|
)
|
Purchase of Federal Home Loan Bank stock
|
|
|
|
|
|
|
(302
|
)
|
|
|
(1,138
|
)
|
Capitalized costs on foreclosed real estate
|
|
|
(369
|
)
|
|
|
(1,613
|
)
|
|
|
(59
|
)
|
Proceeds from sales of foreclosed real estate
|
|
|
3,989
|
|
|
|
2,245
|
|
|
|
1,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(19,492
|
)
|
|
|
(134,692
|
)
|
|
|
(160,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
|
153,911
|
|
|
|
125,623
|
|
|
|
22,406
|
|
Net change in stock subscriptions
|
|
|
|
|
|
|
|
|
|
|
(62,518
|
)
|
Proceeds from sale of common stock
|
|
|
|
|
|
|
|
|
|
|
97,633
|
|
Common stock purchased by ESOP
|
|
|
|
|
|
|
|
|
|
|
(8,280
|
)
|
Net change in borrowings with maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
less than three months
|
|
|
(13,224
|
)
|
|
|
17,399
|
|
|
|
(1,343
|
)
|
Proceeds from Federal Home Loan Bank advances
|
|
|
|
|
|
|
|
|
|
|
|
|
with maturities of three months or more
|
|
|
25,475
|
|
|
|
|
|
|
|
45,150
|
|
Repayment of Federal Home Loan Bank advances
|
|
|
|
|
|
|
|
|
|
|
|
|
with maturities of three months or more
|
|
|
(18,200
|
)
|
|
|
(7,475
|
)
|
|
|
(14,848
|
)
|
Purchase of stock for restricted stock awards
|
|
|
|
|
|
|
(1,468
|
)
|
|
|
(2,262
|
)
|
Purchase of treasury stock
|
|
|
(2,091
|
)
|
|
|
(4,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
145,871
|
|
|
|
129,544
|
|
|
|
75,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
135,527
|
|
|
|
(299
|
)
|
|
|
(82,828
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
19,966
|
|
|
|
20,265
|
|
|
|
103,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
155,493
|
|
|
$
|
19,966
|
|
|
$
|
20,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on deposits
|
|
$
|
18,926
|
|
|
$
|
18,714
|
|
|
$
|
25,237
|
|
Interest paid on borrowings
|
|
|
5,030
|
|
|
|
2,031
|
|
|
|
1,948
|
|
Income taxes paid, net of refunds
|
|
|
7,004
|
|
|
|
635
|
|
|
|
647
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers from loans to foreclosed real estate
|
|
|
2,967
|
|
|
|
1,085
|
|
|
|
3,928
|
|
In conjunction with the purchase acquisition detailed in
Note 2 to the Consolidated Financial Statements, assets
were acquired and liabilities were assumed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired, net of cash acquired
|
|
|
450,576
|
|
|
|
|
|
|
|
|
|
Fair value of liabilities assumed
|
|
|
464,998
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
75
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
|
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation and Consolidation
The consolidated financial statements include the accounts of
Meridian Interstate Bancorp, Inc. and all other entities in
which it has a controlling financial interest (collectively
referred to as the Company), a 58.6%-owned
subsidiary of Meridian Financial Services, Incorporated
(Meridian), a mutual holding company. The Company
was formed in a corporate reorganization in 2006 and owns East
Boston Savings Bank and its subsidiaries (the Bank).
The Banks subsidiaries include Prospect, Inc., which
engages in securities transactions on its own behalf, EBOSCO,
LLC and Berkeley Riverbend Estates LLC, both of which hold
foreclosed real estate; and East Boston Investment Services,
Inc., which is authorized for third-party investment sales and
is currently inactive. The Company has another subsidiary,
Meridian Funding Corporation, which was established in 2008 to
fund a loan to the Companys Employee Stock Ownership Plan
(ESOP). All significant intercompany balances and
transactions have been eliminated in consolidation.
The Company also holds a 40% share in Hampshire First Bank, and
is accounting for this investment by the equity method of
accounting, under which the Companys share of the net
income or loss of the affiliate is recognized as income or loss
in the Companys consolidated statement of operations.
Business
and Operating Segments
The Company provides loan and deposit services to its customers
through its local banking offices in the greater Boston
metropolitan area. The Company is subject to competition from
other financial institutions including commercial banks, other
savings banks, credit unions, mortgage banking companies and
other financial service providers.
Generally, financial information is to be reported on the basis
that it is used internally for evaluating segment performance
and deciding how to allocate resources to segments. Management
evaluates the Companys performance and allocates resources
based on a single segment concept. Accordingly, there is no
separately identified material operating segment for which
discrete financial information is available. The Company does
not derive revenues from, or have assets located in foreign
countries, nor does it derive revenues from any single customer
that represents 10% or more of the Companys total revenues.
Use of
Estimates
In preparing consolidated financial statements in conformity
with accounting principles generally accepted in the United
States of America, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated balance sheet and
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to
significant change in the near term relate to the determination
of the allowance for loan losses, the evaluation of goodwill for
impairment,
other-than-temporary
impairment of securities and the valuation of deferred tax
assets and foreclosed real estate.
Reclassification
Certain amounts in the 2009 and 2008 consolidated financial
statements have been reclassified to conform to the 2010
presentation.
Significant
Concentrations of Credit Risk
Most of the Companys activities are with customers located
within Massachusetts. Note 4 includes the types of
securities in which the Company invests and Note 5 includes
the types of lending in which the Company engages. The Company
believes that it does not have any significant concentration in
any one industry or customer. Within the
76
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
securities portfolio, the Company has a significant amount of
corporate debt and marketable equity securities issued by
companies in the financial services sector. Given the current
market conditions, this sector continues to have an enhanced
level of credit risk. As of December 31, 2010, the fair
value of corporate debt and marketable equity securities in the
financial services sector amounted to $81.6 million and
$7.1 million, respectively. See Note 4.
Cash
and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash
and cash equivalents include amounts due from banks and federal
funds sold on a daily basis, which mature overnight or on
demand. The Bank may from time to time have deposits in
financial institutions which exceed the federally insured
limits. At December 31, 2010, the Company had a
concentration of cash on deposit at the Federal Reserve Bank
amounting to $137.0 million.
Certificates
of Deposit
Certificates of deposits are purchased from FDIC-insured
depository institutions, have an original maturity of greater
than ninety days and are carried at cost. At December 31,
2010 and 2009, the Companys balance in certificate of
deposits was $0 and $3.0 million, respectively, and
exceeded the FDIC insurance limit of $250,000 at
December 31, 2009.
Fair
Value Hierarchy
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.
Due to the illiquid market for certain debt securities, the
Company determined that the prices obtained from a third party
pricing service were no longer indicative of fair value. As of
December 31, 2010, the Company used an internal valuation
model to determine the fair value of these securities.
Securities
Available for Sale
Securities are classified as available for sale and
recorded at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component in
other comprehensive income/loss, net of tax effects. Purchase
premiums and discounts are recognized in interest income using
the effective interest method over the period of maturity. Gains
and losses on the sale of securities are recorded on the trade
date and are determined using the specific identification method.
Each reporting period, the Company evaluates all securities with
a decline in fair value below the amortized cost of the
investment to determine whether or not the impairment is deemed
to be
other-than-temporary
(OTTI). OTTI is required to be recognized
(1) if the Company intends to sell the security;
(2) if it is more likely than not that the
Company will be required to sell the security before recovery of
its amortized cost basis; or (3) for debt securities, the
present value of expected cash flows is not sufficient to
recover the entire amortized cost basis. Marketable equity
77
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
securities are evaluated for OTTI based on the severity and
duration of the impairment and, if deemed to be other than
temporary, the declines in fair value are reflected in earnings
as realized losses. For impaired debt securities that the
Company intends to sell, or more likely than not will be
required to sell, the full amount of the depreciation is
recognized as OTTI through earnings. For all other impaired debt
securities, credit-related OTTI is recognized through earnings
and non-credit related OTTI is recognized in other comprehensive
income/loss, net of applicable taxes.
Federal
Home Loan Bank Stock
The Bank, as a member of the Federal Home Loan Bank
(FHLB) system, is required to maintain an investment
in capital stock of the FHLB. Based on redemption provisions of
the FHLB, the stock has no quoted market value and is carried at
cost. At its discretion, the FHLB may declare dividends on the
stock. The FHLB announced the suspension of its dividend payment
and a moratorium on redemption of its stock in the first quarter
of 2009. During the first quarter of 2011, the FHLB declared a
dividend equal to an annual yield of 0.30% per share to be paid
on March 2, 2011. The Company reviews for impairment based
on the ultimate recoverability of the cost basis on the FHLB
stock. As of December 31, 2010 and 2009, no impairment has
been recognized.
Loans
Held For Sale
Loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses, if any, are recognized through
a valuation allowance by charges to income. Loan origination
fees, net of certain direct origination costs, are deferred,
and, upon sale, included in the determination of the gain or
loss on sale of loans.
Loans
The Company grants mortgage, commercial and consumer loans to
customers. The Companys loan portfolio includes
residential real estate, commercial real estate, construction,
commercial and consumer segments. Residential real estate loans
include classes for one-to four-family, multi-family and home
equity lines of credit.
A substantial portion of the loan portfolio is represented by
mortgage loans throughout eastern Massachusetts. The ability of
the Banks debtors to honor their contracts is dependent
upon the real estate and general economic conditions in this
area.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are
reported at their outstanding unpaid principal balances adjusted
for charge-offs, the allowance for loan losses, and net deferred
loan origination fees. Interest income is accrued on the unpaid
principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment
of the related loan yield using the interest method over the
terms of the loans.
Loans that were acquired in connection with the Mt. Washington
acquisition were recorded at fair value with no carryover of the
related allowance for loan losses. The fair value of the
acquired loans involved estimating the amount and timing of
principal and interest cash flows expected to be collected on
the loans and discounting those cash flows at the market rate of
interest. In addition, the loans were also evaluated for credit
quality. The net of the two measurements, either greater- or
less-than the book value, is referred to as the accretable
premium or accretable discount and is recognized into interest
income over the remaining life of the loan.
Loans that exhibited evidence of deterioration in credit quality
since origination, such that it was unlikely that all
contractually required payments would be collected, were also
recorded upon acquisition at their estimated fair value. The
difference between contractually required payments at
acquisition and the cash flows expected to be collected at
acquisition is referred to as the nonaccretable discount.
Subsequent decreases to the expected cash flows will require the
need to evaluate for an additional allowance for loan losses.
Subsequent improvement in expected cash flows will result in the
reversal of a corresponding amount of the nonaccretable discount
which will then be reclassified as an accretable discount that
will be recognized into interest income over the remaining life
of the loan.
78
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2010, the accretable yield on the
acquired loans with evidence of credit deterioration did not
have a material impact on the Companys consolidated
financial statements.
The accrual of interest on all loans is discontinued at the time
the loan is 90 days past due, unless the credit is well
secured and in process of collection. Past-due status is based
on contractual terms of the loan. In all cases, loans are placed
on non-accrual or charged-off at an earlier date if collection
of principal or interest is considered doubtful. All interest
accrued but not collected for loans that are placed on
non-accrual or charged off is reversed against interest income.
The interest on these loans is accounted for on the cash-basis
or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and
future payments are reasonably assured.
Allowance
for Loan Losses
The allowance for loan losses represents managements
estimate of the probable losses inherent in the loan portfolio
and is established as losses are estimated to have occurred
through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The adequacy of the allowance for loan losses is evaluated on a
regular basis by management and is based upon managements
periodic review of the collectibility of the loans in light of
historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the
borrowers ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information
becomes available.
The allowance consists of general, allocated and unallocated
components.
General
Component
The general component of the allowance for loan losses is based
on historical loss experience adjusted for qualitative factors
stratified by the following loan segments: residential real
estate, commercial real estate, construction, commercial and
consumer. The residential real estate loan segment includes
classes for one-to four-family loans, multi-family loans and
home equity lines of credit. Management uses a rolling average
of historical losses based on a time frame appropriate to
capture relevant loss data for each loan segment. This
historical loss factor is adjusted for the following qualitative
factors: levels/trends in delinquent and non-performing loans;
trends in volume and terms of loans; effects of changes in risk
selection and underwriting standards and other changes in
lending policies, procedures and practices;
experience/ability/depth of lending management and staff;
national and local economic trends and conditions, and industry
conditions. There were no changes in the Companys policies
or methodology pertaining to the general component of the
allowance for loan losses during 2010.
The qualitative factors are determined based on the various risk
characteristics of each loan segment. Risk characteristics
relevant to each portfolio segment are as follows:
Residential real estate loans The Company
primarily originates loans with a
loan-to-value
ratio of 80% or less and does not grant subprime loans. The
Company may also originate loans with
loan-to-value
ratios up to 95% (100% for first time home buyers only) with
such value measured at origination; however, private mortgage
insurance is generally required for loans with a
loan-to-value
ratio over 80%. All loans in this segment are collateralized by
residential real estate and repayment is dependent on the credit
quality of the individual borrower. The overall health of the
economy, including unemployment rates and housing prices, will
have an effect on the credit quality in this segment.
Commercial real estate loans Loans in this
segment are primarily income-producing properties such as
apartment buildings and properties used for business purposes
such as office buildings, industrial facilities and
79
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
retail facilities. These properties are generally located in the
greater Boston metropolitan area and certain other areas in
eastern Massachusetts, and in south-eastern New Hampshire and
Maine. The underlying cash flows generated by the properties can
be adversely impacted by a downturn in the economy as evidenced
by increased vacancy rates, which in turn, could have an effect
on the credit quality in this segment. Management obtains rent
rolls annually and continually monitors the cash flows of these
loans.
Construction loans Loans in this segment
primarily include loans for construction of commercial
development projects, including apartment buildings, small
industrial buildings and retail and office buildings. The
Company also originates loans to individuals and to builders to
finance the construction of residential dwellings. Most of these
construction loans are interest-only loans that provide for the
payment of only interest during the construction phase, which is
usually up to 12 to 24 months, although some construction
loans are renewed, generally for one or two additional years. At
the end of the construction phase, the loan may convert to a
permanent mortgage loan or the loan may be paid in full. Loans
generally can be made with a maximum loan to value ratio of 80%
of the appraised market value upon completion of the project.
Management carefully monitors the existing construction
portfolio for performance and project completion, with a goal of
moving completed commercial projects to the commercial real
estate portfolio and reviewing sales based projects for tracking
toward construction goals.
Commercial loans Loans in this segment are
made to businesses in the Companys market area and are
generally secured by assets of the business. Repayment is
expected from the cash flows of the business. A weakened
economy, and resultant decreased consumer spending, could have
an effect on the credit quality in this segment.
