UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
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Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For the
Fiscal Year Ended December 31, 2009
OR
o
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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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
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20-4652200
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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|
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10 Meridian Street, East Boston,
Massachusetts
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02128
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(Address
of Principal Executive Offices)
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Zip
Code
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(617)
567-1500
(Registrant’s
telephone number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act:
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Name
of Each
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Title of Each
Class
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Exchange on Which
Registered
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Common
Stock, no par value
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The
NASDAQ Global Select Stock Market,
LLC
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Securities
Registered Pursuant to Section 12(g) of the Act:
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None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
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.
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).
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. x
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 x 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).
The
aggregate market value of the common stock held by non-affiliates of the
Registrant, computed by reference to the closing price of such stock on June 30,
2009 was approximately $63,917,640. As of March 1, 2010, there were
22,612,674 outstanding shares of the Registrant’s common stock, the majority of
which are owned by the Registrant’s mutual holding company parent, Meridian
Financial Services, Incorporated.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the 2010 Annual Meeting of Stockholders of the
Registrant are incorporated by reference in Part III of this Form
10-K.
MERIDIAN INTERSTATE BANCORP
2009
FORM 10-K ANNUAL REPORT
TABLE
OF CONTENTS
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Page
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PART
I
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3
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4
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25
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31
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32
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33
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33
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PART
II
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33
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37
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38
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60
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61
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113
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113
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113
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PART
III
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114
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114
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114
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114
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114
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PART
IV
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115
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117
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PART
I
Forward Looking Statements
This report contains certain
“forward-looking statements,” which can be identified by the use of such words
as estimate, project, believe, intend, anticipate, plan, seek and similar
expressions. These forward looking statements
include:
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·
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statements
of our goals, intentions and
expectations;
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·
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statements
regarding our business plans, prospects, growth and operating
strategies;
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·
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statements
regarding the quality of our loan and investment portfolios;
and
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·
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estimates
of our risks and future costs and
benefits.
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These
forward-looking statements are subject to significant risks and
uncertainties. Actual results may differ materially from those
contemplated by the forward-looking statements due to, among others, the
following factors:
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·
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general
economic conditions, either nationally or in our market area, that are
worse than expected;
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·
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inflation
and changes in the interest rate environment that reduce our interest
margins or reduce the fair value of financial
instruments;
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·
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increased
competitive pressures among financial services
companies;
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·
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changes
in consumer spending, borrowing and savings
habits;
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·
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our
ability to enter new markets successfully and take advantage of growth
opportunities, and the possible dilutive effect of potential acquisitions
or de novo
branches, if any;
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·
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legislative
or regulatory changes that adversely affect our
business;
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·
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adverse
changes in the securities markets;
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·
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changes
in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the Financial Accounting Standards Board or the
Securities and Exchange Commission;
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·
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inability
of third-party providers to perform their obligations to us;
and
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·
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changes
in our organization, compensation and benefit
plans.
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Any of
the forward-looking statements that we make in this report and in other public
statements we make may later prove incorrect because of inaccurate assumptions
we might make, the factors illustrated above or other factors that we cannot
foresee. Because of these and other uncertainties, our actual future
results may be materially different from the results indicated by these
forward-looking statements and you should not rely on such
statements.
Meridian
Interstate Bancorp, Inc.
Meridian
Interstate Bancorp, Inc. is a Massachusetts mid-tier stock holding company that
was formed in 2006 by East Boston Savings Bank to be its holding
company. Meridian Interstate Bancorp owns all of East Boston Savings
Bank’s capital stock and directs, plans and coordinates East Boston Savings
Bank’s business activities. In addition, Meridian Interstate Bancorp
owns 40% of the capital stock of Hampshire First Bank, a New Hampshire chartered
bank, organized in 2006 and headquartered in Manchester, New
Hampshire. At December 31, 2009, Hampshire First Bank had assets of
$182.7 million. At December 31, 2009, Meridian Interstate Bancorp had
total assets of $1.2 billion, deposits of $922.5 million and stockholders’
equity of $200.4 million.
Meridian
Financial Services, Incorporated
Meridian
Financial Services, Incorporated is our Massachusetts-chartered mutual holding
company parent. As a mutual holding company, Meridian Financial
Services is a non-stock company. Meridian Financial Services owns
57.2% of Meridian Interstate Bancorp’s common stock. So long as
Meridian Financial Services exists, it will own a majority of the voting stock
of Meridian Interstate Bancorp and, through its Board of Trustees, will be able
to exercise voting control over most matters put to a vote of
stockholders. Of the 13 directors of Meridian Interstate Bancorp, 11
are also members of the Board of Trustees of Meridian Financial Services, which
is composed of 29 members. Meridian Financial Services does not
currently intend to engage in any business activity other than those relating to
owning a majority of the common stock of Meridian Interstate
Bancorp.
East
Boston Savings Bank
East
Boston Savings Bank is a Massachusetts-chartered stock savings bank that
operates from 13 full-service locations and one loan center in the greater
Boston metropolitan area. East Boston Savings Bank was originally
founded in 1848. We offer a variety of deposit and loan products to
individuals and businesses located in our primary market, which consists of
Essex, Middlesex and Suffolk Counties, Massachusetts.
We
operate as a community-oriented financial institution offering financial
services to consumers and businesses in our market area. We attract
deposits from the general public and use those funds to originate one- to
four-family real estate, multi-family and commercial real estate, construction,
commercial business and consumer loans which we primarily hold for
investment. In addition, a segment of our lending business involves
the purchase and sale of loan participation interests. We also offer
non-deposit financial products through a third-party network
arrangement. At December 31, 2009, we had total assets of $1.2
billion, deposits of $924.1 million and stockholders’ equity of $141.1
million. On January 4, 2010, East Boston Savings Bank completed its
acquisition of Mt. Washington Cooperative Bank (“Mt.
Washington”). As of December 31, 2009, Mt. Washington had total
assets of $496.2 million, deposits of 385.0 million and equity of $31.6 million.
Refer to Item 8 Financial
Statements and Supplementary Data, Note 2 to the consolidated financial
statements for information regarding the transaction.
Available
Information
Meridian
Interstate Bancorp is a public company and files interim, quarterly and annual
reports with the Securities and Exchange Commission. These respective
reports are on file and a matter of public record with the Securities and
Exchange Commission and may be read and copied at the Securities and Exchange
Commission’s Public Reference Room at 450 Fifth Street, NW, Washington, DC
20549. The public may obtain information on the operation of the Public
Reference Room by calling the Securities and Exchange Commission at
1-800-SEC-0330. The Securities and Exchange Commission maintains an Internet
site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC (http://www.sec.gov).
Our
website address is www.ebsb.com. Information
on our website should not be considered a part of this
report.
Market
Area
We
consider the greater Boston metropolitan area to be our primary market
area. While our primary deposit-gathering area is concentrated in the
greater Boston metropolitan area, our lending area encompasses a broader market
that includes most of eastern Massachusetts east of Route 93, including Cape
Cod, and portions of south-eastern New Hampshire and Maine. We
conduct our operations through our 13 full service offices and one loan center
located in the following counties, all of which are located in the greater
Boston metropolitan area: Essex (four offices and one loan center), Middlesex
(three offices) and Suffolk (six offices) Counties. The greater
Boston metropolitan area is the 11th largest metropolitan area in the United
States. Located adjacent to major transportation corridors, the
Boston metropolitan area provides a highly diversified economic base, with major
employment sectors ranging from services, manufacturing and wholesale retail
trade, to finance, technology and medical care. Based on data from
the Federal Reserve Bank of Boston, the unemployment rates for Massachusetts and
New Hampshire increased to 9.4% and 7.0%, respectively, for December 2009 from
6.4% and 4.3%, respectively, for the year earlier period. Home prices in
Massachusetts and New Hampshire declined at annual rates of 7.1% and 12.3%,
respectively, in the third quarter of 2009 compared to declines of 3.4% and
5.2%, respectively, for the year earlier period.
Competition
We face
significant competition for the attraction of deposits and origination of
loans. Our most direct competition for deposits has historically come
from the many financial institutions operating in our market area and, to a
lesser extent, from other financial service companies such as brokerage firms
and insurance companies. Several large holding companies operate
banks in our market area, including Bank of America Corporation, Banco Santander
(Sovereign Bank), TD Bank Financial Group, Citizens Financial Group, Inc. and
Eastern Bank. These institutions are significantly larger than us
and, therefore, have greater resources. We also face competition for
investors’ funds from money market funds, mutual funds and other corporate and
government securities. Based on data from the Federal Deposit Insurance
Corporation (the “FDIC”) as of June 30, 2009, East Boston Savings Bank had 0.59%
of the deposit market share within the Boston-Cambridge-Quincy,
Massachusetts – New Hampshire metropolitan statistical area.
Our
competition for loans comes from financial institutions in our market area and
from other financial service providers, such as mortgage companies and mortgage
brokers. Competition for loans also comes from the increasing number
of non-depository financial service companies entering the mortgage market, such
as insurance companies, securities companies and specialty finance
companies.
We expect
competition to remain intense in the future as a result of legislative,
regulatory and technological changes and the continuing trend of consolidation
in the financial services industry. Technological advances, for
example, have lowered barriers to entry, allowed banks to expand their
geographic reach by providing services over the internet and made it possible
for non-depository institutions to offer products and services that
traditionally have been provided by banks. Changes in federal law
permit affiliation among banks, securities firms and insurance companies, which
promotes a competitive environment in the financial services
industry.
Lending
Activities
Commercial and Multi-Family Real
Estate Loans
The
largest segment of our loan portfolio is fixed- and adjustable-rate mortgage
loans secured by commercial real estate and multi-family real
estate. At December 31, 2009, commercial real estate and multi-family
real estate loans were $350.6 million and $53.4 million, or 42.6% and 6.5%,
respectively, of our total loan portfolio. The commercial real estate
and multi-family loan portfolio consisted of $20.0 million of fixed-rate loans
and $384.0 million of adjustable-rate loans at December 31, 2009. We
currently target new individual commercial and multi-family real estate loan
originations to small- and mid-size owner occupants and investors in our market
area and can, by policy, originate loans to one borrower up to $15.0
million. Our commercial real estate and multi-family real estate
loans are generally secured by apartment buildings and properties used for
business purposes such as office buildings, industrial facilities and retail
facilities. We intend to continue to grow our commercial real estate
and multi-family loan portfolio, while maintaining prudent underwriting
standards. In addition to originating these loans, we also
participate in loans with other financial institutions.
We
originate a variety of fixed- and adjustable-rate commercial real estate and
multi-family real estate loans for terms up to 30 years. Interest
rates and payments on our adjustable-rate loans adjust every three or five years
and generally are adjusted to a rate equal to a percentage above the
corresponding U.S. Treasury rate or Federal Home Loan Bank borrowing rate. Most of our
adjustable-rate commercial real estate and multi-family real estate
loans
adjust
every five years and amortize over terms of 20 to 25 years. The
maximum amount by which the interest rate may be increased or decreased is
generally 2.5% per adjustment period, with a lifetime interest rate cap of 5%
over the initial interest rate of the loan. Loan amounts generally do not exceed
75% to 80% of the property’s appraised value at the time the loan is
originated.
At
December 31, 2009, loan participations purchased totaled $64.7 million,
including $20.8 million with Hampshire First Bank, in which the Company owns 40%
of the outstanding common stock. The properties securing these loans
are located primarily in eastern Massachusetts and southern New
Hampshire. Our underwriting practices with respect to loan
participations generally do not differ from loans that we
originate.
One- to Four-Family Residential
Loans
The
second largest segment of our loan portfolio is mortgage loans to enable
borrowers to purchase or refinance existing homes, most of which serve as the
primary residence of the owner. At December 31, 2009, one- to
four-family residential loans were $276.1 million, or 33.5% of our total loan
portfolio, consisting of $156.2 million and $119.9 million of fixed-rate and
adjustable-rate loans, respectively. We generally offer fixed-rate
loans with terms up to 30 years and adjustable-rate loans with terms up to 40
years. Generally, our fixed-rate loans conform to Fannie Mae and
Freddie Mac underwriting guidelines and those with longer terms (more than
fifteen years) are originated with the intention to sell. Our
adjustable-rate mortgage loans generally adjust annually or every three years
after an initial fixed period that ranges from three to seven
years. East Boston Savings Bank also offers fixed-rate bi-weekly
loans (loan payments are made every two weeks) and such loans were $128.8
million at December 31, 2009. Based on a decision by management in
January 2010 to reduce our exposure to interest-rate risk, fixed-rate bi-weekly
loans with an aggregate principal balance of $32.0 million were sold on February
26, 2010 for a gain of $564,000. East Boston Savings Bank also
transferred $2.7 million of fixed-rate bi-weekly loans from its portfolio to
loans held for sale on February 28, 2010 with the intention of completing
another sale by March 31, 2010. Management has the intent and ability to hold
the remaining fixed-rate bi-weekly loans in our portfolio for the foreseeable
future or until maturity or pay-off. Interest rates and payments on
our adjustable-rate loans generally are adjusted to a rate equal to a percentage
above the one or three year U.S. Treasury index. Depending on the
loan type, the maximum amount by which the interest rate may be increased or
decreased is generally 2% per adjustment period and the lifetime interest rate
caps range from 2% to 4% over the initial interest rate of the
loan. Our residential loans generally do not have prepayment
penalties.
Borrower
demand for adjustable-rate compared to fixed-rate loans is a function of the
level of interest rates, the expectations of changes in the level of interest
rates, and the difference between the interest rates and loan fees offered for
fixed-rate mortgage loans as compared to the interest rates and loan fees for
adjustable-rate loans. The relative amount of fixed-rate and
adjustable-rate mortgage loans that can be originated at any time is largely
determined by the demand for each in a competitive environment. The
loan fees, interest rates and other provisions of mortgage loans are determined
by us on the basis of our own pricing criteria and competitive market
conditions.
While
one- to four-family residential real estate loans are normally originated with
up to 30-year terms, such loans typically remain outstanding for substantially
shorter periods because borrowers often prepay their loans in full either upon
sale of the property pledged as security or upon refinancing the original
loan. Therefore, average loan maturity is a function of, among other
factors, the level of purchase and sale activity in the real estate market,
prevailing interest rates and the interest rates payable on outstanding
loans. We do not offer loans with negative amortization and generally
do not offer interest-only one- to four-family residential real estate
loans. Additionally, our current practice is generally (1) to sell to
the secondary market newly originated longer term (more than 15 year terms)
fixed-rate one- to four-family residential real estate loans, and (2) to
hold in our portfolio shorter-term fixed-rate loans, bi-weekly amortization
loans and adjustable-rate loans. Generally, loans are sold to Fannie
Mae and the Federal Home Loan Bank Mortgage Partnership Finance Program with
servicing retained.
We will
make loans with loan-to-value ratios up to 95% (100% for first time home buyers
only) with such value measured at origination; however, we generally require
private mortgage insurance for loans with a loan-to-value ratio over
80%. We require all properties securing mortgage loans to be
appraised by a licensed real estate appraiser. We generally require
title insurance on all first mortgage loans. Borrowers must obtain
hazard insurance, and flood insurance is required for loans on properties
located in a flood zone.
In an
effort to provide financing for first-time buyers, we offer five-year
adjustable-rate, bi-weekly and fixed-rate 30-year residential real estate loans
through the Massachusetts Housing Finance Agency First Time Home Buyer
Program. We offer mortgage loans through this program to qualified
individuals and originate the loans using modified underwriting guidelines,
reduced interest rates and loan conditions.
We also
offer loans secured by one- to four-family properties that are not
owner-occupied (“investment loans”). These loans consist primarily of
bi-weekly fixed-rate loans with terms up to 30 years and adjustable-rate loans
which adjust annually after an initial fixed period of three years or adjust
every three years after an initial fixed period of five
years. Investment loans generally can be made with a loan-to-value
ratio of up to 80% with such value measured at origination. At
December 31, 2009, investment loans totaled $24.6 million.
To
a lesser extent we also originate land loans primarily to local contractors and
developers for making improvements on approved one- to four- family building
lots. Such loans are generally written with a maximum 75%
loan-to-value ratio based upon the appraised value or purchase price, whichever
is less, for a term of up to three years. Interest rates on our land
loans are fixed for three years. At December 31, 2009, land loans
totaled $3.4 million.
Construction
Loans
At
December 31, 2009, construction loans were $94.1 million, or 11.4% of our total
loan portfolio, compared to $91.7 million, or 12.9% at December 31,
2008. We expect to continue some level of construction lending, when
appropriate, while maintaining a guarded, disciplined approach given the current
decline in the local real estate market. We remain focused on a
strong credit culture and underwriting standards, as described
below. In addition, we continue to carefully monitor the existing
construction portfolio for performance and project completion, with a goal of
moving completed commercial projects to the commercial real estate portfolio and
reviewing sales based projects for tracking toward construction
goals.
We
primarily make construction loans for commercial development projects, including
apartment buildings, small industrial buildings and retail and office
buildings. We also originate adjustable and bi-weekly loans to
individuals and to builders to finance the construction of residential
dwellings. Most of our construction loans are interest-only loans
that provide for the payment of only interest during the construction phase,
which is usually up to 12 to 24 months, although some construction loans
are renewed, generally for one or two additional years. At the end of
the construction phase, the loan may convert to a permanent mortgage loan or the
loan may be paid in full. Loans generally can be made with a maximum
loan to value ratio of 80% of the appraised market value upon completion of the
project. As appropriate to the underwriting, a “discounted cash flow
analysis” is utilized. Before making a commitment to fund a
construction loan, we require an appraisal of the property by an independent
licensed appraiser. We also will generally require an inspection of
the property before disbursement of funds during the term of the construction
loan.
We also
originate construction and site development loans to contractors and builders to
finance the construction of single-family homes and subdivisions. While we
may originate these loans whether or not the collateral property underlying the
loan is under contract for sale, we are considering each project carefully in
light of the current slow-down in the residential real estate market.
Residential real estate construction loans include single-family tract
construction loans for the construction of entry level residential
homes. Loans to finance the construction of single-family homes and
subdivisions are generally offered to experienced builders in our primary market
areas. The maximum loan-to-value limit applicable to these loans is
generally 75% to 80% of the appraised market value upon completion of the
project. Development plans are required from builders prior to making
the loan. Our loan officers are required to personally visit the proposed site
of the development and the sites of competing developments. We require
that builders maintain adequate insurance coverage. While maturity dates for
residential construction loans are largely a function of the estimated
construction period of the project, and generally do not exceed one year, land
development loans generally are for 18 to 24 months. Substantially all of our
residential construction loans have adjustable rates of interest based on U.S.
Treasury rates, Federal Home Loan Bank rates or The Wall Street Journal
prime rate, and during the term of construction, the accumulated interest is
added to the principal of the loan through an interest reserve.
Construction loan proceeds are disbursed periodically in increments as
construction progresses and as inspection by our approved inspectors
warrant.
At
December 31, 2009, we had $7.2 million in construction loans for one- to
four-family properties that will convert to permanent loans. Also at that
date, we had $86.9 million in construction loans on commercial and multi-family
real estate consisting of mixed-use and non-residential loans.
Home
Equity Lines of Credit
We offer
home equity lines of credit, which are secured by owner-occupied one- to
four-family residences. At December 31, 2009, the outstanding balance
owed on home equity lines of credit amounted to $30.0 million, or 3.6% of our
total loan portfolio. Home equity lines of credit have adjustable
rates of interest with ten-year draws
amortized
over 15 years that are indexed to the Prime Rate as published by The Wall Street Journal on
the last business day of the month. Our home equity lines either have
a monthly variable interest rate or an interest rate that is fixed for five
years and that adjusts in years six and eleven. We offer home equity
lines of credit with cumulative loan-to-value ratios generally up to 80%, when
taking into account both the balance of the home equity loans and first mortgage
loan.
The
procedures for underwriting home equity lines of credit include an assessment of
the applicant’s payment history on other debts and ability to meet existing
obligations and payments on the proposed loan. Although the
applicant’s creditworthiness is a primary consideration, the underwriting
process also includes a comparison of the value of the collateral to the
proposed loan amount. The procedures for underwriting one- to
four-family residential real estate loans apply equally to home equity
loans.
Commercial Business
Loans
We make
commercial business loans primarily in our market area to a variety of
professionals, sole proprietorships and small businesses. At December
31, 2009, commercial business loans were $18.0 million, or 2.2% of our total
loan portfolio, and we intend to increase the commercial business loans that we
originate. Commercial lending products include term loans and
revolving lines of credit. Commercial loans and lines of credit are
made with either variable or fixed rates of interest. Variable rates are based
on the prime rate as published in The Wall Street Journal, plus
a margin. Initial rates on fixed-rate business loans are generally
based on a corresponding U.S. Treasury or Federal Home Loan Bank rate, plus a
margin. Commercial business loans typically have shorter maturity
terms and higher interest spreads than real estate loans, but generally involve
more credit risk because of the type and nature of the collateral. We
are focusing our efforts on small- to medium-sized, privately-held companies
with local or regional businesses that operate in our market area.
When
making commercial loans, we consider the financial statements of the borrower,
our lending history with the borrower, the debt service capabilities of the
borrower, the projected cash flows of the business and the value of the
collateral, primarily accounts receivable, inventory and
equipment. Depending on the collateral used to secure the loans,
commercial loans are made in amounts of up to 80% of the value of the collateral
securing the loan. All of these loans are secured by assets of the
respective borrowers and were performing according to their original terms at
December 31, 2009.
Consumer
Loans
We
occasionally make fixed-rate second mortgage loans, automobile loans, loans
secured by passbook or certificate accounts and overdraft loans. At
December 31, 2009, consumer loans were $1.2 million, or 0.2% of total
loans. The procedures for underwriting consumer loans include an
assessment of the applicant’s payment history on other debts and ability to meet
existing obligations and payments on the proposed loan. Although the
applicant’s creditworthiness is a primary consideration, the underwriting
process also includes a comparison of the value of the collateral, if any, to
the proposed loan amount.
Loan
Underwriting Risks
Adjustable-Rate
Loans
While we
anticipate that adjustable-rate loans will better offset the adverse effects of
an increase in interest rates as compared to fixed-rate mortgages, an increased
monthly mortgage payment required of adjustable-rate loan borrowers in a rising
interest rate environment could cause an increase in delinquencies and
defaults. The marketability of the underlying property also may be
adversely affected in a high interest rate environment. In addition,
although adjustable-rate mortgage loans make our asset base more responsive to
changes in interest rates, the extent of this interest sensitivity is limited by
the annual and lifetime interest rate adjustment limits.
Commercial and Multi-Family Real
Estate Loans
Loans
secured by commercial and multi-family real estate generally have larger
balances and involve a greater degree of risk than one- to four-family
residential mortgage loans. Of primary concern in commercial and
multi-family real estate lending is the borrower’s creditworthiness and the
feasibility and cash flow potential of the project. Payments on loans
secured by income properties often depend on successful operation and management
of the properties. As a result, repayment of such loans may be
subject to a greater extent than residential real estate loans, to adverse
conditions in the real estate market or the economy. To monitor cash
flows on income properties, we
require
borrowers and loan guarantors, if any, to provide annual financial statements on
commercial and multi-family real estate loans. In reaching a decision
on whether to make a commercial or multi-family real estate loan, we consider
and review a global cash flow analysis of the borrower and consider the net
operating income of the property, the borrower’s expertise, credit history and
profitability and the value of the underlying property. We have
generally required that the properties securing these real estate loans have
debt service coverage ratios (the ratio of earnings before debt service to debt
service) of at least 1.20x. An environmental phase one report is
obtained when the possibility exists that hazardous materials may have existed
on the site, or the site may have been impacted by adjoining properties that
handled hazardous materials. Land loans secured by improved lots
generally involve greater risks than residential mortgage lending because land
loans are more difficult to evaluate. If the estimate of value proves
to be inaccurate, in the event of default and foreclosure, we may be confronted
with a property the value of which is insufficient to assure full
payment.
