Form 10-Q
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-33898
Meridian Interstate Bancorp, Inc.
(Exact name of registrant as specified in its charter)
     
Massachusetts
(State or other jurisdiction of
incorporation or organization)
  20-4652200
(I.R.S. Employer
Identification No.)
     
10 Meridian Street,
East Boston, Massachusetts

(Address of Principal Executive Offices)
  02128
Zip Code
(617) 567-1500
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
At August 2, 2011, the registrant had 22,240,515 shares of no par value common stock outstanding.
 
 

 

 


 

MERIDIAN INTERSTATE BANCORP, INC.
FORM 10-Q
INDEX
         
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 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.0
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

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PART I — FINANCIAL INFORMATION
Item 1. financial statements
MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    June 30,     December 31,  
(Dollars in thousands)   2011     2010  
ASSETS
Cash and due from banks
  $ 226,712     $ 155,430  
Federal funds sold
    63       63  
 
           
Total cash and cash equivalents
    226,775       155,493  
 
               
Certificates of deposit — affiliate bank
    2,500        
Securities available for sale, at fair value
    351,829       360,602  
Federal Home Loan Bank stock, at cost
    12,538       12,538  
Loans held for sale
    3,336       13,013  
 
               
Loans
    1,217,920       1,183,717  
Less allowance for loan losses
    (10,861 )     (10,155 )
 
           
Loans, net
    1,207,059       1,173,562  
 
               
Bank-owned life insurance
    34,444       33,829  
Foreclosed real estate, net
    5,111       4,080  
Investment in affiliate bank
    12,315       11,497  
Premises and equipment, net
    35,538       34,425  
Accrued interest receivable
    7,174       7,543  
Prepaid deposit insurance
    1,843       3,026  
Deferred tax asset, net
    5,914       5,441  
Goodwill
    13,687       13,687  
Other assets
    3,833       7,094  
 
           
 
               
Total assets
  $ 1,923,896     $ 1,835,830  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
               
Non interest-bearing
  $ 122,832     $ 111,423  
Interest-bearing
    1,413,954       1,343,792  
 
           
Total deposits
    1,536,786       1,455,215  
 
               
Short-term borrowings — affiliate bank
    12,464       1,949  
Short-term borrowings — other
    10,047       10,037  
Long-term debt
    116,021       136,697  
Accrued expenses and other liabilities
    29,126       16,321  
 
           
Total liabilities
    1,704,444       1,620,219  
 
           
Stockholders’ equity:
               
Common stock, no par value, 50,000,000 shares authorized; 23,000,000 shares issued
           
Additional paid-in capital
    97,333       97,005  
Retained earnings
    129,939       122,563  
Accumulated other comprehensive income
    7,068       8,038  
Treasury stock, at cost, 441,400 and 192,218 shares at June 30, 2011 and December 31, 2010, respectively
    (5,481 )     (2,121 )
Unearned compensation — ESOP, 683,100 and 703,800 shares at June 30, 2011 and December 31, 2010, respectively
    (6,831 )     (7,038 )
Unearned compensation — restricted shares, 318,085 and 326,905 at June 30, 2011 and December 31, 2010, respectively
    (2,576 )     (2,836 )
 
           
Total stockholders’ equity
    219,452       215,611  
 
           
 
               
Total liabilities and stockholders’ equity
  $ 1,923,896     $ 1,835,830  
 
           
See accompanying notes to unaudited consolidated financial statements.

 

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MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
(Dollars in thousands, except per share amounts)   2011     2010     2011     2010  
Interest and dividend income:
                               
Interest and fees on loans
  $ 16,164     $ 16,829     $ 32,610     $ 33,039  
Interest on debt securities
    2,896       3,389       6,001       6,830  
Dividends on equity securities
    282       228       535       433  
Interest on certificates of deposit
    9       17       17       34  
Interest on other interest-earning assets
    117       36       202       48  
 
                       
Total interest and dividend income
    19,468       20,499       39,365       40,384  
 
                       
Interest expense:
                               
Interest on deposits
    4,616       4,310       9,189       8,509  
Interest on short-term borrowings
    13       15       23       44  
Interest on long-term debt
    778       895       1,657       1,781  
 
                       
Total interest expense
    5,407       5,220       10,869       10,334  
 
                       
 
Net interest income
    14,061       15,279       28,496       30,050  
Provision for loan losses
    486       794       828       2,168  
 
                       
Net interest income, after provision for loan losses
    13,575       14,485       27,668       27,882  
 
                       
Non-interest income:
                               
Customer service fees
    1,499       1,490       2,795       2,904  
Loan fees
    232       140       463       298  
Gain on sales of loans, net
    169       199       605       764  
Gain on sales of securities, net
    2,922             3,789        
Income from bank-owned life insurance
    298       287       615       579  
Equity income on investment in affiliate bank
    333       106       818       176  
 
                       
Total non-interest income
    5,453       2,222       9,085       4,721  
 
                       
Non-interest expenses:
                               
Salaries and employee benefits
    7,058       6,446       14,159       12,613  
Occupancy and equipment
    1,869       1,709       4,085       3,492  
Data processing
    651       749       1,460       1,503  
Marketing and advertising
    540       580       1,081       1,046  
Professional services
    821       755       1,465       1,475  
Foreclosed real estate
    63       122       100       276  
Deposit insurance
    633       577       1,258       1,092  
Other general and administrative
    846       799       1,497       1,589  
 
                       
Total non-interest expenses
    12,481       11,737       25,105       23,086  
 
                       
Income before income taxes
    6,547       4,970       11,648       9,517  
Provision for income taxes
    2,382       1,728       4,272       3,415  
 
                       
Net income
  $ 4,165     $ 3,242     $ 7,376     $ 6,102  
 
                       
 
                               
Earnings per share:
                               
Basic
  $ 0.19     $ 0.15     $ 0.34     $ 0.28  
Diluted
  $ 0.19     $ 0.15     $ 0.33     $ 0.28  
 
                               
Weighted average shares:
                               
Basic
    21,852,665       22,124,539       21,917,330       22,128,822  
Diluted
    21,994,371       22,140,597       22,044,635       22,136,851  
See accompanying notes to unaudited consolidated financial statements.

 

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MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Six Months Ended June 30, 2011 and 2010
(Unaudited)
                                                                 
    Shares of No                     Accumulated                            
    Par Common     Additional             Other             Unearned     Unearned        
    Stock     Paid-in     Retained     Comprehensive     Treasury     Compensation -     Compensation -        
(Dollars in thousands)   Outstanding     Capital     Earnings     Income     Stock     ESOP     Restricted Shares     Total  
Six Months Ended June 30, 2010
                                                               
Balance at December 31, 2009
    22,098,565     $ 100,972     $ 109,189     $ 5,583     $ (4,535 )   $ (7,452 )   $ (3,342 )   $ 200,415  
 
                                                             
Comprehensive income:
                                                               
Net income
                6,102                               6,102  
Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax effects
                      370                         370  
Change in defined benefit plan prior service costs and actuarial losses, net of reclassification adjustments and tax effects
                      102                         102  
 
                                                             
Total comprehensive income
                                                            6,574  
 
                                                             
Purchase of treasury stock
    (109,700 )                       (1,236 )                 (1,236 )
ESOP shares earned (20,700 shares)
          10                         207             217  
Issuance of 514,109 shares to Meridian Financial Services, Incorporated, the mutual holding company
    514,109       (4,505 )                 4,505                    
Share-based compensation expense
    2,620       251                               247       498  
 
                                               
Balance at June 30, 2010
    22,505,594     $ 96,728     $ 115,291     $ 6,055     $ (1,266 )   $ (7,245 )   $ (3,095 )   $ 206,468  
 
                                               
 
                                                               
Six Months Ended June 30, 2011
                                                               
Balance at December 31, 2010
    22,480,877     $ 97,005     $ 122,563     $ 8,038     $ (2,121 )   $ (7,038 )   $ (2,836 )   $ 215,611  
 
                                                             
Comprehensive income:
                                                               
Net income
                7,376                               7,376  
Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax effects
                      (970 )                       (970 )
 
                                                             
Total comprehensive income
                                                            6,406  
 
                                                             
Purchase of treasury stock
    (249,182 )                       (3,360 )                 (3,360 )
ESOP shares earned (20,700 shares)
          64                         207             271  
Share-based compensation expense
    8,820       264                               260       524  
 
                                               
Balance at June 30, 2011
    22,240,515     $ 97,333     $ 129,939     $ 7,068     $ (5,481 )   $ (6,831 )   $ (2,576 )   $ 219,452  
 
                                               
See accompanying notes to unaudited consolidated financial statements.

 

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MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Six Months Ended June 30,  
(In thousands)   2011     2010  
Cash flows from operating activities:
               
Net income
  $ 7,376     $ 6,102  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Accretion of acquisition fair value adjustments
    (1,019 )     (744 )
Earned ESOP shares
    271       217  
Provision for loan losses
    828       2,168  
Amortization (accretion) of net deferred loan origination fees
    250       (781 )
Net amortization of securities available for sale
    367       85  
Depreciation and amortization expense
    1,193       1,229  
Gain on sales of securities, net
    (3,789 )      
Gain on sales of loans held in portfolio, net
          (352 )
Gain on sales and provision for foreclosed real estate, net
    (109 )     (29 )
Deferred income tax provision (benefit)
    119       (2,178 )
Income from bank-owned life insurance
    (615 )     (579 )
Equity income on investment in affiliate bank
    (818 )     (176 )
Share-based compensation expense
    524       498  
Net changes in:
               
Loans held for sale
    9,677       1,023  
Accrued interest receivable
    369       (21 )
Prepaid deposit insurance
    1,183       1,001  
Other assets
    3,261       3,822  
Accrued expenses and other liabilities
    12,805       (774 )
 
           
Net cash provided by operating activities
    31,873       10,511  
 
           
 
               
Cash flows from investing activities:
               
Cash provided by business combination
          14,422  
Purchases of certificates of deposit
    (2,500 )      
Activity in securities available for sale:
               
Proceeds from maturities, calls and principal payments
    73,896       29,030  
Net redemption of mutual funds
    2,230       5,254  
Proceeds from sales
    31,313        
Purchases
    (96,595 )     (40,030 )
Loans originated, net of principal payments received
    (36,103 )     (50,400 )
Proceeds from sales of fixed-rate loans held in portfolio
          34,488  
Purchases of premises and equipment
    (2,265 )     (318 )
Capitalized costs on foreclosed real estate
    (37 )     (322 )
Proceeds from sales of foreclosed real estate
    405       1,603  
 
           
Net cash used in investing activities
    (29,656 )     (6,273 )
 
           
(continued)
See accompanying notes to unaudited consolidated financial statements.