Consumer loans Loans in this segment may
include fixed-rate second mortgage loans, automobile loans,
loans secured by passbook or certificate accounts and overdraft
loans.
Allocated
Component
The allocated component relates to loans that are classified as
impaired. Impairment is measured on a loan by loan basis for
multi-family, commercial real estate, construction and
commercial loans by either the present value of expected future
cash flows discounted at the loans effective interest rate
or the fair value of the collateral if the loan is collateral
dependent.
An allowance is established when the discounted cash flows (or
collateral value) of the impaired loan is lower than the
carrying value of that loan. Large groups of smaller balance
homogeneous loans are collectively evaluated for impairment.
Prior to 2010, management individually reviewed one-to
four-family loans for impairment. However, the growth in the
one-to four-family loan portfolio as a result of the merger with
Mt. Washington
Co-operative
Bank on January 4, 2010 made it less practical to
individually review this homogenous pool of mortgage loans.
Accordingly, the Company does not separately identify individual
consumer and residential real estate loans for impairment
disclosures beginning in 2010, unless such loans are subject to
a troubled debt restructuring agreement.
A loan is considered impaired when, based on current information
and events, it is probable that the Company 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.
Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment
shortfalls on a
case-by-case
basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrowers prior
payment record, and the amount of the shortfall in relation to
the principal and interest owed.
80
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 troubled debt restructuring
(TDR). All TDRs are initially classified as impaired.
Unallocated
Component
An unallocated component may be maintained to cover
uncertainties that could affect managements estimate of
probable losses. The unallocated component of the allowance
reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating allocated
and general components of the allowance for loan losses.
Bank-Owned
Life Insurance
The Bank has purchased insurance policies on the lives of
certain directors, executive officers and employees. Bank-owned
life insurance policies are reflected on the consolidated
balance sheets at cash surrender value. Changes in net cash
surrender value of the policies, as well as insurance proceeds
received, are reflected in non-interest income on the
consolidated statements of operations and are not subject to
income taxes.
Premises
and Equipment
Land is carried at cost. Buildings, equipment and leasehold
improvements are stated at cost, less accumulated depreciation
and amortization, computed on the straight-line method over the
estimated useful lives of the assets or the expected terms of
the leases, if shorter. Expected terms include lease option
periods to the extent that the exercise of such options is
reasonably assured. It is general practice to charge the cost of
maintenance and repairs to earnings when incurred; major
expenditures for improvements are capitalized and depreciated.
Servicing
The Company services residential real estate loans for others.
Servicing assets are recognized as separate assets when rights
are acquired through the purchase or sale of financial assets.
For sale of mortgage loans, a portion of the cost of originating
the loan is allocated to the servicing right based on fair
value. The Company uses an internal valuation model to estimate
the fair value of servicing rights. This model is utilized to
calculate the present value of projected future cash flows and
requires estimates of numerous market assumptions, such as
interest rates, prepayment assumptions, servicing costs,
discount rates, and the payment performance of the underlying
loans. The measurement of the fair value of servicing rights is
limited by the existing conditions and the assumptions utilized
as of a particular point in time. Those same assumptions may not
be appropriate if applied at a different point in time.
Capitalized servicing rights are reported in other assets and
are amortized into non-interest income in proportion to, and
over the period of, the estimated future net servicing income of
the underlying financial assets. Servicing assets are evaluated
for impairment based upon the fair value of the rights as
compared to amortized cost. Impairment is determined by
stratifying rights by predominant characteristics, such as
interest rates and terms. Fair value is determined using prices
for similar assets with similar characteristics. Impairment is
recognized through a valuation allowance for an individual
stratum, to the extent that fair value is less than the
capitalized amount for the stratum. Changes in the valuation
allowance are reported in loan fee income. Mortgage servicing
rights amounted to $585,000 and $442,000 at December 31,
2010 and 2009, respectively and are included in other assets on
the consolidated balance sheets.
Derivative
Financial Instruments
Derivative financial instruments are recognized as assets and
liabilities on the consolidated balance sheet and measured at
fair value, if material.
81
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Derivative
Loan Commitments
Residential real estate loan commitments are referred to as
derivative loan commitments if the loan that will result from
exercise of the commitment will be held for sale upon funding.
Loan commitments that are derivatives are recognized at fair
value on the consolidated balance sheet in other assets and
other liabilities with changes in their fair values recorded in
non-interest income, if material.
Forward
Loan Sale Commitments
To protect against the price risk inherent in derivative loan
commitments, the Company utilizes both mandatory
delivery and best efforts forward loan sale
commitments to mitigate the risk of potential decreases in the
values of loans that would result from the exercise of the
derivative loan commitments. Forward sale commitments are
recognized at fair value on the consolidated balance sheet in
other assets and other liabilities with changes in their fair
values recorded in non-interest income, if material.
Foreclosed
Assets
Assets acquired through, or in lieu of, loan foreclosure are
held for sale and are initially recorded at fair value less
costs to sell at the date of foreclosure, establishing a new
cost basis. The excess, if any, of the loan balance over the
fair value of the asset at the time of transfer from loans to
foreclosed assets is charged to the allowance for loan losses.
Subsequent to foreclosure, valuations are periodically performed
by management and the assets are carried at the lower of
carrying amount or fair value less costs to sell. Revenue and
expenses from operations, changes in the valuation allowance,
any direct write-downs and gains or losses on sales are included
in foreclosed real estate expense.
Valuation
of Goodwill and Analysis for Impairment
The Companys goodwill resulted from the acquisition of
another financial institution accounted for under the
acquisition method of accounting. The amount of goodwill
recorded at acquisition is impacted by the recorded fair value
of the assets acquired and liabilities assumed, which is an
estimate determined by the use of internal or other valuation
techniques.
Goodwill is subject to ongoing periodic impairment tests and is
evaluated using a two step impairment approach. Step one of the
impairment test compares the book value of the Company or the
reporting unit to the fair value of the Company, or to the fair
value of the reporting unit. If test one is failed, a more
detailed analysis is performed, which involves measuring the
excess of the fair value of the reporting unit, as determined in
step one, over the aggregate fair value of the individual
assets, liabilities, and identifiable intangibles by utilizing a
comparable analysis of relevant price multiples in recent market
transactions. In the event of future changes in fair value, the
Company may be exposed to an impairment charge that could be
material.
Transfers
of Financial Assets
Transfers of an entire financial asset, a group of entire
financial assets, or participating interest in an entire
financial asset are accounted for as sales when control over the
assets has been surrendered. Control over transferred assets is
deemed to be surrendered when (1) the assets have been
isolated from the Company, (2) the transferee obtains the
right to pledge or exchange the transferred assets, and
(3) the Company does not maintain effective control over
the transferred assets.
Effective January 1, 2010, the Company adopted accounting
guidance pertaining to transfers of financial assets. During the
normal course of business, the Company may transfer a portion of
a financial asset, for example, a participation loan or the
government guaranteed portion of a loan. In order to be eligible
for sales treatment, the transfer of the portion of the loan
must meet the criteria of a participating interest. If it does
not meet the criteria of a participating interest, the transfer
must be accounted for as a secured borrowing. In order to meet
the criteria for a
82
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
participating interest, all cash flows from the loan must be
divided proportionately, the rights of each loan holder must
have the same priority, the loan holders must have no recourse
to the transferor other than standard representations and
warranties and no loan holder has the right to pledge or
exchange the entire loan.
Advertising
Advertising costs are expensed as incurred.
Supplemental
Executive Retirement Plans
The Company accounts for certain supplemental executive
retirement benefits on the net periodic pension cost method
using an actuarial model that allocates pension costs over the
service period of employees in the plan. The Company accounts
for the over-funded or under-funded status of its defined
benefit plan as an asset or liability in its consolidated
balance sheets and recognizes changes in the funded status in
the year in which the changes occur through other comprehensive
income or loss.
Share-Based
Compensation Plans
The Company measures and recognizes compensation cost relating
to share-based payment transactions based on the grant-date fair
value of the equity instruments issued. Share-based compensation
is recognized over the period the employee is required to
provide service for the award. Reductions in compensation
expense associated with forfeited options are estimated at the
date of grant, and this estimated forfeiture rate is adjusted
quarterly based on actual forfeiture experience. The Company
uses the Black-Scholes option-pricing model to determine the
fair value of stock options granted.
Employee
Stock Ownership Plan
Compensation expense for the Employee Stock Ownership Plan is
recorded at an amount equal to the shares allocated by the ESOP
multiplied by the average fair market value of the shares during
the period. The Company recognizes compensation expense ratably
over the year based upon the Companys estimate of the
number of shares expected to be allocated by the ESOP. Unearned
compensation applicable to the ESOP is reflected as a reduction
of stockholders equity in the consolidated balance sheets.
The difference between the average fair market value and the
cost of the shares allocated by the ESOP is recorded as an
adjustment to additional paid-in capital.
Income
Taxes
Deferred income tax assets and liabilities are determined using
the liability (or balance sheet) method. Under this method, the
net deferred tax asset or liability is determined based on the
tax effects of the temporary differences between the book and
tax basis of the various balance sheet assets and liabilities
and gives current recognition to changes in tax rates and laws.
A valuation allowance is established against deferred tax assets
when, based upon the available evidence including historical and
projected taxable income, it is more likely than not that some
or all of the deferred tax assets will not be realized. The
Company does not have any uncertain tax positions at
December 31, 2010 or 2009 which require accrual or
disclosure. The Company records interest and penalties as part
of income tax expense. No interest or penalties were recorded
for the years ended December 31, 2010, 2009 and 2008.
Income tax benefits related to stock compensation in excess of
grant date fair value, less any proceeds on exercise, are
recognized as an increase to additional paid-in capital upon
vesting or exercising and delivery of the stock. Any income tax
effects related to stock compensation that are less than grant
date fair value less any proceeds on exercise would be
recognized as a reduction of additional paid in capital to the
extent of previously recognized income tax benefits and then
through income tax expense for the remaining amount.
83
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Treasury
Stock
Common stock shares repurchased are recorded as treasury stock
at cost.
Earnings
Per Share
Basic earnings per share excludes dilution and is calculated by
dividing net income available to common stockholders by the
weighted-average number of common shares outstanding during the
period. If rights to dividends on unvested options/awards are
non-forfeitable, these unvested awards/options are considered
outstanding in the computation of basic earnings per share.
Diluted earnings per share is computed in a manner similar to
that of basic earnings per share except that the
weighted-average number of common shares outstanding is
increased to include the number of incremental common shares
(computed using the treasury method) that would have been
outstanding if all potentially dilutive common stock equivalents
(such as options) were issued during the period. Unallocated
common shares held by the ESOP are shown as a reduction in
stockholders equity and are not included in the
weighted-average number of common shares outstanding for either
basic or diluted earnings per share calculations.
Basic and diluted earnings per share have been computed based on
the following:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Net income available to common stockholders
|
|
$
|
13,374
|
|
|
$
|
3,763
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding
|
|
|
21,819,129
|
|
|
|
21,641,073
|
|
Effect of unvested stock awards
|
|
|
252,918
|
|
|
|
179,787
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
22,072,047
|
|
|
|
21,820,860
|
|
Effect of dilutive stock options
|
|
|
8,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
22,081,005
|
|
|
|
21,820,860
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.61
|
|
|
$
|
0.17
|
|
Diluted
|
|
$
|
0.61
|
|
|
$
|
0.17
|
|
Earnings per share are not applicable for the year ended
December 31, 2008, as the Company did not issue stock until
January 22, 2008. Options for 309,340 and
853,440 shares, respectively, were not included in the
computation of diluted earnings per share because to do so would
have been anti-dilutive for the years ended December 31,
2010 and 2009.
Comprehensive
Income
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities are reported as a
separate component of the equity section
84
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of the consolidated balance sheets, such items, along with net
income, are components of comprehensive income/loss. The
components of other comprehensive income/loss and related tax
effects are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Unrealized holding gains (losses) on securities available for
sale
|
|
$
|
5,844
|
|
|
$
|
19,117
|
|
|
$
|
(16,788
|
)
|
Reclassification adjustments for losses (gains) realized in
income
|
|
|
(1,790
|
)
|
|
|
587
|
|
|
|
(4,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses)
|
|
|
4,054
|
|
|
|
19,704
|
|
|
|
(21,221
|
)
|
Tax effect
|
|
|
(1,721
|
)
|
|
|
(7,878
|
)
|
|
|
8,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net-of-tax
amount
|
|
|
2,333
|
|
|
|
11,826
|
|
|
|
(12,384
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss and prior service
cost supplemental director retirement plan
|
|
|
6
|
|
|
|
28
|
|
|
|
27
|
|
Tax effect
|
|
|
(19
|
)
|
|
|
(11
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net-of-tax
amount
|
|
|
(13
|
)
|
|
|
17
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss (gain) and prior service
cost long-term health care plan
|
|
|
203
|
|
|
|
(81
|
)
|
|
|
18
|
|
Tax effect
|
|
|
(68
|
)
|
|
|
26
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net-of-tax
amount
|
|
|
135
|
|
|
|
(55
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,455
|
|
|
$
|
11,788
|
|
|
$
|
(12,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income,
included in stockholders equity, are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net unrealized gain on securities available for sale
|
|
$
|
14,081
|
|
|
$
|
10,027
|
|
Tax effect
|
|
|
(5,637
|
)
|
|
|
(3,916
|
)
|
|
|
|
|
|
|
|
|
|
Net-of-tax
amount
|
|
|
8,444
|
|
|
|
6,111
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net actuarial loss pertaining to supplemental
executive retirement plans
|
|
|
(69
|
)
|
|
|
(48
|
)
|
Unrecognized prior service cost pertaining to supplemental
executive retirement plans
|
|
|
(146
|
)
|
|
|
(173
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(215
|
)
|
|
|
(221
|
)
|
Tax effect
|
|
|
73
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
Net-of-tax
amount
|
|
|
(142
|
)
|
|
|
(129
|
)
|
|
|
|
|
|
|
|
|
|
Unrecognized net actuarial loss pertaining to long-term health
care plan
|
|
|
(74
|
)
|
|
|
(25
|
)
|
Unrecognized prior service cost pertaining to long-term health
care plan
|
|
|
(326
|
)
|
|
|
(578
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(400
|
)
|
|
|
(603
|
)
|
Tax effect
|
|
|
136
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
Net-of-tax
amount
|
|
|
(264
|
)
|
|
|
(399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,038
|
|
|
$
|
5,583
|
|
|
|
|
|
|
|
|
|
|
85
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unrecognized prior service costs amounting to $28,000 and
$23,000, included in accumulated other comprehensive income at
December 31, 2010, are expected to be recognized as a
component of net periodic retirement plan cost and long-term
health care cost, respectively, for the year ending
December 31, 2011.
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. 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
material impact on the Companys consolidated financial
statements.