Construction
Loans
Our
construction loans are based upon estimates of costs and values associated with
the completed project. Construction lending involves additional risks when
compared with permanent residential lending because funds are advanced upon the
security of the project, which is of uncertain value prior to its
completion. Because of the uncertainties inherent in estimating
construction costs, as well as the market value of the completed project and the
effects of governmental regulation of real property, it is relatively difficult
to evaluate accurately the total funds required to complete a project and the
related loan-to-value ratio. This type of lending also typically involves
higher loan principal amounts and is often concentrated with a small number of
builders. In addition, generally during the term of a
construction loan, interest may be funded by the borrower or disbursed from an
interest reserve set aside from the construction loan budget. These loans
often involve the disbursement of substantial funds with repayment substantially
dependent on the success of the ultimate project and the ability of the borrower
to sell or lease the property or obtain permanent take-out financing, rather
than the ability of the borrower or guarantor to repay principal and
interest. If our appraisal of the value of a completed project proves to
be overstated, we may have inadequate security for the repayment of the loan
upon completion of construction of the project and may incur a
loss. A discounted cash flow analysis is utilized for determining the
value of any construction project of five or more units. Our ability to
continue to originate a significant amount of construction loans is dependent on
the strength of the housing market in our market areas.
Commercial
Business Loans
Unlike
residential mortgage loans, which generally are made on the basis of the
borrower’s ability to make repayment from his or her employment or other income,
and which are secured by real property whose value tends to be more easily
ascertainable, commercial business loans are of higher risk and typically are
made on the basis of the borrower’s ability to make repayment from the cash flow
of the borrower’s business and the collateral securing these loans may fluctuate
in value. Our commercial business loans are originated primarily
based on the identified cash flow of the borrower and secondarily on the
underlying collateral provided by the borrower. Most often, this
collateral consists of accounts receivable, inventory or
equipment. Credit support provided by the borrower for most of these
loans and the probability of repayment is based on the liquidation of the
pledged collateral and enforcement of a personal guarantee, if
any. As a result, the availability of funds for the repayment of
commercial business loans may depend substantially on the success of the
business itself. Further, any collateral securing such loans may
depreciate over time, may be difficult to appraise and may fluctuate in
value.
Consumer
Loans
Consumer
loans may entail greater risk than do residential mortgage loans, particularly
in the case of consumer loans that are unsecured or secured by assets that
depreciate rapidly, such as motor vehicles. Repossessed collateral
for a defaulted consumer loan may not provide an adequate source of repayment
for the outstanding loan and a small remaining deficiency often does not warrant
further substantial collection efforts against the borrower. Consumer
loan collections depend on the borrower’s continuing financial stability, and
therefore are likely to be adversely affected by various factors, including job
loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount that can be recovered on
such loans.
Loan Originations, Purchase and
Sales
Loan
originations come from a number of sources. The primary sources of
loan originations are current customers, walk-in traffic, our website,
advertising and referrals from customers as well as our directors, trustees and
corporators. We advertise in newspapers that are widely circulated
throughout our market area and on local radio. We also participate in
loans with others to supplement our origination efforts. We generally
do not purchase whole loans.
We
generally originate loans for our portfolio; however, we generally sell, prior
to funding, to the secondary market all newly originated conforming fixed-rate,
16- to 30-year one- to four-family residential real estate loans. Our
decision to sell loans is based on prevailing market interest rate conditions
and interest rate risk management. Generally, loans are sold to
Fannie Mae and the Federal Home Loan Bank Mortgage Partnership Finance Program
with loan servicing retained. In addition, we sell participation
interests in commercial real estate loans to local financial institutions,
primarily on the portion of loans exceeding our borrowing limits, or as is
prudent in concert with recognition of credit risk. For the years
ended December 31, 2009 and December 31, 2008, we originated $299.5 and $312.8
million of loans, respectively, and sold $36.8 million and $10.5 million of
loans, respectively. At December 31, 2009, we were servicing $102.9 million of
loans for others.
Loan Approval Procedures and
Authority
Our
lending activities follow written, non-discriminatory, underwriting standards
and loan origination procedures established by the Bank’s Board of Directors and
management. The Bank’s Board of Directors has granted loan approval
authority to certain officers up to prescribed limits, depending on the
officer’s experience, the type of loan and whether the loan is secured or
unsecured. All loans in excess of $100,000 require a second
authorized officer’s approval. Loans in excess of $1,000,000
generally must be authorized by the Bank’s Executive Committee.
Loans-to-One Borrower Limit and Loan
Category Concentration
The
maximum amount that we may lend to one borrower and the borrower’s related
entities is generally limited, by statute, to 20% of our capital, which is
defined under Massachusetts law as the sum of our capital stock, surplus account
and undivided profits. At December 31, 2009, our regulatory limit on
loans-to-one borrower was $40.0 million. At that date, our largest
lending relationship consisted of four loans totaling $21.4 million and was
secured by commercial real estate. These loans were performing in
accordance with their original repayment terms at December 31,
2009.
Loan Commitments
We issue
commitments for fixed- and adjustable-rate mortgage loans conditioned upon the
occurrence of certain events. Commitments to originate mortgage loans
are legally binding agreements to lend to our customers. Generally,
our loan commitments expire after 30 days.
Investment
Activities
We have
legal authority to invest in various types of liquid assets, including U.S.
Treasury obligations, securities of various government-sponsored enterprises and
municipal governments, deposits at the Federal Home Loan Bank of Boston,
certificates of deposit of federally insured institutions, investment grade
corporate bonds and investment grade marketable equity securities, including
common stock and money market mutual funds. Our equity securities
generally pay dividends. We also are required to maintain an
investment in Federal Home Loan Bank of Boston stock, which investment is based
on the level of our FHLB borrowings. While we have the authority
under applicable law to invest in derivative securities, we had no investments
in derivative securities at December 31, 2009.
At
December 31, 2009, our investment portfolio consisted primarily of corporate
bonds, investment-grade marketable equity securities, money market mutual fund
investments, short-term obligations of government-sponsored enterprises and
mortgage-backed securities.
Our
investment objectives are to provide and maintain liquidity, to establish an
acceptable level of interest rate and credit risk, to provide a use of funds
when demand for loans is weak and to generate a favorable return. Our
Board of Directors has the overall responsibility for the investment portfolio,
including approval of our investment policy. The Executive Committee
of the Board of Directors and management are responsible for implementation of
the investment policy and monitoring our investment performance. Our Executive Committee
reviews the status of our investment portfolio monthly.
Each
reporting period, the Company evaluates all securities with a decline in fair
value below the amortized cost of the investment to determine whether or not the
impairment is deemed to be other-than-temporary ("OTTI"). Marketable
equity securities are evaluated for OTTI based on the severity and duration of
the impairment and, if deemed to be other than temporary, the declines in fair
value are reflected in earnings as realized losses. For debt securities, OTTI is
required to be recognized (1) if the Company intends to sell the security; (2)
if it is “more likely than not” that the Company will be required to sell the
security before recovery of its amortized cost basis; or (3) the present value
of expected cash flows is not sufficient to recover the entire amortized cost
basis. For all impaired debt securities that the Company intends to sell, or
more likely than not will be required to sell, the full amount of the
depreciation is recognized as OTTI through earnings. Credit-related OTTI for all
other impaired debt securities is recognized through earnings. Non-credit
related OTTI for such debt securities is recognized in other comprehensive
income/loss, net of applicable taxes.
Deposit
Activities and Other Sources of Funds
General
Deposits,
borrowings and loan repayments are the major sources of our funds for lending
and other investment purposes. Scheduled loan repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and market
conditions.
Deposit Accounts
The
substantial majority of our depositors reside in our market
area. Deposits are attracted by advertising and through our website,
primarily from within our market area through the offering of a broad selection
of deposit instruments, including non-interest-bearing demand deposits (such as
checking accounts), interest-bearing demand accounts (such as NOW and money
market accounts), savings accounts and certificates of deposit. In
addition to accounts for individuals, we also offer several commercial checking
accounts designed for the businesses operating in our market area.
Deposit
account terms vary according to the minimum balance required, the time period
that funds must remain on deposit, and the interest rate, among other
factors. In determining the terms of our deposit accounts, we
consider the rates offered by our competition, our liquidity needs,
profitability, and customer preferences and concerns. We generally
review our deposit mix and pricing on a weekly basis. Our deposit
pricing strategy has generally been to offer competitive rates and to
periodically offer special rates in order to attract deposits of a specific type
or term.
Borrowings
We may
utilize advances from the Federal Home Loan Bank of Boston to supplement our
supply of investable funds. The Federal Home Loan Bank functions as a
central reserve bank providing credit for its member financial
institutions. As a member, we are required to own capital stock in
the Federal Home Loan Bank and are authorized to apply for advances on the
security of such stock and certain of our whole first mortgage loans and other
assets (principally securities which are obligations of, or guaranteed by, the
United States), provided certain standards related to creditworthiness have been
met. Advances are made under several different programs, each having
its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either on a fixed
percentage of an institution’s net worth or on the Federal Home Loan Bank’s
assessment of the institution’s creditworthiness. As of December 31,
2009, we had $118.7 million of available borrowing capacity with the Federal
Home Loan Bank of Boston, including an available line of credit of $9.4 million
at an interest rate that adjusts daily. All of our borrowings from
the Federal Home Loan Bank are secured by a blanket lien on qualified
collateral, defined principally as 75% of the carrying value of certain first
mortgage loans on owner-occupied residential property.
In
addition, at December 31, 2009 the Bank has federal funds purchased of $13.1
million, including $3.1 million from Hampshire First Bank. These
purchases are currently a source of low-cost funds for the Bank, at a rate of
0.35% at December 31, 2009.
Financial
Services
We offer
customers a range of non-deposit products, including mutual funds, annuities,
stocks and bonds which are offered and cleared by a third-party
broker-dealer. We receive a portion of the commissions generated by
our sales to our customers. We also offer customers long-term care
insurance through a third-party insurance company which generates commissions
for us. Our non-deposit products generated $211,000, $146,000, and
$118,000 of non-interest income during the years ended December 31, 2009, 2008
and 2007, respectively.
Personnel
As of
December 31, 2009, we had 163 full-time and 34 part-time employees, none of whom
is represented by a collective bargaining unit. We believe our
relationship with our employees is excellent.
Subsidiaries
and Affiliates
In
addition to East Boston Savings Bank, Meridian Interstate Bancorp has another
wholly-owned subsidiary, Meridian Interstate Funding Corporation, a
Massachusetts corporation established in 2008 to loan funds to the Company’s
Employee Stock Ownership Plan “ESOP” to purchase stock in our initial public
offering. At December 31, 2009, Meridian Interstate Funding
Corporation had total assets of $8.9 million and total equity of $8.9
million.
Meridian
Interstate Bancorp also owns 40.0% of the capital stock of Hampshire First Bank,
a New Hampshire chartered bank, organized in 2006 and headquartered in
Manchester, New Hampshire. In connection with the organization of
Hampshire First Bank, Meridian Interstate Bancorp also received non-voting
warrants to purchase an additional 60,000 shares of capital stock of Hampshire
First Bank (currently representing 2% of the outstanding shares of Hampshire
First Bank). At December 31, 2009, our directors and executive
officers also own approximately 1% in the aggregate of the capital stock of
Hampshire First Bank and owned non-voting warrants to purchase in the aggregate
less than 1% of the capital stock. None of our directors and
executive officers has any agreements or contracts with each other or with
Meridian Interstate Bancorp regarding voting their shares of Hampshire First
Bank stock. We also have no additional agreements or contracts to
purchase shares of voting securities of Hampshire First Bank. In
addition, any future acquisition by Meridian Interstate Bancorp of the voting
securities of Hampshire First Bank, either common stock or warrants, would
require prior approval of the Federal Reserve Board and the Massachusetts
Commissioner of Banks.
Hampshire
First Bank bylaws provide that Meridian Interstate Bancorp may nominate or
appoint 40% of the Directors of Hampshire First Bank for as long as it holds 40%
or more of the outstanding common stock of Hampshire First Bank. In
addition, the Hampshire First Bank bylaws require that all matters requiring a
vote of the Board of Directors be approved by a two-thirds vote. The
members of the Hampshire First Bank Board appointed by Meridian Interstate
Bancorp also will appoint the Chairman of the Board. As a result,
three of the ten current directors of Hampshire First Bank also currently serve
as directors of Meridian Interstate Bancorp (Messrs. Gavegnano, Lynch and
Fernandez) and Mr. Gavegnano, our Chairman of the Board and Chief Executive
Officer, also serves as Chairman of the Board of Hampshire First
Bank. None of these individuals has any agreements or contracts with
Meridian Interstate Bancorp regarding their duties or actions as directors of
Hampshire First Bank. We believe Hampshire First Bank is led by a
qualified and experienced executive management team. Although we have
no current intention to sell our investment, we may possibly realize gains from
the sale of this investment in the future.
In
addition, Hampshire First Bank provides us with a source of loans via loan
participations. Hampshire First Bank’s loan portfolio consists
primarily of multi-family and commercial real estate, commercial business and
construction loans. At December 31, 2009, Hampshire First Bank had
assets of $182.7 million, deposits of $139.6 million and equity of $27.5
million. Meridian Interstate Bancorp accounts for its investment in
Hampshire First Bank by the equity method of accounting, under which Meridian
Interstate Bancorp’s share of the net income or loss of Hampshire First Bank is
recognized as income or loss in the Company’s consolidated financial
statements. At December 31, 2009, Meridian Interstate Bancorp had an
$11.0 million investment in Hampshire First Bank and recorded equity income of
$629,000 and loss of $396,000, respectively, during the years ended December 31,
2009 and 2008, from this investment.
The
Bank’s subsidiaries include Prospect, Inc., which engages in securities
transactions on its own behalf, EBOSCO, LLC and Berkeley Riverbend Estates,
LLC, both of which hold foreclosed real estate; and East Boston Investment
Services Inc., which is authorized for third-party investment
sales.
Regulation
and Supervision
General
East
Boston Savings Bank is currently a Massachusetts-charted stock savings bank, and
is the wholly-owned subsidiary of Meridian Interstate Bancorp, a Massachusetts
corporation and registered bank holding company, which is a wholly-owned
subsidiary of Meridian Financial Services, a Massachusetts mutual holding
company and registered bank holding company. East Boston Savings Bank’s deposits
are insured up to applicable limits by the Federal Deposit Insurance Corporation
and by the Depositors Insurance Fund for amounts in excess of the Federal
Deposit Insurance Corporation insurance limits. East Boston Savings Bank is
subject to extensive regulation by the Massachusetts Commissioner of Banks, as
its chartering agency, and by the Federal Deposit Insurance Corporation, as its
deposit insurer. East Boston Savings Bank is required to file reports with, and
is periodically examined by, the Federal Deposit Insurance Corporation and the
Massachusetts Commissioner of Banks concerning its activities and financial
condition and must obtain regulatory approvals prior to entering into certain
transactions, including, but not limited to, mergers with or acquisitions of
other financial institutions. East Boston Savings Bank is a member of
the Federal Home Loan Bank of Boston. Meridian Interstate Bancorp and
Meridian Financial Services are regulated as bank holding companies by the
Federal Reserve Board and the Massachusetts Commissioner of Banks.
The
regulation and supervision of East Boston Savings Bank establish a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of depositors and borrowers and, for purposes of
the Federal Deposit Insurance Corporation, the protection of the insurance
fund. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulatory requirements
and policies, whether by the applicable state legislature, the Federal Deposit
Insurance Corporation or Congress, could have a material adverse impact on
Meridian Financial Services, Meridian Interstate Bancorp or East Boston Savings
Bank and their operations.
Certain
regulatory requirements applicable to East Boston Savings Bank, Meridian
Interstate Bancorp and Meridian Financial Services are referred to below or
elsewhere herein. The description of statutory provisions and
regulations applicable to savings banks and their holding companies set forth
below and elsewhere in this document does not purport to be a complete
description of such statutes and regulations and their effects on East Boston
Savings Bank, Meridian Interstate Bancorp and Meridian Financial Services and is
qualified in its entirety by reference to the actual laws and regulations
involved.
Proposed
Federal Legislation
Legislation
has been proposed that would implement sweeping changes to the current bank
regulatory structure, including eliminating the Office of Thrift Supervision, by
merging the Office of Thrift Supervision into the Comptroller of the Currency
(the primary federal regulator for national banks). The proposed legislation
would also establish a Financial Services Oversight Council and grant the Board
of Governors of the Federal Reserve System exclusive authority to regulate all
banks and thrift holding companies. If such proposals were adopted,
Meridian Interstate Bancorp would continue to be supervised by the Federal
Reserve Board and subject to the Federal Reserve’s regulations, including
holding company capital requirements. Such legislative proposals also include
proposals for the creation of new consumer protection regulations and a new
federal consumer protection agency as well as increased regulatory authority for
certain federal banking regulators, including the Federal Reserve
Board. Compliance with new regulations and being subject to
supervision by additional or new regulatory agencies could increase our
expenses.
Massachusetts Banking Laws and
Supervision
East
Boston Savings Bank, as a Massachusetts savings bank, is regulated and
supervised by the Massachusetts Commissioner of Banks. The Massachusetts
Commissioner of Banks is required to regularly examine each state-chartered
bank. The approval of the Massachusetts Commissioner of Banks is
required to establish or close branches, to merge with another bank, to form a
holding company, to issue stock or to undertake many other activities. Any
Massachusetts bank that does not operate in accordance with the regulations,
policies and directives of the Massachusetts Commissioner of Banks may be
sanctioned. The Massachusetts Commissioner of Banks may suspend or remove
directors or officers of a bank who have violated the law, conducted a bank's
business in a manner that is unsafe, unsound or contrary to the depositors'
interests, or been negligent in the performance of their duties. In
addition, the Massachusetts Commissioner of Banks has the authority to appoint a
receiver or conservator if it is determined that the bank is conducting its
business in an unsafe or unauthorized manner, and under certain other
circumstances.
All
Massachusetts-chartered savings banks are required to be members of the
Depositors Insurance Fund, a private deposit insurer, which insures all deposits
in member banks in excess of FDIC deposit insurance limits. Member
banks are required to pay the assessments of the fund.
The
powers that Massachusetts-chartered savings banks can exercise under these laws
are summarized as follows:
Lending
Activities
A
Massachusetts-chartered savings bank may make a wide variety of mortgage loans
including fixed-rate loans, adjustable-rate loans, variable-rate
loans, participation loans, graduated payment loans, construction and
development loans, condominium and co-operative loans, second mortgage loans and
other types of loans that may be made in accordance with applicable
regulations. Commercial loans may be made to corporations and other commercial
enterprises with or without security. Consumer and personal loans may
also be made with or without security.
Insurance
Sales
Massachusetts
banks may engage in insurance sales activities if the Massachusetts Commissioner
of Banks has approved a plan of operation for insurance activities and the bank
obtains a license from the Massachusetts Division of Insurance. A
bank may be licensed directly or indirectly through an affiliate or a subsidiary
corporation established for this purpose. Customers of East Boston Savings Bank
are offered certain insurance products through a third party. East
Boston Savings Bank has not been approved for insurance sales
activities.
Investment
Activities
In
general, Massachusetts-chartered savings banks may invest in preferred and
common stock of any corporation organized under the laws of the United States or
any state provided such investments do not involve control of any corporation
and do not, in the aggregate, exceed 4.0% of the bank’s deposits.
Massachusetts-chartered savings banks may in addition invest an amount equal to
1.0% of their deposits in stocks of Massachusetts corporations or companies with
substantial employment in the Commonwealth which have pledged to the
Massachusetts Commissioner of Banks that such monies will be used for further
development within the Commonwealth. At the present time, East Boston
Savings Bank has the authority to invest in equity securities. However, such
investment authority is constrained by federal law. See “- Federal Bank
Regulation – Investment Activities” for such federal restrictions.
Dividends
A
Massachusetts stock bank may declare from net profits cash dividends not more
frequently than quarterly and non-cash dividends at any time. No dividends may
be declared, credited or paid if the bank’s capital stock is impaired. The
approval of the Massachusetts Commissioner of Banks is required if the total of
all dividends declared in any calendar year exceeds the total of its net profits
for that year combined with its retained net profits of the preceding two years.
Net profits for this purpose means the remainder of all earnings from current
operations plus actual recoveries on loans and investments and other assets
after deducting from the total thereof all current operating expenses, actual
losses, accrued dividends on preferred stock, if any, and all federal and state
taxes.
Protection
of Personal Information
Massachusetts
has adopted regulatory requirements intended to protect personal information.
The requirements, which become effective March 1, 2010, are similar to existing
federal laws such as the Gramm-Leach-Bliley Act, discussed below under “—Federal
Regulations—Privacy Regulations”, that require organizations to establish
written information security programs to prevent identity theft. However, unlike
federal regulations, the Massachusetts regulation also contains technology
system requirements, especially for the encryption of personal information sent
over wireless or public networks or stored on portable devices.
Parity
Regulation
A
Massachusetts bank may engage in any activity or offer any product or service if
the activity, product or service is engaged in or offered in accordance with
regulations promulgated by the Massachusetts Commissioner of Banks and has been
authorized for national banks, federal thrifts or state banks in a state other
than Massachusetts; provided that the activity is permissible under applicable
federal and Massachusetts law and subject to the same limitations and
restrictions imposed on the national bank, federal thrift or out-of-state bank
that had previously been granted the power.
Loans to One Borrower
Limitations
Massachusetts
banking law grants broad lending authority. However, with certain limited
exceptions, total obligations of one borrower to a bank may not exceed 20.0% of
the total of the bank’s capital, which is defined under Massachusetts law as the
sum of the bank’s capital stock, surplus account and undivided
profits.
Loans to a Bank’s
Insiders
The
Massachusetts banking laws prohibit any executive officer, director or trustee
from borrowing, otherwise becoming indebted, or becoming liable for a loan or
other extension of credit by such bank to any other person, except for any of
the following loans or extensions of credit: (i) loans or extension
of credit, secured or unsecured, to an officer of the bank in an amount not
exceeding $100,000; (ii) loans or extensions of credit intended or secured for
educational purposes to an officer of the bank in an amount not exceeding
$200,000; (iii) loans or extensions of credit secured by a mortgage on
residential real estate to be occupied in whole or in part by the officer to
whom the loan or extension of credit is made, in an amount not exceeding
$750,000; and (iv) loans or extensions of credit to a director or trustee of the
bank who is not also an officer of the bank in an amount permissible under the
bank’s loan to one borrower limit. Massachusetts banking laws also
prohibit officers and directors from receiving a preferential interest rate or
terms on loans or extensions of credit.
Loans to
insiders as described above require approval of the majority of the members of
East Boston Savings Bank’s Board of Directors, excluding any member involved in
the loan or extension of credit. No such loan or extension of credit may be
granted with an interest rate or other terms that are preferential in comparison
to loans granted to persons not affiliated with the savings bank.