 

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MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Six Months Ended June 30,  
(In thousands)   2011     2010  
Cash flows from financing activities:
               
Net increase in deposits
    81,900       52,044  
Net change in borrowings with maturities less than three months
    10,525       (8,822 )
Proceeds from Federal Home Loan Bank advances with maturities of three months or more
          15,475  
Repayment of Federal Home Loan Bank advances with maturities of three months or more
    (20,000 )     (10,050 )
Purchase of treasury stock
    (3,360 )     (1,236 )
 
           
Net cash provided by financing activities
    69,065       47,411  
 
           
 
               
Net change in cash and cash equivalents
    71,282       51,649  
 
               
Cash and cash equivalents at beginning of period
    155,493       19,966  
 
           
 
               
Cash and cash equivalents at end of period
  $ 226,775     $ 71,615  
 
           
 
               
Supplemental cash flow information:
               
Interest paid on deposits
  $ 9,524     $ 8,452  
Interest paid on borrowings
    2,427       1,545  
Income taxes paid, net of refunds
    1,316       2,820  
Non-cash investing and financing activities:
               
Transfers from loans to foreclosed real estate
    1,290       951  
In conjunction with the purchase acquisition:
               
Fair value of assets acquired, net of cash acquired
          450,561  
Fair value of liabilities assumed
          464,983  
See accompanying notes to unaudited consolidated financial statements.

 

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MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Meridian Interstate Bancorp, Inc. (the “Company”) is a Massachusetts mid-tier stock holding company that was formed in 2006 by East Boston Savings Bank (the “Bank”) to be its holding company. Meridian Interstate Bancorp owns all of East Boston Savings Bank’s capital stock and directs, plans and coordinates East Boston Savings Bank’s business activities. In addition, Meridian Interstate Bancorp owns approximately 40% of the capital stock of Hampshire First Bank, a New Hampshire chartered bank, organized in 2006 and headquartered in Manchester, New Hampshire. Meridian Financial Services, Incorporated 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 59.2% of Meridian Interstate Bancorp’s common stock.
The accompanying unaudited interim consolidated financial statements of Meridian Interstate Bancorp, Inc. have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Such adjustments were of a normal recurring nature. The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the entire year or any other interim period. For additional information, refer to the financial statements and footnotes thereto of Meridian Interstate included in Meridian Interstate’s Form 10-K for the year ended December 31, 2010 which was filed with the Securities and Exchange Commission (“SEC”) on March 16, 2011, and is available through the SEC’s website at www.sec.gov.
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the evaluation of goodwill for impairment, other-than-temporary impairment of securities and the valuation of deferred tax assets and foreclosed real estate.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-02, Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 provides additional guidance and clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring (“TDR”). ASU 2011-02 is effective for the first interim or annual period beginning on or after June 15, 2011, with retrospective application to the beginning of the annual period of adoption. The measurement of impairment should be done prospectively in the period of adoption for loans that are newly identified as TDRs upon adoption of ASU 2011-02. In addition, the TDR disclosures required by ASU 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses should be provided beginning in the period of adoption of ASU 2011-02. The Company will adopt ASU 2011-02 on July 1, 2011 and does not anticipate the adoption will have a material impact on its consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 guidance clarifies and expands the disclosures pertaining to unobservable inputs used in Level 3 fair value measurements, including the disclosure of quantitative information related to (1) the valuation processes used, (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial asset in a way that differs from the asset’s highest and best use. ASU 2011-04 also requires, for public companies, disclosure of the level within the fair value hierarchy for assets and liabilities not measured at fair value in the consolidated balance sheets but for which the fair value is disclosed. The amendments in ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company does not expect this pronouncement to have a material effect on its consolidated financial statements.

 

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In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. ASU No. 2011-05 amends the disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholders’ equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early application is permitted. There will be no impact to the consolidated financial results as the amendments relate only to changes in financial statement presentation.
3. FAIR VALUE HIERARCHY
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of assets and liabilities is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various assets and liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 — Valuation is based on quoted prices in active markets for identical assets or liabilities. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 — Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using unobservable inputs to pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Transfers between levels are recognized at the end of a reporting period, if applicable.
The following methods and assumptions were used by the Company in estimating fair value disclosures:
Cash and cash equivalents — The carrying amounts of cash and short-term instruments approximate fair values, based on the short-term nature of the assets.
Certificates of deposit — Fair values of certificates of deposit are estimated using discounted cash flow analyses based on current market rates for similar types of deposits.
Securities available for sale — All fair value measurements are obtained from a third party pricing service and are not adjusted by management. 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 saleThe fair value is based on commitments in effect from investors or prevailing market prices.

 

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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.
BorrowingsThe fair value is estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.
Accrued interest — The carrying amounts of accrued interest approximate fair value.
Off-balance sheet credit-related instruments — Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these instruments is considered immaterial.
Assets Measured at Fair Value on a Recurring Basis
Assets measured at fair value on a recurring basis are summarized as follows:
                                 
    June 30, 2011  
                            Total Fair  
(In thousands)   Level 1     Level 2     Level 3     Value  
Debt securities:
                               
Corporate bonds
  $     $ 180,820     $     $ 180,820  
Government-sponsored enterprises
          77,207             77,207  
Municipal bonds
          7,547             7,547  
Residential mortgage-backed securities:
                               
Government-sponsored enterprises
          30,271             30,271  
Private label
          8,337             8,337  
 
                       
Total debt securities
          304,182             304,182  
 
                       
Marketable equity securities:
                               
Common stocks
    35,986                   35,986  
Money market mutual funds
    11,661                   11,661  
 
                       
Total marketable equity securities
    47,647                   47,647  
 
                       
Total securities available for sale
  $ 47,647     $ 304,182     $     $ 351,829  
 
                       
                                 
    December 31, 2010  
                            Total Fair  
(In thousands)   Level 1     Level 2     Level 3     Value  
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  
 
                       

 

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There were no liabilities measured at fair value on a recurring basis. For the six months ended June 30, 2011, there were no transfers in or out of Levels 1 and 2 and the changes in Level 3 are as follows:
         
    Securities  
    Available  
(In thousands)   for Sale  
Balance as of December 31, 2010
  $ 641  
 
       
Securities sold
    (641 )
 
     
 
       
Balance as of June 30, 2011
  $  
 
     
 
       
Total realized gain on sales of Level 3 securities for the six months ended June 30, 2011
  $ 907  
 
     
 
       
Total unrealized gains (losses) relating to instruments still held at June 30, 2011
  $  
 
     
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, charge-off or specific reserve recorded during the periods noted on the assets held at period end. There were no liabilities measured at fair value on a non-recurring basis.
                                         
                            Three Months Ended     Six Months Ended  
    June 30, 2011     June 30, 2011     June 30, 2011  
(In thousands)   Level 1     Level 2     Level 3     Total Losses     Total Losses  
Impaired loans
  $     $     $ 8,070     $ (125 )   $ (99 )
Foreclosed real esate
                5,111              
 
                             
 
  $     $     $ 13,181     $ (125 )   $ (99 )
 
                             
                                         
                            Three Months Ended     Six Months Ended  
    June 30, 2010     June 30, 2010     June 30, 2010  
(In thousands)   Level 1     Level 2     Level 3     Total Losses     Total Losses  
Impaired loans
  $     $     $ 9,222     $ (358 )   $ (752 )
Foreclosed real esate
                4,221              
 
                             
 
  $     $     $ 13,443     $ (358 )   $ (752 )
 
                             
                         
    December 31, 2010  
(In thousands)   Level 1     Level 2     Level 3  
Impaired loans
  $     $     $ 6,274  
Foreclosed real esate
                4,080  
 
                 
 
  $     $     $ 10,354  
 
                 
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.

 

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Summary of Fair Values of Financial Instruments
The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein do not represent the underlying fair value of the Company.
                                 
    June 30, 2011     December 31, 2010  
    Carrying     Fair     Carrying     Fair  
(In thousands)   Amount     Value     Amount     Value  
 
Financial assets:
                               
Cash and cash equivalents
  $ 226,775     $ 226,775     $ 155,493     $ 155,493  
Certificates of deposit
    2,500       2,512              
Securities available for sale
    351,829       351,829       360,602       360,602  
Federal Home Loan Bank stock
    12,538       12,538       12,538       12,538  
Loans and loans held for sale, net
    1,210,395       1,236,317       1,186,575       1,195,661  
Accrued interest receivable
    7,174       7,174       7,543       7,543  
 
                               
Financial liabilities:
                               
Deposits
    1,536,786       1,544,630       1,455,215       1,463,016  
Borrowings
    138,532       143,162       148,683       153,618  
Accrued interest payable
    1,056       1,056       1,131       1,131  

 

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4. 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:
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
(Dollars in thousands, except per share amounts)   2011     2010     2011     2010  
 
Net income available to common stockholders
  $ 4,165     $ 3,242     $ 7,376     $ 6,102  
 
                       
 
                               
Average number of common shares outstanding
    21,642,552       21,860,129       21,707,724       21,863,162  
Effect of unvested stock awards
    210,113       264,410       209,606       265,660  
 
                       
Basic weighted average shares outstanding
    21,852,665       22,124,539       21,917,330       22,128,822  
Effect of dilutive stock options
    141,706       16,058       127,305       8,029  
 
                       
Diluted weighted average shares outstanding
    21,994,371       22,140,597       22,044,635       22,136,851  
 
                       
 
                               
Earnings per share:
                               
Basic
  $ 0.19     $ 0.15     $ 0.34     $ 0.28  
Diluted
  $ 0.19     $ 0.15     $ 0.33     $ 0.28  
At June 30, 2011 and 2010, options for 21,500 and 306,840 shares, respectively, were not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive.
5. SECURITIES
All securities held by the Company as of June 30, 2011 and December 31, 2010 were classified as available for sale and are carried at fair value. Unrealized gains and losses, net of tax, are excluded from earnings and reported as a separate component of stockholders’ equity. Gains or losses on the sale of available-for-sale securities are determined using the specific identification method. Premiums and discounts are recognized in interest income using the effective interest method over the period to maturity.
At June 30, 2011, the securities portfolio was $351.8 million, or 18.3% of total assets. At that date, 51.4% of the securities portfolio, or $180.8 million, was invested in corporate bonds. As of June 30, 2011, the fair value of corporate debt and marketable equity securities in the financial services sector amounted to $85.7 million, and $5.5 million, respectively.