In January 2010, the FASB issued Accounting Standards Update
(ASU)
2010-06,
Fair Value Measurements and Disclosures (Topic 820),
Improving Disclosures about Fair Value Measurements. This
Update requires new disclosures and clarifies existing
disclosures regarding recurring and nonrecurring fair value
measurements to provide increased transparency to users of the
financial statements. The new disclosures and clarification of
existing disclosures are effective for interim and annual
periods beginning after December 15, 2009, except for the
disclosures pertaining to the roll forward of activity for
Level 3 fair value measurements, which are effective for
fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. Management adopted
this statement, except for the roll forward of activity for
Level 3 fair value measurements, as of January 1, 2010
and this adoption did not have a material impact on the
Companys consolidated financial statements.
In July 2010, the FASB issued 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 Company has provided the disclosures required as of
December 31, 2010 in Note 5.
In an effort to expand and diversify its market area, the
Company completed its acquisition of Mt. Washington Co-operative
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 $15.0 million of
capital to East Boston Savings Bank in connection with the
acquisition.
86
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company accounted for the acquisition using the acquisition
method. Accordingly, the Company recorded merger and acquisition
expenses of $284,000 and $449,000 for the years ended
December 31, 2010 and 2009, respectively. 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 is a summary of the estimated fair value of assets
acquired and liabilities assumed as of the date of the
acquisition:
|
|
|
|
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
14,422
|
|
Certificates of deposit
|
|
|
100
|
|
Securities available for sale, at fair value
|
|
|
45,491
|
|
Federal Home Loan Bank Stock, at cost
|
|
|
7,933
|
|
Loans held for sale
|
|
|
4,919
|
|
Loans, net
|
|
|
345,320
|
|
Bank-owned life insurance
|
|
|
8,939
|
|
Foreclosed real estate, net
|
|
|
1,747
|
|
Premises and equipment, net
|
|
|
10,618
|
|
Accrued interest receivable
|
|
|
1,373
|
|
Deferred tax asset, net
|
|
|
6,875
|
|
Goodwill
|
|
|
13,687
|
|
Other assets
|
|
|
3,574
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
464,998
|
|
|
|
|
|
|
Deposits
|
|
$
|
380,438
|
|
FHLB Borrowings
|
|
|
80,932
|
|
Accrued expenses and other liabilities
|
|
|
3,628
|
|
|
|
|
|
|
Total liabilities assumed
|
|
$
|
464,998
|
|
|
|
|
|
|
The following is a summary of the unaudited pro forma financial
results of operations as if the Company acquired Mt. Washington
on January 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
|
(In thousands, except per share amounts)
|
|
Net interest income
|
|
$
|
61,176
|
|
|
$
|
51,837
|
|
Net income
|
|
|
13,583
|
|
|
|
1,291
|
|
Net income per share Basic
|
|
|
0.62
|
|
|
|
0.06
|
|
Net income per share Diluted
|
|
|
0.62
|
|
|
|
0.06
|
|
|
|
3.
|
RESTRICTIONS
ON CASH AND AMOUNTS DUE FROM BANKS
|
The Bank is required to maintain average balances on hand or
with the Federal Reserve Bank. At December 31, 2010 and
2009, these reserve balances amounted to $400,000.
87
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
SECURITIES
AVAILABLE FOR SALE
|
The amortized cost and fair values of securities available for
sale, with gross unrealized gains and losses, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
$
|
79,896
|
|
|
$
|
1,983
|
|
|
$
|
(266
|
)
|
|
$
|
81,613
|
|
Industry and manufacturing
|
|
|
32,875
|
|
|
|
1,595
|
|
|
|
|
|
|
|
34,470
|
|
Consumer products and services
|
|
|
39,173
|
|
|
|
1,895
|
|
|
|
|
|
|
|
41,068
|
|
Technology
|
|
|
29,280
|
|
|
|
948
|
|
|
|
|
|
|
|
30,228
|
|
Healthcare
|
|
|
21,687
|
|
|
|
783
|
|
|
|
|
|
|
|
22,470
|
|
Other
|
|
|
11,714
|
|
|
|
475
|
|
|
|
|
|
|
|
12,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate bonds
|
|
|
214,625
|
|
|
|
7,679
|
|
|
|
(266
|
)
|
|
|
222,038
|
|
Government-sponsored enterprises
|
|
|
36,062
|
|
|
|
77
|
|
|
|
(239
|
)
|
|
|
35,900
|
|
Municipal bonds
|
|
|
6,583
|
|
|
|
10
|
|
|
|
(100
|
)
|
|
|
6,493
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises
|
|
|
33,625
|
|
|
|
927
|
|
|
|
(10
|
)
|
|
|
34,542
|
|
Private label
|
|
|
9,737
|
|
|
|
687
|
|
|
|
(90
|
)
|
|
|
10,334
|
|
Other debt securities
|
|
|
641
|
|
|
|
|
|
|
|
|
|
|
|
641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
301,273
|
|
|
|
9,380
|
|
|
|
(705
|
)
|
|
|
309,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
31,344
|
|
|
|
5,596
|
|
|
|
(175
|
)
|
|
|
36,765
|
|
Money market mutual funds
|
|
|
13,904
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
13,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities
|
|
|
45,248
|
|
|
|
5,596
|
|
|
|
(190
|
)
|
|
|
50,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
346,521
|
|
|
$
|
14,976
|
|
|
$
|
(895
|
)
|
|
$
|
360,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
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
|
|
Technology
|
|
|
17,689
|
|
|
|
1,099
|
|
|
|
|
|
|
|
18,788
|
|
Healthcare
|
|
|
9,583
|
|
|
|
291
|
|
|
|
|
|
|
|
9,874
|
|
Other
|
|
|
20,864
|
|
|
|
1,004
|
|
|
|
|
|
|
|
21,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate bonds
|
|
|
212,279
|
|
|
|
8,491
|
|
|
|
(763
|
)
|
|
|
220,007
|
|
Residential mortgage-backed securities
|
|
|
23,659
|
|
|
|
148
|
|
|
|
(29
|
)
|
|
|
23,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
235,938
|
|
|
|
8,639
|
|
|
|
(792
|
)
|
|
|
243,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
26,698
|
|
|
|
3,001
|
|
|
|
(821
|
)
|
|
|
28,878
|
|
Money market mutual funds
|
|
|
20,704
|
|
|
|
|
|
|
|
|
|
|
|
20,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities
|
|
|
47,402
|
|
|
|
3,001
|
|
|
|
(821
|
)
|
|
|
49,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
283,340
|
|
|
$
|
11,640
|
|
|
$
|
(1,613
|
)
|
|
$
|
293,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amortized cost and fair value of debt securities by
contractual maturity at December 31, 2010 are as follows.
Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations
with or without prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 Year
|
|
|
Over 1 Year to 5 Years
|
|
|
Over 5 Years
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Corporate bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
$
|
18,011
|
|
|
$
|
18,508
|
|
|
$
|
54,966
|
|
|
$
|
56,279
|
|
|
$
|
6,919
|
|
|
$
|
6,826
|
|
|
$
|
79,896
|
|
|
$
|
81,613
|
|
Industry and manufacturing
|
|
|
1,502
|
|
|
|
1,563
|
|
|
|
31,373
|
|
|
|
32,907
|
|
|
|
|
|
|
|
|
|
|
|
32,875
|
|
|
|
34,470
|
|
Consumer products and services
|
|
|
7,717
|
|
|
|
7,780
|
|
|
|
31,456
|
|
|
|
33,288
|
|
|
|
|
|
|
|
|
|
|
|
39,173
|
|
|
|
41,068
|
|
Technology
|
|
|
15,518
|
|
|
|
15,648
|
|
|
|
13,762
|
|
|
|
14,580
|
|
|
|
|
|
|
|
|
|
|
|
29,280
|
|
|
|
30,228
|
|
Healthcare
|
|
|
3,997
|
|
|
|
3,998
|
|
|
|
17,690
|
|
|
|
18,472
|
|
|
|
|
|
|
|
|
|
|
|
21,687
|
|
|
|
22,470
|
|
Other
|
|
|
4,076
|
|
|
|
4,175
|
|
|
|
7,638
|
|
|
|
8,014
|
|
|
|
|
|
|
|
|
|
|
|
11,714
|
|
|
|
12,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate bonds
|
|
|
50,821
|
|
|
|
51,672
|
|
|
|
156,885
|
|
|
|
163,540
|
|
|
|
6,919
|
|
|
|
6,826
|
|
|
|
214,625
|
|
|
|
222,038
|
|
Government-sponsored enterprises
|
|
|
|
|
|
|
|
|
|
|
20,306
|
|
|
|
20,303
|
|
|
|
15,756
|
|
|
|
15,597
|
|
|
|
36,062
|
|
|
|
35,900
|
|
Municipal bonds
|
|
|
|
|
|
|
|
|
|
|
2,070
|
|
|
|
2,057
|
|
|
|
4,513
|
|
|
|
4,436
|
|
|
|
6,583
|
|
|
|
6,493
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
8
|
|
|
|
33,617
|
|
|
|
34,534
|
|
|
|
33,625
|
|
|
|
34,542
|
|
Private label
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,737
|
|
|
|
10,334
|
|
|
|
9,737
|
|
|
|
10,334
|
|
Other debt securities
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
140
|
|
|
|
501
|
|
|
|
501
|
|
|
|
641
|
|
|
|
641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50,821
|
|
|
$
|
51,672
|
|
|
$
|
179,409
|
|
|
$
|
186,048
|
|
|
$
|
71,043
|
|
|
$
|
72,228
|
|
|
$
|
301,273
|
|
|
$
|
309,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2010, 2009 and 2008,
proceeds from sales of securities available for sale amounted to
$12.3 million, $9.2 million and $18.4 million,
respectively. Gross gains of $2.0 million,
$1.3 million and $5.1 million and gross losses of
$219,000, $1.4 million and $700,000, respectively, were
realized on those sales.
90
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Information pertaining to securities available for sale as of
December 31, 2010 and 2009, with gross unrealized losses
aggregated by investment category and length of time that
individual securities have been in a continuous loss position,
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over Twelve
|
|
|
|
Less Than Twelve Months
|
|
|
Months
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds financial services
|
|
$
|
213
|
|
|
$
|
18,533
|
|
|
$
|
53
|
|
|
$
|
5,947
|
|
Government-sponsored enterprises
|
|
|
239
|
|
|
|
25,254
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
|
100
|
|
|
|
4,983
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises
|
|
|
10
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
Private label
|
|
|
90
|
|
|
|
1,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
652
|
|
|
|
50,974
|
|
|
|
53
|
|
|
|
5,947
|
|
Marketable equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
86
|
|
|
|
2,556
|
|
|
|
89
|
|
|
|
735
|
|
Money market mutual funds
|
|
|
15
|
|
|
|
968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities
|
|
|
101
|
|
|
|
3,524
|
|
|
|
89
|
|
|
|
735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
753
|
|
|
$
|
54,498
|
|
|
$
|
142
|
|
|
$
|
6,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Residential mortgage-backed securities
|
|
|
26
|
|
|
|
8,163
|
|
|
|
3
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
50
|
|
|
|
14,222
|
|
|
|
742
|
|
|
|
12,264
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
821
|
|
|
|
6,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
50
|
|
|
$
|
14,222
|
|
|
$
|
1,563
|
|
|
$
|
19,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company determined no securities were
other-than-temporarily
impaired for the year ended December 31, 2010. Management
evaluates securities for
other-than-temporary
impairment on a quarterly basis, with more frequent evaluation
for selected issuers or when economic or market concerns warrant
such evaluations.
As of December 31, 2010, the net unrealized gain on the
total debt securities portfolio was $8.7 million. At
December 31, 2010, 38 debt securities had unrealized losses
with aggregate depreciation of 1.2% from the Companys
amortized 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
91
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the portfolio compared to risk-free rates. The unrealized losses
are primarily caused by (a) recent declines in
profitability and near-term profit forecasts by industry
analysts resulting from a decline in the level of business
activity and (b) recent downgrades by several industry
analysts. The contractual terms of these investments do not
permit the companies to settle the security at a price less than
the par value of the investment. The Company currently does not
believe it is probable that it will be unable to collect all
amounts due according to the contractual terms of the
investments. Therefore, it is expected that the bonds would not
be settled at a price less than the par value of the investment.
Because (1) the Company does not intend to sell the
securities; (2) the Company does not believe it is
more likely than not that the Company will be
required to sell the securities before recovery of its amortized
cost basis; and (3) the present value of expected cash
flows is sufficient to recover the entire amortized cost basis
of the securities, the Company does not consider these
investments to be
other-than-temporarily
impaired at December 31, 2010.
As of December 31, 2010, the net unrealized gain on the
total equity portfolio was $5.4 million. At
December 31, 2010, eight marketable equity securities have
unrealized losses with aggregate depreciation of 4.3% from the
Companys cost basis. One equity security had a fair value
decline of 15.0%, with a net unrealized loss of $52,000.
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.
92
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of loans follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
One-to four-family
|
|
$
|
402,887
|
|
|
$
|
276,122
|
|
Multi-family
|
|
|
135,290
|
|
|
|
53,402
|
|
Home equity lines of credit
|
|
|
62,750
|
|
|
|
29,979
|
|
Commercial real estate
|
|
|
433,504
|
|
|
|
350,648
|
|
Construction
|
|
|
113,142
|
|
|
|
94,102
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans on real estate
|
|
|
1,147,573
|
|
|
|
804,253
|
|
|
|
|
|
|
|
|
|
|
Other loans:
|
|
|
|
|
|
|
|
|
Commercial business loans
|
|
|
30,189
|
|
|
|
18,029
|
|
Consumer
|
|
|
6,043
|
|
|
|
1,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,232
|
|
|
|
19,234
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
1,183,805
|
|
|
|
823,487
|
|
Less:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(10,155
|
)
|
|
|
(9,242
|
)
|
Net deferred loan origination fees
|
|
|
(88
|
)
|
|
|
(945
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
1,173,562
|
|
|
$
|
813,300
|
|
|
|
|
|
|
|
|
|
|
The Company has transferred a portion of its originated
commercial real estate loans to participating lenders. The
amounts transferred have been accounted for as sales and are
therefore not included in the Companys accompanying
balance sheets. The Company and participating lenders share
ratably in any gains or losses that may result from a
borrowers lack of compliance with contractual terms of the
loan. The Company continues to service the loans on behalf of
the participating lenders and, as such, collects cash payments
from the borrowers, remits payments to participating lenders and
disburses required escrow funds to relevant parties. At
December 31, 2010 and 2009, the Company was servicing loans
for participants aggregating $22.5 million and
$12.9 million, respectively.