Regulatory
Enforcement Authority
Any
Massachusetts bank that does not operate in accordance with the regulations,
policies and directives of the Massachusetts Commissioner of Banks may be
subject to sanctions for non-compliance, including seizure of the property and
business of the bank and suspension or revocation of its charter. The
Massachusetts Commissioner of Banks may under certain circumstances suspend or
remove officers or directors who have violated the law, conducted the bank’s
business in a manner which is unsafe, unsound or contrary to the depositors
interests or been negligent in the performance of their duties. In addition,
upon finding that a bank has engaged in an unfair or deceptive act or practice,
the Massachusetts Commissioner of Banks may issue an order to cease and desist
and impose a fine on the bank concerned. Finally, Massachusetts consumer
protection and civil rights statutes applicable to East Boston Savings Bank
permit private individual and class action law suits and provide for the
rescission of consumer transactions, including loans, and the recovery of
statutory and punitive damage and attorney’s fees in the case of certain
violations of those statutes.
Depositors Insurance
Fund
All Massachusetts-chartered savings
banks are required to be members of the Depositors Insurance Fund, a corporation
that insures savings bank deposits in excess of federal deposit insurance
coverage. The Depositors Insurance Fund is authorized to charge savings banks an
annual assessment of up to 1/50th of 1.0% of a savings bank’s deposit balances
in excess of amounts insured by the Federal Deposit Insurance
Corporation.
Massachusetts has other statutes and
regulations that are similar to the federal provisions discussed
below.
Federal
Bank Regulation
Capital Requirements
Under FDIC regulations, federally
insured state-chartered banks that are not members of the Federal Reserve System
(“state non-member banks”), such as East Boston Savings Bank, are required to
comply with minimum leverage capital requirements. For an institution determined
by the FDIC to not be anticipating or experiencing significant growth and to be,
in general, a strong banking organization rated composite 1 under the Uniform
Financial Institutions Ranking System established by the Federal Financial
Institutions Examination Council, the minimum capital leverage requirement is a
ratio of Tier 1 capital to total assets of 3.0%. For all other institutions, the
minimum leverage capital ratio is not less than 4.0%. Tier 1 capital is the sum
of common stockholders’ equity, noncumulative perpetual preferred stock
(including any related surplus) and minority investments in certain
subsidiaries, less intangible assets (except for certain servicing rights and
credit card relationships) and certain other specified items.
The FDIC regulations require state
non-member banks to maintain certain levels of regulatory capital in relation to
regulatory risk-weighted assets. The ratio of regulatory capital to regulatory
risk-weighted assets is referred to as a bank’s “risk-based capital ratio.”
Risk-based capital ratios are determined by allocating assets and specified
off-balance sheet items (including recourse obligations, direct credit
substitutes and residual interests) to four risk-weighted categories ranging
from 0.0% to 100.0%, with higher levels of capital being required for the
categories perceived as representing greater risk.
State non-member banks must maintain a
minimum ratio of total capital to risk-weighted assets of at least 8.0%, of
which at least one-half must be Tier 1 capital. Total capital consists of Tier 1
capital plus Tier 2 or supplementary capital items, which include allowances for
loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative
preferred stock and certain other capital instruments, and a portion of the net
unrealized gain on equity securities. The includable amount of Tier 2 capital
cannot exceed the amount of the institution’s Tier 1 capital. Banks that engage
in specified levels of trading activities are subject to adjustments in their
risk based capital calculation to ensure the maintenance of sufficient capital
to support market risk.
The Federal Deposit Insurance
Corporation Improvement Act (the “FDICIA”) required each federal banking agency
to revise its risk-based capital standards for insured institutions to ensure
that those standards take adequate account of interest-rate risk, concentration
of credit risk, and the risk of nontraditional activities, as well as to reflect
the actual performance and expected risk of loss on multi-family residential
loans. The FDIC, along with the other federal banking agencies, has adopted a
regulation providing that the agencies will take into account the exposure of a
bank’s capital and economic value to changes in interest rate risk in assessing
a bank’s capital adequacy. The FDIC also has authority to establish individual
minimum capital requirements in appropriate cases upon determination that an
institution’s capital level is, or is likely to become, inadequate in light of
the particular circumstances.
Standards for
Safety and Soundness
As required by statute, the federal
banking agencies adopted final regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness to implement safety and
soundness standards. The guidelines set forth the safety and soundness standards
that the federal banking agencies use to identify and address problems at
insured depository institutions before capital becomes impaired. The guidelines
address internal controls and information systems, internal audit system, credit
underwriting, loan documentation, interest rate exposure, asset growth, asset
quality, earnings and compensation, fees and benefits. Most recently, the
agencies have established standards for safeguarding customer information. If
the appropriate federal banking agency determines that an institution fails to
meet any standard prescribed by the guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard.
Investment
Activities
All state-chartered FDIC insured banks,
including savings banks, are generally limited in their investment activities to
principal and equity investments of the type and in the amount authorized for
national banks, notwithstanding state law, subject to certain exceptions. For
example, state chartered banks may, with FDIC approval, continue to exercise
state authority to invest in common or preferred stocks listed on a national
securities exchange or the NASDAQ Global Market and in the shares of an
investment company registered under the Investment Company Act of 1940, as
amended. The maximum permissible investment is 100.0% of Tier 1 Capital, as
specified by the FDIC’s regulations, or the maximum amount permitted by
Massachusetts law, whichever is less. East Boston Savings Bank received approval
from the FDIC to retain and acquire such equity instruments equal to the lesser
of 100% of East Boston Savings Bank’s Tier 1 capital or the maximum permissible
amount specified by Massachusetts law. Any such grandfathered authority may be
terminated upon the FDIC’s determination that such investments pose a safety and
soundness risk. In addition, the FDIC is authorized to permit such institutions
to engage in state authorized activities or investments not permissible for
national banks (other than non-subsidiary equity investments) if they meet all
applicable capital requirements and it is determined that such activities or
investments do not pose a significant risk to the Bank Insurance Fund. The FDIC
has adopted revisions to its regulations governing the procedures for
institutions seeking approval to engage in such activities or investments. In
addition, a nonmember bank may control a subsidiary that engages in activities
as principal that would only be permitted for a national bank to conduct in a
“financial subsidiary” if a bank meets specified conditions and deducts its
investment in the subsidiary for regulatory capital purposes.
Interstate Banking and
Branching
The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, or the Interstate Banking Act, permits
adequately capitalized bank holding companies to acquire banks in any state
subject to specified concentration limits and other conditions. The Interstate
Banking Act also authorizes the interstate merger of banks. In addition, among
other things, the Interstate Banking Act permits banks to establish new branches
on an interstate basis provided that such action is specifically authorized by
the law of the host state.
Prompt Corrective Regulatory
Action
Federal law requires, among other
things, that federal bank regulatory authorities take “prompt corrective action”
with respect to banks that do not meet minimum capital requirements. For these
purposes, the law establishes five capital categories: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized.
The FDIC has adopted regulations to
implement the prompt corrective action legislation. An institution is deemed to
be “well capitalized” if it has a total risk-based capital ratio of 10.0% or
greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a leverage
ratio of 5.0% or greater. An institution is “adequately capitalized” if it has a
total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital
ratio of 4.0% or greater, and generally a leverage ratio of 4.0% or greater. An
institution is “undercapitalized” if it has a total risk-based capital ratio of
less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or
generally a leverage ratio of less than 4.0%. An institution is deemed to be
“significantly undercapitalized” if it has a total risk-based capital ratio of
less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0%, or a
leverage ratio of less than 3.0%. An institution is considered to be “critically
undercapitalized” if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2.0%. As of December
31, 2009, East Boston Savings Bank was classified as a “well capitalized”
institution.
“Undercapitalized” banks must adhere to
growth, capital distribution (including dividend) and other limitations and are
required to submit a capital restoration plan. A bank’s compliance with such a
plan is required to be guaranteed by any company that controls the
undercapitalized institution in an amount equal to the lesser of 5.0% of the
institution’s total assets when deemed undercapitalized or the amount necessary
to achieve the status of adequately capitalized. If an “undercapitalized” bank
fails to submit an acceptable plan, it is treated as if it is “significantly
undercapitalized.” “Significantly undercapitalized” banks must comply with one
or more of a number of additional restrictions, including but not limited to an
order by the FDIC to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets, cease receipt of deposits from
correspondent banks or dismiss directors or officers, and restrictions on
interest rates paid on deposits, compensation of executive officers and capital
distributions by the parent holding company. “Critically undercapitalized”
institutions are subject to additional measures including, subject to a narrow
exception, the appointment of a receiver or conservator within 270 days after it
obtains such status.
Transaction
with Affiliates and Regulation W of the Federal Reserve Regulations
Transactions between banks and their
affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An
affiliate of a bank is any company or entity that controls, is controlled by or
is under common control with the bank. In a holding company context, the parent
bank holding company and any companies which are controlled by such parent
holding company are affiliates of the bank. Generally, Sections 23A and 23B of
the Federal Reserve Act and Regulation W (i) limit the extent to which the bank
or its subsidiaries may engage in “covered transactions” with any one affiliate
to an amount equal to 10.0% of such institution’s capital stock and surplus, and
contain an aggregate limit on all such transactions with all affiliates to an
amount equal to 20.0% of such institution’s capital stock and surplus and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term “covered transaction” includes the making of loans,
purchase of assets, issuance of a guarantee and other similar transactions. In
addition, loans or other extensions of credit by the financial institution to
the affiliate are required to be collateralized in accordance with the
requirements set forth in Section 23A of the Federal Reserve Act.
“Financial subsidiaries” of banks are
treated as affiliates for purposes of Sections 23A and 23B of the Federal
Reserve Act. However, (i) the 10.0% capital limit on transactions
between the bank and such financial subsidiary as an affiliate is not
applicable, and (ii) the investment by the bank in the financial subsidiary does
not include retained earnings in the financial subsidiary. Certain anti-evasion
provisions have been included that relate to the relationship between any
financial subsidiary of a bank and sister companies of the bank: (1) any
purchase of, or investment in, the securities of a financial subsidiary by any
affiliate of the parent bank is considered a purchase or investment by the bank;
or (2) if the Federal Reserve Board determines that such treatment is necessary,
any loan made by an affiliate of the parent bank to the financial subsidiary is
to be considered a loan made by the parent bank.
In addition, Sections 22(h) and (g) of
the Federal Reserve Act place restrictions on loans to executive officers,
directors and principal stockholders. Under Section 22(h) of the Federal Reserve
Act, loans to a director, an executive officer and to a greater than 10.0%
stockholder of a financial institution, and certain affiliated interests of
these, may not exceed, together with all other outstanding loans to such person
and affiliated interests, the financial institution’s loans to one borrower
limit, generally equal to 15.0% of the institution’s unimpaired capital and
surplus. Section 22(h) of the Federal Reserve Act also requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
and also requires prior board approval for certain loans. In addition, the
aggregate amount of extensions of credit by a financial institution to insiders
cannot exceed the institution’s unimpaired capital and surplus. Furthermore,
Section 22(g) of the Federal Reserve Act places additional restrictions on loans
to executive officers.
Enforcement
The FDIC has extensive enforcement
authority over insured state savings banks, including East Boston Savings Bank.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, issue cease and desist orders and remove directors and
officers. In general, these enforcement actions may be initiated in response to
violations of laws and regulations and unsafe or unsound practices. The FDIC has
authority under federal law to appoint a conservator or receiver for an insured
bank under limited circumstances. The FDIC is required, with certain exceptions,
to appoint a receiver or conservator for an insured state non-member bank if
that bank was “critically undercapitalized” on average during the calendar
quarter beginning 270 days after the date on which the institution became
“critically undercapitalized.” The FDIC may also appoint itself as conservator
or receiver for an insured state non-member institution under specific
circumstances on the basis of the institution’s financial condition or upon the
occurrence of other events, including: (1) insolvency; (2) substantial
dissipation of assets or earnings through violations of law or unsafe or unsound
practices; (3) existence of an unsafe or unsound condition to transact business;
and (4) insufficient capital, or the incurring of losses that will deplete
substantially all of the institution’s capital with no reasonable prospect of
replenishment without federal assistance.
Insurance
of Deposit Accounts
East Boston Savings Bank is a member of
the Deposit Insurance Fund, which is administered by the Federal Deposit
Insurance Corporation. In October 2008, deposit insurance by the Federal Deposit
Insurance Corporation was increased to a maximum of $250,000 per
depositor. On January 1, 2014, the maximum insurance amount will
return to $100,000 per depositor for all deposit accounts except certain
retirement accounts, which will remain at $250,000 per depositor.
Pursuant to the Federal Deposit
Insurance Reform Act of 2005 (the “Reform Act”), the Federal Deposit Insurance
Corporation is authorized to set the reserve ratio for the Deposit Insurance
Fund annually at between 1.15% and 1.5% of estimated insured deposits. As of
June 30, 2008, the reserve ratio had decreased to 1.01% as a result of bank
failures. As part of a plan to restore the reserve ratio to 1.15%,
the Federal Deposit Insurance Corporation imposed a special assessment equal to
five basis points of assets less Tier 1 capital as of June 30, 2009, which was
payable on September 30, 2009. As a result, we paid a special assessment of
$502,000. In addition, the Federal Deposit Insurance Corporation has
increased its quarterly assessment rates and amended the method by which rates
are calculated. Beginning in the second quarter of 2009, institutions
are assigned an initial base assessment rate ranging from 12 to 45 basis points
of deposits depending on risk category. The initial base assessment is then
adjusted based upon the level of unsecured debt, secured liabilities, and
brokered deposits to establish a total base assessment rate ranging from seven
to 77.5 basis points.
On November 12, 2009, the Federal
Deposit Insurance Corporation approved a final rule requiring insured depository
institutions to prepay on December 30, 2009, their estimated quarterly
risk-based assessments for all of 2010, 2011, and 2012. Estimated
assessments for the fourth quarter of 2009 and for all of 2010 are based upon
the assessment rate in effect on September 30, 2009, with three basis points
added for the 2011 and 2012 assessment rates. In addition, a 5%
annual growth in the assessment base is assumed. Prepaid assessments
are to be applied against the actual quarterly assessments until exhausted, and
may not be applied to any special assessments that may occur in the
future. Any unused prepayments will be returned to the institution on
June 30, 2013. On December 30, 2009, we prepaid $5.1 million in
estimated assessment fees for the first quarter of 2010 through
2012. Because the prepaid assessments represent the prepayment of
future expense, they do not affect our regulatory capital (the prepaid asset
will have a risk-weighting of 0%) or tax obligations.
Insurance of deposits may be terminated
by the Federal Deposit Insurance Corporation upon a finding that an institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the Federal Deposit Insurance Corporation. We do
not currently know of any practice, condition or violation that may lead to
termination of our deposit insurance.
In addition to the Federal Deposit
Insurance Corporation assessments, the Financing Corporation (“FICO”) is
authorized to impose and collect, with the approval of the Federal Deposit
Insurance Corporation, assessments for anticipated payments, issuance costs and
custodial fees on bonds issued by the FICO in the 1980s to recapitalize the
former Federal Savings and Loan Insurance Corporation. The bonds issued by the
FICO are due to mature in 2017 through 2019. For the quarter ended December 31,
2009, the annualized FICO assessment was equal to 1.06 basis points for each
$100 in domestic deposits maintained at an institution.
Temporary
Liquidity Guarantee Program.
On October 14, 2008, the Federal
Deposit Insurance Corporation announced a new program – the Temporary Liquidity
Guarantee Program. This program has two components. One guarantees
newly issued senior unsecured debt of a participating organization, up to
certain limits established for each institution, issued between October 14, 2008
and June 30, 2009. The Federal Deposit Insurance Corporation will pay the unpaid
principal and interest on a Federal Deposit Insurance Corporation-guaranteed
debt instrument upon the uncured failure of the participating entity to make a
timely payment of principal or interest in accordance with the terms of the
instrument. The guarantee will remain in effect until June 30, 2012.
In return for the Federal Deposit Insurance Corporation’s guarantee,
participating institutions will pay the Federal Deposit Insurance Corporation a
fee based on the amount and maturity of the debt. East Boston Savings
Bank opted not to participate in this component of the Temporary Liquidity
Guarantee Program.
The other component of the program
provides full federal deposit insurance coverage for non-interest bearing
transaction deposit accounts, regardless of dollar amount, until June 30, 2010.
Through December 31, 2009, an annualized 10 basis point assessment on balances
in noninterest-bearing transaction accounts that exceed $250,000 was assessed to
insured depository institutions that have not opted out of this component of the
Temporary Liquidity Guarantee Program. Beginning January 1, 2010, the
fees will be based on the institution’s risk category rating assigned with
respect to regular Federal Deposit Insurance Corporation assessments.
Institutions in Risk Category I (generally well-capitalized institutions with
composite CAMELS 1 or 2 ratings) will pay an annualized assessment rate of 15
basis points. Institutions in Risk Category II (generally adequately
capitalized institutions with composite CAMELS 3 or better) will pay an
annualized assessment rate of 20 basis points. Institutions in Risk
Category III or IV (generally under capitalized or composite CAMELS 4 or 5) will
pay an annualized assessment rate of 25 basis points. East Boston
Savings Bank opted not to participate in this component of the Temporary
Liquidity Guarantee Program.
U.S.
Treasury’s Troubled Asset Relief Program Capital Purchase Program
The Emergency Economic Stabilization
Act of 2008 provides the U.S. Secretary of the Treasury with broad authority to
implement certain actions to help restore stability and liquidity to U.S.
markets. One of the provisions resulting from the legislation is the Troubled
Asset Relief Program Capital Purchase Program (“CPP”), which provides direct
equity investment in perpetual preferred stock by the U.S. Treasury Department
in qualified financial institutions. The program is voluntary and requires an
institution to comply with a number of restrictions and provisions, including
limits on executive compensation, stock redemptions and declaration of
dividends. East Boston Savings Bank opted not to participate in the
CPP.
Privacy
Regulations
Pursuant to the Gramm-Leach-Bliley
Financial Modernization Act of 1999, FDIC regulations generally require that
East Boston Savings Bank disclose its privacy policy, including identifying with
whom it shares a customer’s “non-public personal information,” to customers at
the time of establishing the customer relationship and annually thereafter. In
addition, East Boston Savings Bank is required to provide its customers with the
ability to “opt-out” of having their personal information shared with
unaffiliated third parties and not to disclose account numbers or access codes
to non-affiliated third parties for marketing purposes. East Boston Savings Bank
currently has a privacy protection policy in place and believes that such policy
is in compliance with the regulations. The privacy provisions of the
Act affect how consumer information is transmitted through diversified financial
companies and conveyed to outside vendors.
Community
Reinvestment Act
Under the Community Reinvestment Act,
or CRA, as amended and as implemented by FDIC regulations, a bank has a
continuing and affirmative obligation, consistent with its safe and sound
operation, to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution’s discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA does require the FDIC, in connection with its examination of a bank, to
assess the institution’s record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications by
such institution, including applications to acquire branches and other financial
institutions. The CRA requires the FDIC to provide a written evaluation of an
institution’s CRA performance utilizing a four-tiered descriptive rating system.
East Boston Savings Banks’ latest FDIC CRA rating was
“Outstanding.”
Massachusetts has its own statutory
counterpart to the CRA which is also applicable to East Boston Savings Bank. The
Massachusetts version is generally similar to the CRA but utilizes a five-tiered
descriptive rating system. Massachusetts law requires the Massachusetts
Commissioner of Banks to consider, but not be limited to, a bank’s record of
performance under Massachusetts law in considering any application by the bank
to establish a branch or other deposit-taking facility, to relocate an office or
to merge or consolidate with or acquire the assets and assume the liabilities of
any other banking institution. East Boston Savings Banks’ most recent
rating under Massachusetts law was “Satisfactory.”
Consumer Protection and Fair Lending
Regulations
Massachusetts savings banks are subject
to a variety of federal and Massachusetts statutes and regulations that are
intended to protect consumers and prohibit discrimination in the granting of
credit. These statutes and regulations provide for a range of sanctions for
non-compliance with their terms, including imposition of administrative fines
and remedial orders, and referral to the Attorney General for prosecution of a
civil action for actual and punitive damages and injunctive relief. Certain of
these statutes authorize private individual and class action lawsuits and the
award of actual, statutory and punitive damages and attorneys’ fees for certain
types of violations.
USA
Patriot Act
East Boston Savings Bank is subject to
the USA PATRIOT Act, which gives the federal government new powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title III
of the USA PATRIOT Act takes measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents, and parties registered under the Commodity
Exchange Act.
Other
Regulations
Interest
and other charges collected or contracted for by East Boston Savings Bank are
subject to state usury laws and federal laws concerning interest
rates. Loan operations are also subject to state and federal laws
applicable to credit transactions, such as the:
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Home
Mortgage Disclosure Act of 1975, requiring financial institutions to
provide information to enable the public and public officials to determine
whether a financial institution is fulfilling its obligation to help meet
the housing needs of the community it
serves;
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Equal
Credit Opportunity Act, prohibiting discrimination on the basis of race,
creed or other prohibited factors in extending
credit;
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Fair
Credit Reporting Act of 1978, governing the use and provision of
information to credit reporting
agencies;
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Massachusetts
Debt Collection Regulations, establishing standards, by defining unfair or
deceptive acts or practices, for the collection of debts from persons
within the Commonwealth of Massachusetts and the General Laws of
Massachusetts, Chapter 167E, which governs East Boston Savings Bank’s
lending powers; and
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Rules
and regulations of the various federal and state agencies charged with the
responsibility of implementing such federal and state
laws.
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The
deposit operations of East Boston Savings Bank also are subject to, among
others, the:
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Right
to Financial Privacy Act, which imposes a duty to maintain confidentiality
of consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial
records;
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Check
Clearing for the 21st Century Act (also known as “Check 21”), which gives
“substitute checks,” such as digital check images and copies made from
that image, the same legal standing as the original paper check;
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Electronic
Funds Transfer Act and Regulation E promulgated thereunder, and, as to
East Boston Savings Bank Chapter 167B of the General Laws of
Massachusetts, which govern automatic deposits to and withdrawals from
deposit accounts and customers’ rights and liabilities arising from the
use of automated teller machines and other electronic banking services;
and
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General
Laws of Massachusetts, Chapter 167D, which governs East Boston Savings
Bank’s deposit powers.
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Federal
Reserve System
The
Federal Reserve Board regulations require depository institutions to maintain
non-interest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The Federal Reserve Board regulations generally
require that reserves be maintained against aggregate transaction accounts as
follows: for that portion of transaction accounts aggregating $45.8 million or
less (which may be adjusted by the Federal Reserve Board) the reserve
requirement is 3.0%; and the amounts greater than $45.8 million require a 10.0%
reserve (which may be adjusted by the Federal Reserve Board between 8.0% and
14.0%). The first $8.5 million of otherwise reservable balances (which may be
adjusted by the Federal Reserve Board) are exempted from the reserve
requirements. East Boston Savings Bank is in compliance with these
requirements.