 

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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.
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
(In thousands)   Cost     Gains     Losses     Value  
June 30, 2011
                               
Debt securities:
                               
Corporate bonds:
                               
Financial services
  $ 83,870     $ 1,928     $ (97 )   $ 85,701  
Industry and manufacturing
    25,681       1,102             26,783  
Consumer products and services
    26,395       1,430             27,825  
Technology
    12,729       520             13,249  
Healthcare
    19,664       889             20,553  
Other
    6,601       108             6,709  
 
                       
Total corporate bonds
    174,940       5,977       (97 )     180,820  
Government-sponsored enterprises
    77,142       197       (132 )     77,207  
Municipal bonds
    7,470       88       (11 )     7,547  
Residential mortgage-backed securities:
                               
Government-sponsored enterprises
    29,195       1,097       (21 )     30,271  
Private label
    8,142       346       (151 )     8,337  
 
                       
Total debt securities
    296,889       7,705       (412 )     304,182  
 
                       
Marketable equity securities:
                               
Common stocks:
                               
Financial services
    5,193       548       (221 )     5,520  
Industry and manufacturing
    4,137       1,407       (5 )     5,539  
Consumer products and services
    12,851       2,294       (14 )     15,131  
Technology
    2,479       611       (22 )     3,068  
Healthcare
    2,783       328       (4 )     3,107  
Other
    3,304       328       (11 )     3,621  
 
                       
Total common stocks
    30,747       5,516       (277 )     35,986  
Money market mutual funds
    11,674             (13 )     11,661  
 
                       
Total marketable equity securities
    42,421       5,516       (290 )     47,647  
 
                       
 
                               
Total securities available for sale
  $ 339,310     $ 13,221     $ (702 )   $ 351,829  
 
                       
 
                               
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:
                               
Financial services
    5,482       975       (104 )     6,353  
Industry and manufacturing
    3,994       1,532             5,526  
Consumer products and services
    12,763       2,113       (29 )     14,847  
Technology
    3,189       512             3,701  
Healthcare
    3,253       341       (21 )     3,573  
Other
    2,663       123       (21 )     2,765  
 
                       
Total 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  
 
                       

 

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The amortized cost and fair value of debt securities by contractual maturity at June 30, 2011 are as follows. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties.
                                                                 
    Within 1 year     Over 1 year to 5 years     Over 5 years     Total  
    Amortized     Fair     Amortized     Fair     Amortized     Fair     Amortized     Fair  
(In thousands)   Cost     Value     Cost     Value     Cost     Value     Cost     Value  
Corporate bonds:
                                                               
Financial services
  $ 20,008     $ 20,321     $ 53,363     $ 54,919     $ 10,499     $ 10,461     $ 83,870     $ 85,701  
Industry and manufacturing
    6,579       6,712       19,102       20,071                   25,681       26,783  
Consumer products and services
    9,730       10,089       16,665       17,736                   26,395       27,825  
Technology
    5,772       5,900       6,957       7,349                   12,729       13,249  
Healthcare
    1,007       1,028       18,657       19,525                   19,664       20,553  
Other
    4,052       4,069       2,549       2,640                   6,601       6,709  
 
                                               
Total corporate bonds
    47,148       48,119       117,293       122,240       10,499       10,461       174,940       180,820  
Government-sponsored enterprises
                21,402       21,432       55,740       55,775       77,142       77,207  
Municipal bonds
                2,570       2,576       4,900       4,971       7,470       7,547  
Residential mortgage-backed securities:
                                                               
Government-sponsored enterprises
                7       7       29,188       30,264       29,195       30,271  
Private label
                            8,142       8,337       8,142       8,337  
 
                                               
 
                                                               
Total
  $ 47,148     $ 48,119     $ 141,272     $ 146,255     $ 108,469     $ 109,808     $ 296,889     $ 304,182  
 
                                               
For the six months ended June 30, 2011, proceeds from sales of securities available for sale amounted to $31.3 million. Gross gains and losses of $3.9 million and $131,000, respectively, were realized on those sales.
Information pertaining to securities available for sale as of June 30, 2011 and December 31, 2010, with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
                                 
    Less Than Twelve Months     Over Twelve Months  
    Gross             Gross        
    Unrealized     Fair     Unrealized     Fair  
(In thousands)   Losses     Value     Losses     Value  
June 30, 2011
                               
Debt securities:
                               
Corporate bonds — financial services
  $ 93     $ 10,729     $ 4     $ 2,996  
Government-sponsored enterprises
    132       16,856              
Municipal bonds
    11       3,559              
Residential mortgage-backed securities:
                               
Government-sponsored enterprises
    21       331              
Private label
    151       552              
 
                       
Total debt securities
    408       32,027       4       2,996  
Marketable equity securities:
                               
Common stocks:
                               
Financial services
    169       1,404       52       553  
Industry and manufacturing
    5       116              
Consumer products and services
    14       859              
Technology
    22       738              
Healthcare
    4       247              
Other
    11       358              
 
                       
Total common stocks
    225       3,722       52       553  
Money market mutual funds
    13       980              
 
                       
Total marketable equity securities
    238       4,702       52       553  
 
                       
 
                               
Total temporarily impaired securities
  $ 646     $ 36,729     $ 56     $ 3,549  
 
                       

 

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    Less Than Twelve Months     Over Twelve Months  
    Gross             Gross        
    Unrealized     Fair     Unrealized     Fair  
(In thousands)   Losses     Value     Losses     Value  
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:
                               
Financial services
    15       706       89       735  
Consumer products and services
    29       882              
Healthcare
    21       240              
Other
    21       728              
 
                       
Total 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  
 
                       
The Company determined no securities were other-than-temporarily impaired for the six months ended June 30, 2011. 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 June 30, 2011, the net unrealized gain on the total debt securities portfolio was $7.3 million. At June 30, 2011, 27 debt securities had unrealized losses with aggregate depreciation of 1.2% from the Company’s amortized cost basis. In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, industry analysts’ reports and, to a lesser extent given the relatively insignificant levels of depreciation in the Company’s debt portfolio, spread differentials between the effective rates on instruments in the portfolio compared to risk-free rates. The unrealized losses are primarily caused by (a) recent declines in profitability and near-term profit forecasts by industry analysts resulting from a decline in the level of business activity and (b) recent downgrades by several industry analysts. The contractual terms of these investments do not permit the companies to settle the security at a price less than the par value of the investment. The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments. Therefore, it is expected that the bonds would not be settled at a price less than the par value of the investment. Because (1) the Company does not intend to sell the securities; (2) the Company does not believe it is “more likely than not” that the Company will be required to sell the securities before recovery of its amortized cost basis; and (3) the present value of expected cash flows is sufficient to recover the entire amortized cost basis of the securities, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2011.
As of June 30, 2011, the net unrealized gain on the total equity portfolio was $5.2 million. At June 30, 2011, 13 marketable equity securities have unrealized losses with aggregate depreciation of 5.2% from the Company’s cost basis. Although the issuers have shown declines in earnings as a result of the weakened economy, no credit issues have been identified that cause management to believe the decline in market value is other than temporary, and the Company has the ability and intent to hold these investments until a recovery of fair value. In analyzing an equity issuer’s financial condition, management considers industry 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.