During 2010, the Company sold residential mortgage loans
aggregating $173.2 million. As part of those sales, during
the first quarter of 2010, the Company reduced its exposure to
interest-rate risk, by selling fixed-rate bi-weekly one- to
four-family residential loans with an aggregate principal
balance of $34.1 million for a gain of $352,000. Management
has the intent and ability to hold the remaining fixed-rate
bi-weekly loans in the Companys loan portfolio for the
foreseeable future or until maturity or pay-off.
As a result of the Mt. Washington acquisition, the Company
acquired loans at fair value of $345.3 million. Included in
this amount was $27.7 million of loans with evidence of
deterioration of credit quality since origination for which it
was probable, at the time of the acquisition, that the Company
would be unable to collect all contractually required payments
receivable. The Companys evaluation of loans with evidence
of credit deterioration as of the acquisition date resulted in a
nonaccretable discount of $7.6 million, which is defined as
the 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.
93
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of the outstanding balance of the
acquired loans with evidence of credit deterioration:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Residential real estate:
|
|
|
|
|
One-to four-family
|
|
$
|
10,685
|
|
Multi-family
|
|
|
2,120
|
|
Home equity lines of credit
|
|
|
667
|
|
Commercial real estate
|
|
|
4,769
|
|
Construction
|
|
|
2,361
|
|
|
|
|
|
|
Total mortgage loans on real estate
|
|
|
20,602
|
|
|
|
|
|
|
Other loans:
|
|
|
|
|
Commercial business loans
|
|
|
111
|
|
Consumer
|
|
|
5
|
|
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
Outstanding principal balance
|
|
|
20,718
|
|
Nonaccretable discount
|
|
|
(4,216
|
)
|
|
|
|
|
|
Carrying amount
|
|
$
|
16,502
|
|
|
|
|
|
|
An analysis of the allowance for loan losses follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
9,242
|
|
|
$
|
6,912
|
|
|
$
|
3,637
|
|
Provision for loan losses
|
|
|
3,181
|
|
|
|
4,082
|
|
|
|
5,638
|
|
Recoveries
|
|
|
743
|
|
|
|
273
|
|
|
|
3
|
|
Loans charged-off
|
|
|
(3,011
|
)
|
|
|
(2,025
|
)
|
|
|
(2,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
10,155
|
|
|
$
|
9,242
|
|
|
$
|
6,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth further information pertaining to
the allowance for loan losses at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to
|
|
|
Multi-
|
|
|
Equity Lines
|
|
|
Commercial
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Four-Family
|
|
|
Family
|
|
|
of Credit
|
|
|
Real Estate
|
|
|
Construction
|
|
|
Business
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Amount of allowance for loan losses for loans deemed to be
impaired
|
|
$
|
37
|
|
|
$
|
|
|
|
$
|
8
|
|
|
$
|
38
|
|
|
$
|
18
|
|
|
$
|
19
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
120
|
|
Amount of allowance for loan losses for loans not deemed to be
impaired
|
|
|
1,093
|
|
|
|
1,038
|
|
|
|
219
|
|
|
|
5,200
|
|
|
|
2,024
|
|
|
|
429
|
|
|
|
32
|
|
|
|
|
|
|
|
10,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,130
|
|
|
$
|
1,038
|
|
|
$
|
227
|
|
|
$
|
5,238
|
|
|
$
|
2,042
|
|
|
$
|
448
|
|
|
$
|
32
|
|
|
$
|
|
|
|
$
|
10,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of allowance for loans acquired with deteriorated credit
quality included above
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans deemed to be impaired
|
|
$
|
4,200
|
|
|
$
|
3,732
|
|
|
$
|
125
|
|
|
$
|
11,794
|
|
|
$
|
18,474
|
|
|
$
|
186
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
38,511
|
|
Loans not deemed to be impaired
|
|
|
398,687
|
|
|
|
131,558
|
|
|
|
62,625
|
|
|
|
421,710
|
|
|
|
94,668
|
|
|
|
30,003
|
|
|
|
6,043
|
|
|
|
|
|
|
|
1,145,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
402,887
|
|
|
$
|
135,290
|
|
|
$
|
62,750
|
|
|
$
|
433,504
|
|
|
$
|
113,142
|
|
|
$
|
30,189
|
|
|
$
|
6,043
|
|
|
$
|
|
|
|
$
|
1,183,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of past due and non-accrual loans at
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59
|
|
|
60-89
|
|
|
Greater Than
|
|
|
|
|
|
Past Due 90
|
|
|
|
|
|
|
Days
|
|
|
Days
|
|
|
90 Days
|
|
|
Total
|
|
|
Days or More
|
|
|
Loans on
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
and Still Accruing
|
|
|
Non-accrual
|
|
|
|
(In thousands)
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family
|
|
$
|
4,434
|
|
|
$
|
799
|
|
|
$
|
7,400
|
|
|
$
|
12,633
|
|
|
$
|
|
|
|
$
|
11,529
|
|
Multi-family
|
|
|
2,630
|
|
|
|
|
|
|
|
860
|
|
|
|
3,490
|
|
|
|
|
|
|
|
2,246
|
|
Home equity lines of credit
|
|
|
1,129
|
|
|
|
322
|
|
|
|
1,769
|
|
|
|
3,220
|
|
|
|
|
|
|
|
2,408
|
|
Commercial real estate
|
|
|
1,265
|
|
|
|
534
|
|
|
|
2,735
|
|
|
|
4,534
|
|
|
|
|
|
|
|
11,290
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
6,969
|
|
|
|
6,969
|
|
|
|
|
|
|
|
15,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
|
9,458
|
|
|
|
1,655
|
|
|
|
19,733
|
|
|
|
30,846
|
|
|
|
|
|
|
|
42,799
|
|
Commercial business loans
|
|
|
15
|
|
|
|
48
|
|
|
|
385
|
|
|
|
448
|
|
|
|
|
|
|
|
335
|
|
Consumer
|
|
|
293
|
|
|
|
245
|
|
|
|
5
|
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,766
|
|
|
$
|
1,948
|
|
|
$
|
20,123
|
|
|
$
|
31,837
|
|
|
$
|
|
|
|
$
|
43,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of impaired loans at
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
|
(In thousands)
|
|
|
Impaired loans without a valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family
|
|
$
|
3,255
|
|
|
$
|
3,255
|
|
|
$
|
|
|
Multi-family
|
|
|
3,732
|
|
|
|
3,732
|
|
|
|
|
|
Home equity lines of credit
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
Commercial real estate
|
|
|
6,494
|
|
|
|
6,578
|
|
|
|
|
|
Construction
|
|
|
17,422
|
|
|
|
18,285
|
|
|
|
|
|
Commercial business loans
|
|
|
167
|
|
|
|
167
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
31,170
|
|
|
|
32,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with a valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family
|
|
|
908
|
|
|
|
945
|
|
|
|
37
|
|
Multi-family
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit
|
|
|
17
|
|
|
|
25
|
|
|
|
8
|
|
Commercial real estate
|
|
|
5,178
|
|
|
|
5,216
|
|
|
|
38
|
|
Construction
|
|
|
171
|
|
|
|
189
|
|
|
|
18
|
|
Commercial business loans
|
|
|
|
|
|
|
19
|
|
|
|
19
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,274
|
|
|
|
6,394
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
37,444
|
|
|
$
|
38,511
|
|
|
$
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, additional funds of $637,000 are
committed to be advanced in connection with an impaired
construction loan.
The following is a summary of information pertaining to impaired
and non-accrual loans at December 31, 2009 and for the
three years ended December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Impaired loans without a valuation allowance
|
|
$
|
27,171
|
|
Impaired loans with a valuation allowance
|
|
|
2,172
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
29,343
|
|
|
|
|
|
|
Valuation allowance related to impaired loans
|
|
$
|
472
|
|
|
|
|
|
|
Total non-accrual loans
|
|
$
|
21,698
|
|
|
|
|
|
|
Total loans past-due ninety days or more and still accruing
|
|
$
|
|
|
|
|
|
|
|
96
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Average investment in impaired loans
|
|
$
|
33,566
|
|
|
$
|
18,061
|
|
|
$
|
8,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized on impaired loans
|
|
$
|
2,703
|
|
|
$
|
1,362
|
|
|
$
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized on a cash basis on impaired loans
|
|
$
|
2,220
|
|
|
$
|
1,008
|
|
|
$
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company utilizes a nine grade internal loan rating system
for multi-family, commercial real estate, construction and
commercial loans as follows:
Loans rated 1, 2, 3 and 3A: Loans in these
categories are considered pass rated loans with low
to average risk.
Loans rated 4 and 4A: Loans in this category
are considered special mention. These loans are
starting to show signs of potential weakness and are being
closely monitored by management.
Loans rated 5: Loans in this category are
considered substandard. Generally, a loan is
considered substandard if it is inadequately protected by the
current net worth and paying capacity of the obligors
and/or the
collateral pledged. There is a distinct possibility that the
Company will sustain some loss if the weakness is not corrected.
Loans rated 6: Loans in this category are
considered doubtful. Loans classified as doubtful
have all the weaknesses inherent in those classified substandard
with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently
existing facts, highly questionable and improbable.
Loans rated 7: Loans in this category are
considered uncollectible (loss) and of such little
value that their continuance as loans is not warranted.
On an annual basis, or more often if needed, the Company
formally reviews the ratings on all multi-family, commercial
real estate, construction and commercial loans. The Company also
engages an independent third-party to review a significant
portion of loans within these segments on at least an annual
basis. Management uses the results of these reviews as part of
its annual review process.
The following table presents the Companys loans by risk
rating at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Family
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
Commercial
|
|
|
|
|
|
Commercial
|
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Construction
|
|
|
Business
|
|
|
|
(In thousands)
|
|
|
Loans rated 1 4
|
|
$
|
132,176
|
|
|
$
|
425,010
|
|
|
$
|
93,092
|
|
|
$
|
29,872
|
|
Loans rated 5
|
|
|
3,114
|
|
|
|
8,494
|
|
|
|
20,050
|
|
|
|
317
|
|
Loans rated 6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans rated 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
135,290
|
|
|
$
|
433,504
|
|
|
$
|
113,142
|
|
|
$
|
30,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Loans serviced for others by the Bank are not included in the
accompanying consolidated balance sheets. The Bank retains
servicing on most loan sales and generally earns a fee of 0.25%
per annum based on the monthly outstanding balances of the loans
serviced. Mortgage servicing rights amounted to $585,000 and
$442,000 at December 31, 2010 and 2009, respectively and
are included in other assets on the consolidated balance sheets.
The unpaid principal balances of mortgage loans serviced for
others amounted to $134.4 million and $102.9 million
at December 31, 2010 and 2009, respectively.
Included in loans serviced for others at December 31, 2010
and 2009 is $57.1 million and $70.7 million,
respectively, of loans serviced for the Federal Home Loan Bank
of Boston with a recourse provision whereby the Bank may be
obligated to participate in potential losses on a limited basis
when a realized loss on foreclosure occurs. Losses are borne in
priority order by the borrower, PMI insurance, the Federal Home
Loan Bank and the Bank. At December 31, 2010 and 2009, the
maximum contingent liability associated with loans sold with
recourse is $2.9 million and $2.2 million,
respectively, which is not recorded in the consolidated
financial statements. The Bank has never repurchased any loans
or incurred any losses under these recourse provisions.
|
|
7.
|
FORECLOSED
REAL ESTATE
|
At December 31, 2010, foreclosed assets consist of one
townhouse construction development project, one commercial
property and residential properties held for sale.
Foreclosed real estate is presented net of an allowance for
losses. An analysis of the allowance for losses on foreclosed
real estate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
400
|
|
|
$
|
475
|
|
|
$
|
|
|
Provision for losses
|
|
|
63
|
|
|
|
286
|
|
|
|
475
|
|
Charge-offs
|
|
|
(50
|
)
|
|
|
(361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
413
|
|
|
$
|
400
|
|
|
$
|
475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses applicable to foreclosed real estate include the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net (gain) loss on sales
|
|
$
|
(180
|
)
|
|
$
|
(98
|
)
|
|
$
|
5
|
|
Provision for losses
|
|
|
63
|
|
|
|
286
|
|
|
|
475
|
|
Operating expenses, net of rental income
|
|
|
605
|
|
|
|
185
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreclosed real estate expenses
|
|
$
|
488
|
|
|
$
|
373
|
|
|
$
|
675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
PREMISES
AND EQUIPMENT
|
A summary of the cost and accumulated depreciation and
amortization of premises and equipment follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
December 31,
|
|
|
Useful
|
|
|
|
2010
|
|
|
2009
|
|
|
Lives
|
|
|
|
(In thousands)
|
|
|
|
|
|
Land and land improvements
|
|
$
|
7,731
|
|
|
$
|
6,228
|
|
|
|
|
|
Buildings
|
|
|
29,819
|
|
|
|
17,764
|
|
|
|
40 years
|
|
Leasehold improvements
|
|
|
2,428
|
|
|
|
866
|
|
|
|
5-15 years
|
|
Equipment
|
|
|
10,962
|
|
|
|
6,808
|
|
|
|
3-10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,940
|
|
|
|
31,666
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
and amortization
|
|
|
(16,515
|
)
|
|
|
(8,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,425
|
|
|
$
|
23,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended
December 31, 2010, 2009 and 2008 amounted to
$2.5 million, $1.3 million and $1.3 million
respectively.
Lease
Commitments
The Company is obligated under non-cancelable operating lease
agreements for banking offices and facilities. These leases have
terms with renewal options, the cost of which is not included
below. The leases generally provide that real estate taxes,
insurance, maintenance and other related costs are to be paid by
the Company. At December 31, 2010, future minimum lease
payments are as follows:
|
|
|
|
|
Year Ending December 31,
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
2011
|
|
$
|
515
|
|
2012
|
|
|
497
|
|
2013
|
|
|
459
|
|
2014
|
|
|
442
|
|
2015
|
|
|
445
|
|
Thereafter
|
|
|
4,049
|
|
|
|
|
|
|
|
|
$
|
6,407
|
|
|
|
|
|
|
Total rent expense for all operating leases amounted to
$441,000, $156,000, and $108,000 for the years ended
December 31, 2010, 2009 and 2008, respectively.