Federal
Home Loan Bank System
East
Boston Savings Bank is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank
provides a central credit facility primarily for member institutions. Members of
the Federal Home Loan Bank are required to acquire and hold shares of capital
stock in the Federal Home Loan Bank. East Boston Savings Bank was in compliance
with this requirement with an investment in stock of the Federal Home Loan Bank
of Boston (“FHLB-Boston”) at December 31, 2009 of $4.6 million. Based
on redemption provisions of the FHLB-Boston, the stock has no quoted market
value and is carried at cost. In 2008, due to sustained losses, the FHLB-Boston
announced a moratorium on redemption of members’ excess stock. The
Bank reviews for impairment based on the ultimate recoverability of the cost
basis of the FHLB-Boston stock. As of December 31, 2009, no
impairment has been recognized.
At its
discretion, the FHLB-Boston may declare dividends on the stock. The
Federal Home Loan Banks are required to provide funds for certain purposes
including the resolution of insolvent thrifts in the late 1980s and to
contributing funds for affordable housing programs. These requirements could
reduce the amount of dividends that the Federal Home Loan Banks pay to their
members and result in the Federal Home Loan Banks imposing a higher rate of
interest on advances to their members. As a result of losses
sustained in 2008, the FHLB-Boston suspended
all dividends in 2009 and currently has a moratorium on the redemption of its
stock. There can be no assurance that such dividends will resume in
the future. If interest on future Federal Home Loan Bank advances
increased, a member bank affected by such increase would likely experience a
reduction in its net interest income. Further, there can be no
assurance that the impact of recent or future legislation on the Federal Home
Loan Banks also will not cause a decrease in the value of the FHLB-Boston stock
held by East Boston Savings Bank.
Holding
Company Regulation
Meridian
Interstate Bancorp and Meridian Financial Services are subject to examination,
regulation, and periodic reporting under the Bank Holding Company Act of 1956,
as amended, as administered by the Federal Reserve Board. Meridian
Interstate Bancorp and Meridian Financial Services are required to obtain the
prior approval of the Federal Reserve Board to acquire all, or substantially
all, of the assets of any bank or bank holding company. Prior Federal Reserve
Board approval would be required for Meridian Interstate Bancorp or Meridian
Financial Services to acquire direct or indirect ownership or control of any
voting securities of any bank or bank holding company if, after such
acquisition, it would, directly or indirectly, own or control more than 5% of
any class of voting shares of the bank or bank holding company. In addition to
the approval of the Federal Reserve Board, prior approval may also be necessary
from other agencies having supervisory jurisdiction over the bank to be acquired
before any bank acquisition can be completed.
A bank
holding company is generally prohibited from engaging in non-banking activities,
or acquiring, direct or indirect control of more than 5% of the voting
securities of any company engaged in non-banking activities. One of the
principal exceptions to this prohibition is for activities found by the Federal
Reserve Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. Some of the principal activities that
the Federal Reserve Board has determined by regulation to be so closely related
to banking are: (i) making or servicing loans; (ii) performing certain data
processing services; (iii) providing discount brokerage services; (iv) acting as
fiduciary, investment or financial advisor; (v) leasing personal or real
property; (vi) making investments in corporations or projects designed primarily
to promote community welfare; and (vii) acquiring a savings and loan association
whose direct and indirect activities are limited to those permitted for bank
holding companies.
The
Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets
specified conditions, including being “well capitalized” and “well managed,” to
opt to become a “financial holding company” and thereby engage in a broader
array of financial activities than previously permitted. Such activities can
include insurance underwriting and investment banking.
Meridian
Interstate Bancorp and Meridian Financial Services are subject to the Federal
Reserve Board’s capital adequacy guidelines for bank holding companies (on a
consolidated basis) substantially similar to those of the Federal Deposit
Insurance Corporation for East Boston Savings Bank.
A bank
holding company is generally required to give the Federal Reserve Board prior
written notice of any purchase or redemption of then outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of the company’s
consolidated net worth. The Federal Reserve Board may disapprove such a purchase
or redemption if it determines that the proposal would constitute an unsafe and
unsound practice, or would violate any law, regulation, Federal Reserve Board
order or directive, or any condition imposed by, or written agreement with, the
Federal Reserve Board. The Federal Reserve Board has adopted an exception to
this approval requirement for well-capitalized bank holding companies that meet
certain other conditions.
The
Federal Reserve Board has issued a policy statement regarding the payment of
dividends by bank holding companies. In general, the Federal Reserve Board’s
policies provide that dividends should be paid only out of current earnings and
only if the prospective rate of earnings retention by the bank holding company
appears consistent with the organization’s capital needs, asset quality and
overall financial condition. The Federal Reserve Board’s policies also require
that a bank holding company serve as a source of financial strength to its
subsidiary banks by standing ready to use available resources to provide
adequate capital funds to those banks during periods of financial stress or
adversity and by maintaining the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its subsidiary banks where
necessary. Under the prompt corrective action laws, the ability of a bank
holding company to pay dividends may be restricted if a subsidiary bank becomes
undercapitalized. These regulatory policies could affect the ability of Meridian
Interstate Bancorp or Meridian Financial Services to pay dividends or otherwise
engage in capital distributions.
Under the
Federal Deposit Insurance Act, depository institutions are liable to the Federal
Deposit Insurance Corporation for losses suffered or anticipated by the Federal
Deposit Insurance Corporation in connection with the default of a commonly
controlled depository institution or any assistance provided by the Federal
Deposit Insurance Corporation to such an institution in danger of
default.
The
status of Meridian Interstate Bancorp and Meridian Financial Services as
registered bank holding companies under the Bank Holding Company Act does not
exempt them from certain federal and state laws and regulations applicable to
corporations generally, including, without limitation, certain provisions of the
federal securities laws.
Meridian
Interstate Bancorp, Meridian Financial Services and East Boston Savings Bank
will be affected by the monetary and fiscal policies of various agencies of the
United States Government, including the Federal Reserve System. In view of
changing conditions in the national economy and in the money markets, it is
impossible for management to accurately predict future changes in monetary
policy or the effect of such changes on the business or financial condition of
Meridian Interstate Bancorp, Meridian Financial Services or East Boston Savings
Bank.
Massachusetts
Holding Company Regulation
Under the
Massachusetts banking laws, a company owning or controlling two or more banking
institutions, including a savings bank, is regulated as a bank holding company.
The term “company” is defined by the Massachusetts banking laws similarly to the
definition of “company” under the Bank Holding Company Act. Each Massachusetts
bank holding company: (i) must obtain the approval of the Massachusetts Board of
Bank Incorporation before engaging in certain transactions, such as the
acquisition of more than 5% of the voting stock of another banking institution;
(ii) must register, and file reports, with the Division; and (iii) is subject to
examination by the Division. In addition, a Massachusetts mutual
holding company: (i) may invest in the stock of one or more banking
institutions; (ii) may merge with or acquire a mutual banking institution; (iii)
may merge with or acquire another bank holding company provided that any such
holding company has a subsidiary banking institution; (iv) may invest in a
corporation; (v) must register, and file reports, with the Division; (vi) may
engage directly or indirectly only in activities permitted by law for a
Massachusetts bank holding company; and (vii) may take any action with respect
to any securities of any subsidiary banking institution which are held by such
mutual holding company. Meridian Interstate Bancorp and Meridian
Financial Services are registered Massachusetts bank holding
companies.
Federal
Securities Laws
Our
common stock is registered with the Securities and Exchange Commission under
Section 12(b) of the Securities Exchange Act of 1934, as amended. We
are subject to information, proxy solicitation, insider trading restrictions,
and other requirements under the Exchange Act.
Sarbanes-Oxley
Act of 2002
The
Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance,
auditing and accounting, executive compensation, and enhanced and timely
disclosure of corporate information. As directed by the Sarbanes-Oxley Act of
2002, Meridian Interstate Bancorp’s Chief Executive Officer and Chief Financial
Officer each are required to certify that Meridian Interstate Bancorp’s
quarterly and Annual Reports do not contain any untrue statement of a material
fact. The rules adopted by the Securities and Exchange Commission
under the Sarbanes-Oxley Act of 2002 have several requirements, including having
these officers certify that: they are responsible for establishing, maintaining
and regularly evaluating the effectiveness of our internal controls; they have
made certain disclosures to our auditors and the audit committee of the Board of
Directors about our internal controls; and they have included information in our
quarterly and Annual Reports about their evaluation and whether there have been
significant changes in our internal controls or in other factors that could
significantly affect internal controls.
Federal
Income Taxation
General
East
Boston Savings Bank reports its income on a calendar year basis using the
accrual method of accounting. The federal income tax laws apply to
East Boston Savings Bank in the same manner as to other corporations with some
exceptions, including the reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to East
Boston Savings Bank. East Boston Savings Bank’s federal income tax
returns have been either audited or closed under the statute of limitations
through December 31, 2004. For its 2009 tax year, East Boston Savings
Bank’s maximum federal income tax rate was 34%.
Bad Debt
Reserves
For
taxable years beginning before January 1, 1996, thrift institutions that
qualified under certain definitional tests and other conditions of the Internal
Revenue Code were permitted to use certain favorable provisions to calculate
their deductions from taxable income for annual additions to their bad debt
reserve. A reserve could be established for bad debts on qualifying real
property loans, generally secured by interests in real property improved or to
be improved, under the percentage of taxable income method or the experience
method. The reserve for non-qualifying loans was computed using the
experience method. Federal legislation enacted in 1996 repealed the
reserve method of accounting for bad debts and the percentage of taxable income
method for tax years beginning after 1995 and required savings institutions to
recapture or take into income certain portions of their accumulated bad debt
reserves. However, those bad debt reserves accumulated prior to 1988
(“Base Year Reserves”) were not required to be recaptured unless the savings
institution failed certain tests. At December 31, 2009, $7.5
million of East Boston Savings Bank’s accumulated bad debt reserves would not be
recaptured into taxable income unless East Boston Savings Bank makes a
“non-dividend distribution” to Meridian Interstate Bancorp as described
below.
Distributions
If East
Boston Savings Bank makes “non-dividend distributions” to Meridian Interstate
Bancorp, the distributions will be considered to have been made from East Boston
Savings Bank’s un-recaptured tax bad debt reserves, including the balance of its
Base Year Reserves as of December 31, 1987, to the extent of the “non-dividend
distributions,” and then from East Boston Savings Bank’s supplemental reserve
for losses on loans, to the extent of those reserves, and an amount based on the
amount distributed, but not more than the amount of those reserves, will be
included in East Boston Savings Bank’s taxable income. Non-dividend
distributions include distributions in excess of East Boston Savings Bank’s
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock and distributions in partial
or complete liquidation. Dividends paid out of East Boston Savings
Bank’s current or accumulated earnings and profits will not be so included in
Meridian Interstate Bancorp’s taxable income.
The
amount of additional taxable income triggered by a non-dividend is an amount
that, when reduced by the tax attributable to the income, is equal to the amount
of the distribution. Therefore, if East Boston Savings Bank makes a
non-dividend distribution to Meridian Interstate Bancorp, approximately one and
one-half times the amount of the distribution not in excess of the amount of the
reserves would be includable in income for federal income tax purposes, assuming
a 34% federal corporate income tax rate. East Boston Savings Bank
does not intend to pay dividends that would result in a recapture of any portion
of its bad debt reserves.
State
Taxation
Financial
institutions in Massachusetts will be allowed to file combined income tax
returns for the year ended December 31, 2009. Starting in 2010,
decreasing over a three year period, the Massachusetts excise tax rate for
savings banks is changing from 10.5% to 9.0% of federal taxable income, adjusted
for certain items. Refer to Note 11, Income Taxes in the Notes to
Consolidated Financial Statements included in Item 8, Financial Statements and
Supplementary Data, which shows the effect of this change in 2008 which
was when the law was enacted. Taxable income includes gross income as
defined under the Internal Revenue Code, plus interest from bonds, notes and
evidences of indebtedness of any state, including Massachusetts, less
deductions, but not the credits, allowable under the provisions of the Internal
Revenue Code, except for those deductions relating to dividends received and
income or franchise taxes imposed by a state or political
subdivision. Carryforwards and carrybacks of net operating losses and
capital losses are not allowed. East Boston Savings Bank’s state tax returns, as
well as those of its subsidiary, are not currently under audit.
A
financial institution or business corporation is generally entitled to special
tax treatment as a “security corporation” under Massachusetts law provided that:
(a) its activities are limited to buying, selling, dealing in or holding
securities on its own behalf and not as a broker; and (b) it has applied for,
and received, classification as a “security corporation” by the Commissioner of
the Massachusetts Department of Revenue. A security corporation that
is also a bank holding company under the Internal Revenue Code must pay a tax
equal to 0.33% of its gross income. A security corporation that is
not a bank holding company under the Internal Revenue Code must pay a tax equal
to 1.32% of its gross income. Prospect, Inc. is qualified as a
security corporation. As such, it has received security corporation
classification by the Massachusetts Department of Revenue; and does not conduct
any activities deemed impermissible under the governing statutes and the various
regulations, directives, letter rulings and administrative pronouncements issued
by the Massachusetts Department of Revenue.
Risks
Related to Our Business
The
United States economy is in recession. A prolonged economic downturn, especially
one affecting our geographic market area, could materially affect our business
and financial results.
The
United States economy entered a recession in the fourth quarter of
2007. Throughout the course of 2008 and into 2009, economic
conditions continued to worsen, due in large part to the fallout from the
collapse of the sub-prime mortgage market. Unemployment remains at very high
levels and is not expected to improve in the near future. Our lending
business is tied, in large part, to the housing market and real estate markets
in general. The continuing housing slump has resulted in reduced
demand for the construction of new housing, declines in home prices, and could
ultimately result in increased delinquencies on our residential, commercial,
multi-family and construction mortgage loans. Further, the ongoing concern about
the stability of the financial markets in general has caused many lenders to
reduce or cease providing funding to borrowers. These conditions may also cause
a further reduction in loan demand, and increases in our non-performing assets,
net charge-offs and provisions for loan losses. Continued negative
developments in the financial services industry and the domestic and
international credit markets may significantly affect the markets in which we do
business, the market for and value of our loans and investments, and our ongoing
operations, costs and profitability. Moreover, continued declines in
the stock market in general, or stock values of financial institutions and their
holding companies specifically, could adversely affect our stock
performance.
The
Federal Deposit Insurance Corporation actions to recapitalize the Deposit
Insurance Fund could hurt our profits.
On May
22, 2009, the FDIC adopted a final rule levying a five basis point special
assessment on each insured depository institution's assets minus Tier 1 capital
as of September 30, 2009. The special assessment was paid on
September 30, 2009. We recorded an expense of $502,000 during the
quarter ended June 30, 2009, to reflect the special assessment. The
final rule permitted the FDIC’s Board of Directors to levy up to two additional
special assessments of up to five basis points each during 2009 if the FDIC
estimated that the Deposit Insurance Fund reserve ratio will fall to a level
that the FDIC’s Board of Directors believes would adversely affect public
confidence or to a level that will be close to or below
zero. Although there were no further special assessments in 2009, any
such action by the FDIC in the future will be recorded as an expense during the
appropriate period.
The
Federal Deposit Insurance Corporation also adopted a rule pursuant to which all
insured depository institutions prepaid on December 30, 2009 their estimated
assessments for all of 2010, 2011 and 2012. The assessment rate for
the fourth quarter of 2009 and for 2010 is based on each
institution’s
total
base assessment rate for the third quarter of 2009, modified to assume that the
assessment rate in effect on September 30, 2009 had been in effect for the
entire third quarter, and the assessment rate for 2011 and 2012 will be equal to
the modified third quarter assessment rate plus an additional three basis
points. In addition, each institution’s base assessment rate for each
period will be calculated using its third quarter assessment base, adjusted
quarterly for an estimated 5% annual growth rate in the assessment base through
the end of 2012. We recorded the pre-payment as a prepaid expense,
which will be amortized to expense over three years. Based on our
deposits and assessment rate as of September 30, 2009, our prepayment amount was
$5.1 million which was paid during the quarter ended December 31,
2009.
Our
emphasis on commercial real estate, multi-family, commercial business and
construction lending involves risks.
In recent years, the Company has
focused on shifting its asset mix to reduce the one- to four-family residential
loan portfolio and increase commercial real estate, multi-family, commercial
business and construction loans. As of December 31, 2009, our
commercial real estate, multi-family, commercial business and construction loans
totaled $516.2 million, or 62.7% of our loan portfolio. As a result,
our credit risk profile is higher than traditional savings institutions that
have higher concentrations of one- to four-family residential
loans. Also, these types of commercial lending activities, while
potentially more profitable than one- to four-family residential lending, are
generally more sensitive to regional and local economic conditions, making loss
levels more difficult to predict. Collateral evaluation and financial
statement analysis in these types of loans requires a more detailed analysis at
the time of loan underwriting and on an ongoing basis. A further decline
in real estate values would reduce the value of the real estate collateral
securing our loans and increase the risk that we would incur losses if borrowers
defaulted on their loans. In addition, the repayment of commercial real
estate and multi-family loans generally is dependent, in large part, on the
successful operation of the property securing the loan or the business conducted
on the property securing the loan. In addition, loan balances for
commercial real estate, multi-family and construction loans are typically larger
than those for permanent single-family and consumer loans. Accordingly,
when there are defaults and losses on these types of loans, they are often
larger on a per loan basis than those for permanent one- to four-family
residential and consumer loans. Commercial business loans expose us to
additional risks since they typically are made on the basis of the borrower’s
ability to make repayments from the cash flow of the borrower’s business and are
secured by non-real estate collateral that may depreciate over
time. A secondary market for most types of commercial real estate,
multi-family, commercial business and construction loans is not readily liquid,
so we have less opportunity to mitigate credit risk by selling part or all of
our interest in these loans.
Our construction loans are based upon
estimates of costs and values associated with the completed project. These
estimates may be inaccurate. Construction lending involves additional
risks when compared with permanent residential lending because funds are
advanced upon the security of the project, which is of uncertain value prior to
its completion. Because of the uncertainties inherent in estimating
construction costs, as well as the market value of the completed project and the
effects of governmental regulation of real property, it is relatively difficult
to evaluate accurately the total funds required to complete a project and the
related loan-to-value ratio. This type of lending also typically involves
higher loan principal amounts and is often concentrated with a small number of
builders. In addition, generally during the term of a construction loan,
interest may be funded by the borrower or disbursed from an interest reserve set
aside from the construction loan budget. These loans often involve the
disbursement of substantial funds with repayment substantially dependent on the
success of the ultimate project and the ability of the borrower to sell or lease
the property or obtain permanent take-out financing, rather than the ability of
the borrower or guarantor to repay principal and interest. If our
appraisal of the value of a completed project proves to be overstated, we may
have inadequate security for the repayment of the loan upon completion of
construction of the project and may incur a loss. A “discounted cash
flow analysis” is utilized for determining the value of any construction project
of five or more units. Our ability to continue to originate a significant
amount of construction loans is dependent on the recovery of the strength of the
housing market in our market areas.
The credit risk related to commercial
real estate and multi-family loans is considered to be greater than the risk
related to one- to four-family residential or consumer loans because the
repayment of commercial real estate loans and multi-family typically is
dependent on the income stream of the real estate securing the loan as
collateral and the successful operation of the borrower’s business, which can be
significantly affected by conditions in the real estate markets or in the
economy. For example, if the cash flow from the borrower’s project is
reduced as a result of leases not being obtained or renewed, the borrower’s
ability to repay the loan may be impaired. In addition, some of our
commercial real estate loans are not fully amortizing and contain large balloon
payments upon maturity. These balloon payments may require the borrower to
either sell or refinance the underlying property in order to make the balloon
payment.
Further, if we foreclose on a
commercial real estate and multi-family or construction loan, our holding period
for the collateral may be longer than for one- to four-family residential
mortgage loans because there are fewer potential purchasers of the
collateral. These loans also generally have relatively large balances to
single borrowers or related groups of borrowers. Accordingly, if we make
any errors in judgment in the collectibility of our commercial real estate
loans, any resulting charge-offs may be larger on a per loan basis than those
incurred with our residential or consumer loan portfolios.
The
Company’s recent business acquisition could have an impact on our earnings and
results of operations that may negatively impact the value of the Company’s
stock.
On
January 4, 2010, the Company completed its acquisition of Mt.
Washington. The acquisition will materially increase the size and
complexity of our operations. Although the Company believes it has
the management resources and internal systems in place to successfully integrate
Mt. Washington, there can be no assurance that the Company will successfully
integrate the acquired operations into our existing
operations. There can be no assurance that acquisition will not
have an adverse effect upon the Company’s operating results while the operations
of the acquired business are being integrated into the Company’s
operations. In addition, once integrated, acquired operations may not
achieve levels of profitability comparable to those achieved by the Company’s
existing operations, or otherwise perform as expected. Further,
transaction-related expenses may adversely affect the Company’s
earnings. These adverse effects on the Company’s earnings and results
of operations may have a negative impact on the value of the Company’s
stock.
Legislative
or regulatory actions responding to financial and market weakness could affect
us adversely. There can be no assurance that actions of the U.S. government,
Federal Reserve and other governmental and regulatory bodies for the purpose of
stabilizing the financial markets will achieve the intended effect.
The potential exists for additional
federal or state laws and regulations regarding lending and funding practices
and liquidity standards, and bank regulatory agencies are expected to be active
in responding to concerns and trends identified in examinations, including the
expected issuance of many formal enforcement orders. Actions taken to
date, as well as potential actions, may not have the beneficial effects that are
intended, particularly with respect to the extreme levels of volatility and
limited credit availability currently being experienced. In addition,
new laws, regulations, and other regulatory changes will increase our costs of
regulatory compliance and of doing business, and otherwise affect our
operations. Our FDIC insurance premiums have increased, and may continue to
increase, because market developments have significantly depleted the insurance
fund of the FDIC and reduced the ratio of reserves to insured deposits. New
laws, regulations, and other regulatory changes, along with negative
developments in the financial services industry and the credit markets, may
significantly affect the markets in which we do business, the markets for and
value of our loans and investments, and our ongoing operations, costs and
profitability.
We
operate in a highly regulated environment and we may be adversely affected by
changes in laws and regulations.
The Company is subject to extensive
regulation, supervision and examination by the Massachusetts Commissioner of
Banks, the Federal Deposit Insurance Corporation and the Federal Reserve
Board. Such regulation and supervision governs the activities in
which an institution and its holding company may engage and are intended
primarily for the protection of the insurance fund and the depositors and
borrowers of East Boston Savings Bank rather than for holders of Meridian
Interstate Bancorp common stock. Regulatory authorities have
extensive discretion in their supervisory and enforcement activities, including
the imposition of restrictions on our operations, the classification of our
assets and determination of the level of our allowance for loan
losses. Any change in such regulation and oversight, whether in the
form of regulatory policy, regulations, legislation or supervisory action, may
have a material impact on our operations.
Our
business strategy includes the continuation of significant growth plans, and our
financial condition and results of operations could be negatively affected if we
fail to grow or fail to manage our growth effectively.
We expect
to continue to experience growth in the amount of our assets, the level of our
deposits and the scale of our operations. Achieving our growth targets requires
us to attract customers that currently bank at other financial institutions in
our market, thereby increasing our share of the market. Our ability to
successfully grow will depend on a variety of factors, including our ability to
attract and retain experienced bankers, the continued availability of desirable
business opportunities, the competitive responses from other financial
institutions in our market areas and our ability to manage our growth. While we
believe we have the management resources and internal systems in place to
successfully manage our future growth, there can be no assurance growth
opportunities will be
available
or that we will successfully manage our growth. If we do not manage our growth
effectively, we may not be able to achieve our business plan, and our business
could be harmed.