 

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6. LOANS
The Company’s 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:
                                 
    June 30, 2011     December 31, 2010  
(Dollars in thousands)   Amount     %     Amount     %  
Real estate loans:
                               
Residential real estate:
                               
One-to four-family
  $ 393,659       32.3 %   $ 402,887       34.0 %
Multi-family
    176,325       14.5       135,290       11.4  
Home equity lines of credit
    62,088       5.1       62,750       5.3  
Commercial real estate
    456,393       37.5       433,504       36.6  
Construction
    90,591       7.4       113,142       9.6  
 
                       
Total real estate loans
    1,179,056       96.8       1,147,573       96.9  
Commercial business loans
    33,341       2.7       30,189       2.6  
Consumer
    5,613       0.5       6,043       0.5  
 
                       
Total loans
    1,218,010       100.0 %     1,183,805       100.0 %
 
                           
Allowance for loan losses
    (10,861 )             (10,155 )        
Net deferred loan origination fees
    (90 )             (88 )        
 
                           
 
                               
Loans, net
  $ 1,207,059             $ 1,173,562          
 
                           
The Company has transferred a portion of its originated commercial real estate loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying balance sheets. The Company and participating lenders share ratably in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments to participating lenders and disburses required escrow funds to relevant parties. At June 30, 2011 and December 31, 2010, the Company was servicing loans for participants aggregating $24.3 million and $22.5 million, respectively.
As a result of the Mt. Washington Co-operative Bank (“Mt. Washington”) acquisition in January 2010, the Company acquired loans at fair value of $345.3 million. Included in this amount was $27.7 million of loans with evidence of deterioration of credit quality since origination for which it was probable, at the time of the acquisition, that the Company would be unable to collect all contractually required payments receivable. The Company’s evaluation of loans with evidence of credit deterioration as of the acquisition date resulted in a nonaccretable discount of $7.6 million, which is defined as the loan’s contractually required payments receivable in excess of the amount of its cash flows expected to be collected. The Company considered factors such as payment history, collateral values, and accrual status when determining whether there was evidence of deterioration of the loan’s credit quality at the acquisition date.
The following is a summary of the outstanding balance of the acquired loans with evidence of credit deterioration:
                 
    June 30,     December 31,  
(In thousands)   2011     2010  
Residential real estate:
               
One-to four-family
  $ 8,047     $ 10,685  
Multi-family
    1,881       2,120  
Home equity lines of credit
    393       667  
Commercial real estate
    3,550       4,769  
Construction
    2,410       2,361  
 
           
Total mortgage loans on real estate
    16,281       20,602  
 
           
Other loans:
               
Commercial business loans
    100       111  
Consumer
    4       5  
 
           
 
    104       116  
 
           
 
               
Outstanding principal balance
    16,385       20,718  
Nonaccretable discount
    (3,618 )     (4,216 )
 
           
 
               
Carrying amount
  $ 12,767     $ 16,502  
 
           

 

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An analysis of the allowance for loan losses and related information follows:
                                                                         
                    Home                                        
    One-to     Multi-     equity lines     Commercial             Commercial                    
(In thousands)   four-family     family     of credit     real estate     Construction     business     Consumer     Unallocated     Total  
 
    For the Three Months Ended June 30, 2011
Beginning Balance
  $ 1,078     $ 1,273     $ 177     $ 5,976     $ 1,296     $ 492     $ 31     $     $ 10,323  
Provision for loan loss
    150       68       (2 )     7       154       60       49             486  
Charge-offs
    (31 )                       (37 )     (14 )     (18 )           (100 )
Recoveries
    51       41             10       36             14             152  
 
                                                     
Ending Balance
  $ 1,248     $ 1,382     $ 175     $ 5,993     $ 1,449     $ 538     $ 76     $     $ 10,861  
 
                                                     
 
                                                                       
    For the Six Months Ended June 30, 2011
Beginning Balance
  $ 1,130     $ 1,038     $ 227     $ 5,238     $ 2,042     $ 448     $ 32     $     $ 10,155  
Provision for loan loss
    200       301       (26 )     819       (652 )     123       63             828  
Charge-offs
    (135 )           (27 )     (74 )     (231 )     (33 )     (48 )           (548 )
Recoveries
    53       43       1       10       290             29             426  
 
                                                     
Ending Balance
  $ 1,248     $ 1,382     $ 175     $ 5,993     $ 1,449     $ 538     $ 76     $     $ 10,861  
 
                                                     
 
                                                                       
    At June 30, 2011
Amount of allowance for loan losses for loans deemed to be impaired
  $ 94     $     $ 8     $ 69     $     $     $     $     $ 171  
Amount of allowance for loan losses for loans not deemed to be impaired
    1,154       1,382       167       5,924       1,449       538       76             10,690  
 
                                                     
 
  $ 1,248     $ 1,382     $ 175     $ 5,993     $ 1,449     $ 538     $ 76     $     $ 10,861  
 
                                                     
Amount of allowance for loan losses for loans acquired with deteriorated credit quality included above
  $     $     $     $ 5     $     $     $     $     $ 5  
 
                                                     
 
Loans deemed to be impaired
  $ 4,601     $ 4,191     $ 124     $ 10,995     $ 27,028     $ 616     $     $     $ 47,555  
Loans not deemed to be impaired
    389,058       172,134       61,964       445,398       63,563       32,725       5,613             1,170,455  
 
                                                     
 
  $ 393,659     $ 176,325     $ 62,088     $ 456,393     $ 90,591     $ 33,341     $ 5,613     $     $ 1,218,010  
 
                                                     
 
                                                                       
    December 31, 2010
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 loan losses 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  
 
                                                     

 

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                    Home                                        
    One-to     Multi-     equity lines     Commercial             Commercial                    
(In thousands)   four-family     family     of credit     real estate     Construction     business     Consumer     Unallocated     Total  
 
    For the Three Months Ended June 30, 2010
Beginning Balance
  $ 1,931     $ 918     $ 129     $ 4,869     $ 2,386     $ 257     $ 139     $     $ 10,629  
Provision for loan loss
    531       128             8       2       88       37             794  
Charge-offs
    (157 )                                   (29 )           (186 )
Recoveries
    23                                     5             28  
 
                                                     
Ending Balance
  $ 2,328     $ 1,046     $ 129     $ 4,877     $ 2,388     $ 345     $ 152     $     $ 11,265  
 
                                                     
 
                                                                       
    For the Six Months Ended June 30, 2010
Beginning Balance
  $ 1,730     $ 467     $ 128     $ 4,435     $ 1,859     $ 586     $ 37     $     $ 9,242  
Provision for loan loss
    710       579       1       442       529       (241 )     148             2,168  
Charge-offs
    (158 )                                   (50 )           (208 )
Recoveries
    46                                     17             63  
 
                                                     
Ending Balance
  $ 2,328     $ 1,046     $ 129     $ 4,877     $ 2,388     $ 345     $ 152     $     $ 11,265  
 
                                                     
 
                                                                       
    At June 30, 2010
Amount of allowance for loan losses for loans deemed to be impaired
  $ 576     $ 71     $     $ 236     $ 256     $ 84     $     $     $ 1,223  
Amount of allowance for loan losses for loans not deemed to be impaired
    1,752       975       129       4,641       2,132       261       152             10,042  
 
                                                     
 
  $ 2,328     $ 1,046     $ 129     $ 4,877     $ 2,388     $ 345     $ 152     $     $ 11,265  
 
                                                     
Amount of allowance for loan losses for loans acquired with deteriorated credit quality included above
  $     $     $     $ 41     $     $     $     $     $ 41  
 
                                                     
 
                                                                       
Loans deemed to be impaired
  $ 4,066     $ 3,141     $ 100     $ 7,834     $ 16,251     $ 107     $     $     $ 31,499  
Loans not deemed to be impaired
    421,097       120,735       72,837       388,431       111,167       30,528       7,901             1,152,696  
 
                                                     
 
  $ 425,163     $ 123,876     $ 72,937     $ 396,265     $ 127,418     $ 30,635     $ 7,901     $     $ 1,184,195  
 
                                                     
The following table sets forth the breakdown of the allowance for loan losses by loan category at the periods indicated:
                                                 
    June 30, 2011     December 31, 2010  
                    % of                     % of  
            % of     Loans in             % of     Loans in  
            Allowance     Category             Allowance     Category  
            to Total     of Total             to Total     of Total  
(Dollars in thousands)   Amount     Allowance     Loans     Amount     Allowance     Loans  
Real estate loans:
                                               
Residential real estate:
                                               
One-to four-family
  $ 1,248       11.5 %     32.3 %   $ 1,130       11.1 %     34.0 %
Multi-family
    1,382       12.7       14.5       1,038       10.2       11.4  
Home equity lines of credit
    175       1.6       5.1       227       2.2       5.3  
Commercial real estate
    5,993       55.2       37.5       5,238       51.7       36.6  
Construction
    1,449       13.3       7.4       2,042       20.1       9.6  
 
                                   
Total real estate loans
    10,247       94.3       96.8       9,675       95.3       96.9  
 
                                               
Commercial business loans
    538       5.0       2.7       448       4.4       2.6  
Consumer
    76       0.7       0.5       32       0.3       0.5  
 
                                   
 
                                               
Total loans
  $ 10,861       100.0 %     100.0 %   $ 10,155       100.0 %     100.0 %
 
                                   
 
                                               
Allowance to non-accrual loans
    21.08 %                     23.54 %                
Allowance to total loans outstanding
    0.89 %                     0.86 %                
Net charge-offs to average loans outstanding (annualized)
    0.02 %                     0.19 %                

 

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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 following table provides information about delinquencies in the Company’s loan portfolio at the dates indicated.
                                                                 
    June 30, 2011     December 31, 2010  
    30-59     60-89     90 Days             30-59     60-89     90 Days        
    Days     Days     or Greater     Total     Days     Days     or Greater     Total  
(In thousands)   Past Due     Past Due     Past Due     Past Due     Past Due     Past Due     Past Due     Past Due  
Real estate loans:
                                                               
Residential real estate:
                                                               
One-to four-family
  $ 5,168     $ 1,133     $ 5,642     $ 11,943     $ 4,434     $ 799     $ 7,400     $ 12,633  
Multi-family
                            2,630             860       3,490  
Home equity lines of credit
    919             864       1,783       1,129       322       1,769       3,220  
Commercial real estate
    1,333             2,872       4,205       1,265       534       2,735       4,534  
Construction
    609             12,285       12,894                   6,969       6,969  
 
                                               
Total real estate loans
    8,029       1,133       21,663       30,825       9,458       1,655       19,733       30,846  
 
                                                               
Commercial business loans
    789             601       1,390       15       48       385       448  
Consumer
    388       233             621       293       245       5       543  
 
                                               
Total
  $ 9,206     $ 1,366     $ 22,264     $ 32,836     $ 9,766     $ 1,948     $ 20,123     $ 31,837  
 
                                               
Delinquent loans at June 30, 2011 and December 31, 2010 included $4.9 million and $6.8 million of loans acquired with evidence of credit deterioration.
The following table provides information with respect to the Company’s non-performing assets at the dates indicated.
                 