99
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of deposit balances, by type, follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Demand deposits
|
|
$
|
111,423
|
|
|
$
|
63,606
|
|
NOW deposits
|
|
|
134,677
|
|
|
|
38,780
|
|
Money market deposits
|
|
|
323,619
|
|
|
|
247,006
|
|
Regular and other deposits
|
|
|
188,178
|
|
|
|
128,016
|
|
|
|
|
|
|
|
|
|
|
Total non-certificate accounts
|
|
|
757,897
|
|
|
|
477,408
|
|
|
|
|
|
|
|
|
|
|
Term certificates less than $100,000
|
|
|
348,201
|
|
|
|
255,139
|
|
Term certificates $100,000 and greater
|
|
|
349,117
|
|
|
|
189,928
|
|
|
|
|
|
|
|
|
|
|
Total term certificates
|
|
|
697,318
|
|
|
|
445,067
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
1,455,215
|
|
|
$
|
922,475
|
|
|
|
|
|
|
|
|
|
|
A summary of term certificates, by maturity, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Maturing
|
|
Amount
|
|
|
Average Rate
|
|
|
Amount
|
|
|
Average Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Within 1 year
|
|
$
|
381,736
|
|
|
|
1.74
|
%
|
|
$
|
260,669
|
|
|
|
2.20
|
%
|
Over 1 year to 2 years
|
|
|
184,705
|
|
|
|
1.78
|
|
|
|
95,277
|
|
|
|
2.60
|
|
Over 2 years to 3 years
|
|
|
48,140
|
|
|
|
2.51
|
|
|
|
46,965
|
|
|
|
2.66
|
|
Over 3 years to 4 years
|
|
|
35,987
|
|
|
|
2.91
|
|
|
|
11,317
|
|
|
|
3.41
|
|
Over 4 years to 5 years
|
|
|
43,553
|
|
|
|
2.89
|
|
|
|
30,839
|
|
|
|
3.00
|
|
Greater than 5 years
|
|
|
3,197
|
|
|
|
4.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
697,318
|
|
|
|
1.95
|
%
|
|
$
|
445,067
|
|
|
|
2.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, short-term borrowings consisted of
federal funds purchased from our affiliate bank of
$1.9 million, federal funds purchased from a non-affiliate
institution of $10.0 million, both with a weighted average
rate of 0.20%. At December 31, 2009, short-term borrowings
consisted of federal funds purchased from our affiliate bank of
$3.1 million, federal funds purchased from a non-affiliate
institution of $10.0 million, both with a weighted average
rate of 0.35%, and $12.1 million of Federal Home Loan Bank
advances with a weighted average rate of 0.27%.
100
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term debt consists of FHLB advances as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
Maturing During the
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Year Ending December 31,
|
|
Amount
|
|
|
Average Rate
|
|
|
Amount
|
|
|
Average Rate
|
|
|
|
(Dollars in thousands)
|
|
|
2010
|
|
$
|
|
|
|
|
|
%
|
|
$
|
5,200
|
|
|
|
4.20
|
%
|
2011
|
|
|
20,538
|
|
|
|
2.99
|
|
|
|
15,000
|
|
|
|
2.99
|
|
2012
|
|
|
43,523
|
|
|
|
2.20
|
|
|
|
15,000
|
|
|
|
3.29
|
|
2013
|
|
|
45,136
|
|
|
|
2.86
|
|
|
|
15,000
|
|
|
|
3.54
|
|
2014
|
|
|
4,000
|
|
|
|
2.37
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
17,000
|
|
|
|
2.25
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
6,500
|
|
|
|
3.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
136,697
|
|
|
|
2.63
|
%
|
|
$
|
50,200
|
|
|
|
3.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, advances amounting to
$64.0 million are callable by the FHLB prior to maturity.
As of December 31, 2010, the Bank also has an available
line of credit of $9.4 million with the Federal Home Loan
Bank of Boston at an interest rate that adjusts daily. No
amounts were drawn on the line of credit as of December 31,
2010 and 2009. All borrowings from the FHLB are secured by a
blanket lien on qualified collateral, defined principally as 75%
of the carrying value of certain first mortgage loans on
owner-occupied residential property.
Allocation of federal and state income taxes between current and
deferred portions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Current tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4,145
|
|
|
$
|
1,333
|
|
|
$
|
1,081
|
|
State
|
|
|
2,087
|
|
|
|
155
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
6,232
|
|
|
|
1,488
|
|
|
|
1,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,857
|
|
|
|
597
|
|
|
|
(2,239
|
)
|
State
|
|
|
(267
|
)
|
|
|
133
|
|
|
|
(830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision (benefit)
|
|
|
1,590
|
|
|
|
730
|
|
|
|
(3,069
|
)
|
Change in enacted state tax rate deferred
|
|
|
|
|
|
|
|
|
|
|
106
|
|
Change in valuation reserve
|
|
|
(441
|
)
|
|
|
(59
|
)
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision (benefit)
|
|
|
1,149
|
|
|
|
671
|
|
|
|
(2,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax provision (benefit)
|
|
$
|
7,381
|
|
|
$
|
2,159
|
|
|
$
|
(1,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The reasons for the differences between the statutory federal
income tax rate and the effective tax rates are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Statutory federal tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
(34.0
|
)%
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal tax benefit
|
|
|
6.4
|
|
|
|
3.6
|
|
|
|
(14.0
|
)
|
Dividends received deduction
|
|
|
(1.0
|
)
|
|
|
(3.3
|
)
|
|
|
(5.8
|
)
|
Bank-owned life insurance
|
|
|
(1.1
|
)
|
|
|
(1.5
|
)
|
|
|
(3.0
|
)
|
Non-deductible acquisition expenses
|
|
|
0.2
|
|
|
|
2.6
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
1.9
|
|
|
|
|
|
Change in state tax rate
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Change in valuation reserve
|
|
|
(2.2
|
)
|
|
|
(1.0
|
)
|
|
|
14.8
|
|
Other, net
|
|
|
(0.7
|
)
|
|
|
0.2
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rates
|
|
|
35.6
|
%
|
|
|
36.5
|
%
|
|
|
(37.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the net deferred tax asset are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
9,217
|
|
|
$
|
4,661
|
|
State
|
|
|
2,691
|
|
|
|
1,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,908
|
|
|
|
6,017
|
|
Valuation reserve on assets
|
|
|
|
|
|
|
(441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
11,908
|
|
|
|
5,576
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(6,229
|
)
|
|
|
(3,266
|
)
|
State
|
|
|
(238
|
)
|
|
|
(787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,467
|
)
|
|
|
(4,053
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
5,441
|
|
|
$
|
1,523
|
|
|
|
|
|
|
|
|
|
|
102
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of each item that give rise to deferred tax
assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net unrealized gain on securities available for sale
|
|
$
|
(5,637
|
)
|
|
$
|
(3,916
|
)
|
Depreciation and amortization
|
|
|
(178
|
)
|
|
|
(204
|
)
|
Other-than-temporary
impairment losses
|
|
|
171
|
|
|
|
|
|
Allowance for loan losses
|
|
|
4,307
|
|
|
|
3,691
|
|
Employee benefit and retirement plans
|
|
|
2,147
|
|
|
|
1,189
|
|
Charitable contribution carryforward
|
|
|
892
|
|
|
|
944
|
|
Acquisition accounting
|
|
|
3,557
|
|
|
|
|
|
Equity loss on investment in affiliate bank
|
|
|
398
|
|
|
|
398
|
|
Other, net
|
|
|
(216
|
)
|
|
|
(138
|
)
|
Valuation reserve
|
|
|
|
|
|
|
(441
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
5,441
|
|
|
$
|
1,523
|
|
|
|
|
|
|
|
|
|
|
The Company reduces deferred tax assets by a valuation allowance
if, based on the weight of available evidence, it is not
more likely than not that some portion or all of the
deferred tax assets will be realized. The Company assesses the
realizability of its deferred tax assets by assessing the
likelihood of the Company generating federal and state tax
income, as applicable, in future periods in amounts sufficient
to offset the deferred tax charges in the periods they are
expected to reverse. Based on this assessment, management
concluded that a valuation allowance was not required as of
December 31, 2010 due to a change in assumptions related to
future taxable income. A valuation allowance of $441,000 and
$500,000 was required as of December 31, 2009 and 2008,
respectively, due primarily to the limited future taxable income
projected for federal and state tax purposes that can be
utilized to offset a charitable contribution carryforward of
$2.4 million, which will expire in 2013.
A summary of the change in the net deferred tax asset
(liability) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
1,523
|
|
|
$
|
10,057
|
|
|
$
|
(1,410
|
)
|
Deferred tax (provision) benefit
|
|
|
(1,149
|
)
|
|
|
(671
|
)
|
|
|
2,463
|
|
Deferred tax effects of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain (loss) on securities available for
sale
|
|
|
(1,721
|
)
|
|
|
(7,878
|
)
|
|
|
8,837
|
|
Adjustment to initially apply plan accounting for long-term care
plan
|
|
|
|
|
|
|
|
|
|
|
187
|
|
Acquisition
|
|
|
6,875
|
|
|
|
|
|
|
|
|
|
Amortization of defined benefit plan net actuarial loss and
prior service cost
|
|
|
(87
|
)
|
|
|
15
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
5,441
|
|
|
$
|
1,523
|
|
|
$
|
10,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The federal income tax reserve for loan losses at the
Banks base year is $9.8 million. If any portion of
the reserve is used for purposes other than to absorb loan
losses, approximately 150% of the amount actually used (limited
to the amount of the reserve) would be subject to taxation in
the year in which used. As the Bank intends to use the reserve
to absorb only loan losses, a deferred tax liability of
$3.9 million has not been provided.
103
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys income tax returns are subject to review and
examination by federal and state taxing authorities. The Company
is currently open to audit under the applicable statutes of
limitations by the Internal Revenue Service for the years ended
December 31, 2007 through 2009. The years open to
examination by state taxing authorities vary by jurisdiction; no
years prior to 2007 are open. Mt. Washingtons income tax
returns for the years ended June 30, 2005 through 2009 and
the final return as of January 4, 2010 are also open to
audit.
|
|
12.
|
OTHER
COMMITMENTS AND CONTINGENCIES
|
In the normal course of business, there are outstanding
commitments and contingencies which are not reflected in the
accompanying consolidated financial statements.
Loan
Commitments
The Company is party to financial instruments with off-balance
sheet risk in the normal course of business to meet the
financing needs of its customers and to reduce its own exposure
to fluctuations in interest rates. The instruments involve, to
varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the accompanying consolidated
balance sheets. The contract amounts of those instruments
reflect the extent of involvement the Bank has in particular
classes of financial instruments.
The Companys exposure to credit loss in the event of
nonperformance by the other party to the financial instrument
for loan commitments is represented by the contractual amount of
those instruments. The Company uses the same credit policies in
making commitments as it does for on-balance sheet instruments.
A summary of outstanding financial instruments whose contract
amounts represent credit risk is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Unadvanced portion of existing loans:
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
64,722
|
|
|
$
|
72,218
|
|
Home equity line of credit
|
|
|
39,791
|
|
|
|
25,623
|
|
Other lines and letters of credit
|
|
|
7,095
|
|
|
|
4,038
|
|
Commitments to originate:
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
15,362
|
|
|
|
1,844
|
|
Commercial real estate
|
|
|
65,187
|
|
|
|
18,711
|
|
Construction
|
|
|
12,625
|
|
|
|
27,460
|
|
Other loans
|
|
|
2,783
|
|
|
|
4,457
|
|
|
|
|
|
|
|
|
|
|
Total loan commitments outstanding
|
|
$
|
207,565
|
|
|
$
|
154,351
|
|
|
|
|
|
|
|
|
|
|
Commitments to originate loans are agreements to lend to a
customer provided there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since a portion of the commitments are
expected to expire without being drawn upon, the total
commitments do not necessarily represent future cash
requirements. The Company evaluates each customers credit
worthiness on a case by case basis. The amount of collateral
obtained, if deemed necessary by the Company for the extension
of credit, is based upon managements credit evaluation of
the borrower. Collateral held includes, but is not limited to,
residential real estate and deposit accounts.
Unfunded commitments under lines of credit are commitments for
possible future extensions of credit to existing customers.
These lines of credit are collateralized if deemed necessary and
usually do not contain a specified maturity date and may not be
drawn upon to the total extent to which the Company is
committed. Letters of credit are conditional commitments issued
by the Company to guarantee the performance of a customer to a
third
104
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
party. Those letters of credit are primarily issued to support
borrowing arrangements. The credit risk involved in issuing
letters of credit is essentially the same as that involved in
extending loan facilities to customers.
Derivative
Loan Commitments
Residential real estate loan commitments are referred to as
derivative loan commitments if the loan that will result from
exercise of the commitment will be held for sale upon funding.
The Company enters into commitments to fund residential real
estate loans at specified times in the future, with the
intention that these loans will subsequently be sold in the
secondary market. A residential loan commitment requires the
Company to originate a loan at a specific interest rate upon the
completion of various underwriting requirements. Outstanding
derivative loan commitments expose the Company to the risk that
the price of the loans arising from the exercise of the loan
commitment might decline from the inception of the rate lock to
funding of the loan due to increases in loan interest rates. If
interest rates increase, the value of these commitments
decreases. Conversely, if interest rates decrease, the value of
these loan commitments increase. Derivative loan commitments
with a notional amount of $8.9 million were outstanding at
December 31, 2010 and the fair value was immaterial.
Forward
Loan Sale Commitments
To protect against the price risk inherent in derivative loan
commitments, the Company utilizes both mandatory
delivery and best efforts forward loan sale
commitments to mitigate the risk of potential decreases in the
values of loans that would result from the exercise of the
derivative loan commitments. Under a mandatory
delivery contract, the Company commits to deliver a
certain principal amount of mortgage loans to an investor at a
specified price on or before a specified date. If the Company
fails to deliver the amount of mortgages necessary to fulfill
the commitment by the specified date, it is obligated to pay the
investor a pair-off fee, based then-current market
prices, to compensate the investor for the shortfall. Under a
best efforts contract, the Company commits to
deliver an individual mortgage loan of a specified principal
amount and quality to an investor and the investor commits to a
price that it will purchase the loan from the Company if the
loan to the underlying borrower closes. The Company generally
enters into forward sale contracts on the same day it commits to
lend funds to a potential borrower. The Company expects that
these forward loan sale commitments will experience changes in
fair value opposite to the change in fair value of derivative
loan commitments. Forward loan sale commitments with a notional
amount of $21.0 million were outstanding at
December 31, 2010 and the fair value was immaterial.
Other
Commitments
The Company provides participating checking accounts with
overdraft account protection covering $14.1 million and
$7.7 million of balances as of December 31, 2010 and
2009, respectively.
In July 2010, we extended the contract with our core data
processing provider through December 2017. This contract
extension resulted in an outstanding commitment of
$15.6 million as of December 31, 2010, with total
annual payments of $2.2 million.
In addition, we had outstanding commitments as of
December 31, 2010 totaling $347,000 for the construction of
two new branches in Revere and the West Roxbury area of Boston,
Massachusetts, and $134,000 for renovations of several existing
branch locations.