Lack
of consumer confidence in financial institutions may decrease our level of
deposits.
Our level of deposits may be affected
by lack of consumer confidence in financial institutions, which has resulted in
large numbers of depositors unwilling to maintain deposits that are not insured
by the Federal Deposit Insurance Corporation. In some cases, depositors have
withdrawn deposits and invested uninsured funds in investments perceived as
being more secure, such as securities issued by the U.S. Treasury. These
consumer preferences may force us to pay higher interest rates to retain
deposits and may constrain liquidity as we seek to meet funding needs caused by
reduced deposit levels.
Economic
conditions may adversely affect our liquidity.
In the
past year, significant declines in the values of mortgage-backed securities and
derivative securities issued by financial institutions, government sponsored
entities, and major commercial and investment banks has led to decreased
confidence in financial markets among borrowers, lenders, and depositors, as
well as disruption and extreme volatility in the capital and credit markets and
the failure of some entities in the financial sector. As a result, many lenders
and institutional investors have reduced or ceased to provide funding to
borrowers. Continued turbulence in the capital and credit markets may adversely
affect our liquidity and financial condition and the willingness of certain
counterparties and customers to do business with us.
Future
legislative or regulatory actions responding to perceived financial and market
problems could impair our rights against borrowers.
As a result of the recent financial
crisis, the potential exists for the promulgation of new federal or state laws
and regulations regarding lending and funding practices and liquidity standards,
and bank regulatory agencies are expected to be active in responding to concerns
and trends identified in examinations, which are expected to result in the
issuance of many formal enforcement orders. Negative developments in the
financial services industry and the credit markets, and the impact of new
legislation in response to these developments, may negatively affect our
operations by restricting our business operations, including our ability to
originate or sell loans and pursue business opportunities. Compliance with such
regulation also will likely increase our costs.
There have been proposals made by
members of Congress and others that would reduce the amount distressed borrowers
are otherwise contractually obligated to pay under their mortgage loans and
limit an institution’s ability to foreclose on mortgage collateral. Were
proposals such as these, or other proposals limiting our rights as a creditor,
to be implemented, we could experience increased credit losses or increased
expense in pursuing our remedies as a creditor.
A
downturn in the local economy or a decline in local real estate values could
hurt our profits.
Unlike larger financial institutions
that are more geographically diversified, our profitability depends on the
general economic conditions in the Boston metropolitan area. Local
economic conditions have a significant impact on our commercial real estate and
construction and consumer loans, the ability of the borrowers to repay these
loans and the value of the collateral securing these loans. Almost
all of our loans are to borrowers or secured by collateral located in
Massachusetts. As a result of this concentration, the downturn in the
local economy has resulted in an increase in non-performing loans, which can
result in higher levels of loan loss provision expense. Moreover, a
significant decline in general economic conditions, caused by inflation,
recession, acts of terrorism, an outbreak of hostilities or other international
or domestic calamities, unemployment or other factors beyond our control could
further impact these local economic conditions and could further negatively
affect the financial results of our banking operations. A decline in real estate
values in our market area may have caused some of our mortgage loans to become
inadequately collateralized, which would expose us to a greater risk of loss on
defaulted loans which would negatively impact our net income. The Company
experienced increased levels of non-performing loans and provision for loan
losses in 2009 as a result of a downturn in the local real estate market; refer
to “Management’s Discussion
and Analysis of Results of Operations and Financial Condition - Analysis of
Non-performing and Classified Assets.”
If
our allowance for loan losses is not sufficient to cover actual loan losses, our
earnings could decrease.
The
Company maintains an allowance for loan losses, which is established through a
provision for loan losses that represents management’s best estimate of probable
losses within the existing portfolio of loans. The
Company
makes
various assumptions and judgments about the collectibility of its loan
portfolio, including the creditworthiness of borrowers and the value of the real
estate and other assets serving as collateral for the repayment of loans. In
determining the adequacy of the allowance for loan losses, the Company relies on
its experience and its evaluation of economic conditions. If its assumptions
prove to be incorrect, its current allowance for loan losses may not be
sufficient to cover losses inherent in its loan portfolio and adjustment may be
necessary to allow for different economic conditions or adverse developments in
its loan portfolio. Consequently, a problem with one or more loans could require
the Company to significantly increase the level of its provision for loan
losses. In addition, federal and state regulators periodically review the
Company’s allowance for loan losses and may require it to increase its provision
for loan losses or recognize further loan charge-offs. Material additions to the
allowance would materially decrease the Company’s net income.
Changes
in interest rates could hurt our profits.
Our profitability, like most financial
institutions, depends to a large extent upon our net interest income, which is
the difference between our interest income on interest-earning assets, such as
loans and securities, and our interest expense on interest-bearing liabilities,
such as deposits and borrowed funds. Accordingly, our results of
operations depend largely on movements in market interest rates and our ability
to manage our interest-rate-sensitive assets and liabilities in response to
these movements. Factors such as inflation, recession and instability
in financial markets, among other factors beyond the Company’s control, may
affect interest rates.
If interest rates rise, and if rates on
our deposits reprice upwards faster than the rates on our long-term loans and
investments, we would experience compression of our interest rate spread, which
would have a negative effect on our profitability. Decreases in
interest rates can result in increased prepayments of loans and mortgage-related
securities, as borrowers refinance to reduce their borrowing
costs. Under these circumstances, we are subject to reinvestment risk
as we may have to redeploy such loan or securities proceeds into lower-yielding
assets, which might also negatively impact our income.
While the
Company pursues an asset/liability strategy designed to mitigate its risk from
changes in interest rates, changes in interest rates can still have a material
adverse effect on the Company’s financial condition and results of operations.
Changes in the level of interest rates also may negatively affect our ability to
originate real estate loans, the value of our assets and our ability to realize
gains from the sale of our assets, all of which ultimately affect our earnings.
For further discussion of how changes in interest rates could impact us, see
“Management’s Discussion and
Analysis of Results of Operations and Financial Condition—Risk
Management—Interest Rate Risk Management.”
The
financial services sector represents a significant concentration within our
investment portfolio.
Within
the investment portfolio, the Company has a significant amount of marketable
equity securities and corporate debt securities, including mortgage-backed
securities, issued by companies in the financial services sector. Given the
current market conditions, this sector has an enhanced level of credit
risk.
We
could record future losses on our securities portfolio.
During
the year ended December 31, 2009, we recognized total other-than-temporary
impairment losses on our securities portfolio of $429,000. We
considered all of this impairment to be credit-related and, therefore, in
accordance with applicable accounting standards, we recorded all of the
impairment as losses through a reduction of non-interest income. A
number of factors or combinations of factors could require us to conclude in one
or more future reporting periods that an unrealized loss that exists with
respect to our securities portfolio constitutes additional impairment that is
other than temporary, which could result in material losses to
us. These factors include, but are not limited to, a continued
failure by an issuer to make scheduled interest payments, an increase in the
severity of the unrealized loss on a particular security, an increase in the
continuous duration of the unrealized loss without an improvement in value or
changes in market conditions and/or industry or issuer specific factors that
would render us unable to forecast a full recovery in value. In
addition, the fair values of securities could decline if the overall economy and
the financial condition of some of the issuers continues to deteriorate and
there remains limited liquidity for these securities.
Changes
in the valuation of our securities portfolio could hurt our
profits.
Management evaluates securities for
other-than-temporary impairment on a monthly basis, with more frequent
evaluation for selected issues. In analyzing a debt 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. 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. Market valuation levels of the securities portfolio have
improved as of December 31, 2009 compared to December 31,
2008. However, in 2009, due to continued low market valuations of
some of our equity securities, we recorded other than temporary impairment
charges. A decline in the market for the securities portfolio
could result in further impairment charges on some issues. Refer
to “Management’s Discussion
and Analysis of Results of Operations and Financial Condition – Securities
Portfolio.”
The
suspension of dividends by the Federal Home Loan Bank of Boston will negatively
affect our earnings.
The
Federal Home Loan Bank of Boston has not paid dividends on its stock since
suspending them during the fourth quarter of 2008 and it is uncertain when these
payments will recommence. We received $138,000 in dividends from the
Federal Home Loan Bank of Boston during the year ended December 31, 2008 and, as
a result of the moratorium, we did not receive any such dividends in 2009. The
continued failure of the Federal Home Loan Bank of Boston to pay dividends for
any future periods will reduce our earnings during such periods.
If
our investment in stock of the Federal Home Loan Bank of Boston is classified as
other-than-temporarily impaired, our earnings and stockholders’ equity would
decrease.
We own common stock of the Federal Home
Loan Bank of Boston. We hold this stock to qualify for membership in the Federal
Home Loan Bank System and to be eligible to borrow funds under the Federal Home
Loan Bank of Boston’s advance program. The aggregate cost and fair value of our
Federal Home Loan Bank of Boston common stock as of December 31, 2009 was $4.6
million based on its par value. There is no market for our Federal Home Loan
Bank of Boston common stock. Recent published reports indicate that
certain member banks of the Federal Home Loan Bank System may be subject to
accounting rules and asset quality risks that could result in materially lower
regulatory capital levels. In an extreme situation, it is possible
that the capitalization of a Federal Home Loan Bank, including the Federal Home
Loan Bank of Boston, could be substantially diminished. Consequently,
we believe that there is a risk that our investment in Federal Home Loan Bank of
Boston common stock could be impaired at some time in the future. If
this occurs, it would cause our earnings and stockholders’ equity to decrease by
the after-tax amount of the impairment charge.
The
building of market share through de novo branching could cause our expenses to
increase faster than revenues.
We intend to continue to build market
share in the greater Boston metropolitan area through de novo
branching. Since 2002, we have opened six de novo branches, the most
recent in August 2009. There are considerable costs involved in
opening branches and new branches generally require a period of time to generate
the necessary revenues to offset their costs, especially in areas in which we do
not have an established presence. Accordingly, any new branch can be
expected to negatively impact our earnings for some period of time until the
branch reaches certain economies of scale. Our expenses could be
further increased if we encounter delays in the opening of any of our new
branches. Finally, we have no assurance our new branches will be
successful after they have been established.
Our
funding sources may prove insufficient to replace deposits at maturity and
support our future growth.
We must maintain sufficient funds to
respond to the needs of depositors and borrowers. As a part of our liquidity
management, we use a number of funding sources in addition to core deposit
growth and repayments and maturities of loans and investments. As we continue to
grow, we are likely to become more dependent on these sources, which include
Federal Home Loan Bank advances, proceeds from the sale of loans; federal funds
purchased and brokered certificates of deposit. Adverse operating
results or changes in industry conditions could lead to difficulty or an
inability to access these additional funding sources. Our financial flexibility
will be severely constrained if we are unable to maintain our access to funding
or if adequate financing is not available to accommodate future growth at
acceptable interest rates. Finally, if we are required to rely more heavily on
more expensive funding sources to support future growth, our revenues may not
increase proportionately to cover our costs. In this case, our operating margins
and profitability would be adversely affected.
Strong
competition within our market area could hurt our profits and slow
growth.
We face intense competition in making
loans and attracting deposits. Price competition for loans and
deposits sometimes results in us charging lower interest rates on our loans and
paying higher interest rates on our deposits and may reduce our net
interest income. Competition also makes it more difficult and costly
to attract and retain qualified employees. Many of the institutions
with which we compete have substantially greater resources and lending limits
than we have and may offer services that we do not provide. We expect
competition to increase in the future as a result of legislative, regulatory and
technological changes and the continuing trend of consolidation in the financial
services industry. If we are not able to effectively compete in our
market area, our profitability may be negatively affected, potentially limiting
our ability to pay dividends. The greater resources and broader offering
of deposit and loan products of some of our competitors may also limit our
ability to increase our interest-earning assets. For more information
about our market area and the competition we face, see “Item 1 - Business—Market
Area” and “Item 1
- Business—Competition.”
The
success of the Company is dependent on hiring and retaining certain key
personnel.
The
Company’s performance is largely dependent on the talents and efforts of highly
skilled individuals. The Company relies on key personnel to manage and operate
its business, including major revenue generating functions such as loan and
deposit generation. The loss of key staff may adversely affect the
Company’s ability to maintain and manage these functions effectively, which
could negatively affect the Company’s revenues. In addition, loss of
key personnel could result in increased recruiting and hiring expenses, which
could cause a decrease in the Company’s net income. The Company’s
continued ability to compete effectively depends on its ability to attract new
employees and to retain and motivate its existing employees. In 2009,
the Company appointed a new President and Senior Lender. The Company
also hired a new Chief Financial Officer in January 2010.
We
could incur losses from our equity investment in Hampshire First Bank, a de novo
institution.
In 2006, we acquired 40% of the capital
stock of Hampshire First Bank, a New Hampshire chartered bank, organized in 2006
and headquartered in Manchester, New Hampshire. We account for our
investment in Hampshire First Bank by the equity method of accounting under
which our share of the net income or loss of Hampshire First Bank is recognized
as income or loss in our consolidated financial statements. While
Hampshire First Bank earned income during 2009, it incurred operating losses
during its initial years of operation and could record additional losses in the
future. We cannot guarantee that these losses may not significantly
affect our profitability.
Item 1b. unresolved staff
comments
Not
applicable.
At December 31, 2009, we conducted
business through our thirteen full service offices and one loan center located
in East Boston, Everett, Lynn, Lynnfield, Medford, Melrose, Peabody, Revere,
Saugus, Winthrop and Wakefield, Massachusetts. In 2009, we opened our
branch office in Medford, Massachusetts. We own all of our offices
except for the Medford, Saugus and Wakefield offices, which are subject to
renewable leases. At December 31, 2009, the total net book value of
our land, buildings, furniture, fixtures and equipment was $23.2
million.
Location
|
|
Size
(Square
feet)
|
|
Owned
or
Leased
|
|
Lease
Expiration
Date
|
|
|
|
|
|
|
|
Branch offices:
|
|
|
|
|
|
|
Suffolk
County:
|
|
|
|
|
|
|
10
Meridian Street, East Boston, MA 02128
|
|
6,900
|
|
Owned
|
|
Not
Applicable
|
1
Bennington Street, East Boston, MA 20128
|
|
3,285
|
|
Owned
|
|
Not
Applicable
|
856
Bennington Street, East Boston, MA 02128
|
|
6,900
|
|
Owned
|
|
Not
Applicable
|
575
Broadway, Revere, MA 02151
|
|
4,400
|
|
Owned
|
|
Not
Applicable
|
Middelesex
County:
|
|
|
|
|
|
|
1755
Revere Beach Parkway, Everett, MA 02149
|
|
8,800
|
|
Owned
|
|
Not
Applicable
|
410
Riverside Avenue, Medford, MA 02155
|
|
3,200
|
|
Leased
|
|
6/1/2018
|
108
Main Street, Melrose, MA 02176
|
|
6,052
|
|
Owned
|
|
Not
Applicable
|
381
Main Street, Wakefield, MA 01880
|
|
2,200
|
|
Leased
|
|
3/1/2013
|
15
Barlett Road, Winthrop, MA 02152
|
|
2,600
|
|
Owned
|
|
Not
Applicable
|
Essex
County:
|
|
|
|
|
|
|
335
Broadway, Lynn, MA 01904
|
|
6,000
|
|
Owned
|
|
Not
Applicable
|
Route
1 South 220 Broadway, Suite 401, Lynnfield, MA 01940
|
|
1,760
|
|
Owned
|
|
Not
Applicable
|
67
Prospect Street, Peabody, MA 01960
|
|
108,000
|
|
Owned
|
|
Not
Applicable
|
320
Central Street, Saugus, MA 01906
|
|
14,860
|
|
Owned
|
|
Not
Applicable
|
317
Main Street, Saugus, MA 01906
|
|
3,870
|
|
Leased
|
|
1/31/2012
|
Planned branch offices:
|
|
|
|
|
|
|
Revere,
MA
|
|
(A)
|
|
Owned
|
|
Not
Applicable
|
|
|
|
|
|
|
|
(A)
Facility currently under construction or in planning.
|
|
|
|
|
|
|
Item 3. legal
proceedings
Periodically,
there have been various claims and lawsuits against us, such as claims to
enforce liens, condemnation proceedings on properties in which we hold security
interests, claims involving the making and servicing of real property loans and
other issues incident to our business. We are not a party to any
pending legal proceedings that we believe would have a material adverse effect
on our financial condition, results of operations or cash flows.
Item 5. market for registrant’s
common equity, related stockholder matters and issuer purchases of equity
securities
Market
Information and Holders
Our
shares of common stock are traded on the NASDAQ Global Select Market under the
symbol “EBSB”. The approximate number of shareholders of record of
Meridian Interstate Bancorp, Inc.’s common stock as of February 26, 2010 was
1,042. Certain shares of Meridian Interstate Bancorp, Inc. are held
in “nominee” or “street” name and accordingly, the number of beneficial owners
of such shares is not known or included in the foregoing number.
The
following table sets forth for each quarter of 2009 and 2008 the intra-day high
and low sales prices per share of common stock as reported by
Nasdaq. No cash dividends were declared in either year. On
March 5, 2010, the closing market price of the Company’s common stock was
$10.13.
2009
|
|
High
|
|
|
Low
|
|
|
Dividends
Declared
|
|
Fourth
quarter
|
|
$ |
9.49 |
|
|
$ |
8.20 |
|
|
$ |
- |
|
Third
quarter
|
|
|
9.67 |
|
|
|
7.39 |
|
|
|
- |
|
Second
quarter
|
|
|
9.00 |
|
|
|
7.10 |
|
|
|
- |
|
First
quarter
|
|
|
9.65 |
|
|
|
6.34 |
|
|
|
- |
|
2008
|
|
High
|
|
|
Low
|
|
|
Dividends
Declared
|
|
Fourth
quarter
|
|
$ |
10.17 |
|
|
$ |
7.93 |
|
|
$ |
- |
|
Third
quarter
|
|
|
10.40 |
|
|
|
9.15 |
|
|
|
- |
|
Second
quarter
|
|
|
10.40 |
|
|
|
9.50 |
|
|
|
- |
|
First
quarter
|
|
|
9.80 |
|
|
|
8.21 |
|
|
|
- |
|
Dividends
Meridian
Interstate Bancorp has not yet determined whether it will pay a dividend on the
common stock. The Board of Directors will consider a policy of paying
regular cash dividends. The Board of Directors may declare and pay
periodic special cash dividends in addition to, or in lieu of, regular cash
dividends. In determining whether to declare or pay any dividends,
whether regular or special, the Board of Directors will take into account our
financial condition and results of operations, tax considerations, capital
requirements, industry standards, and economic conditions. The
regulatory restrictions that affect the payment of dividends by East Boston
Savings Bank to us discussed below also will be considered. We cannot
guarantee that we will pay dividends or that, if paid, we will not reduce or
eliminate dividends in the future.
If
Meridian Interstate Bancorp pays dividends to its stockholders, it will be
required to pay dividends to Meridian Financial Services. The Federal Reserve
Board’s current policy prohibits the waiver of dividends by mutual holding
companies. In addition, Massachusetts banking regulations prohibit
Meridian Financial Services from waiving dividends declared and paid by Meridian
Interstate Bancorp unless the Massachusetts Commissioner of Banks does not
object to the waiver and provided the waiver is not detrimental to the safe and
sound operation of East Boston
Savings
Bank. Accordingly, we do not currently anticipate that Meridian
Financial Services will be permitted to waive dividends paid by Meridian
Interstate Bancorp.
Meridian
Interstate Bancorp is subject to Massachusetts law, which prohibits
distributions to stockholders if, after giving effect to the distribution, the
Company would not be able to pay its debts as they become due in the usual
course of business or the Company’s total assets would be less than the sum of
its total liabilities plus the amount that would be needed, if the Company were
to be dissolved at the time of the distribution, to satisfy the preferential
rights upon dissolution of stockholders whose preferential rights are superior
to those receiving the distribution.
Dividends
from Meridian Interstate Bancorp may depend, in part, upon receipt of dividends
from East Boston Savings Bank because Meridian Interstate Bancorp will have no
source of income other than dividends from East Boston Savings Bank and earnings
from investment of net proceeds from the offering retained by Meridian
Interstate Bancorp. Massachusetts banking law and Federal Deposit
Insurance Corporation regulations limit distributions from East Boston Savings
Bank to Meridian Interstate Bancorp. For example, East Boston Savings
Bank could not pay dividends if it were not in compliance with applicable
regulatory capital requirements. See “Regulation and Supervision–State
Bank Regulation–Dividends” and “Federal Bank Regulation–Prompt
Corrective Regulatory Action.” In addition, Meridian
Interstate Bancorp is subject to the Federal Reserve Board’s policy that
dividends should be paid only out of current earnings and only if the
prospective rate of earnings retention by Meridian Interstate Bancorp appears
consistent with its capital needs, asset quality and overall financial
condition. See “Regulation and Supervision–Holding
Company Regulation.”
Any
payment of dividends by East Boston Savings Bank to Meridian Interstate Bancorp
that would be deemed to be drawn out of East Boston Savings Bank’s bad debt
reserves would require East Boston Savings Bank to pay federal income taxes at
the then-current income tax rate on the amount deemed
distributed. See “Federal and State Taxation—Federal
Income Taxation” and Note 11, Income Taxes in the Notes to
Consolidated Financial Statements included in Item 8, Financial Statements and
Supplementary Data within this report. Meridian
Interstate Bancorp does not contemplate any distribution by East Boston Savings
Bank that would result in this type of tax liability.
Recent
Sales of Unregistered Securities; Use of Proceeds from Registered
Securities
On July
2, 2007, the Board of Directors of Meridian Interstate Bancorp, Inc. adopted a
Stock Issuance Plan pursuant to which Meridian Interstate Bancorp, Inc. sold 43%
of its outstanding shares of common stock to the public in a stock offering and
issued 2% of its outstanding shares to Meridian Charitable Foundation,
Inc. The remaining 55% of the outstanding shares are held by Meridian
Financial Services, Incorporated, Meridian Interstate Bancorp, Inc.’s mutual
holding company.
Meridian
Interstate Bancorp, Inc. filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission in connection with the stock offering (File
No. 333-146373). The Registration Statement was declared effective by
the Securities and Exchange Commission on November 13, 2007. Meridian
Interstate Bancorp, Inc. registered 13,591,125 shares on the Registration
Statement, including up to 13,291,125 shares for sale to the
public. The stock offering commenced on November 27, 2007, and closed
on January 22, 2008.
Keefe,
Bruyette & Woods, Inc. was engaged to assist in the marketing of the shares
of common stock. For their services, Keefe, Bruyette & Woods, Inc. received
a success fee of 0.75% of the aggregate dollar amount of the shares of common
stock sold in the Subscription and Community offering excluding shares sold to
our employee stock ownership plan and to our officers, employees, corporators
and directors and their immediate family members and contributed to Meridian
Charitable Foundation, Inc. For shares of common stock sold
through a group of broker-dealers in a syndicated community offering, the total
fees payable to the selected dealers (which included Keefe, Bruyette &
Woods, Inc.) for the shares sold totaled 0.50% of the aggregate dollar amount of
shares sold in the syndicated offering. Keefe, Bruyette & Woods, Inc. was
also reimbursed $10,750 for its reasonable out-of-pocket expenses and $25,000
for its legal fees and expenses.