    June 30,     December 31,  
(Dollars in thousands)   2011     2010  
Loans accounted for on a non-accrual basis:
               
Real estate loans:
               
Residential real estate:
               
One-to four-family
  $ 12,890     $ 11,529  
Multi-family
    3,928       2,246  
Home equity lines of credit
    2,564       2,408  
Commercial real estate
    9,452       11,290  
Construction
    22,175       15,326  
 
           
Total real estate loans
    51,009       42,799  
 
               
Commercial business loans
    524       335  
Consumer
           
 
           
 
               
Total non-accrual loans
    51,533       43,134  
 
               
Foreclosed assets
    5,111       4,080  
 
           
 
               
Total nonperforming assets
  $ 56,644     $ 47,214  
 
           
 
               
Non-performing loans to total loans
    4.23 %     3.64 %
Non-performing loans to total assets
    2.68 %     2.35 %
Non-performing assets to total assets
    2.94 %     2.57 %
Non-accrual loans at June 30, 2011 and December 31, 2010 included $7.3 million and $9.5 million of loans acquired with evidence of credit deterioration.

 

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The following tables provide information with respect to the Company’s impaired loans at the dates and for the periods indicated.
                                                                         
    June 30, 2011     Three Months Ended June 30, 2011     Six Months Ended June 30, 2011  
                          Interest                     Interest  
            Unpaid             Average     Interest     Income     Average     Interest     Income  
    Recorded     Principal     Related     Recorded     Income     Recognized     Recorded     Income     Recognized  
(In thousands)   Investment     Balance     Allowance     Investment     Recognized     on Cash Basis     Investment     Recognized     on Cash Basis  
Impaired loans without a valuation allowance:
                                                                       
One-to four-family
  $ 2,543     $ 2,867     $     $ 2,458     $ 53     $ 48     $ 2,547     $ 79     $ 75  
Multi-family
    4,162       4,191             4,278       110       88       4,096       183       176  
Home equity lines of credit
    100       100             100       2       2       100       4       4  
Commercial real estate
    4,084       4,201             6,483       60       38       6,650       120       103  
Construction
    24,458       27,028             24,733       432       172       22,641       822       377  
Commercial business loans
    537       616             298       10       8       255       20       12  
Consumer
                                                     
 
                                                     
Total
    35,884       39,003             38,350       667       356       36,289       1,228       747  
 
                                                     
 
                                                                       
Impaired loans with a valuation allowance:
                                                                       
One-to four-family
    1,591       1,734       94       1,452       24       18       1,445       48       38  
Multi-family
                                                     
Home equity lines of credit
    16       24       8       17                   17              
Commercial real estate
    6,463       6,794       69       4,744       109       71       4,758       211       142  
Construction
                                                     
Commercial business loans
                                                     
Consumer
                                                     
 
                                                     
Total
    8,070       8,552       171       6,213       133       89       6,220       259       180  
 
                                                     
 
                                                                       
Total impaired loans
  $ 43,954     $ 47,555     $ 171     $ 44,563     $ 800     $ 445     $ 42,509     $ 1,487     $ 927  
 
                                                     
                                                                         
    December 31, 2010     Three Months Ended June 30, 2010     Six Months Ended June 30, 2010  
                          Interest                     Interest  
            Unpaid             Average     Interest     Income     Average     Interest     Income  
    Recorded     Principal     Related     Recorded     Income     Recognized     Recorded     Income     Recognized  
(In thousands)   Investment     Balance     Allowance     Investment     Recognized     on Cash Basis     Investment     Recognized     on Cash Basis  
Impaired loans without a valuation allowance:
                                                                       
One-to four-family
  $ 3,255     $ 3,255     $     $ 1,693     $ 25     $ 14     $ 2,291     $ 50     $ 41  
Multi-family
    3,732       3,732             2,211       66       42       5,027       98       84  
Home equity lines of credit
    100       100             100       4       2       118       6       6  
Commercial real estate
    6,494       6,578             1,985       149       97       1,353       172       104  
Construction
    17,422       18,285             15,205       342       184       15,170       569       325  
Commercial business loans
    167       167             4                   2              
Consumer
                      4                   3              
 
                                                     
Total
    31,170       32,117             21,202       586       339       23,964       895       560  
 
                                                     
 
                                                                       
Impaired loans with a valuation allowance:
                                                                       
One-to four-family
    908       945       37       1,820       40       38       1,865       68       67  
Multi-family
                      755       12       6       772       25       15  
Home equity lines of credit
    17       25       8                                      
Commercial real estate
    5,178       5,216       38       5,761       72       43       3,868       149       82  
Construction
    171       189       18       662       22       7       802       36       7  
Commercial business loans
          19       19       11                   11              
Consumer
                                                     
 
                                                     
Total
    6,274       6,394       120       9,009       146       94       7,318       278       171  
 
                                                     
 
                                                                       
Total impaired loans
  $ 37,444     $ 38,511     $ 120     $ 30,211     $ 732     $ 433     $ 31,282     $ 1,173     $ 731  
 
                                                     

 

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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 tables provide information with respect to the Company’s risk rating at the dates indicated.
                                 
    June 30, 2011  
    Multi-family                      
    residential     Commercial             Commercial  
(In thousands)   real estate     real estate     Construction     business  
Loans rated 1 - 4
  $ 168,851     $ 447,375     $ 65,803     $ 32,881  
Loans rated 5
    7,474       9,018       24,788       460  
Loans rated 6
                       
Loans rated 7
                       
 
                       
 
                               
Total
  $ 176,325     $ 456,393     $ 90,591     $ 33,341  
 
                       
                                 
    December 31, 2010  
    Multi-family                      
    residential     Commercial             Commercial  
(In thousands)   real estate     real estate     Construction     business  
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  
 
                       

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of the financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Meridian Interstate Bancorp. The following discussion should be read in conjunction with the consolidated financial statements, notes and tables included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the Securities and Exchange Commission.
Forward Looking Statements
This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of Meridian Interstate Bancorp. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. Meridian Interstate Bancorp’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of Meridian Interstate Bancorp and its subsidiaries include, but are not limited to:
   
general economic conditions, either nationally or in our market area, that are worse than expected;
   
inflation and changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;
   
increased competitive pressures among financial services companies;
   
changes in consumer spending, borrowing and savings habits;
   
our ability to enter new markets successfully and take advantage of growth opportunities, and the possible dilutive effect of potential acquisitions or de novo branches, if any;
   
legislative or regulatory changes that adversely affect our business;
   
adverse changes in the securities markets;
   
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Securities and Exchange Commission;
   
inability of third-party providers to perform their obligations to us; and
   
changes in our organization, compensation and benefit plans.
Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. These factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of Meridian Interstate Bancorp’s loan or investment portfolios. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the Securities and Exchange Commission on March 16, 2011, under “Risk Factors,” which is available through the SEC’s website at www.sec.gov, as updated by subsequent filings with the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, Meridian Interstate Bancorp does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

 

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Critical Accounting Policies
The Company’s summary of significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in the 2010 Annual Report on Form 10-K for the year ended December 31, 2010. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management has identified accounting for the allowance for loan losses, the valuation of goodwill and analysis for impairment, other-than-temporary impairment of securities and the valuation of deferred tax assets and foreclosed real estate as the Company’s critical accounting policies.
Comparison of Financial Condition at June 30, 2011 and December 31, 2010
Assets
Total assets increased $88.1 million, or 4.8%, to $1.924 billion at June 30, 2011 from $1.836 billion at December 31, 2010. Cash and cash equivalents increased $71.3 million, or 45.8% to $226.8 million at June 30, 2011 from $155.5 million at December 31, 2010. Securities available for sale decreased $8.8 million, or 2.4%, to $351.8 million at June 30, 2011 from $360.6 million at December 31, 2010. Net loans increased $33.5 million, or 2.9%, to $1.207 billion at June 30, 2011 from $1.174 billion at December 31, 2010.
Asset Quality
Credit Risk Management
Our strategy for credit risk involves our maintaining and executing well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans.
When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status, including contacting the borrower by letter and phone at regular intervals. When the borrower is in default, we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Management informs the Executive Committee monthly of the amount of loans delinquent more than 30 days. Management provides detailed information to the Board of Directors on loans 60 or more days past due and all loans in foreclosure and repossessed property that we own.
Delinquencies
Total past due loans increased $999,000, or 3.1%, to $32.8 million at June 30, 2011 from $31.8 million at December 31, 2010, reflecting an increase of $2.1 million in loans 90 days or more past due partially offset by a decrease of $1.1 million in loans 30 to 89 days past due. Delinquent loans at June 30, 2011 included $13.8 million of loans acquired in the Mt. Washington merger, including $5.7 million that were 30 to 59 days past due, $417,000 that were 60 to 89 days past due and $7.6 million that were 90 days or more past due. At June 30, 2011, non-accrual loans exceed loans 90 days or more past due primarily due to loans which were placed on non-accrual status based on a determination that the ultimate collection of all principal and interest due was not expected and certain loans that remain on non-accrual status until they attain a sustained payment history of six months.
Non-performing Assets
Non-performing assets include loans that are 90 or more days past due or on non-accrual status and real estate and other loan collateral acquired through foreclosure and repossession. Loans 90 days or more past due may remain on an accrual basis if adequately collateralized and in the process of collection. At June 30, 2011, 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.
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.

 

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Non-performing loans increased to $51.5 million, or 4.23% of total loans outstanding at June 30, 2011, from $43.1 million, or 3.64% of total loans outstanding at December 31, 2010 primarily due to increases of $6.8 million in non-accrual construction loans, $1.7 million in non-accrual multi-family loans and $1.4 million in non-accrual one-to four-family loans. Non-performing assets increased to $56.6 million, or 2.94% of total assets, at June 30, 2011, from $47.2 million, or 2.57% of total assets, at December 31, 2010. Non-performing assets at June 30, 2011 included $16.9 million acquired in the Mt. Washington merger, comprised of $13.7 million of non-performing loans and $3.2 million of foreclosed real estate. Interest income that would have been recorded for the six months ended June 30, 2011 had nonaccruing loans and accruing loans past due 90 days or more been current according to their original terms amounted to $1.0 million as compared to $969,000 for the six months ended June 30, 2010.
Impaired Loans
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 loan’s effective interest rate, the loan’s 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 (“TDR”). 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 June 30, 2011 and considered any probable loss in determining the allowance for loan losses.
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 management’s 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.