Employment
and Change in Control Agreements
The Company has entered into employment agreements with certain
senior executives which provide for a minimum annual salary,
subject to increase at the discretion of the Board of Directors,
and other benefits. The agreements may be terminated for cause
by the Company without further liability on the part of the
Bank, or by the executives with prior written notice to the
Board of Directors. The Company also has change in control
agreements
105
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
with several officers which provide a severance payment in the
event employment is terminated in conjunction with a defined
change in control.
Legal
Claims
Various legal claims may arise from time to time in the normal
course of business, but in the opinion of management, these
claims are not expected to have a material effect on the
Companys consolidated financial statements.
|
|
13.
|
EMPLOYEE
BENEFIT PLANS
|
401(k)
Plan
The Company has a 401(k) plan to provide retirement benefits for
eligible employees. Under this plan, each employee reaching the
age of eighteen and having completed at least three months of
service in any one twelve-month period, beginning with such
employees date of employment, can elect to be a
participant in the retirement plan. All participants are fully
vested upon entering the plan. The Company contributes an amount
equal to three percent of an employees compensation
regardless of the employees contributions and makes
matching contributions equal to fifty percent of the first six
percent of an employees compensation contributed to the
Plan. For the years ended December 31, 2010, 2009 and 2008,
expense attributable to the plan amounted to $920,000, $556,000
and $558,000, respectively.
Supplemental
Executive Retirement Benefits Officers and
Directors
The Company has supplemental retirement benefit agreements with
certain officers. The present value of the estimated future
benefits is accrued over the required service periods. At
December 31, 2010 and 2009, the accrued liability for these
agreements amounted to $2.1 million and $809,000,
respectively.
The Company also has a Supplemental Executive Retirement Plan
for certain directors which provide for a defined benefit
obligation, based on the directors final average
compensation. The plan was unfunded for tax purposes. The
Company does not expect to contribute assets to the plan in
2011.
106
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Information pertaining to the activity in the plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Employer contribution
|
|
|
|
|
|
|
190
|
|
|
|
|
|
Benefits payments
|
|
|
|
|
|
|
(190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
|
674
|
|
|
|
762
|
|
|
|
668
|
|
Service cost
|
|
|
78
|
|
|
|
73
|
|
|
|
66
|
|
Interest cost
|
|
|
39
|
|
|
|
33
|
|
|
|
38
|
|
Benefit payments
|
|
|
|
|
|
|
(190
|
)
|
|
|
|
|
Actuarial loss (gain)
|
|
|
37
|
|
|
|
(4
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
828
|
|
|
|
674
|
|
|
|
762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(828
|
)
|
|
$
|
(674
|
)
|
|
$
|
(762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit obligation
|
|
$
|
(828
|
)
|
|
$
|
(674
|
)
|
|
$
|
(762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
(729
|
)
|
|
$
|
(575
|
)
|
|
$
|
(657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net periodic benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Service cost
|
|
$
|
78
|
|
|
$
|
73
|
|
|
$
|
66
|
|
Interest cost
|
|
|
39
|
|
|
|
33
|
|
|
|
38
|
|
Recognition of prior service cost
|
|
|
28
|
|
|
|
28
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
145
|
|
|
$
|
134
|
|
|
$
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assumptions used to determine benefit obligations and net
periodic benefit costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Discount rate
|
|
|
5.25
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
Rate of compensation increase
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
Retirement age
|
|
|
72
|
|
|
|
72
|
|
|
|
72
|
|
107
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The expected future benefit payments for the directors
plan are as follows:
|
|
|
|
|
Year Ending December 31,
|
|
Amount
|
|
|
(In thousands)
|
|
2011
|
|
$
|
|
|
2012
|
|
|
294
|
|
2013
|
|
|
167
|
|
2014
|
|
|
|
|
2015
|
|
|
304
|
|
2016-2020
|
|
|
760
|
|
Supplemental executive retirement benefit expense for officers
and directors amounted to $700,000, $1.3 million and
$1.2 million for the years ended December 31, 2010,
2009 and 2008, respectively.
Separation
Agreements
Consistent with the terms of their employment agreements, the
Company entered into Separation Agreements with two executives
upon their retirement during 2009 and one executive in 2008,
which provided for the payment of certain benefits. During 2009
and 2008, the Company recorded pre-tax charges of
$1.8 million and $1.5 million, respectively as a
result of the Separation Agreements.
Long-Term
Health Care Plan
The Company provides long-term health care policies for certain
directors and executives. The Company established a liability
for the present value of the premiums due for the long-term care
policies in 2008. The adjustment to stockholders equity
was an after-tax reduction of $353,000. The plan is unfunded and
has no assets. Information pertaining to activity in the plan is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Employer contribution
|
|
|
44
|
|
|
|
44
|
|
|
|
44
|
|
Benefits payments
|
|
|
(44
|
)
|
|
|
(44
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
|
694
|
|
|
|
729
|
|
|
|
540
|
|
Interest cost
|
|
|
37
|
|
|
|
42
|
|
|
|
42
|
|
Benefit payments
|
|
|
(44
|
)
|
|
|
(44
|
)
|
|
|
(44
|
)
|
Actuarial loss (gain)
|
|
|
50
|
|
|
|
(33
|
)
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
737
|
|
|
|
694
|
|
|
|
729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(737
|
)
|
|
$
|
(694
|
)
|
|
$
|
(729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
(737
|
)
|
|
$
|
(694
|
)
|
|
$
|
(729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of net periodic benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
37
|
|
|
|
42
|
|
|
|
42
|
|
Recognition of prior service cost
|
|
|
88
|
|
|
|
108
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
125
|
|
|
$
|
150
|
|
|
$
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2010 and 2009, the Company incurred prior service costs
for the retirement and termination of plan participants
amounting to $66,000 and $82,000, respectively.
The assumptions used to determine benefit obligations and net
periodic benefit costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Discount rate
|
|
|
5.54
|
%
|
|
|
6.00
|
%
|
|
|
6.50
|
%
|
Rate of premium increases
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
The expected future contributions and benefit payments for this
plan are as follows:
|
|
|
|
|
Year Ending December 31,
|
|
Amount
|
|
|
(In thousands)
|
|
2011
|
|
$
|
47
|
|
2012
|
|
|
49
|
|
2013
|
|
|
51
|
|
2014
|
|
|
53
|
|
2015
|
|
|
55
|
|
2016-2020
|
|
|
302
|
|
Share-Based
Compensation Plan
On August 19, 2008, stockholders of the Company approved
the 2008 Equity Incentive Plan (the Equity Incentive
Plan). The Equity Incentive Plan provides for the award of
up to 1,449,000 shares of common stock pursuant to grants
of restricted stock awards, incentive stock options,
non-qualified stock options and stock appreciation rights;
provided, however, that no more than 1,035,000 shares may
be issued or delivered in the aggregate pursuant to the exercise
of stock options or stock appreciation rights and no more than
414,000 shares may be issued or delivered pursuant to
restricted stock awards.
In 2008, the Company announced that it would repurchase up to
414,000 shares of the Companys common stock through a
stock repurchase program to fund restricted stock awards under
the plan. As of December 31, 2009, 414,000 shares had
been repurchased at a cost of $3.7 million. Pursuant to
terms of the Equity Incentive Plan, the Board of Directors
granted stock options and restricted shares to employees and
directors in 2008, 2009 and 2010. The options may be treated as
stock appreciation rights that are settled in stock at the
option of the vested participant. All of the awards granted to
date vest evenly over a five year period from the date of the
grant.
The fair value of each option award is estimated on the date of
grant using the Black-Scholes Option-Pricing Model. The expected
volatility is based on historical volatility of the stock price.
The dividend yield assumption is based on the Companys
expectation of dividend payouts. The Company uses historical
employee turnover data to determine the expected forfeiture rate
in the valuation model. The risk-free rate for periods within
the contractual life of the option is based on the
U.S. Treasury yield curve in effect at the date of grant.
109
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company utilized the simplified method of calculating the
expected term of the options granted in 2008, 2009 and 2010
because limited historical data specific to the shares exists at
the present time. The simplified method is an appropriate method
because the option awards are plain vanilla shares
that are valued utilizing the Black-Scholes method. The
weighted-average assumptions used for options granted during the
years ended December 31, 2010, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Assumptions
|
|
|
2010
|
|
2009
|
|
2008
|
|
Expected term (years)
|
|
|
6.50
|
|
|
|
6.50
|
|
|
|
6.50
|
|
Expected dividend yield
|
|
|
0.84
|
%
|
|
|
0.90
|
%
|
|
|
0.84
|
%
|
Expected volatility
|
|
|
46.27
|
%
|
|
|
36.21
|
%
|
|
|
18.83
|
%
|
Expected forfeiture rate
|
|
|
|
%
|
|
|
7.23
|
%
|
|
|
9.00
|
%
|
Risk-free interest rate
|
|
|
3.02
|
%
|
|
|
3.08
|
%
|
|
|
3.48
|
%
|
Fair value of options granted
|
|
$
|
4.36
|
|
|
$
|
3.38
|
|
|
$
|
2.37
|
|
The weighted average grant date fair value of options granted in
2010, 2009 and 2008 was $190,000, $1.1 million and
$1.5 million respectively.
A summary of options under the plan as of December 31,
2010, and activity during the year then ended, is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Options outstanding at beginning of year
|
|
|
867,600
|
|
|
$
|
9.27
|
|
Options granted
|
|
|
43,500
|
|
|
|
9.59
|
|
Options exercised
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(21,650
|
)
|
|
|
9.15
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at end of year
|
|
|
889,450
|
|
|
$
|
9.29
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
277,650
|
|
|
$
|
9.36
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about options
outstanding and options exercisable at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
Range of
|
|
Number of
|
|
|
Contractual Life
|
|
|
Exercise
|
|
|
Number of
|
|
|
Contractual Life
|
|
|
Exercise
|
|
Exercise Prices
|
|
Shares
|
|
|
(In Years)
|
|
|
Price
|
|
|
Shares
|
|
|
(In Years)
|
|
|
Price
|
|
|
$8.50 - 9.00
|
|
|
316,250
|
|
|
|
8.71
|
|
|
|
8.90
|
|
|
|
63,850
|
|
|
|
8.71
|
|
|
|
8.90
|
|
$9.00 - 9.50
|
|
|
565,700
|
|
|
|
7.87
|
|
|
|
9.49
|
|
|
|
213,800
|
|
|
|
7.79
|
|
|
|
9.50
|
|
$10.50 - 11.00
|
|
|
2,500
|
|
|
|
9.57
|
|
|
|
10.75
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
$11.00 - 11.50
|
|
|
5,000
|
|
|
|
9.48
|
|
|
|
11.13
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
889,450
|
|
|
|
|
|
|
|
|
|
|
|
277,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value, which fluctuates based on changes
in the fair market value of the Companys stock, is
$2.2 million and $675,000 for all outstanding and
exercisable options, respectively at December 31, 2010,
based on a closing stock price of $11.79. The aggregate
intrinsic value represents the total pretax intrinsic value
(i.e., the difference between the Companys closing stock
price on the last trading day of 2010 and the weighted-average
110
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
exercise price, multiplied by the number of shares) that would
have been received by the option holders had all option holders
exercised their options on December 31, 2010.
Shares for the exercise of stock options are expected to come
from the Companys authorized and unissued shares or
treasury shares.
The following table summarizes the Companys non-vested
restricted stock activity for the year ended December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Non-vested restricted stock at beginning of year
|
|
|
260,920
|
|
|
$
|
9.20
|
|
Granted
|
|
|
17,250
|
|
|
|
9.66
|
|
Vested
|
|
|
(57,030
|
)
|
|
|
9.24
|
|
Forfeited
|
|
|
(8,300
|
)
|
|
|
9.18
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock at end of year
|
|
|
212,840
|
|
|
|
9.23
|
|
|
|
|
|
|
|
|
|
|
The total fair value of restricted shares vested in 2010 was
$672,000.
For the years ended December 31, 2010, 2009 and 2008,
compensation expense and the related tax benefit for the plan
totaled $1.0 million and $277,000, $672,000 and $183,000,
and $128,000 and $35,000, respectively.
As of December 31, 2010, there was $3.4 million of
total unrecognized compensation expense related to non-vested
options and restricted shares granted under the plan. This cost
is expected to be recognized over a weighted-average period of
3.4 years.
Employee
Stock Ownership Plan (ESOP)
The Company established an ESOP for its eligible employees
effective January 1, 2008 to provide eligible employees the
opportunity to own Company stock. The plan is a tax-qualified
retirement plan for the benefit of all Company employees.
Contributions are allocated to eligible participants on the
basis of compensation, subject to federal tax law limits. The
ESOP acquired 828,000 shares in the stock offering with the
proceeds of a loan totaling $8.3 million from the
Companys subsidiary, Meridian Funding Corporation. The
loan is payable annually over 20 years at a rate of 6.5%.
The loan is secured by the shares purchased, which are held in a
suspense account for allocation among participants as the loan
is repaid. The Companys annual cash contributions to the
ESOP at a minimum will be sufficient to service the annual debt
of the ESOP. Shares used as collateral to secure the loan are
released and available for allocation to eligible employees as
the principal and interest on the loan is paid.
At December 31, 2010, the remaining principal balance on
the ESOP debt is payable as follows:
|
|
|
|
|
Year Ending December 31,
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
2011
|
|
$
|
257
|
|
2012
|
|
|
272
|
|
2013
|
|
|
291
|
|
2014
|
|
|
310
|
|
2015
|
|
|
330
|
|
Therafter
|
|
|
6,110
|
|
|
|
|
|
|
|
|
$
|
7,570
|
|
|
|
|
|
|
111
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Shares held by the ESOP include the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Allocated
|
|
|
82
|
|
|
|
41
|
|
Committed to be allocated
|
|
|
41
|
|
|
|
41
|
|
Unallocated
|
|
|
705
|
|
|
|
746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
828
|
|
|
|
828
|
|
|
|
|
|
|
|
|
|
|
The fair value of the unallocated shares was $8.3 million
and $6.5 million at December 31, 2010 and 2009,
respectively. Total compensation expense recognized in
connection with the ESOP for 2010, 2009 and 2008 was $440,000,
$355,000 and $400,000, respectively.
Bank-Owned
Life Insurance
The Company is the sole owner of life insurance policies
pertaining to certain employees. The Company has entered into
agreements with these executives whereby the Company will pay to
the employees estate or beneficiaries a portion of the
death benefit that the Company will receive as beneficiary of
such policies. In 2008, the Company adopted guidance that
requires the Company to accrue for these post-retirement
benefits over the expected service period of the employee. As a
result, the Company recognized a liability for future death
benefits in the amount of $1.6 million as of
January 1, 2008. Expense associated with this
post-retirement benefit for the years ended December 31,
2010, 2009 and 2008 amounted to $487,000, $628,000 and $526,000,
respectively.