The stock
offering resulted in gross proceeds of $100.5 million, through the sale of
10,050,000 shares at a price of $10.00 per share. Expenses related to the
offering were approximately $2.9 million, including $1.5 million paid to Keefe,
Bruyette & Woods, Inc. No underwriting discounts, commissions or
finders fees were paid in connection with the stock offering. Net investable
proceeds of the offering were approximately $89.4 million.
$44.7
million of the net proceeds of the offering were retained by Meridian Interstate
Bancorp, Inc. and $44.7 million were contributed to East Boston Savings
Bank. Meridian Interstate Bancorp, Inc. may use the proceeds from the
stock offering as described in the section entitled “Use of Proceeds” in the
prospectus for the stock offering.
Securities
Authorized for Issuance under Equity Compensation Plans
Information
regarding stock-based compensation awards outstanding and available for future
grants as of December 31, 2009, represents stock-based compensation plans
approved by stockholders. There are no plans that have not been approved by
stockholders. Additional information is presented in Note 13,
Employee Benefits, in
the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and
Supplementary Data, within this report. Additional information regarding
the Company’s equity compensation plans is included in Part III, Item 12(d) of
this Form 10-K.
Purchases
of Equity Securities by the Issuer and Affiliated Purchases
The following table provides
information regarding the Company’s purchase of its equity securities during the
three months ended December 31, 2009.
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
Period
|
|
Total
Number of Shares (or Units) Purchased
|
|
|
Average
Price Paid Per Share (or Unit)
|
|
|
Total
Number of Shares (or Units) Purchased as Part of Publicly Announced Plans
or Programs (1)
|
|
|
Maximum
Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be
Purchased Under the Plans or Programs
|
|
October
1 – 31, 2009
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
189,268 |
|
November
1 – 30, 2009
|
|
|
189,268 |
|
|
$ |
8.63 |
|
|
|
189,268 |
|
|
|
- |
|
December
1 – 31, 2009
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
189,268 |
|
|
$ |
8.63 |
|
|
|
189,268 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
On
March 25, 2009 the Company announced that 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 517,500 shares of its common
stock (the “Second Stock Repurchase Program”). Any
purchase of common stock under the Company’s stock repurchase programs may
be made through open market purchase transactions from time to time or
privately negotiated transactions. The amount and exact timing of any
repurchases depend on market conditions and other factors, at the
discretion of management of the Company. The Company completed
the Second Stock Repurchase Program on December 8,
2009.
|
Performance
Graph
Our
shares of common stock began trading on the NASDAQ Global Select Market on
January 23, 2008. Accordingly, no comparative stock performance
information is available for periods ending prior to this date. The
performance graph below compares the Company’s cumulative shareholder return on
its common stock since the inception of trading on January 23, 2008 to the
cumulative total return of the Nasdaq Composite and the SNL Bank and Thrift
Composite. Total shareholder return is measured by dividing total
dividends (assuming dividend reinvestment) for the measurement period plus share
price change for the period from the share price at the beginning of the
measurement period. The return is based on an initial investment of
$100.00.
|
|
Period
Ending |
|
Index
|
|
01/22/08
|
|
|
06/30/08
|
|
|
12/31/08
|
|
|
06/30/09
|
|
|
12/31/09
|
|
Meridian
Interstate Bancorp, Inc. (MHC)
|
|
|
100.00 |
|
|
|
97.20 |
|
|
|
92.50 |
|
|
|
74.50 |
|
|
|
87.00 |
|
SNL
Bank and Thrift
|
|
|
100.00 |
|
|
|
77.44 |
|
|
|
63.90 |
|
|
|
54.93 |
|
|
|
63.04 |
|
NASDAQ
Composite
|
|
|
100.00 |
|
|
|
100.03 |
|
|
|
68.80 |
|
|
|
80.05 |
|
|
|
98.99 |
|
Item 6. selected financial
data
The
following table sets forth selected financial data for the Company.
|
|
At
or for the Year Ended December 31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Financial
Condition Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
1,211,386 |
|
|
$ |
1,065,352 |
|
|
$ |
1,003,226 |
|
|
$ |
899,563 |
|
|
$ |
824,500 |
|
Securities
available for sale
|
|
|
293,367 |
|
|
|
252,529 |
|
|
|
267,058 |
|
|
|
281,662 |
|
|
|
264,174 |
|
Loans
receivable, net
|
|
|
813,300 |
|
|
|
704,104 |
|
|
|
568,104 |
|
|
|
529,650 |
|
|
|
480,833 |
|
Deposits
|
|
|
922,475 |
|
|
|
796,852 |
|
|
|
774,446 |
|
|
|
736,989 |
|
|
|
672,544 |
|
Borrowings
|
|
|
75,410 |
|
|
|
65,486 |
|
|
|
36,527 |
|
|
|
40,589 |
|
|
|
37,108 |
|
Total
stockholders' equity
|
|
|
200,415 |
|
|
|
189,840 |
|
|
|
115,684 |
|
|
|
110,275 |
|
|
|
104,243 |
|
Operating
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividend income
|
|
$ |
56,667 |
|
|
$ |
52,897 |
|
|
$ |
49,175 |
|
|
$ |
45,235 |
|
|
$ |
40,186 |
|
Interest
expense
|
|
|
20,392 |
|
|
|
27,044 |
|
|
|
28,096 |
|
|
|
21,828 |
|
|
|
14,545 |
|
Net
interest income
|
|
|
36,275 |
|
|
|
25,853 |
|
|
|
21,079 |
|
|
|
23,407 |
|
|
|
25,641 |
|
Provision
for loan losses
|
|
|
4,082 |
|
|
|
5,638 |
|
|
|
465 |
|
|
|
434 |
|
|
|
456 |
|
Net
interest income after provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
loan losses
|
|
|
32,193 |
|
|
|
20,215 |
|
|
|
20,614 |
|
|
|
22,973 |
|
|
|
25,185 |
|
Non-interest
income
|
|
|
5,295 |
|
|
|
8,373 |
|
|
|
4,652 |
|
|
|
3,342 |
|
|
|
3,555 |
|
Non-interest
expenses
|
|
|
31,566 |
|
|
|
31,966 |
|
|
|
22,620 |
|
|
|
21,894 |
|
|
|
20,637 |
|
Income
(loss) before income taxes
|
|
|
5,922 |
|
|
|
(3,378 |
) |
|
|
2,646 |
|
|
|
4,421 |
|
|
|
8,103 |
|
Income
tax provision (benefit)
|
|
|
2,159 |
|
|
|
(1,270 |
) |
|
|
380 |
|
|
|
1,127 |
|
|
|
2,700 |
|
Net
income (loss)
|
|
$ |
3,763 |
|
|
$ |
(2,108 |
) |
|
$ |
2,266 |
|
|
$ |
3,294 |
|
|
$ |
5,403 |
|
Key
Performance Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
(loss) on average assets
|
|
|
0.32 |
% |
|
|
(0.20 |
)
% |
|
|
0.25 |
% |
|
|
0.38 |
% |
|
|
0.68 |
% |
Return
(loss) on average equity
|
|
|
1.94 |
|
|
|
(1.09 |
) |
|
|
2.01 |
|
|
|
3.12 |
|
|
|
5.31 |
|
Interest
rate spread (1)
|
|
|
2.95 |
|
|
|
2.01 |
|
|
|
1.97 |
|
|
|
2.60 |
|
|
|
3.23 |
|
Net
interest margin (2)
|
|
|
3.34 |
|
|
|
2.61 |
|
|
|
2.47 |
|
|
|
2.92 |
|
|
|
3.47 |
|
Non-interest
expense to average assets
|
|
|
2.71 |
|
|
|
2.99 |
|
|
|
2.47 |
|
|
|
2.55 |
|
|
|
2.58 |
|
Efficiency
ratio (3)
|
|
|
75.44 |
|
|
|
107.29 |
|
|
|
88.94 |
|
|
|
81.72 |
|
|
|
70.97 |
|
Average
interest-earning assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
interest-bearing liabilities
|
|
|
120.76 |
|
|
|
122.16 |
|
|
|
115.31 |
|
|
|
111.47 |
|
|
|
111.97 |
|
Capital
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
equity to average assets
|
|
|
16.65 |
% |
|
|
18.17 |
% |
|
|
12.32 |
% |
|
|
12.26 |
% |
|
|
12.72 |
% |
Total
capital to risk weighted assets (4)
|
|
|
14.17 |
|
|
|
15.26 |
|
|
|
12.97 |
|
|
|
13.44 |
|
|
|
15.49 |
|
Tier
I capital to risk weighted assets (4)
|
|
|
13.17 |
|
|
|
14.50 |
|
|
|
11.93 |
|
|
|
12.39 |
|
|
|
14.77 |
|
Tier
I capital to average assets (4)
|
|
|
11.20 |
|
|
|
12.82 |
|
|
|
10.21 |
|
|
|
10.46 |
|
|
|
12.77 |
|
Asset
Quality Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses/total loans
|
|
|
1.12 |
% |
|
|
0.97 |
% |
|
|
0.63 |
% |
|
|
0.63 |
% |
|
|
0.61 |
% |
Allowance
for loan losses/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-performing
loans
|
|
|
42.59 |
|
|
|
48.57 |
|
|
|
73.00 |
|
|
|
126.06 |
|
|
|
926.50 |
|
Net
charge-offs/average loans outstanding
|
|
|
0.23 |
|
|
|
0.38 |
|
|
|
0.03 |
|
|
|
0.00 |
|
|
|
0.00 |
|
Non-performing
loans/total loans
|
|
|
2.63 |
|
|
|
2.00 |
|
|
|
0.87 |
|
|
|
0.50 |
|
|
|
0.07 |
|
Non-performing
assets/total assets
|
|
|
2.03 |
|
|
|
1.58 |
|
|
|
0.55 |
|
|
|
0.30 |
|
|
|
0.04 |
|
Other data: Number of
offices
|
|
|
13 |
|
|
|
12 |
|
|
|
11 |
|
|
|
11 |
|
|
|
10 |
|
(1)
|
Represents the difference between
the weighted average yield on average interest-earning assets and the
weighted average cost of interest-bearing
liabilities.
|
(2)
|
Represents
net interest income as a percent of average interest-earning
assets.
|
(3)
|
Represents non-interest expense
divided by the sum of net interest income and non-interest income,
excluding gains or losses on the sale of
securities.
|
(4)
|
Ratios
are for East Boston Savings Bank
only.
|
Item 7. management’s discussion and
analysis of financial condition and results of
operations
The
objective of this section is to help readers understand our views on our results
of operations and financial condition. You should read this
discussion in conjunction with the consolidated financial statements and notes
to the consolidated financial statements that appear elsewhere in the Annual
Report.
Critical
Accounting Policies
Note 1 to
the Company’s Consolidated Financial Statements included in this Annual Report
on Form 10-K for the year ended December 31, 2009 contains a summary of the
Company’s significant accounting policies. Critical accounting
estimates are necessary in the application of certain accounting policies and
procedures and are particularly susceptible to significant
change. Critical accounting policies are defined as those involving
significant judgments and assumptions by management that could have a material
impact on the carrying value of certain assets or on income under different
assumptions or conditions. Management believes that the most critical
accounting policies, which involve the most complex or subjective decisions or
assessments, are as follows:
Allowance for
Loan Losses
The determination of the allowance for
loan losses is considered critical due to the high degree of judgment involved,
the subjectivity of the underlying assumptions used, and the potential for
changes in the economic environment that could result in material changes in the
amount of the allowance for loan losses considered necessary. The
allowance for loan losses is utilized to absorb losses inherent in the loan
portfolio. The allowance represents management’s estimate of losses as of the
date of the financial statements. The allowance includes a specific component
for impaired loans and a general component for pools of non-impaired
loans.
The
adequacy of the allowance for loan losses is evaluated on a regular basis by
management and is based upon management’s periodic review of the collectibility
of the loans in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrower’s ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
While
management believes that it uses the best information available to establish the
allowance for loan losses, future adjustments to the allowance may be necessary
and results of operations could be adversely affected if circumstances differ
substantially from the assumptions used in making its determinations. Because
the estimation of inherent losses cannot be made with certainty, there can be no
assurance that the existing allowance for loan losses is adequate or that
increases will not be necessary should the quality of any loan deteriorate as a
result of the factors noted above. Any material increase in the allowance for
loan losses may adversely affect the financial condition and results of
operations and will be recorded in the period in which the circumstances become
known.
Other-than-temporary
Impairment of Securities
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. Management evaluates securities for other-than-temporary impairment
at least on a quarterly basis, and more frequently when economic or market
concerns warrant such evaluation.
From time
to time, management’s intent to hold depreciated debt securities to recovery or
maturity may change as a result of prudent portfolio management. If
management’s intent changes, unrealized losses are recognized either as
impairment charges to the consolidated income statement or as realized losses if
a sale has been executed. In most instances, management sells the
securities at the time their intent changes.
In
analyzing an equity 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.
Foreclosed
Real Estate
Assets acquired through, or in lieu of,
loan foreclosure are held for sale and are initially recorded at fair value less
costs to sell at the date of foreclosure, establishing a new cost basis. The
excess, if any, of the loan balance over the fair value of the asset at the time
of transfer from loans to foreclosed assets is charged to the allowance for loan
losses. Subsequent to foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of carrying amount or fair
value less costs to sell. Revenue and expenses from operations, changes in the
valuation allowance and any direct write-downs are included in foreclosed real
estate expense. While the Company utilizes certified appraisers, the valuation
of these estimates is subject to change, especially in a period of rapidly
changing real estate market values.
Income
Taxes
The
Company reduces deferred tax assets by a valuation allowance if, based on the
weight of available evidence, it is not “more likely than not” that some portion
or all of the deferred tax assets will be realized. The Company
assesses the realizability of its deferred tax assets by assessing the
likelihood of the Company generating federal and state tax income, as
applicable, in future periods in amounts sufficient to offset the deferred tax
charges in the periods they are expected to reverse. Based on this
assessment, management concluded that a valuation allowance of $441,000 and
$500,000 was required as of December 31, 2009 and 2008, respectively, due
primarily to the limited future taxable income projected for federal and state
tax purposes that can be utilized to offset a charitable contribution
carryforward of $2,400,000 which will expire in 2013.
Operating
Strategies
Our
mission is to operate and grow a profitable community-oriented financial
institution. We plan to achieve this by executing our strategies
of:
|
1.
|
Managing
credit risk to maintain a low level of nonperforming assets, and interest
rate risk to optimize our net interest
margin;
|
|
2.
|
Expanding
our franchise through the opening of additional branch offices and the
possible acquisition of existing financial service companies or their
assets;
|
|
3.
|
Increasing
core deposits through aggressive marketing and offering new deposit
products; and
|
|
4.
|
Continuing
to grow and diversify our sources of non-interest
income.
|
Managing
credit risk to maintain a low level of nonperforming assets, and interest rate
risk to optimize our net interest margin;
Managing risk is an essential part of
successfully managing a financial institution. Credit risk and
interest rate risk are two prominent risk exposures that we face. Credit risk is
the risk of not collecting the interest and/or the principal balance of a loan
or investment when it is due. Our strategy for credit risk management
focuses on having well-defined credit policies and uniform underwriting criteria
and providing prompt attention to potential problem loans. We believe
that high asset quality is a key to long-term financial success. We have sought
to grow and diversify the loan portfolio, while maintaining a high level of
asset quality and moderate credit risk, using underwriting standards that we
believe are conservative, as well as diligent monitoring of the portfolio and
loans in non-accrual status and on-going collection efforts. Although we will
continue to originate commercial real estate, commercial business and
construction loans, we intend to continue our philosophy of managing large loan
exposures through our experienced, risk-based approach to lending. In
addition, we intend to remain focused on lending within the Bank’s immediate
market area, with a specific focus on commercial customers disaffected by their
relationships with larger banks as a result of turmoil in the
industry.
We continually monitor the investment
portfolio for credit risk, with a monthly formal review by the Company’s
Executive Committee of any issuers that have heightened credit risk factors such
as rating agency and analyst downgrades and declines in market
valuation. In addition, the Executive Committee reviews new
investments for credit-worthiness before purchase. The Company
generally purchases marketable equity securities in lots over time, while debt
securities are purchased individually. We intend to replace maturing
investments in 2010 as determined to be appropriate in accordance with our risk
management policies and our funding needs. The Company also invests
in money market mutual fund accounts which it utilizes as an alternative to
investing excess cash in federal funds.
Interest rate risk is the potential
reduction of net interest income as a result of changes in interest rates. Our
earnings and the market value of our assets and liabilities are subject to
fluctuations caused by changes in the level of interest rates. We
manage the interest rate sensitivity of our interest-bearing liabilities and
interest-earning assets in an effort to minimize the adverse effects of changes
in the interest rate environment. To reduce the potential volatility
of our earnings, we have sought to improve the match between asset and liability
maturities and rates, while maintaining an acceptable interest rate
spread. Our strategy for managing interest rate risk
emphasizes: originating loans with adjustable interest rates; selling
the residential real estate fixed-rate loans with terms greater than 15 years
that we originate; promoting core deposit products; and gradually extending the
maturity of funding sources, as borrowing and term deposit rates are
historically low.
In order
to improve our risk management, we utilize a Risk Management Officer to oversee
the bank-wide risk management process. These responsibilities include
the implementation of an overall risk program and strategy, determining risks
and implementing risk mitigation strategies in the following areas: interest
rates, operational/compliance, liquidity, strategic, reputation, credit and
legal/regulatory. This position provides counsel to members of our
senior management team on all issues that effect our risk
positions.
Expanding
our franchise through the opening of additional branch offices and the possible
acquisition of existing financial service companies or their
assets;
We are always looking to expand our
franchise in the greater Boston metropolitan area. Since 2001, we
have opened six de novo branches, the most recent in August
2009. East Boston Savings Bank has acquired a property in Revere,
Massachusetts with the intention of opening our second branch location in that
city. We have already obtained the necessary regulatory approvals and we are in
process of obtaining proposals to design and build the branch. We anticipate
opening the new branch during the fourth quarter of 2010. We intend
to continue our geographic expansion in the greater Boston metropolitan area by
opening de novo branches in communities contiguous to those currently served by
East Boston Savings Bank, as opportunities present themselves in favorable
locations. In the short-term, we anticipate relocating staff from
existing branches for new locations instead of hiring additional
employees.
On January 4, 2010, the Company
completed its acquisition of Mt. Washington. The combination of Mt.
Washington and East Boston resulted in a community bank with 20 full service
branch offices located throughout the Boston metropolitan area. The
transaction increased the Company’s deposits from $922.5 million to $1.3 billion
as of January 4, 2010. We hope to continue to increase our franchise
by pursuing expansion through the acquisition of existing financial service
companies or their assets, although we currently have no specific plans or
agreements regarding any acquisitions.
In addition to branching and
acquisitions, we are focusing on upgrading existing facilities in an effort to
better serve our customers. The new branches and the renovations to
our existing branches are expected to be funded by cash generated by our
business. Consequently, we do not currently expect to borrow funds
for these expansion projects.
We have also diversified our market
area through our acquisition in 2006 of 40% of the capital stock of Hampshire
First Bank, a de novo New Hampshire chartered bank headquartered in Manchester,
New Hampshire. We account for our investment in Hampshire First Bank
by the equity method of accounting under which our share of the net income or
loss of Hampshire First Bank is recognized as a component of non-interest income
in our consolidated financial statements. During the years ended
December 31, 2009 and 2008, Meridian Interstate Bancorp recorded equity income
of $629,000 and a loss of $396,000, respectively, on this
investment.
Increasing
core deposits through aggressive marketing and the offering of new deposit
products;
Retail
deposits are our primary source of funds for investing and
lending. Core deposits, which include all deposit account types
except certificates of deposit, comprised 51.8% of our total deposits at
December 31, 2009. We value our core deposits because they represent
a lower cost of funding and are generally less sensitive to withdrawal when
interest rates fluctuate as compared to certificate of deposit
accounts. We market core deposits through the internet, in-branch and
local mail, print and television advertising, as well as programs that link
various accounts and services together, minimizing service fees. We
will continue to customize existing deposit products and introduce new products
to meet the needs of our customers.
Continuing
to grow and diversify our sources of non-interest income.
Our profits rely heavily on the spread
between the interest earned on loans and securities and interest paid on
deposits and borrowings. In order to decrease our reliance on
interest rate spread income, we have pursued initiatives to increase
non-interest income. Our courtesy overdraft protection program
generated fee income of $1.3 million, $1.0 million and $970,000 in 2009, 2008
and 2007 respectively. We offer reverse mortgages, which generated
$43,000, $168,000 and $233,000 of loan fee income in 2009, 2008 and 2007,
respectively. We also offer non-deposit investment products,
including mutual funds, annuities, stocks, bonds, life insurance and long-term
care. Our non-deposit financial products generated $211,000, $146,000
and $118,000 of non-interest income during the years ended December 31, 2009,
2008 and 2007, respectively.
Balance
Sheet Analysis
Assets
The
Company’s total assets increased by $146.0 million, or 13.7%, to $1.2 billion at
December 31, 2009 from December 31, 2008. Net loans increased by
$109.2 million, or 15.5%, with the most significant growth in commercial real
estate loans. Securities available for sale increased $40.8 million,
or 16.2%. Loan and securities portfolio growth was primarily funded
by increased deposit balances.
Deposits
increased by $125.6 million in 2009, or 15.8%, from December 31, 2008, with
increases in all deposit types. In 2009, we successfully launched an
online money market deposit account-opening website, which contributed to an
increase to money market accounts of $74.1 million, or 42.9%. In
addition, our marketing efforts emphasized the safety provided by the Bank’s
full deposit insurance coverage and the range of our products, which provide
customers an alternative to larger competitors.
Loans
At December 31, 2009, net loans were
$813.3 million, or 67.1% of total assets. During the year ended
December 31, 2009, the gross loan portfolio increased $111.5 million, or
15.7%. Growth in total real estate loans was $109.0 million, or
15.7%, and included increases of $81.2 million, or 30.1%, in commercial real
estate loans and $22.2 million, or 71.1% in multi-family real
estate. The commercial real estate portfolio increased as a result of
increased marketing by the Company and an increase in loan
participations. At December 31, 2009, loan participations were $98.5
million, compared to $42.6 million at December 31, 2008. The increase in
participations was due primarily to an increase in participations with the
Company’s 40%-owned affiliate, Hampshire First Bank
(”HFB”). Participations with HFB were $47.8 million and $17.0
million, respectively, at December 31, 2009 and 2008.