 

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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 debtor’s financial difficulties, a concession is granted to the debtor that would not otherwise be considered.
The following table summarizes the Company’s TDRs at the dates indicated.
                 
    June 30,     December 31,  
(In thousands)   2011     2010  
TDRs on accrual status:
               
One-to four-family
  $ 658     $ 1,289  
 
           
 
    658       1,289  
TDRs on non-accrual status:
               
One-to four-family
    1,061       288  
Multi-family
    3,379        
Commercial real estate
    4,729       4,797  
Construction
    5,011       3,487  
 
           
 
    14,180       8,572  
 
           
 
               
Total TDRs
  $ 14,838     $ 9,861  
 
           
The increase in multi-family TDRs during the first six months of 2011 was due to a $3.5 million loan which was originated to consolidate five loans of an existing six-loan relationship. Of this amount, $375,000 was utilized to pay delinquent real estate taxes and other fees. The restructure and consolidation of this relationship reflected a slight increase in the monthly payment amount based on the combined monthly payment of the loans prior to consolidation and a slight increase in the interest rate to 6.875% (previous blended rate was 6.60%). The interest rate is equal to the Five Year Federal Home Loan Bank Advance Rate plus 275 basis points and the loan term is 30 years. No charge offs have been incurred on this loan.
The increase in construction TDRs was due to a $1.9 million loan which was originated to consolidate a two-loan relationship. The restructure and consolidation of this relationship reflects a six month interest only balloon note with a fixed interest rate of 6% (a reduction of 50 basis points from the original loan). The Bank incurred charge offs totaling $194,000 on this loan during the first three months of 2011.
The increase in one-to four-family TDRs was due to three residential loan modifications completed during the first six months of 2011. 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
Certain loans are identified during the Company’s loan review process that are currently performing in accordance with their contractual terms and we expect to receive payment in full of principal and interest, but it is deemed probable that we will be unable to collect all the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. This may result from deteriorating conditions such as cash flows, collateral values or creditworthiness of the borrower. These loans are classified as impaired but are not accounted for on a non-accrual basis. There were no potential problem loans identified at June 30, 2011 other than those already classified as non-performing, impaired or troubled debt restructurings.

 

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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 management’s 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.
The Company’s provision for loan losses was $486,000 for the quarter ended June 30, 2011 compared to $794,000 for the quarter ended June 30, 2010. For the six months ended June 30, 2011, the provision for loan losses was $828,000 compared to $2.2 million for the six months ended June 30, 2010. These changes were based primarily on management’s assessment of loan portfolio growth and composition changes, an ongoing evaluation of credit quality and current economic conditions. In addition, the reductions in the provision for loan losses were primarily due to lower provision expense related to specific reserves recorded for impaired loans for the second quarter and six months ended June 30, 2011 compared to the same periods in 2010. The allowance for loan losses was $10.9 million or 0.89% of total loans outstanding at June 30, 2011, compared to $10.2 million or 0.86% of total loans outstanding at December 31, 2010. The Company continues to assess the adequacy of its allowance for loan losses in accordance with established policies.
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 Company’s 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.
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 June 30, 2011, core deposits were 54.0% of total deposits. Deposits increased $81.6 million, or 5.6%, to $1.537 billion at June 30, 2011 from $1.455 million at December 31, 2010, primarily as a result of growth of $72.1 million in core deposits. The growth for the six months ended June 30, 2011 also reflects $26.8 million of new deposits in the three branches opened during the first half of 2011.
The following table summarizes the period end balance and the composition of deposits:
                                 
    June 30, 2011     December 31, 2010  
            Percent of             Percent of  
(Dollars in thousands)   Balance     Total Deposits     Balance     Total Deposits  
Demand deposits
  $ 122,833       8.0 %   $ 111,423       7.7 %
NOW deposits
    134,592       8.8       134,677       9.3  
Money market deposits
    369,289       24.0       323,619       22.2  
Regular and other deposits
    203,332       13.2       188,178       12.9  
Certificates of deposit
    706,740       46.0       697,318       47.9  
 
                       
 
                               
Total
  $ 1,536,786       100.0 %   $ 1,455,215       100.0 %
 
                       

 

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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 short-term funding source for the Bank. At June 30, 2011, total borrowings decreased $10.2 million, or 6.8%, to $138.5 million at June 30, 2011 from $148.7 million at December 31, 2010, reflecting $20.7 million of reductions in Federal Home Loan Bank advances partially offset by a $10.5 million increase in short-term borrowings. At June 30, 2011 and December 31, 2010, FHLB advances totaled $116.0 million and $136.7 million, respectively, with a weighted average rate of 2.58% and 2.63% at the end of each period. At June 30, 2011 and December 31, 2010, federal funds purchased totaled $22.5 million and $12.0 million, respectively, with a weighted average rate of 0.20% at the end of each of the period. At June 30, 2011, 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.
Stockholders’ Equity
Total stockholders’ equity increased $3.8 million, or 1.8%, to $219.5 million at June 30, 2011, from $215.6 million at December 31, 2010. The increase for the six months ended June 30, 2011 was due primarily to $7.4 million in net income, partially offset by a $3.4 million increase in treasury stock resulting from the Company’s repurchase of 249,182 shares. Stockholders’ equity to assets was 11.41% at June 30, 2011, compared to 11.74% at December 31, 2010. Book value per share increased to $9.87 at June 30, 2011 from $9.59 at December 31, 2010. Tangible book value per share increased to $9.25 at June 30, 2011 from $8.98 at December 31, 2010. Market price per share increased $1.90, or 16.1%, to $13.69 at June 30, 2011 from $11.79 at December 31, 2010. At June 30, 2011, the Company and the Bank continued to exceed all regulatory capital requirements.

 

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Results of Operations for the Three and Six Months Ended June 30, 2011 and 2010
Net Income
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.
The Company recorded net income of $4.2 million, or $0.19 per diluted share, for the quarter ended June 30, 2011 compared to $3.2 million, or $0.15 per diluted share, for the quarter ended June 30, 2010. Income before income tax expense increased $1.6 million to $6.5 million, the net result of a decrease in the provision for loan loss of $308,000 and an increase in non-interest income of $3.2 million, partially offset by a decrease in net interest income of $1.2 million and an increase in non-interest expense of $744,000.
For the six months ended June 30, 2011, net income was $7.4 million, or $0.33 per diluted share compared to $6.1 million, or $0.28 per diluted share, for the six months ended June 30, 2010. Income before income tax expense increased $2.1 million to $11.6 million, the net result of a decrease in the provision for loan loss of $1.3 million and an increase in non-interest income of $4.4 million, partially offset by a decrease in net interest income of $1.6 million and an increase in non-interest expense of $2.0 million.
Return on average equity increased to 7.56% for the quarter ended June 30, 2011 and 6.73% for the six months ended June 30, 2011, compared to 6.24% and 5.94% for the respective periods of 2010. Return on average assets increased to 0.87% for the quarter ended June 30, 2011 and 0.78% for the six months ended June 30, 2011, compared to 0.75% and 0.72% for the respective periods of 2010.
Net Interest Income
Net interest income decreased $1.2 million, or 8.0%, to $14.1 million for the quarter ended June 30, 2011 from $15.3 million for the quarter ended June 30, 2010. The net interest rate spread and net interest margin were 3.02% and 3.20%, respectively, for the quarter ended June 30, 2011 compared to 3.67% and 3.85%, respectively, for the quarter ended June 30, 2010. For the six months ended June 30, 2011, net interest income decreased $1.6 million, or 5.2%, to $28.5 million from $30.1 million for the six months ended June 30, 2010. The net interest rate spread and net interest margin were 3.12% and 3.30%, respectively, for the six months ended June 30, 2011 compared to 3.71% and 3.88%, respectively, for the six months ended June 30, 2010. The decreases in net interest income were due primarily to deposit growth that was in excess of loan growth along with declines in yields on loans and securities for the second quarter and six months ended June 30, 2011 compared to the same periods in 2010.
The Company’s yield on loans declined by 33 basis points to 5.43%, which was partially offset by the increase in the average balance of the loan portfolio, which is principally comprised of real estate loans, of $21.9 million, or 1.9%, to $1.193 billion for the quarter ended June 30, 2011 compared to the quarter ended June 30, 2010. For the six months ended June 30, 2011, the yield on loans declined by 23 basis points to 5.51%, which was partially offset by the increase in the average balance of the loan portfolio of $32.4 million, or 2.8%, to $1.194 billion compared to the six months ended June 30, 2010.
The average balance of the Company’s interest-bearing deposits increased $158.3 million, or 12.8%, to $1.399 billion, which was partially offset by a decline in the cost of interest-bearing deposits of seven basis points to 1.32% for the quarter ended June 30, 2011 compared to the quarter ended June 30, 2010. For the six months ended June 30, 2011, the average balance of interest-bearing deposits increased $157.9 million, or 12.9%, to $1.378 billion, which was partially offset by a decline in the cost of interest-bearing deposits of seven basis points to 1.34% compared to the quarter ended June 30, 2010.
The Company’s yield on interest-earning assets declined by 75 basis points to 4.42% for the quarter ended June 30, 2011 compared to 5.17% for the quarter ended June 30, 2010, while the cost of interest-bearing liabilities declined ten basis points to 1.40% for the quarter ended June 30, 2011 compared to 1.50% for the quarter ended June 30, 2010. For the six months ended June 30, 2011, the yield on interest-earning assets declined by 67 basis points to 4.55% compared to 5.22% for the six months ended June 30, 2010, while cost of interest-bearing liabilities declined by eight basis points to 1.43% compared to 1.51% for the six months ended June 30, 2010.