Incentive
Compensation Plan
Eligible officers and employees of the Company participate in an
incentive compensation plan which is based on various factors as
set forth by the Executive Committee. Incentive compensation
plan expense for the years ended December 31, 2010, 2009
and 2008 amounted to $1.8 million, $940,000 and $410,000,
respectively.
|
|
14.
|
RELATED
PARTY TRANSACTIONS
|
Loans
The following summarizes the activity with respect to loans made
to officers and directors of the Company, their affiliates, and
members of their immediate families.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
6,268
|
|
|
$
|
9,123
|
|
Additions
|
|
|
3,022
|
|
|
|
1,543
|
|
Reductions
|
|
|
(2,188
|
)
|
|
|
(4,398
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
7,102
|
|
|
$
|
6,268
|
|
|
|
|
|
|
|
|
|
|
Such loans are made in the normal course of business at the
Banks normal credit terms, including interest rate and
collateral requirements, and do not represent more than a normal
risk of collection.
112
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deposits
Deposits from related parties totaled $35.1 million and
$5.8 million at December 31, 2010 and 2009,
respectively. All such deposits were accepted in the ordinary
course of business on substantially the same terms as those
prevailing at the time for comparable transactions with other
persons.
Other
Affiliate Bank
In connection with the Companys investment in Hampshire
First Bank (HFB), East Boston Savings Bank has
entered into a Master Services Agreement whereby certain
services are provided to HFB. During the year ended
December 31, 2008, revenue recorded by the Company for
providing such services amounted to $1,000. The Company did not
provide any services under this agreement in 2010 or 2009.
Additionally, three out of ten of the directors of HFB also
serve as directors of the Company, including one who serves as
the Chairman of the Board of both entities. At December 31,
2010 and 2009, the Company has loan participations with HFB of
$56.9 million and $47.8 million, respectively, of
which the Company services $34.9 million and
$27.0 million, respectively. The Company also has federal
funds purchased from HFB of $1.9 million and
$3.1 million as of December 31, 2010 and 2009,
respectively. As of December 31, 2009, the Company had a
$3.0 million in certificates of deposit with Hampshire
First Bank.
Minimum
Regulatory Capital Requirements
The Company and the Bank are subject to various regulatory
capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct
material effect on the Companys and Banks
consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Prompt corrective action provisions are not applicable to mutual
holding companies.
Quantitative measures established by regulation to ensure
capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios (set forth in the table) of total and
Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as
of December 31, 2010 and 2009, that the Company and the
Bank meet all capital adequacy requirements to which they are
subject. As of December 31, 2010, the most recent
notification from the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage
ratios as set forth in the following table. There are no
conditions or events since that notification that management
believes have changed the Banks category.
113
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys and the Banks actual capital amounts
and ratios follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
Minimum
|
|
Capitalized Under
|
|
|
|
|
Capital
|
|
Prompt Corrective
|
|
|
Actual
|
|
Requirement
|
|
Action Provisions
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
(Dollars in thousands)
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
206,416
|
|
|
|
14.1
|
%
|
|
$
|
116,907
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
162,779
|
|
|
|
11.4
|
|
|
|
114,514
|
|
|
|
8.0
|
|
|
$
|
143,142
|
|
|
|
10.0
|
%
|
Tier 1 Capital (to Risk Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
193,828
|
|
|
|
13.3
|
|
|
|
58,453
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
150,161
|
|
|
|
10.5
|
|
|
|
57,257
|
|
|
|
4.0
|
|
|
|
85,885
|
|
|
|
6.0
|
|
Tier 1 Capital (to Average Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
193,828
|
|
|
|
10.8
|
|
|
|
71,892
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
150,161
|
|
|
|
8.5
|
|
|
|
70,637
|
|
|
|
4.0
|
|
|
|
88,296
|
|
|
|
5.0
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
205,011
|
|
|
|
19.4
|
%
|
|
$
|
84,322
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
145,113
|
|
|
|
14.2
|
|
|
|
81,930
|
|
|
|
8.0
|
|
|
$
|
102,413
|
|
|
|
10.0
|
%
|
Tier 1 Capital (to Risk Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
194,788
|
|
|
|
18.5
|
|
|
|
42,161
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
134,844
|
|
|
|
13.2
|
|
|
|
40,965
|
|
|
|
4.0
|
|
|
|
61,448
|
|
|
|
6.0
|
|
Tier 1 Capital (to Average Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
194,788
|
|
|
|
16.2
|
|
|
|
48,147
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
134,844
|
|
|
|
11.2
|
|
|
|
48,145
|
|
|
|
4.0
|
|
|
|
60,181
|
|
|
|
5.0
|
|
A reconciliation of the Companys and Banks
stockholders equity to regulatory capital follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Consolidated
|
|
|
Bank
|
|
|
Consolidated
|
|
|
Bank
|
|
|
|
(In thousands)
|
|
|
Total stockholders equity per financial statements
|
|
$
|
215,611
|
|
|
$
|
172,333
|
|
|
$
|
200,415
|
|
|
$
|
141,066
|
|
Adjustments to Tier 1 capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
(8,038
|
)
|
|
|
(8,427
|
)
|
|
|
(5,583
|
)
|
|
|
(6,178
|
)
|
Goodwill disallowed
|
|
|
(13,687
|
)
|
|
|
(13,687
|
)
|
|
|
|
|
|
|
|
|
Servicing assets disallowed
|
|
|
(58
|
)
|
|
|
(58
|
)
|
|
|
(44
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tier 1 capital
|
|
|
193,828
|
|
|
|
150,161
|
|
|
|
194,788
|
|
|
|
134,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to total capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
10,155
|
|
|
|
10,155
|
|
|
|
9,242
|
|
|
|
9,242
|
|
45% of net unrealized gains on marketable equity securities
|
|
|
2,433
|
|
|
|
2,463
|
|
|
|
981
|
|
|
|
1,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total regulatory capital
|
|
$
|
206,416
|
|
|
$
|
162,779
|
|
|
$
|
205,011
|
|
|
$
|
145,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Liquidation
Account
At the time of the minority stock offering which was completed
on January 22, 2008, the Company established a liquidation
account in the amount of $114.2 million, which is equal to
the net worth of the Company as of the date of the latest
consolidated balance sheet appearing in the final prospectus
distributed in connection with the offering. The liquidation
account is maintained for the benefit of the eligible account
holders and supplemental eligible account holders who maintain
their accounts at East Boston Savings Bank after the offering.
The liquidation account is reduced annually to the extent that
such account holders have reduced their qualifying deposits as
of each anniversary date and amounted to $66.7 million at
December 31, 2010. Subsequent increases will not restore an
account holders interest in the liquidation account. In
the event of a complete liquidation, each eligible account
holder will be entitled to receive balances for accounts held
then.
Other
Capital Restrictions
Federal and state banking regulations place certain restrictions
on dividends paid and loans or advances made by the Bank to the
Company. The total amount for dividends which may be paid in any
calendar year cannot exceed the Banks net income for the
current year, plus the Banks net income retained for the
two previous years, without regulatory approval. At
December 31, 2010, the Banks retained earnings
available for the payment of dividends was $16.0 million.
Loans or advances are limited to 10 percent of the
Banks capital stock and surplus on a secured basis. Funds
available for loans or advances by the Bank to the Company
amounted to $17.2 million. In addition, dividends paid by
the Bank to the Company would be prohibited if the effect
thereof would cause the Banks capital to be reduced below
applicable minimum capital requirements.
Stock
Repurchase Plan
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 December 31, 2010, the Company had
repurchased 188,827 shares of its stock at an average price
of $11.07 per share as included in treasury stock, or 40.0% of
the shares authorized for repurchase under the Companys
third stock repurchase program. The Company has repurchased
1,120,327 shares since December 2008.
|
|
16.
|
FAIR
VALUES OF ASSETS AND LIABILITIES
|
Determination
of Fair Value
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 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.
115
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Securities available for sale At
December 31, 2010, all fair value measurements are obtained
from a third party pricing service and are not adjusted by
management, except for other debt securities. Due to the
illiquid market for other debt securities, the Company
determined that the prices obtained from a third party pricing
service were no longer indicative of fair value. As of
December 31, 2010, the Company used an internal valuation
model to determine the fair value of these securities.
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 and mortgage-backed securities are
determined by pricing models that consider standard input
factors such as observable market data, benchmark yields,
reported trades, broker/dealer quotes, credit spreads, benchmark
securities, as well as new issue data, monthly payment
information, and collateral performance, among others
(Level 2). Other debt securities are measured at fair value
utilizing pricing models, discounted cash flow methodologies, or
similar techniques that require significant management judgment
or estimation (Level 3).
Federal Home Loan Bank stock The
carrying value of Federal Home Loan Bank stock approximates fair
value based on the redemption provisions of the Federal Home
Loan Bank.
Loans held for sale The fair value is
determined using market prices currently being offered for loans
with similar terms to borrowers of similar credit quality.
Loans For variable-rate loans that
reprice frequently and with no significant change in credit
risk, fair values are based on carrying values. Fair values for
other loans are estimated using discounted cash flow analyses,
using market interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. Fair
values for non-performing loans are estimated using discounted
cash flow analyses or underlying collateral values, where
applicable.
Deposits The fair values disclosed for
non-certificate accounts, by definition, equal to the amount
payable on demand at the reporting date which is their carrying
amounts. Fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies market
interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time
deposits.
Borrowings The fair value is estimated
using discounted cash flow analyses based on the Companys
current incremental borrowing rates for similar types of
borrowing arrangements.
Accrued interest The carrying amounts
of accrued interest approximate fair value.
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.
116
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assets
Measured at Fair Value on a Recurring Basis
Assets measured at fair value on a recurring basis are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
|
|
|
$
|
222,038
|
|
|
$
|
|
|
|
$
|
222,038
|
|
Government-sponsored enterprises
|
|
|
|
|
|
|
35,900
|
|
|
|
|
|
|
|
35,900
|
|
Municipal bonds
|
|
|
|
|
|
|
6,493
|
|
|
|
|
|
|
|
6,493
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises
|
|
|
|
|
|
|
34,542
|
|
|
|
|
|
|
|
34,542
|
|
Private label
|
|
|
|
|
|
|
10,334
|
|
|
|
|
|
|
|
10,334
|
|
Other debt securities
|
|
|
|
|
|
|
|
|
|
|
641
|
|
|
|
641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
|
|
|
|
309,307
|
|
|
|
641
|
|
|
|
309,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
36,765
|
|
|
|
|
|
|
|
|
|
|
|
36,765
|
|
Money market mutual funds
|
|
|
13,889
|
|
|
|
|
|
|
|
|
|
|
|
13,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities
|
|
|
50,654
|
|
|
|
|
|
|
|
|
|
|
|
50,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
50,654
|
|
|
$
|
309,307
|
|
|
$
|
641
|
|
|
$
|
360,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
|
|
|
$
|
220,007
|
|
|
$
|
|
|
|
$
|
220,007
|
|
Residential mortgage-backed securities
|
|
|
|
|
|
|
23,778
|
|
|
|
|
|
|
|
23,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
|
|
|
|
243,785
|
|
|
|
|
|
|
|
243,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
28,878
|
|
|
|
|
|
|
|
|
|
|
|
28,878
|
|
Money market mutual funds
|
|
|
20,704
|
|
|
|
|
|
|
|
|
|
|
|
20,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities
|
|
|
49,582
|
|
|
|
|
|
|
|
|
|
|
|
49,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
49,582
|
|
|
$
|
243,785
|
|
|
$
|
|
|
|
$
|
293,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
There were no liabilities measured at fair value on a recurring
basis. For the year ended December 31, 2010, there were no
transfers in or out of Levels 1 and 2 and the changes in
Level 3 are as follows:
|
|
|
|
|
|
|
Securities
|
|
|
|
Available
|
|
|
|
for Sale
|
|
|
|
(In thousands)
|
|
|
Balance as of December 31, 2009
|
|
$
|
|
|
Total unrealized gains (losses) included in other comprehensive
income
|
|
|
|
|
Securities acquired from Mt. Washington
|
|
|
641
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
$
|
641
|
|
|
|
|
|
|
Total unrealized gains (losses) relating to instruments still
held at December 31, 2010
|
|
$
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2010
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,274
|
|
|
$
|
(95
|
)
|
Foreclosed real esate
|
|
|
|
|
|
|
|
|
|
|
4,080
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,354
|
|
|
$
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2009
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,700
|
|
|
$
|
(315
|
)
|
Foreclosed real esate
|
|
|
|
|
|
|
|
|
|
|
2,869
|
|
|
|
(198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,569
|
|
|
$
|
(513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain impaired loans were adjusted to fair value, less cost to
sell, of the underlying collateral securing these loans
resulting in losses. The loss is not recorded directly as an
adjustment to current earnings, but rather as a component in
determining the allowance for loan losses. Fair value was
measured using appraised values of collateral and adjusted as
necessary by management based on unobservable inputs for
specific properties.
Certain properties in foreclosed real estate were adjusted to
fair value using appraised values of collateral, less cost to
sell, and adjusted as necessary by management based on
unobservable inputs for specific properties. The loss on
foreclosed assets represents adjustments in valuation recorded
during the time period indicated and not for losses incurred on
sales.