Loan
Portfolio Analysis
Loan
Portfolio Composition at December 31,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(Dollars
in thousands)
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to
four-family
|
|
$ |
276,122 |
|
|
|
33.5 |
% |
|
$ |
274,716 |
|
|
|
38.6 |
|
|
$ |
224,109 |
|
|
|
39.1 |
% |
|
$ |
204,559 |
|
|
|
38.3 |
% |
|
$ |
205,044 |
|
|
|
42.2 |
% |
Multi-family
|
|
|
53,402 |
|
|
|
6.5 |
|
|
|
31,212 |
|
|
|
4.4 |
|
|
|
26,855 |
|
|
|
4.7 |
|
|
|
26,781 |
|
|
|
5.0 |
|
|
|
19,392 |
|
|
|
4.0 |
|
Commercial
real estate
|
|
|
350,648 |
|
|
|
42.6 |
|
|
|
269,454 |
|
|
|
37.7 |
|
|
|
177,233 |
|
|
|
30.9 |
|
|
|
169,422 |
|
|
|
31.7 |
|
|
|
156,995 |
|
|
|
32.3 |
|
Home
equity lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
credit
|
|
|
29,979 |
|
|
|
3.6 |
|
|
|
28,253 |
|
|
|
4.0 |
|
|
|
21,541 |
|
|
|
3.8 |
|
|
|
20,663 |
|
|
|
3.9 |
|
|
|
16,794 |
|
|
|
3.5 |
|
Construction
|
|
|
94,102 |
|
|
|
11.4 |
|
|
|
91,652 |
|
|
|
12.9 |
|
|
|
109,635 |
|
|
|
19.1 |
|
|
|
101,495 |
|
|
|
19.0 |
|
|
|
76,041 |
|
|
|
15.7 |
|
Total
real estate loans
|
|
|
804,253 |
|
|
|
97.6 |
|
|
|
695,287 |
|
|
|
97.6 |
|
|
|
559,373 |
|
|
|
97.6 |
|
|
|
522,920 |
|
|
|
97.9 |
|
|
|
474,266 |
|
|
|
97.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business loans
|
|
|
18,029 |
|
|
|
2.2 |
|
|
|
15,355 |
|
|
|
2.2 |
|
|
|
11,859 |
|
|
|
2.1 |
|
|
|
10,220 |
|
|
|
1.9 |
|
|
|
10,149 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
loans
|
|
|
1,205 |
|
|
|
0.2 |
|
|
|
1,379 |
|
|
|
0.2 |
|
|
|
1,576 |
|
|
|
0.3 |
|
|
|
1,330 |
|
|
|
0.2 |
|
|
|
999 |
|
|
|
0.2 |
|
Total
loans
|
|
|
823,487 |
|
|
|
100.0 |
% |
|
|
712,021 |
|
|
|
100.0 |
% |
|
|
572,808 |
|
|
|
100.0 |
% |
|
|
534,470 |
|
|
|
100.0 |
% |
|
|
485,414 |
|
|
|
100.0 |
% |
Net
deferred loan origination fees
|
|
|
(945 |
) |
|
|
|
|
|
|
(1,005 |
) |
|
|
|
|
|
|
(1,067 |
) |
|
|
|
|
|
|
(1,458 |
) |
|
|
|
|
|
|
(1,644 |
) |
|
|
|
|
Allowance
for loan losses
|
|
|
(9,242 |
) |
|
|
|
|
|
|
(6,912 |
) |
|
|
|
|
|
|
(3,637 |
) |
|
|
|
|
|
|
(3,362 |
) |
|
|
|
|
|
|
(2,937 |
) |
|
|
|
|
Loans,
net
|
|
$ |
813,300 |
|
|
|
|
|
|
$ |
704,104 |
|
|
|
|
|
|
$ |
568,104 |
|
|
|
|
|
|
$ |
529,650 |
|
|
|
|
|
|
$ |
480,833 |
|
|
|
|
|
Loan
Maturity
The following tables set forth certain
information at December 31, 2009 regarding the dollar amount of loan principal
repayments becoming due during the periods indicated. The tables do
not include any estimate of prepayments which significantly shorten the average
life of all loans and may cause our actual repayment experience to differ from
that shown below. Demand loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or
less. The amounts shown below exclude net deferred loan origination
fees. Our
adjustable-rate mortgage loans generally do not provide for downward adjustments
below the initial discounted contract rate, other than declines due to a decline
in the index rate.
(In
thousands)
|
|
Real
Estate Loans
|
|
|
Commercial
Business Loans
|
|
|
Consumer
Loans
|
|
|
Total
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
due in:
|
|
|
|
|
|
|
|
|
|
|
|
|
One
year or less
|
|
$ |
111,320 |
|
|
$ |
6,200 |
|
|
$ |
425 |
|
|
$ |
117,945 |
|
More
than one to five years
|
|
|
429,458 |
|
|
|
7,341 |
|
|
|
780 |
|
|
|
437,579 |
|
More
than five to ten years
|
|
|
97,249 |
|
|
|
395 |
|
|
|
- |
|
|
|
97,644 |
|
More
than ten years
|
|
|
166,226 |
|
|
|
4,093 |
|
|
|
- |
|
|
|
170,319 |
|
Total
|
|
$ |
804,253 |
|
|
$ |
18,029 |
|
|
$ |
1,205 |
|
|
$ |
823,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate terms on amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
due
after one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
loans
|
|
$ |
235,073 |
|
|
$ |
10,599 |
|
|
$ |
780 |
|
|
$ |
246,452 |
|
Adjustable-rate
loans
|
|
|
457,860 |
|
|
|
1,230 |
|
|
|
- |
|
|
|
459,090 |
|
Total
|
|
$ |
692,933 |
|
|
$ |
11,829 |
|
|
$ |
780 |
|
|
$ |
705,542 |
|
At December 31, 2009, our loan
portfolio consisted of $307.5 million of fixed-rate loans and $516.0 million of
adjustable-rate loans.
Credit
Risk Management
Our
strategy for credit risk management focuses on having well-defined credit
policies and uniform underwriting criteria and providing prompt attention to
potential problem loans.
When a
borrower fails to make a required loan payment, we take a number of steps to
have the borrower cure the delinquency and restore the loan to current status,
including contacting the borrower by letter and phone at regular
intervals. When the borrower is in default, we may commence
collection proceedings. If a foreclosure action is instituted and the
loan is not brought current, paid in full, or refinanced before the foreclosure
sale, the real property securing the loan generally is sold at
foreclosure. Management informs the Executive Committee monthly of
the amount of loans delinquent more than 30 days. Management provides
detailed information to the Board of Directors on loans 60 or more days past due
and all loans in foreclosure and repossessed property that we own.
Analysis
of Non-performing and Classified Assets
We
consider repossessed assets and loans that are 90 days or more past due to be
non-performing assets. 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. A loan may remain on accrual status if it is in the
process of collection and is either guaranteed or well secured. When
a loan is placed on non-accrual status, unpaid interest is reversed against
interest income. Interest received on non-accrual loans generally is
either applied against principal or reported as interest income, according to
management’s judgment as to the collectibility of
principal. Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the contractual
terms for a reasonable period of time, and the ultimate collectibility of the
total contractual principal and interest in no longer in
doubt.
Real
estate that we acquire as a result of foreclosure or by deed-in-lieu of
foreclosure is classified as foreclosed real estate until it is
sold. When property is acquired, it is initially recorded at the fair
value less costs to sell at the date of foreclosure, establishing a new cost
basis. Holding costs and declines in fair value after acquisition of the
property result in charges against income. The following table
provides information with respect to our non-performing assets at the dates
indicated.
Non-performing
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Loans
accounted for on a non-accrual basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to
four-family
|
|
$ |
4,098 |
|
|
$ |
3,962 |
|
|
$ |
2,059 |
|
|
$ |
824 |
|
|
$ |
167 |
|
Multi-family
|
|
|
850 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
real estate
|
|
|
7,388 |
|
|
|
883 |
|
|
|
1,561 |
|
|
|
- |
|
|
|
123 |
|
Home
equity lines of credit
|
|
|
- |
|
|
|
- |
|
|
|
98 |
|
|
|
29 |
|
|
|
27 |
|
Construction
|
|
|
9,224 |
|
|
|
9,387 |
|
|
|
1,218 |
|
|
|
1,814 |
|
|
|
- |
|
Total
real estate loans
|
|
|
21,560 |
|
|
|
14,232 |
|
|
|
4,936 |
|
|
|
2,667 |
|
|
|
317 |
|
Commercial
business loans
|
|
|
- |
|
|
|
- |
|
|
|
45 |
|
|
|
- |
|
|
|
- |
|
Consumer
loans
|
|
|
138 |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
Total
non-accrual loans
|
|
|
21,698 |
|
|
|
14,232 |
|
|
|
4,982 |
|
|
|
2,667 |
|
|
|
317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing
loans past due 90 days or more:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
business loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Consumer
loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
accruing past due 90 days or more
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
non-performing loans
|
|
|
21,698 |
|
|
|
14,232 |
|
|
|
4,982 |
|
|
|
2,667 |
|
|
|
317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets
|
|
|
2,869 |
|
|
|
2,604 |
|
|
|
560 |
|
|
|
- |
|
|
|
- |
|
Other
non-performing assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
non-performing assets
|
|
$ |
24,567 |
|
|
$ |
16,836 |
|
|
$ |
5,542 |
|
|
$ |
2,667 |
|
|
$ |
317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans
|
|
$ |
1,928 |
|
|
$ |
4,273 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans to total loans
|
|
|
2.63 |
% |
|
|
2.00 |
% |
|
|
0.87 |
% |
|
|
0.50 |
% |
|
|
0.07 |
% |
Non-performing
loans to total assets
|
|
|
1.79 |
% |
|
|
1.34 |
% |
|
|
0.55 |
% |
|
|
0.30 |
% |
|
|
0.04 |
% |
Non-performing
assets (non-accrual loans and property acquired through foreclosure) were $24.6
million, or 2.03% of total assets at December 31, 2009, compared to 1.58% at
December 31, 2008. The increase in non-performing assets from 2008
resulted primarily from seven non-performing commercial real estate
loans. The largest such commercial real estate loan is a $4.8 million
loan participation with our Hampshire First Bank affiliate, for a hotel located
in Bedford, New Hampshire, which is part of an $8.0 million loan secured by a
hotel property. Although payments on this loan were being received in
accordance with the original loan terms as of December 31, 2009, the loan was
placed in non-accrual status on that date and negotiations are currently
underway to provide concessions that would modify the loan terms based on
financial difficulties that the borrower is experiencing.
Total
property acquired through foreclosure at December 31, 2009 was $2.9 million,
compared to $2.6 at December 31, 2008. The increase in property
acquired through foreclosure from the prior year is due primarily to
foreclosures on two construction loans to the same borrower and several
residential properties. Refer to the Analysis and Determination of the
Allowance for Loan Losses discussion below for additional information
regarding non-performing and impaired loans.
We did
not have any loans accruing past due 90 days or more at the dates
presented. Foregone interest income that would have been recorded for
the year ended December 31, 2009 had non-accruing loans been current according
to their original repayment terms was $618,000. Income recognized on
a cash basis for non-accrual loans included in interest income for the year
ended December 31, 2009 was $620,000.
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 Company had six troubled
debt restructure loans totaling $1.9 million of as of December 31, 2009, the
largest of which is a $591,000 non-performing loan secured by an over-55
construction development. The other troubled debt restructure loans
are for five one-to-four family residential properties to unaffiliated
borrowers.
Delinquencies
The
following table provides information about delinquencies in our loan portfolio
at the dates indicated.
|
|
At
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(In
thousands)
|
|
30-59
Days
Past
Due
|
|
|
60-89
Days
Past
Due
|
|
|
90
days
or
more
Past
Due
|
|
|
30-59
Days
Past
Due
|
|
|
60-89
Days
Past
Due
|
|
|
90
days
or
more
Past
Due
|
|
|
30-59
Days
Past
Due
|
|
|
60-89
Days
Past
Due
|
|
|
90
days
or
more
Past
Due
|
|
Real
estate loans :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to
four-family
|
|
$ |
1,559 |
|
|
$ |
978 |
|
|
$ |
2,760 |
|
|
$ |
1,352 |
|
|
$ |
842 |
|
|
$ |
1,413 |
|
|
$ |
1,489 |
|
|
$ |
856 |
|
|
$ |
1,036 |
|
Multi-family
|
|
|
155 |
|
|
|
- |
|
|
|
- |
|
|
|
840 |
|
|
|
- |
|
|
|
80 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
real estate
|
|
|
2,692 |
|
|
|
- |
|
|
|
5,870 |
|
|
|
1,193 |
|
|
|
348 |
|
|
|
230 |
|
|
|
526 |
|
|
|
- |
|
|
|
623 |
|
Home
equity lines of credit
|
|
|
86 |
|
|
|
40 |
|
|
|
100 |
|
|
|
40 |
|
|
|
- |
|
|
|
- |
|
|
|
41 |
|
|
|
- |
|
|
|
70 |
|
Construction
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
348 |
|
|
|
- |
|
|
|
- |
|
|
|
4,576 |
|
|
|
- |
|
|
|
- |
|
Total
real estate loans
|
|
|
4,492 |
|
|
|
1,018 |
|
|
|
8,730 |
|
|
|
3,773 |
|
|
|
1,190 |
|
|
|
1,723 |
|
|
|
6,632 |
|
|
|
856 |
|
|
|
1,729 |
|
Commercial
business loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25 |
|
|
|
- |
|
|
|
250 |
|
Consumer loans
|
|
|
8 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
- |
|
|
|
4 |
|
|
|
1 |
|
|
|
- |
|
|
|
1 |
|
Total
|
|
$ |
4,500 |
|
|
$ |
1,019 |
|
|
$ |
8,731 |
|
|
$ |
3,774 |
|
|
$ |
1,190 |
|
|
$ |
1,727 |
|
|
$ |
6,658 |
|
|
$ |
856 |
|
|
$ |
1,980 |
|
At
December 31, 2009, non-accrual loans exceed loans ninety days or more past due
primarily to loans which were placed on non-accrual status based on a
determination that the ultimate collection of all principal and
interest due was not expected.
Analysis
and Determination of the Allowance for Loan Losses
The
allowance for loan losses is a valuation allowance that represents our estimate
of the probable losses inherent in the loan portfolio. We evaluate
the need to establish allowances against losses on loans on a quarterly
basis. We review previously classified assets and any new non-accrual
loans and other loans where collectibility may be in question as part of
determining whether additional allowances are necessary. When
additional allowances are necessary, a provision for loan losses is charged to
earnings.
The
allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to
earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The
adequacy of the allowance for loan losses is evaluated on a regular basis by
management and is based upon management’s periodic review of the collectibility
of the loans in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrower’s ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
The
allowance consists of specific and general components. The specific
component relates to loans that are classified as impaired, whereby an allowance
is established when the discounted cash flows, collateral value or observable
market price of the impaired loan is lower than the carrying value of that
loan. The general component relates to pools of non-impaired loans
and is based on historical loss experience adjusted for qualitative
factors.
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
consumer loans for impairment disclosures, unless such loans are subject to a
troubled debt restructuring. The Company periodically may agree to
modify the contractual terms of loans. When a loan is modified and a concession
is made to a borrower experiencing financial difficulty, the modification is
considered a troubled debt restructuring ("TDR"). All TDRs are
initially classified as impaired.
We
identify loans that may need to be charged off as a loss by reviewing all
delinquent loans, watch list loans and other loans that management may have
concerns about collectibility. For individually reviewed loans, the
borrower’s inability to make payments under the terms of the loan or a shortfall
in collateral value would result in our charging off the loan or the portion of
the loan that was impaired.
The following table sets forth an
analysis of the allowance for loan losses for the periods
indicated.
|
|
Years
Ended December 31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Allowance
at beginning of year
|
|
$ |
6,912 |
|
|
$ |
3,637 |
|
|
$ |
3,362 |
|
|
$ |
2,937 |
|
|
$ |
2,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
4,082 |
|
|
|
5,638 |
|
|
|
465 |
|
|
|
434 |
|
|
|
456 |
|
Charge
offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
|
1,938 |
|
|
|
2,265 |
|
|
|
207 |
|
|
|
- |
|
|
|
- |
|
Commercial
business loans
|
|
|
- |
|
|
|
98 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Consumer
loans
|
|
|
87 |
|
|
|
3 |
|
|
|
63 |
|
|
|
12 |
|
|
|
11 |
|
Total
charge-offs
|
|
|
2,025 |
|
|
|
2,366 |
|
|
|
270 |
|
|
|
12 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
|
250 |
|
|
|
- |
|
|
|
16 |
|
|
|
- |
|
|
|
- |
|
Commercial
business
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Consumer
loans
|
|
|
23 |
|
|
|
3 |
|
|
|
64 |
|
|
|
3 |
|
|
|
7 |
|
Total
recoveries
|
|
|
273 |
|
|
|
3 |
|
|
|
80 |
|
|
|
3 |
|
|
|
7 |
|
Net
charge-offs
|
|
|
(1,752 |
) |
|
|
(2,363 |
) |
|
|
(190 |
) |
|
|
(9 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
at end of year
|
|
$ |
9,242 |
|
|
$ |
6,912 |
|
|
$ |
3,637 |
|
|
$ |
3,362 |
|
|
$ |
2,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
to non-performing loans
|
|
|
42.59 |
% |
|
|
48.57 |
% |
|
|
73.00 |
% |
|
|
126.06 |
% |
|
|
926.50 |
% |
Allowance
to total loans outstanding
|
|
|
1.12 |
% |
|
|
0.97 |
% |
|
|
0.63 |
% |
|
|
0.63 |
% |
|
|
0.61 |
% |
Net
charge-offs to average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loans
outstanding
|
|
|
0.23 |
% |
|
|
0.38 |
% |
|
|
0.03 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
The
allowance for loan losses was $9.2 million, or 1.12% of total loans outstanding
as of December 31, 2009, compared to $6.9 million, or 0.97% as of December 31,
2008. The increase in the allowance for loan losses from the prior year is due
to continued growth of the loan portfolio, particularly the commercial real
estate portfolio, increased loan delinquencies, non-accrual loans and impaired
loans. Management also considered its ongoing assessment of factors
affecting the loan portfolio, including further deterioration of the national
and local economic environment.
At
December 31, 2009, there was $29.3 million of impaired loans, including loans of
$2.2 million with an impairment allowance of $472,000. At December 31, 2008,
there was $12.5 million of impaired loans, including loans of $1.9 million with
an impairment allowance of $418,000. Commercial real estate,
construction, and residential real estate impaired loans all increased from
prior year. Certain impaired loans without a specific valuation
allowance (i.e. a number of the construction and residential loans) continue to
pay according to the contractual terms of the loan and are therefore maintained
on an accrual basis, although management believes that the collectibility of all
amounts due according to the original loan terms is not probable due to the
financial condition of the borrowers. Additional
funds
of $1.0
million are committed to be advanced on an impaired construction loan as of
December 31, 2009. Proceeds of the loan are being used to finance the
construction of townhouses and the loan is performing as of December 31,
2009.
The Bank individually reviews
classified residential and commercial loans for impairment based on the fair
value of collateral or expected cash flows. Management has reviewed
the collateral for all impaired and non-accrual loans as of December 31, 2009
and considered any potential loss in determining the allowance for loan
losses. To ensure the valuations of the collateral are accurate, we
obtain updated appraisals using current market conditions. For more
complex loans, we utilize the expertise of outside appraisers that have more
experience with the particular collateral. For impaired construction
loans, the appraisal includes sales projections for the project that we utilize
to perform a discounted cash flow analysis. We believe that all
impaired and non-accrual loans were adequately collateralized or reserved for at
December 31, 2009.
Included
in the balance of impaired loans at December 31, 2009 are troubled debt
restructures of $1.9 million. A modification of loan terms
constitutes a troubled debt restructuring if, for reasons related to the
debtor’s financial difficulties, a concession is granted to the debtor that
would not otherwise be considered.
Management
views the increased levels of impaired and non-performing assets during 2009 to
be indicative of the local economy. While the level of residential
real estate activity in the local market has improved from 2008, the performance
of the residential, commercial real estate and construction loan portfolios
continue to be negatively impacted by the economy.
The
following table sets forth the breakdown of the allowance for loan losses by
loan category at the dates indicated.
At
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(Dollars
in thousands)
|
|
Amount
|
|
|
% of
Allowance to Total Allowance
|
|
|
% of
Loans
in
Category
to
Total
Loans
|
|
|
Amount
|
|
|
% of
Allowance to Total Allowance
|
|
|
% of
Loans
in
Category
to
Total
Loans
|
|
|
Amount
|
|
|
% of
Allowance to Total Allowance
|
|
|
% of
Loans
in
Category
to
Total
Loans
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
$ |
1,730 |
|
|
|
18.7 |
% |
|
|
33.5 |
% |
|
$ |
1,481 |
|
|
|
21.4 |
% |
|
|
38.6 |
% |
|
$ |
668 |
|
|
|
18.4 |
% |
|
|
39.1 |
% |
Multi-family
|
|
|
467 |
|
|
|
5.1 |
|
|
|
6.5 |
|
|
|
259 |
|
|
|
3.8 |
|
|
|
4.4 |
|
|
|
201 |
|
|
|
5.5 |
|
|
|
4.7 |
|
Commercial
real estate
|
|
|
4,435 |
|
|
|
48.0 |
|
|
|
42.6 |
|
|
|
2,544 |
|
|
|
36.8 |
|
|
|
37.7 |
|
|
|
1,313 |
|
|
|
36.1 |
|
|
|
30.9 |
|
Home
equity lines of credit
|
|
|
128 |
|
|
|
1.4 |
|
|
|
3.6 |
|
|
|
110 |
|
|
|
1.6 |
|
|
|
4.0 |
|
|
|
82 |
|
|
|
2.2 |
|
|
|
3.8 |
|
Construction
|
|
|
1,859 |
|
|
|
20.1 |
|
|
|
11.4 |
|
|
|
2,019 |
|
|
|
29.2 |
|
|
|
12.9 |
|
|
|
1,007 |
|
|
|
27.7 |
|
|
|
19.1 |
|
Total
real estate loans
|
|
|
8,619 |
|
|
|
93.3 |
|
|
|
97.6 |
|
|
|
6,413 |
|
|
|
92.8 |
|
|
|
97.6 |
|
|
|
3,271 |
|
|
|
89.9 |
|
|
|
97.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business loans
|
|
|
586 |
|
|
|
6.3 |
|
|
|
2.2 |
|
|
|
490 |
|
|
|
7.1 |
|
|
|
2.2 |
|
|
|
355 |
|
|
|
9.8 |
|
|
|
2.1 |
|
Consumer loans
|
|
|
37 |
|
|
|
0.4 |
|
|
|
0.2 |
|
|
|
9 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
11 |
|
|
|
0.3 |
|
|
|
0.3 |
|
Total
|
|
$ |
9,242 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
$ |
6,912 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
$ |
3,637 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Although
we believe that we use the best information available to establish the allowance
for loan losses, future adjustments to the allowance for loan losses may be
necessary and our results of operations could be adversely affected if
circumstances differ substantially from the assumptions used in making the
determinations. Furthermore, while we believe we have established our
allowance for loan losses in conformity with generally accepted accounting
principles in the United States of America, there can be no assurance that
regulators, in reviewing our loan portfolio, will not require us to increase our
allowance for loan losses. In addition, because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that the existing allowance for loan losses is adequate or that
increases will not be necessary should the quality of any loans deteriorate as a
result of the factors discussed above. Any material increase in the
allowance for loan losses may adversely affect our financial condition and
results of operations.