 

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Average Balance Sheets and Related Yields and Rates
The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of these tables, average balances have been calculated using daily average balances, and non-accrual loans are included in average balances but are not deemed material. Loan fees are included in interest income on loans but are not material. None of the income reflected in the following table is tax-exempt income.
                                                 
    For the Three Months Ended June 30,  
    2011     2010  
    Average             Yield/     Average             Yield/  
(Dollars in thousands)   Balance     Interest     Cost (4)     Balance     Interest     Cost (4)  
Assets:
                                               
Interest-earning assets:
                                               
Loans (1)
  $ 1,193,195     $ 16,164       5.43 %   $ 1,171,274     $ 16,829       5.76 %
Securities and certificates of deposits
    394,273       3,187       3.24       351,891       3,634       4.14  
Other interest-earning assets
    177,701       117       0.26       67,882       36       0.21  
 
                                       
Total interest-earning assets
    1,765,169       19,468       4.42       1,591,047       20,499       5.17  
 
                                           
Noninterest-earning assets
    140,093                       134,686                  
 
                                       
Total assets
  $ 1,905,262                     $ 1,725,733                  
 
                                           
 
                                               
Liabilities and stockholders’ equity:
                                               
Interest-bearing liabilities:
                                               
NOW deposits
  $ 129,434       141       0.44     $ 114,469       136       0.48  
Money market deposits
    363,043       872       0.96       307,323       888       1.16  
Regular and other deposits
    200,490       277       0.55       186,255       256       0.55  
Certificates of deposit
    706,260       3,326       1.89       632,873       3,030       1.92  
 
                                       
Total interest-bearing deposits
    1,399,227       4,616       1.32       1,240,920       4,310       1.39  
Borrowings
    148,454       791       2.14       156,160       910       2.34  
 
                                       
Total interest-bearing liabilities
    1,547,681       5,407       1.40       1,397,080       5,220       1.50  
 
                                           
Noninterest-bearing demand deposits
    119,346                       104,493                  
Other noninterest-bearing liabilities
    17,772                       16,497                  
 
                                           
Total liabilities
    1,684,799                       1,518,070                  
Total stockholders’ equity
    220,463                       207,663                  
 
                                           
Total liabilities and stockholders’ equity
  $ 1,905,262                     $ 1,725,733                  
 
                                           
 
                                               
Net interest-earning assets
  $ 217,488                     $ 193,967                  
 
                                           
Net interest income
          $ 14,061                     $ 15,279          
 
                                           
Interest rate spread (2)
                    3.02 %                     3.67 %
Net interest margin (3)
                    3.20 %                     3.85 %
Average interest-earning assets to average interest-bearing liabilities
            114.05 %                     113.88 %        
 
                                               
Supplemental Information:
                                               
Total deposits, including noninterest-bearing demand deposits
  $ 1,518,573     $ 4,616       1.22 %   $ 1,345,413     $ 4,310       1.28 %
Total deposits and borrowings, including noninterest-bearing demand deposits
  $ 1,667,027     $ 5,407       1.30 %   $ 1,501,573     $ 5,220       1.39 %
     
(1)  
Loans on non-accrual status are included in average balances.
 
(2)  
Interest rate spread represents the difference between the yield on interest-earning assets and
the cost of interest-bearing liabilities.
 
(3)  
Net interest margin represents net interest income divided by average interest-earning assets.
 
(4)  
Annualized.

 

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    For the Six Months Ended June 30,  
    2011     2010  
    Average             Yield/     Average             Yield/  
(Dollars in thousands)   Balance     Interest     Cost (4)     Balance     Interest     Cost (4)  
Assets:
                                               
Interest-earning assets:
                                               
Loans (1)
  $ 1,193,679     $ 32,610       5.51 %   $ 1,161,329     $ 33,039       5.74 %
Securities and certificates of deposits
    383,668       6,553       3.44       346,640       7,297       4.25  
Other interest-earning assets
    166,067       202       0.25       53,551       48       0.18  
 
                                       
Total interest-earning assets
    1,743,414       39,365       4.55       1,561,520       40,384       5.22  
 
                                           
Noninterest-earning assets
    138,059                       136,662                  
 
                                       
Total assets
  $ 1,881,473                     $ 1,698,182                  
 
                                           
 
                                               
Liabilities and stockholders’ equity:
                                               
Interest-bearing liabilities:
                                               
NOW deposits
  $ 129,233       290       0.45     $ 111,137       265       0.48  
Money market deposits
    349,978       1,739       1.00       304,069       1,781       1.18  
Regular and other deposits
    196,104       537       0.55       182,616       502       0.55  
Certificates of deposit
    702,714       6,623       1.90       622,354       5,961       1.93  
 
                                       
Total interest-bearing deposits
    1,378,029       9,189       1.34       1,220,176       8,509       1.41  
Borrowings
    152,281       1,680       2.22       156,040       1,825       2.36  
 
                                       
Total interest-bearing liabilities
    1,530,310       10,869       1.43       1,376,216       10,334       1.51  
 
                                           
Noninterest-bearing demand deposits
    116,294                       99,701                  
Other noninterest-bearing liabilities
    15,579                       16,664                  
 
                                           
Total liabilities
    1,662,183                       1,492,581                  
Total stockholders’ equity
    219,290                       205,601                  
 
                                           
Total liabilities and stockholders’ equity
  $ 1,881,473                     $ 1,698,182                  
 
                                           
 
                                               
Net interest-earning assets
  $ 213,104                     $ 185,304                  
 
                                           
Net interest income
          $ 28,496                     $ 30,050          
 
                                           
Interest rate spread (2)
                    3.12 %                     3.71 %
Net interest margin (3)
                    3.30 %                     3.88 %
Average interest-earning assets to average interest-bearing liabilities
            113.93 %                     113.46 %        
 
                                               
Supplemental Information:
                                               
Total deposits, including noninterest-bearing demand deposits
  $ 1,494,323     $ 9,189       1.24 %   $ 1,319,877     $ 8,509       1.30 %
Total deposits and borrowings, including noninterest-bearing demand deposits
  $ 1,646,604     $ 10,869       1.33 %   $ 1,475,917     $ 10,334       1.41 %
     
(1)  
Loans on non-accrual status are included in average balances.
 
(2)  
Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
 
(3)  
Net interest margin represents net interest income divided by average interest-earning assets.
 
(4)  
Annualized.

 

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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.
                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011 Compared to 2010     2011 Compared to 2010  
    Increase (Decrease)     Increase (Decrease)  
    Due to             Due to        
(In thousands)   Volume     Rate     Total     Volume     Rate     Total  
Interest Income:
                                               
Loans
  $ 311     $ (976 )   $ (665 )   $ 905     $ (1,334 )   $ (429 )
Securities and certificates of deposits
    404       (851 )     (447 )     726       (1,470 )     (744 )
Other interest-earning assets
    70       11       81       132       22       154  
 
                                   
Total
    785       (1,816 )     (1,031 )     1,763       (2,782 )     (1,019 )
 
                                               
Interest Expense:
                                               
Deposits
    530       (224 )     306       1,086       (406 )     680  
Borrowings
    (43 )     (76 )     (119 )     (43 )     (102 )     (145 )
 
                                   
Total
    487       (300 )     187       1,043       (508 )     535  
 
                                   
Change in net interest income
  $ 298     $ (1,516 )   $ (1,218 )   $ 720     $ (2,274 )   $ (1,554 )
 
                                   
Provision for Loan Losses
The Company’s provision for loan losses was $486,000 for the quarter ended June 30, 2011 compared to $794,000 for the quarter ended June 30, 2010. For the six months ended June 30, 2011, the provision for loan losses was $828,000 compared to $2.2 million for the six months ended June 30, 2010. These changes were based primarily on management’s assessment of loan portfolio growth and composition changes, an ongoing evaluation of credit quality and current economic conditions. In addition, the reductions in the provision for loan losses were primarily due to lower provision expense related to specific reserves recorded for impaired loans for the second quarter and six months ended June 30, 2011 compared to the same periods in 2010. For further analysis of the changes in the allowance for loan losses including the provision for loans losses refer to “Management’s Discussion and Analysis of Results of Operations and Financial Condition -Allowance for Loan Losses.”
Non-Interest Income
Non-interest income increased $3.2 million, or 145.4%, to $5.5 million for the quarter ended June 30, 2011 from $2.2 million for the quarter ended June 30, 2010, primarily due to increases of $2.9 million in gain on sales of securities and $227,000 in equity income from the Company’s Hampshire First Bank affiliate. For the six months ended June 30, 2011, non-interest income increased $4.4 million, or 92.4%, to $9.1 million from $4.7 million for the six months ended June 30, 2010, primarily due to increases of $3.8 million in gain on sales of securities and $642,000 in equity income from Hampshire First Bank.
Gain on sales of securities, net, of $2.9 million for the quarter ended June 30, 2011 included $1.5 million from sales of corporate bonds, $907,000 from sales of collateralized debt obligations acquired as part of the Mt. Washington merger and $502,000 from sales of marketable equity securities. For the six months ended June 30, 2011, gain on sales of securities, net, of $3.8 million also included $867,000 from sales of marketable equity securities during the quarter ended March 31, 2011.