118
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summary
of Fair Values of Financial Instruments
The estimated fair values, and related carrying amounts, of the
Companys financial instruments are as follows. Certain
financial instruments and all nonfinancial instruments are
exempt from disclosure requirements. Accordingly, the aggregate
fair value amounts presented herein do not represent the
underlying fair value of the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
(In thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
155,493
|
|
|
$
|
155,493
|
|
|
$
|
19,966
|
|
|
$
|
19,966
|
|
Certificates of deposit
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
3,028
|
|
Securities available for sale
|
|
|
360,602
|
|
|
|
360,602
|
|
|
|
293,367
|
|
|
|
293,367
|
|
Federal Home Loan Bank stock
|
|
|
12,538
|
|
|
|
12,538
|
|
|
|
4,605
|
|
|
|
4,605
|
|
Loans and loans held for sale, net
|
|
|
1,186,575
|
|
|
|
1,195,661
|
|
|
|
814,255
|
|
|
|
813,393
|
|
Accrued interest receivable
|
|
|
7,543
|
|
|
|
7,543
|
|
|
|
6,231
|
|
|
|
6,231
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,455,215
|
|
|
|
1,463,016
|
|
|
|
922,475
|
|
|
|
927,385
|
|
Borrowings
|
|
|
148,683
|
|
|
|
153,618
|
|
|
|
75,410
|
|
|
|
76,782
|
|
Accrued interest payable
|
|
|
1,131
|
|
|
|
1,131
|
|
|
|
728
|
|
|
|
728
|
|
119
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
17. CONDENSED
FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining only to Meridian Interstate
Bancorp, Inc. is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
BALANCE SHEET
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents subsidiary
|
|
$
|
2,578
|
|
|
$
|
578
|
|
Cash and cash equivalents other
|
|
|
63
|
|
|
|
9,427
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
2,641
|
|
|
|
10,005
|
|
Certificates of deposit affiliate bank
|
|
|
|
|
|
|
3,000
|
|
Securities available for sale, at fair value
|
|
|
17,937
|
|
|
|
20,649
|
|
Investment in subsidiaries
|
|
|
181,521
|
|
|
|
149,954
|
|
Investment in affiliate bank
|
|
|
11,497
|
|
|
|
11,005
|
|
Bank-owned life insurance
|
|
|
|
|
|
|
4,333
|
|
Other assets
|
|
|
2,028
|
|
|
|
2,261
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
215,624
|
|
|
$
|
201,207
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
$
|
13
|
|
|
$
|
792
|
|
Stockholders equity
|
|
|
215,611
|
|
|
|
200,415
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
215,624
|
|
|
$
|
201,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
$
|
216
|
|
|
$
|
227
|
|
|
$
|
812
|
|
Equity income (loss) on investment in affliate bank
|
|
|
492
|
|
|
|
629
|
|
|
|
(396
|
)
|
Bank-owned life insurance income
|
|
|
|
|
|
|
189
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
708
|
|
|
|
1,045
|
|
|
|
560
|
|
Contribution to Meridian Charitable Foundation
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
Operating expenses
|
|
|
568
|
|
|
|
736
|
|
|
|
1,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and equity in undistributed
earnings of subsidiaries
|
|
|
140
|
|
|
|
309
|
|
|
|
(3,794
|
)
|
Applicable income tax provision (benefit)
|
|
|
(194
|
)
|
|
|
49
|
|
|
|
(1,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
334
|
|
|
|
260
|
|
|
|
(2,455
|
)
|
Equity in undistributed earnings of subsidiaries
|
|
|
13,040
|
|
|
|
3,503
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,374
|
|
|
$
|
3,763
|
|
|
$
|
(2,108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,374
|
|
|
$
|
3,763
|
|
|
$
|
(2,108
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed earnings of subsidiaries
|
|
|
(13,040
|
)
|
|
|
(3,503
|
)
|
|
|
(347
|
)
|
Contribution of stock to Merididan Charitable Foundation
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
Equity (income) loss on investment in affliate bank
|
|
|
(492
|
)
|
|
|
(629
|
)
|
|
|
396
|
|
Net amortization of securities available for sale
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Income from bank-owned life insurance
|
|
|
|
|
|
|
(189
|
)
|
|
|
(144
|
)
|
Share-based compensation expense
|
|
|
301
|
|
|
|
171
|
|
|
|
45
|
|
Decrease (increase) in other assets
|
|
|
189
|
|
|
|
(538
|
)
|
|
|
(112
|
)
|
Increase (decrease) in other liabilities
|
|
|
(779
|
)
|
|
|
428
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities
|
|
|
(445
|
)
|
|
|
(497
|
)
|
|
|
865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of certificates of deposit
|
|
|
|
|
|
|
(3,000
|
)
|
|
|
(7,000
|
)
|
Maturity of certificates of deposit
|
|
|
3,000
|
|
|
|
7,000
|
|
|
|
|
|
Activity in securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities, calls and principal payments
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
Proceeds from redemption of mutual funds
|
|
|
8,888
|
|
|
|
859
|
|
|
|
5,250
|
|
Purchases
|
|
|
(7,049
|
)
|
|
|
(5,132
|
)
|
|
|
(20,634
|
)
|
Capital contribution to bank subsidiary
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
(8,280
|
)
|
Loan to subsidiary
|
|
|
|
|
|
|
2,262
|
|
|
|
(2,262
|
)
|
Transfer of bank-owned life insurance to bank subsidiary
|
|
|
4,333
|
|
|
|
|
|
|
|
|
|
Purchase of bank-owned life insurance
|
|
|
|
|
|
|
|
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities
|
|
|
(4,828
|
)
|
|
|
1,989
|
|
|
|
(36,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock offering
|
|
|
|
|
|
|
|
|
|
|
97,633
|
|
Offering proceeds to bank subsidiary
|
|
|
|
|
|
|
|
|
|
|
(48,701
|
)
|
Treasury stock purchases
|
|
|
(2,091
|
)
|
|
|
(4,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities
|
|
|
(2,091
|
)
|
|
|
(4,535
|
)
|
|
|
48,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(7,364
|
)
|
|
|
(3,043
|
)
|
|
|
12,871
|
|
Cash and cash equivalents at beginning of year
|
|
|
10,005
|
|
|
|
13,048
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
2,641
|
|
|
$
|
10,005
|
|
|
$
|
13,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Concluded)
18. SELECTED
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
The selected quarterly financial data presented below should be
read in conjunction with the Consolidated Financial Statements
and related notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Interest and dividend income
|
|
$
|
20,447
|
|
|
$
|
21,228
|
|
|
$
|
20,499
|
|
|
$
|
19,885
|
|
|
$
|
14,875
|
|
|
$
|
14,426
|
|
|
$
|
13,919
|
|
|
$
|
13,447
|
|
Interest expense
|
|
|
5,472
|
|
|
|
5,234
|
|
|
|
5,220
|
|
|
|
5,114
|
|
|
|
4,239
|
|
|
|
4,911
|
|
|
|
5,447
|
|
|
|
5,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
14,975
|
|
|
|
15,994
|
|
|
|
15,279
|
|
|
|
14,771
|
|
|
|
10,636
|
|
|
|
9,515
|
|
|
|
8,472
|
|
|
|
7,652
|
|
Provision for loan losses
|
|
|
936
|
|
|
|
77
|
|
|
|
794
|
|
|
|
1,374
|
|
|
|
2,274
|
|
|
|
694
|
|
|
|
568
|
|
|
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, after provision for loan losses
|
|
|
14,039
|
|
|
|
15,917
|
|
|
|
14,485
|
|
|
|
13,397
|
|
|
|
8,362
|
|
|
|
8,821
|
|
|
|
7,904
|
|
|
|
7,106
|
|
Non-interest income(1)
|
|
|
3,682
|
|
|
|
3,318
|
|
|
|
2,222
|
|
|
|
2,499
|
|
|
|
2,069
|
|
|
|
1,098
|
|
|
|
1,035
|
|
|
|
1,093
|
|
Non-interest expenses(2)
|
|
|
11,073
|
|
|
|
14,645
|
|
|
|
11,737
|
|
|
|
11,349
|
|
|
|
7,038
|
|
|
|
7,167
|
|
|
|
7,684
|
|
|
|
9,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
6,648
|
|
|
|
4,590
|
|
|
|
4,970
|
|
|
|
4,547
|
|
|
|
3,393
|
|
|
|
2,752
|
|
|
|
1,255
|
|
|
|
(1,478
|
)
|
Provision (benefit) for income taxes
|
|
|
2,347
|
|
|
|
1,619
|
|
|
|
1,728
|
|
|
|
1,687
|
|
|
|
1,372
|
|
|
|
864
|
|
|
|
293
|
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,301
|
|
|
$
|
2,971
|
|
|
$
|
3,242
|
|
|
$
|
2,860
|
|
|
$
|
2,021
|
|
|
$
|
1,888
|
|
|
$
|
962
|
|
|
$
|
(1,108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.20
|
|
|
$
|
0.13
|
|
|
$
|
0.15
|
|
|
$
|
0.13
|
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
|
$
|
0.04
|
|
|
$
|
(0.05
|
)
|
Diluted
|
|
$
|
0.20
|
|
|
$
|
0.13
|
|
|
$
|
0.15
|
|
|
$
|
0.13
|
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
|
$
|
0.04
|
|
|
$
|
(0.05
|
)
|
Weighted Average Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,998,757
|
|
|
|
22,033,643
|
|
|
|
22,124,539
|
|
|
|
22,133,155
|
|
|
|
21,680,522
|
|
|
|
21,712,292
|
|
|
|
22,024,179
|
|
|
|
22,050,960
|
|
Diluted
|
|
|
22,014,612
|
|
|
|
22,037,561
|
|
|
|
22,140,597
|
|
|
|
22,133,155
|
|
|
|
21,680,522
|
|
|
|
21,712,292
|
|
|
|
22,024,179
|
|
|
|
22,050,960
|
|
|
|
|
(1) |
|
Non-interest income fluctuates each quarter primarily due to
securities gains. |
|
(2) |
|
Non-interest expenses for the third quarter of 2010 include a
data processing contract termination charge of $3.1 million
and for the first quarter of 2009 include a charge of
$1.8 million as a result of the Separation Agreements. |
122
|
|
Item 9.
|
Changes
in and disagreements with accountants on accounting and
financial disclosure
|
None.
|
|
Item 9a.
|
Controls
and Procedures
|
Conclusion Regarding the Effectiveness of 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.
Changes in Internal Controls 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.
|
|
Item 9b.
|
other
information
|
Not applicable.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant and Corporate
Governance
|
The information in the Corporations definitive Proxy
Statement, prepared for the 2011 Annual Meeting of Shareholders,
which contains information concerning directors of the
Corporation under the captions Election of Directors
and Information About the Board of Directors;
information concerning executive officers of the Corporation
under the caption Information About the Executive
Officers; and information concerning Section 16(a)
compliance under the caption Section 16(a) Beneficial
Ownership Reporting Compliance will be incorporated herein
by reference or will be filed by an amendment to this Annual
Report.
|
|
Item 11.
|
Executive
Compensation
|
The information in the Corporations definitive Proxy
Statement, prepared for the 2011 Annual Meeting of Shareholders,
which contains information concerning this item, under the
caption Executive Compensation will be incorporated
herein by reference or will be filed by an amendment to this
Annual Report.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information in the Corporations definitive Proxy
Statement, prepared for the 2011 Annual Meeting of Shareholders,
which contains information concerning this item, under the
caption Stock Ownership is incorporated herein by
reference or will be filed by an amendment to this Annual Report.
123
Equity
Compensation Plan Information
The following table provides information as of December 31,
2010, regarding shares outstanding and available for issuance
under the Companys equity compensation plan. Additional
information regarding stock-based compensation is presented in
Note 13, Employee Benefit Plans of the notes to
consolidated financial statements within Part II,
Item 8, Financial Statements and Supplementary
Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
(a)
|
|
|
|
|
|
Remaining Available
|
|
|
|
Number of
|
|
|
|
|
|
for Future Issuance
|
|
|
|
Securities to be
|
|
|
(b)
|
|
|
Under Equity
|
|
|
|
Issued Upon
|
|
|
Weighted-Average
|
|
|
Compensation Plans
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
(Excluding
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Securities
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
Reflected in Column
|
|
Plan Category
|
|
and Rights
|
|
|
and Rights
|
|
|
(a))
|
|
|
Equity compensation plans approved by security holders
|
|
|
889,450
|
|
|
$
|
9.29
|
|
|
|
145,550
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
889,450
|
|
|
$
|
9.29
|
|
|
|
145,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The Transactions with Certain Related Persons
section of the 2011 Proxy Statement will be incorporated herein
by reference or filed by an amendment to this Annual Report.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The Proposal II Ratification of
Appointment of Independent Registered Public Accounting
Firm Section of the 2011 Proxy Statement will be
incorporated herein by reference or filed by an amendment to
this Annual Report.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Financial Statements
The following documents are filed as part of this
Form 10-K.
|
|
|
|
(A)
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
|
(B)
|
Consolidated Balance Sheets at December 31,
2010 and 2009
|
|
|
(C)
|
Consolidated Statements of Operations Years ended
December 31, 2010, 2009 and 2008
|
|
|
|
|
(D)
|
Consolidated Statements of Changes in Stockholders Equity
- Years ended December 31, 2010, 2009 and 2008
|
|
|
|
|
(E)
|
Consolidated Statements of Cash Flows Years ended
December 31, 2010, 2009 and 2008
|
|
|
|
|
(F)
|
Notes to Consolidated Financial Statements.
|
(a)(2) Financial Statement Schedules
None.
124
(a)(3) 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
|
|
[Reserved]
|
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 Co-operative Bank***
|
10.20
|
|
First Amendment to Joint Beneficiary Designation Agreement
between Edward J. Merritt and Mt. Washington Co-operative 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. |
125
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
|
|
|
|
Date: March 16, 2011
|
|
By: /s/ Richard
J. Gavegnano
Richard
J. Gavegnano
Chairman and Chief Executive Officer
(Duly Authorized Representative)
|
Pursuant to the requirements of the Securities Exchange of 1934,
this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Richard
J. Gavegnano
Richard
J. Gavegnano
|
|
Chairman and Chief Executive Officer (Principal Executive
Officer)
|
|
March 16, 2011
|
|
|
|
|
|
/s/ Mark
L. Abbate
Mark
L. Abbate
|
|
Senior Vice President, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
March 16, 2011
|
|
|
|
|
|
/s/ Vincent
D. Basile
Vincent
D. Basile
|
|
Director
|
|
March 16, 2011
|
|
|
|
|
|
/s/ Marilyn
A. Censullo
Marilyn
A. Censullo
|
|
Director
|
|
March 16, 2011
|
|
|
|
|
|
/s/ Robert
D. DeBlosi
Robert
D. DeBlosi
|
|
Director
|
|
March 16, 2011
|
|
|
|
|
|
/s/ Anna
R. DiMaria
Anna
R. DiMaria
|
|
Director
|
|
March 16, 2011
|
|
|
|
|
|
/s/ Richard
F. Fernandez
Richard
F. Fernandez
|
|
Director
|
|
March 16, 2011
|
|
|
|
|
|
/s/ Domenic
A. Gambardella
Domenic
A. Gambardella
|
|
Director
|
|
March 16, 2011
|
|
|
|
|
|
/s/ Thomas
J. Gunning
Thomas
J. Gunning
|
|
Director
|
|
March 16, 2011
|
|
|
|
|
|
/s/ Carl
A. LaGreca
Carl
A. LaGreca
|
|
Director
|
|
March 16, 2011
|
126
|
|
|
|
|
|
|
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Edward
L. Lynch
Edward
L. Lynch
|
|
Director
|
|
March 16, 2011
|
|
|
|
|
|
/s/ Edward
J. Merritt
Edward
J. Merritt
|
|
Director
|
|
March 16, 2011
|
|
|
|
|
|
/s/ Gregory
F. Natalucci
Gregory
F. Natalucci
|
|
Director
|
|
March 16, 2011
|
|
|
|
|
|
/s/ James
G. Sartori
James
G. Sartori
|
|
Director
|
|
March 16, 2011
|
|
|
|
|
|
/s/ Paul
T. Sullivan
Paul
T. Sullivan
|
|
Director
|
|
March 16, 2011
|
127