 

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Non-Interest Expense
Non-interest expense increased $744,000, or 6.3%, to $12.5 million for the quarter ended June 30, 2011 from $11.7 million for the quarter ended June 30, 2010, primarily due to increases of $612,000 in salaries and employee benefits and $160,000 in occupancy and equipment expenses. For the six months ended June 30, 2011, non-interest expense increased $2.0 million, or 8.7%, to $25.1 million from $23.1 million for the six months ended June 30, 2010, primarily due to increases of $1.5 million in salaries and employee benefits and $593,000 in occupancy and equipment expenses. The increases in salaries and employee benefits and occupancy and equipment expenses were associated with two new branches opened in January 2011, another new branch opened in May 2011 and costs associated with the expansion of residential and commercial lending capacity. The Company’s efficiency ratio was 75.22% for the quarter ended June 30, 2011 compared to 67.06% for the quarter ended June 30, 2010. For the six months ended June 30, 2011, the efficiency ratio was 74.29% compared to 66.39% for the quarter ended June 30, 2010.
The Bank received regulatory approval to open new branches in Cambridge and Danvers, Massachusetts as planned for the fourth quarter of 2011. In July, 2011, the Bank also announced the establishment of a new commercial and industrial lending division comprised of a veteran team of bankers. As a result of this planned business expansion, the Company expects to incur increases in staffing, facilities and other overhead expenses.
Income Tax Provision
The Company recorded a provision for income taxes of $2.4 million for the quarter ended June 30, 2010, reflecting an effective tax rate of 36.4%, compared to $1.7 million, or 34.8%, for the quarter ended June 30, 2010. For the six months ended June 30, 2011, the provision for income taxes was $4.3 million, reflecting an effective tax rate of 36.7%, compared to $3.4 million, or 35.9%, for the six months ended June 30, 2010. The increases in the income tax provision were primarily due to the increases in pre-tax income.

 

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Liquidity and Capital Management
Liquidity Management
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities of and payments on investment securities and borrowings from the Federal Home Loan Bank of Boston. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.
Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At June 30, 2011, cash and cash equivalents totaled $226.8 million. In addition, at June 30, 2011, we had $75.5 million of available borrowing capacity with the Federal Home Loan Bank of Boston, including a $9.4 million line of credit. On June 30, 2011, we had $116.0 million of advances outstanding.
A significant use of our liquidity is the funding of loan originations. At June 30, 2011 and December 31, 2010, we had total loan commitments outstanding, as follows:
                 
    June 30,     December 31,  
(In thousands)   2011     2010  
Unadvanced portion of existing loans:
               
Construction
  $ 71,298     $ 64,722  
Home equity line of credit
    39,164       39,791  
Other lines and letters of credit
    6,692       7,095  
Commitments to originate:
               
One-to four-family
    5,666       15,362  
Commercial real estate
    60,243       65,187  
Construction
    29,241       12,625  
Other loans
    4,821       2,783  
 
           
Total loan commitments outstanding
  $ 217,125     $ 207,565  
 
           
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 $13.2 million of balances as of June 30, 2011. We also have a seven year contract with our core data processing provider with an outstanding commitment of $14.5 million as of June 30, 2011, with total annual payments of $2.2 million. The Bank is also developing plans to open new branches on leased property in Cambridge, Massachusetts and Danvers, Massachusetts later in 2011.
Another significant use of our liquidity is the funding of deposit withdrawals. Certificates of deposit due within one year of June 30, 2011 totaled $474.0 million, or 67.1% 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.
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.

 

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Capital Management
Both Meridian Interstate Bancorp and East Boston Savings Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board and Federal Deposit Insurance Corporation, respectively, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2011, both Meridian Interstate Bancorp and East Boston Savings Bank exceeded all of their respective regulatory capital requirements.
The following table details both the Company’s and Bank’s actual and minimum regulatory capital ratios.
                                                 
                                    Minimum  
                                    To Be Well  
                    Minimum     Capitalized Under  
                    Capital     Prompt Corrective  
    Actual     Requirement     Action Provisions  
(Dollars in thousands)   Amount     Ratio     Amount     Ratio     Amount     Ratio  
June 30, 2011
                                               
Total Capital (to Risk Weighted Assets):
                                               
Company
  $ 211,862       14.2 %   $ 119,140       8.0 %     N/A       N/A  
Bank
    171,242       11.7       116,814       8.0     $ 146,018       10.0 %
 
                                               
Tier 1 Capital (to Risk Weighted Assets):
                                               
Company
    198,644       13.3       59,570       4.0       N/A       N/A  
Bank
    158,021       10.8       58,407       4.0       87,611       6.0  
 
                                               
Tier 1 Capital (to Average Assets):
                                               
Company
    198,644       10.6       75,287       4.0       N/A       N/A  
Bank
    158,021       8.5       73,980       4.0       92,475       5.0  
 
                                               
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  
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 Board’s 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 is also subject to the Federal Reserve Board’s notice guidelines for stock repurchases.

 

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In April 2010, the Commonwealth of Massachusetts Office of the Commissioner of Banks approved the Company’s application to repurchase up to 5% of its outstanding common stock not held by its mutual holding company parent, or 472,428 shares of its common stock. As of June 30, 2011, the Company had repurchased 438,009 shares of its stock at an average price of $12.45 per share as included in treasury stock, or 92.7% of the shares authorized for repurchase under the Company’s third stock repurchase program. The Company has repurchased 1,369,509 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 the six months ended June 30, 2011, 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.

 

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Item 3. quantitative and qualitative disclosures about market risk
Interest Rate Risk Management
Our earnings and the market value of our assets and liabilities are subject to fluctuations caused by changes in the level of interest rates. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk emphasizes: originating loans with adjustable interest rates; selling the residential real estate fixed-rate loans with terms greater than 15 years that we originate; and promoting core deposit products and short-term time deposits.
We have an Asset/Liability Management Committee to coordinate all aspects 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.
Net Interest Income Simulation Analysis
We analyze our interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income simulation. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest sensitive.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period.
Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income. Interest income simulations are completed quarterly and presented to the Asset/Liability Committee and the board of directors. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. The numerous assumptions used in the simulation process are reviewed by the Asset/Liability Committee and the Executive Committee on a quarterly basis. Changes to these assumptions can significantly affect the results of the simulation. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management’s 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 July 1, 2011 through June 30, 2012.
                         
Increase (Decrease)      
in Market Interest   Net Interest Income  
Rates (Rate Shock)   Amount     Change     Percent  
(Dollars in Thousands)  
300
  $ 55,474     $ (4,439 )     (7.41 )%
Flat
    59,913                  
-50
    58,439       (1,474 )     (2.46 )

 

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Item 4. Controls and Procedures
  (a)  
Disclosure Controls and Procedures Meridian Interstate Bancorp’s management, including Meridian Interstate Bancorp’s principal executive officer and principal financial officer, have evaluated the effectiveness of Meridian Interstate Bancorp’s “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 Bancorp’s 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 SEC’s rules and forms and (2) is accumulated and communicated to Meridian Interstate Bancorp’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
 
  (b)  
Internal Control over Financial Reporting There have not been any changes in Meridian Interstate Bancorp’s 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 Bancorp’s internal control over financial reporting.

 

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PART II — OTHER INFORMATION
Item 1. legal proceedings
Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
Item 1a. risk factors
For information regarding our risk factors, see “Risk Factors,” in our 2010 Annual Report on Form 10-K, filed with the SEC on March 16, 2011, which is available through the SEC’s website at www.sec.gov. As of June 30, 2011, our risk factors have not changed materially from those reported in the annual report. The risks described in our annual report are not the only risks that we face. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.
Item 2. unregistered sales of equity securities and use of proceeds
   
(a.) — (b.) Not applicable.
 
   
(c.) The following table sets forth information with respect to any purchase made by or on behalf of the Company during the indicated periods:
                                 
                            (d)  
                            Maximum Number  
                    (c)     (or Approximate  
                    Total Number of     Dollar Value) of  
                    Shares (or Units)     Shares (or Units)  
    (a)     (b)     Purchased as Part     that May Yet Be  
    Total Number of     Average Price     of Publicly     Purchased Under  
    Shares (or Units)     Paid Per Share (or     Announced Plans     the Plans or  
Period   Purchased     Unit)     or Programs (1)     Programs  
April 1 – 30, 2011
    50,000     $ 13.58       50,000       210,265  
May 1 – 31, 2011
    157,418     $ 13.57       157,418       52,847  
June 1 – 30, 2011
    18,428     $ 13.06       18,428       34,419  
 
                       
Total
    225,846     $ 13.53       225,846       34,419  
 
                       
     
(1)  
In April 2010, the Commonwealth of Massachusetts Office of the Commissioner of Banks approved the Company’s application to repurchase up to 5% of its outstanding common stock not held by its mutual holding company parent, or 472,428 shares of its common stock.
Item 3. defaults upon senior secutiries
Not applicable.
Item 4. [removed and reserved]
Item 5. other information
None.

 

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Item 6. Exhibits
       
3.1
    Amended and Restated Articles of Organization of Meridian Interstate Bancorp, Inc.*
3.2
    Amended and Restated Bylaws of Meridian Interstate Bancorp, Inc.*
3.3
    Articles of Correction of Meridian Interstate Bancorp, Inc.***
4
    Form of Common Stock Certificate of Meridian Interstate Bancorp, Inc.*
10.1
    Form of East Boston Savings Bank Employee Stock Ownership Plan*
10.2
    Form of East Boston Savings Bank Employee Stock Ownership Plan Trust Agreement*
10.3
    East Boston Savings Bank Employee Stock Ownership Plan Loan Agreement, Pledge Agreement and Promissory Note*
10.4
    Form of Amended and Restated Employment Agreement*
10.5
    Form of East Boston Savings Bank Employee Severance Compensation Plan*
10.6
    Form of Supplemental Executive Retirement Agreements with certain directors*
10.7
    [Reserved]
10.8
    [Reserved]
10.9
    [Reserved]
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
101
    The following financial statements for the quarter ended June 30,2011, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Changes in Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.
101.INS
    XBRL Instance Document
101.SCH
    XBRL Taxonomy Extension Schema Document
101.CAL
    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
    XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
    XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
    XBRL Taxonomy Extension Definition Linkbase Document
     
*  
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 Company’s 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 Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 16, 2010.

 

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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)
 
 
Dated: August 9, 2011  /s/ Richard J. Gavegnano    
  Richard J. Gavegnano   
  Chairman and Chief Executive Officer
(Principal Executive Officer) 
 
     
Dated: August 9, 2011  /s/ Mark L. Abbate    
  Mark L. Abbate   
  Senior Vice President, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer) 
 

 

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