Securities
Portfolio
At
December 31, 2009, the securities portfolio was $293.4 million, or 24.2% of
total assets. At that date, 75.0% of the securities portfolio, or
$220.0 million, was invested in corporate bonds. The amortized cost
and fair value of corporate bonds in the financial services sector was $59.2
million, and $60.7 million, respectively. The remainder of the
corporate bond portfolio includes companies from a variety of industries. Refer
to Note 4 Securities Available
for Sale in Notes to the Consolidated Financial Statements included in
Item 8 Financial Statements
and Supplementary Data within this report for more detail regarding
industry concentrations in the Company’s corporate bond portfolio. The remainder
of the securities portfolio was invested primarily in residential
mortgage-backed securities issued by government-sponsored enterprises of $23.8
million and marketable equity securities of $49.6 million. The
following table sets forth the amortized cost and fair value of our securities,
all of which at the dates indicated were available for sale.
|
|
At
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(In
thousands)
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
– sponsored
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
enterprises
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,000 |
|
|
$ |
1,003 |
|
|
$ |
7,002 |
|
|
$ |
6,975 |
|
Corporate
bonds
|
|
|
212,279 |
|
|
|
220,007 |
|
|
|
210,079 |
|
|
|
203,687 |
|
|
|
219,626 |
|
|
|
220,629 |
|
Residential
mortgage-backed securities
|
|
|
23,659 |
|
|
|
23,778 |
|
|
|
40 |
|
|
|
40 |
|
|
|
43 |
|
|
|
43 |
|
Total
debt securities
|
|
|
235,938 |
|
|
|
243,785 |
|
|
|
211,119 |
|
|
|
204,730 |
|
|
|
226,671 |
|
|
|
227,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
equity securities :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
26,698 |
|
|
|
28,878 |
|
|
|
26,142 |
|
|
|
22,854 |
|
|
|
27,498 |
|
|
|
38,066 |
|
Money
market mutual funds
|
|
|
20,704 |
|
|
|
20,704 |
|
|
|
24,945 |
|
|
|
24,945 |
|
|
|
1,345 |
|
|
|
1,345 |
|
Total
marketable equity securities
|
|
|
47,402 |
|
|
|
49,582 |
|
|
|
51,087 |
|
|
|
47,799 |
|
|
|
28,843 |
|
|
|
39,411 |
|
Total
|
|
$ |
283,340 |
|
|
$ |
293,367 |
|
|
$ |
262,206 |
|
|
$ |
252,529 |
|
|
$ |
255,514 |
|
|
$ |
267,058 |
|
At December 31, 2009, we had no
investments in a single company or entity that had an aggregate book value in
excess of 10% of our equity.
The following table sets forth the
stated maturities and weighted average yields of the securities at December 31,
2009. All of the securities listed have fixed rates.
|
|
One
Year or Less
|
|
|
More
than One Year to Five Years
|
|
|
More
than Five Years to Ten Years
|
|
|
More
than Ten Years
|
|
|
Total
|
|
(Dollars
in thousands)
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
Corporate
bonds
|
|
$ |
31,110 |
|
|
|
5.15 |
% |
|
$ |
181,169 |
|
|
|
5.19 |
% |
|
$ |
- |
|
|
|
- |
% |
|
$ |
- |
|
|
|
- |
% |
|
$ |
212,279 |
|
|
|
5.18 |
% |
Residential
mortgage-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
backed
securities
|
|
|
- |
|
|
|
- |
|
|
|
3,045 |
|
|
|
3.57 |
|
|
|
13 |
|
|
|
7.93 |
|
|
|
20,601 |
|
|
|
4.28 |
|
|
|
23,659 |
|
|
|
4.19 |
|
Total
debt securities
|
|
$ |
31,110 |
|
|
|
5.15 |
% |
|
$ |
184,214 |
|
|
|
5.16 |
% |
|
$ |
13 |
|
|
|
7.93 |
% |
|
$ |
20,601 |
|
|
|
4.28 |
% |
|
$ |
235,938 |
|
|
|
5.08 |
% |
The
available-for-sale securities portfolio increased $40.8 million, or 16.2% to
$293.4 million at December 31, 2009 from $252.5 million December 31, 2008 as
some of the Company’s deposit growth was used for security
purchases. Money market mutual funds included in the marketable
equity securities portfolio totaled $20.7 million and $24.9 million at December
31, 2009 and December 31, 2008, respectively.
Each
reporting period, the Company evaluates all securities with a decline in fair
value below the amortized cost of the investment to determine whether or not the
impairment is deemed to be other-than-temporary. Marketable equity
securities are evaluated for OTTI based on the severity and duration of the
impairment and, if deemed to be other than temporary, the declines in fair value
are reflected in earnings as realized losses. For debt securities, OTTI is
required to be recognized (1) if the Company intends to sell the security; (2)
if it is “more likely than not” that the Company will be required to sell the
security before recovery of its amortized cost basis; or (3) if the present
value of expected cash flows is not sufficient to recover the entire amortized
cost basis. For all impaired debt securities that the Company intends to sell,
or more likely than not will be required to sell, the full amount of the
depreciation is recognized as OTTI through earnings. Credit-related OTTI for all
other impaired debt securities is recognized through earnings. Non-credit
related OTTI for such debt securities is recognized in other comprehensive
income/loss, net of applicable taxes. At
December 31, 2009, unrealized losses in our debt portfolio ranged from 0% to
15.2%, and unrealized losses in our equity portfolio ranged from 0% to
30.0%.
As of
December 31, 2009, the net unrealized gain on the total equity portfolio was
$2.2 million. Four equity securities had market value declines of 15.0% or more,
with net unrealized losses of $398,000. The most significant market valuation
decrease related to any one equity security at December 31, 2009 is $115,000.
Although the issuers have shown declines in earnings as a result of the weakened
economy, no credit issues have been identified that cause management to believe
the decline in market value is other than temporary, and the Company has the
ability and intent to hold these investments until a recovery of fair value. In
analyzing an equity issuer’s financial condition, management considers industry
analysts’ reports, financial performance and projected target prices of
investment analysts within a one-year time frame.
At
December 31, 2009, the aggregate amortized cost of debt obligations owned by the
Company was $235.9 million and the aggregate market value was $243.8
million. Two corporate bonds, issued by a commercial finance
subsidiary of a major insurance company, had a market decline of 15.2% and 14.1%
from amortized cost. The aggregate unrealized loss on these bonds at
December 31, 2009 was $576,000 and is presently considered to be
temporary. The Company has no indication that the issuers will be
unable to continue to service the obligations based on ongoing operations, and
management does intend not to sell, and more likely than not will not be
required to sell, such bonds before the earlier of recovery or maturity. As a
result, management considers the decline in market value to be
temporary. No other corporate bonds had a market decline greater than
3.0% of amortized cost.
Refer to
Note 4 Securities Available
for Sale in Notes to the Consolidated Financial Statements included in
Item 8 Financial Statements
and Supplementary Data within this report for more detail regarding the
Company’s assessment of other-than-temporary impairment.
Deposits
Our deposit base is comprised of NOW
and demand deposits, money market deposits, regular and other deposits and
certificates of deposit. We consider NOW and demand deposits, money
market deposits, regular and other deposits to be core deposits. At
December 31, 2009, core deposits were 51.8% of total
deposits. Deposits increased $125.6 million, or 15.8%, during 2009 to
$922.5 million at December 31, 2009, primarily as a result of a $74.1 million,
or 42.9%, increase in money market deposits as we initiated an online money
market deposit product in 2009.
The following table sets forth the
average balances of deposits for the periods indicated.
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Percent
of Total Deposits
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Percent
of Total Deposits
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Percent
of Total Deposits
|
|
Demand
deposits
|
|
$ |
61,342 |
|
|
|
- |
% |
|
|
6.9 |
% |
|
$ |
54,503 |
|
|
|
- |
% |
|
|
6.7 |
% |
|
$ |
54,051 |
|
|
|
- |
% |
|
|
7.2 |
% |
NOW
deposits
|
|
|
37,838 |
|
|
|
0.34 |
|
|
|
4.2 |
|
|
|
39,351 |
|
|
|
0.76 |
|
|
|
4.9 |
|
|
|
34,355 |
|
|
|
0.36 |
|
|
|
4.6 |
|
Money
market deposits
|
|
|
231,248 |
|
|
|
1.71 |
|
|
|
25.8 |
|
|
|
149,827 |
|
|
|
2.68 |
|
|
|
18.5 |
|
|
|
113,392 |
|
|
|
3.67 |
|
|
|
15.0 |
|
Regular
and other deposits
|
|
|
127,621 |
|
|
|
0.80 |
|
|
|
14.3 |
|
|
|
127,250 |
|
|
|
1.14 |
|
|
|
15.7 |
|
|
|
129,153 |
|
|
|
1.16 |
|
|
|
17.1 |
|
Certificates
of deposit
|
|
|
436,341 |
|
|
|
3.04 |
|
|
|
48.8 |
|
|
|
437,183 |
|
|
|
4.41 |
|
|
|
54.2 |
|
|
|
422,588 |
|
|
|
4.84 |
|
|
|
56.1 |
|
Total
|
|
$ |
894,390 |
|
|
|
2.21 |
% |
|
|
100.0 |
% |
|
$ |
808,114 |
|
|
|
3.32 |
% |
|
|
100.0 |
% |
|
$ |
753,539 |
|
|
|
3.75 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table indicates the
amount of certificates of deposit of $100,000 or more by time remaining until
maturity as of December 31, 2009.
Time
Deposit Maturities of $100,000 or more
|
|
(In
thousands)
|
|
Certificates
of
Deposit
|
|
Maturity
Period:
|
|
|
|
Three
months or less
|
|
$ |
30,612 |
|
Over
three through six months
|
|
|
24,044 |
|
Over
six through twelve months
|
|
|
45,675 |
|
Over
twelve months
|
|
|
89,597 |
|
Total
|
|
$ |
189,928 |
|
Borrowings
We use borrowings from the Federal Home
Loan Bank of Boston to supplement our supply of funds for loans and
investments. Borrowings increased in 2009 as the Company opted to
supplement maturing FHLB debt with lower rate FHLB borrowings to support loan
growth. In 2008, we also began purchasing federal funds from local
banking institutions as an additional funding source for the
Bank. Information relating to borrowings, including the federal funds
purchased, is detailed in the following table.
|
|
Years
Ended
December
31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Balance
outstanding at end of year
|
|
$ |
75,410 |
|
|
$ |
65,486 |
|
|
$ |
36,527 |
|
Average
amount outstanding during the year
|
|
$ |
65,884 |
|
|
$ |
55,882 |
|
|
$ |
39,193 |
|
Weighted
average interest rate during the year
|
|
|
3.04 |
% |
|
|
3.59 |
% |
|
|
4.74 |
% |
Maximum
outstanding at any month end
|
|
$ |
75,410 |
|
|
$ |
73,227 |
|
|
$ |
49,188 |
|
Weighted
average interest rate at end of year
|
|
|
2.35 |
% |
|
|
3.15 |
% |
|
|
4.49 |
% |
Federal funds purchased at December 31,
2009 totaling $13.1 million had a weighted average rate of
0.35%. Outstanding FHLB borrowings at December 31, 2009 totaling
$62.3 million had a weighted average rate of 2.77%. At December 31,
2009, 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
Stockholders’ equity increased from
$189.8 million as of December 31, 2008 to $200.4 million as of December 31,
2009, primarily as a result of net income and improved market pricing on the
available-for-sale securities portfolio. The Company also completed
the repurchase of $4.5 million of treasury shares and $1.5 million of shares for
its equity incentive plan.
Average
Balance Sheets and Related Yields and Rates
The
following tables presents information regarding average balances of assets and
liabilities, the total dollar amounts of interest income and dividends from
average interest-earning assets, the total dollar amounts of interest expense on
average interest-bearing liabilities, and the resulting annualized average
yields and costs. The yields and costs for the periods indicated are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. For purposes of
these tables, average balances have been calculated using daily average
balances, and non-accrual loans are included in average balances but are not
deemed material. Loan fees are included in interest income on loans
but are not material. None of the income reflected in the following
table is tax-exempt income.
|
|
At
or For the
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(Dollars
in thousands)
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
768,278 |
|
|
$ |
45,050 |
|
|
|
5.86 |
% |
|
$ |
621,985 |
|
|
$ |
38,781 |
|
|
|
6.24 |
% |
|
$ |
550,494 |
|
|
$ |
35,745 |
|
|
|
6.49 |
|
Securities
|
|
|
291,372 |
|
|
|
11,592 |
|
|
|
3.98 |
|
|
|
297,645 |
|
|
|
12,433 |
|
|
|
4.18 |
|
|
|
275,055 |
|
|
|
12,170 |
|
|
|
4.42 |
|
Other
interest-earning assets
|
|
|
25,883 |
|
|
|
25 |
|
|
|
0.10 |
|
|
|
69,275 |
|
|
|
1,683 |
|
|
|
2.43 |
|
|
|
26,244 |
|
|
|
1,260 |
|
|
|
4.80 |
|
Total
interest-earning assets
|
|
|
1,085,533 |
|
|
|
56,667 |
|
|
|
5.22 |
|
|
|
988,905 |
|
|
|
52,897 |
|
|
|
5.35 |
|
|
|
851,793 |
|
|
|
49,175 |
|
|
|
5.77 |
|
Noninterest-earning
assets
|
|
|
78,776 |
|
|
|
|
|
|
|
|
|
|
|
79,250 |
|
|
|
|
|
|
|
|
|
|
|
65,348 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
1,164,309 |
|
|
|
|
|
|
|
|
|
|
$ |
1,068,155 |
|
|
|
|
|
|
|
|
|
|
$ |
917,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
deposits
|
|
$ |
37,838 |
|
|
$ |
128 |
|
|
|
0.34 |
|
|
$ |
39,351 |
|
|
$ |
301 |
|
|
|
0.76 |
|
|
$ |
34,355 |
|
|
$ |
123 |
|
|
|
0.36 |
|
Money
market deposits
|
|
|
231,248 |
|
|
|
3,956 |
|
|
|
1.71 |
|
|
|
149,827 |
|
|
|
4,019 |
|
|
|
2.68 |
|
|
|
113,392 |
|
|
|
4,164 |
|
|
|
3.67 |
|
Regular
and other deposits
|
|
|
127,621 |
|
|
|
1,026 |
|
|
|
0.80 |
|
|
|
127,250 |
|
|
|
1,445 |
|
|
|
1.14 |
|
|
|
129,153 |
|
|
|
1,500 |
|
|
|
1.16 |
|
Certificates
of deposit
|
|
|
436,341 |
|
|
|
13,276 |
|
|
|
3.04 |
|
|
|
437,183 |
|
|
|
19,275 |
|
|
|
4.41 |
|
|
|
422,588 |
|
|
|
20,452 |
|
|
|
4.84 |
|
Total
interest-bearing deposits
|
|
|
833,048 |
|
|
|
18,386 |
|
|
|
2.21 |
|
|
|
753,611 |
|
|
|
25,040 |
|
|
|
3.32 |
|
|
|
699,488 |
|
|
|
26,239 |
|
|
|
3.75 |
|
Borrowings
|
|
|
65,884 |
|
|
|
2,006 |
|
|
|
3.04 |
|
|
|
55,882 |
|
|
|
2,004 |
|
|
|
3.59 |
|
|
|
39,193 |
|
|
|
1,857 |
|
|
|
4.74 |
|
Total
interest-bearing liabilities
|
|
|
898,932 |
|
|
|
20,392 |
|
|
|
2.27 |
|
|
|
809,493 |
|
|
|
27,044 |
|
|
|
3.34 |
|
|
|
738,681 |
|
|
|
28,096 |
|
|
|
3.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
|
|
61,342 |
|
|
|
|
|
|
|
|
|
|
|
54,503 |
|
|
|
|
|
|
|
|
|
|
|
54,051 |
|
|
|
|
|
|
|
|
|
Other
noninterest-bearing liabilities
|
|
|
10,149 |
|
|
|
|
|
|
|
|
|
|
|
10,070 |
|
|
|
|
|
|
|
|
|
|
|
11,429 |
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
970,423 |
|
|
|
|
|
|
|
|
|
|
|
874,066 |
|
|
|
|
|
|
|
|
|
|
|
804,161 |
|
|
|
|
|
|
|
|
|
Total
equity
|
|
|
193,886 |
|
|
|
|
|
|
|
|
|
|
|
194,089 |
|
|
|
|
|
|
|
|
|
|
|
112,980 |
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$ |
1,164,309 |
|
|
|
|
|
|
|
|
|
|
$ |
1,068,155 |
|
|
|
|
|
|
|
|
|
|
$ |
917,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest-earning assets
|
|
$ |
186,601 |
|
|
|
|
|
|
|
|
|
|
$ |
179,412 |
|
|
|
|
|
|
|
|
|
|
$ |
113,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
36,275 |
|
|
|
|
|
|
|
|
|
|
$ |
25,853 |
|
|
|
|
|
|
|
|
|
|
$ |
21,079 |
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
|
|
|
|
2.95 |
% |
|
|
|
|
|
|
|
|
|
|
2.01 |
% |
|
|
|
|
|
|
|
|
|
|
1.97 |
% |
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
3.34 |
% |
|
|
|
|
|
|
|
|
|
|
2.61 |
% |
|
|
|
|
|
|
|
|
|
|
2.47 |
% |
Average
interest-earning assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
interest-bearing liabilities
|
|
|
|
|
|
|
120.76 |
% |
|
|
|
|
|
|
|
|
|
|
122.16 |
% |
|
|
|
|
|
|
|
|
|
|
115.31 |
% |
|
|
|
|
Rate/Volume
Analysis
The
following table sets forth the effects of changing rates and volumes on our net
interest income. The rate column shows the effects attributable to
changes in rate (changes in rate multiplied by prior volume). The
volume column shows the effects attributable to changes in volume (changes in
volume multiplied by prior rate). The net column represents the sum
of the prior columns. For purposes of this table, changes
attributable to changes in both rate and volume that cannot be segregated have
been allocated proportionally based on the changes due to rate and the changes
due to volume.
|
|
Years
Ended December 31,
2009
Compared to 2008
Increase
(Decrease) Due to
|
|
|
Years
Ended December 31,
2008
Compared to 2007
Increase
(Decrease) Due to
|
|
(In
thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
8,394 |
|
|
$ |
(2,125 |
) |
|
$ |
6,269 |
|
|
$ |
4,398 |
|
|
$ |
(1,362 |
) |
|
$ |
3,036 |
|
Securities
|
|
|
(258 |
) |
|
|
(583 |
) |
|
|
(841 |
) |
|
|
824 |
|
|
|
(561 |
) |
|
|
263 |
|
Other
interest-earning assets
|
|
|
(655 |
) |
|
|
(1,003 |
) |
|
|
(1,658 |
) |
|
|
605 |
|
|
|
(182 |
) |
|
|
423 |
|
Total
|
|
|
7,481 |
|
|
|
(3,711 |
) |
|
|
3,770 |
|
|
|
5,827 |
|
|
|
(2,105 |
) |
|
|
3,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
3,045 |
|
|
|
(9,699 |
) |
|
|
(6,654 |
) |
|
|
2,517 |
|
|
|
(3,716 |
) |
|
|
(1,199 |
) |
Borrowings
|
|
|
13 |
|
|
|
(11 |
) |
|
|
2 |
|
|
|
343 |
|
|
|
(196 |
) |
|
|
147 |
|
Total
|
|
|
3,058 |
|
|
|
(9,710 |
) |
|
|
(6,652 |
) |
|
|
2,860 |
|
|
|
(3,912 |
) |
|
|
(1,052 |
) |
Change
in net interest income
|
|
$ |
4,423 |
|
|
$ |
5,999 |
|
|
$ |
10,422 |
|
|
$ |
2,967 |
|
|
$ |
1,807 |
|
|
$ |
4,774 |
|
Results
of Operations for the Years Ended December 31, 2009, 2008 and 2007
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 securities.
For the
year ended December 31, 2009, the Company recorded net income of $3.8 million
compared to a net loss of $2.1 million for the year ended December 31,
2008. The results of 2009 were positively impacted by higher net
interest income, which increased by $10.4 million, or 40.3%, to $36.3
million. In 2009, the Company recorded a net loss on sale of
securities of $158,000 and other than temporary impairment losses of $429,000,
compared to a gain on sale of securities of $4.4 million in 2008. In
addition, the 2008 results include a non-recurring $3.0 million pre-tax
contribution of stock to the Company’s charitable foundation.
For the
year ended December 31, 2008, the Company recorded a net loss of $2.1 million,
compared to net income of $2.3 million for the year ended December 31,
2007. The 2008 net loss includes a non-recurring $3.0 million pre-tax
contribution of stock to the Company’s charitable foundation, and pre-tax
compensation charges of $1.5 million as a result of the retirement of the Bank’s
President. The results of 2008 were also impacted by higher
non-interest income, which increased by $3.7 million, or 80.0%, and higher
non-interest expenses, which increased $9.3 million, or
41.3%.
Net
Income (Loss)
Net
income (loss) information is as follows:
|
|
Years
Ended December 31,
|
|
|
Change
2009/2008
|
|
|
Change
2008/2007
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Net
interest income
|
|
$ |
36,275 |
|
|
$ |
25,853 |
|
|
$ |
21,079 |
|
|
$ |
10,422 |
|
|
|
40.3 |
% |
|
$ |
4,774 |
|
|
|
22.6 |
% |
Provision
for loan losses
|
|
|
4,082 |
|
|
|
5,638 |
|
|
|
465 |
|
|
|
(1,556 |
) |
|
|
(27.6 |
) |
|
|
5,173 |
|
|
|
1,112.5 |
|
Non-interest
income
|
|
|
5,295 |
|
|
|
8,373 |
|
|
|
4,652 |
|
|
|
(3,078 |
) |
|
|
(36.8 |
) |
|
|
3,721 |
|
|
|
80.0 |
|
Non-interest
expenses
|
|
|
31,566 |
|
|
|
31,966 |
|
|
|
22,620 |
|
|
|
(400 |
) |
|
|
(1.3 |
) |
|
|
9,346 |
|
|
|
41.3 |
|
Net
income (loss)
|
|
|
3,763 |
|
|
|
(2,108 |
) |
|
|
2,266 |
|
|
|
5,871 |
|
|
|
278.5 |
|
|
|
(4,374 |
) |
|
|
(193.0 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
(loss) on average equity
|
|
|
1.94 |
% |
|
|
(1.09 |
)% |
|
|
2.01 |
% |
|
|
|
|
|
|
278.0 |
% |
|
|
|
|
|
|
(154.2 |
)
% |
Return
(loss) on average assets
|
|
|
0.32 |
% |
|
|
(0.20 |
)% |
|
|
0.25 |
% |
|
|
|
|
|
|
260.0 |
% |
|
|
|
|
|
|
(180.0 |
)
% |
Net
Interest Income
Net interest income for the year ended
December 31, 2009 was $36.3 million, an increase of $10.4 million, or 40.3%,
from the year ended December 31, 2008. Loan interest income increased
by $6.3 million, or 16.2%, while deposit interest expense decreased by $6.7
million, or 26.6%. For the year ended December 31, 2009, the net
interest margin was 3.34%, compared to 2.61% for 2008. The increase
in the margin in 2009 is due primarily to a decrease in the overall rate paid on
deposits and borrowings, as competition has lessened due to customers’
preference for the safety of insured deposits and the low interest rate
environment.
Growth in the loan portfolio resulted
in increased interest income in 2009, from $38.8 million for the year ended
December 31, 2008, to $45.0 million for the year ended December 31, 2009, as
average loan balances increased from $622.0 million to $768.3 million despite a
decline in yield from 6.24% to 5.86%. The average balance of
interest-bearing deposits increased from $753.6 million to $833.0 million for
the years ended December 31, 2008 and 2009, respectively, while deposit interest
expense decreased $6.7 million, or 26.6%. The average rate paid on
all deposit types declined from 3.32% in 2008 to 2.21% in 2009.
Net interest income for the year ended
December 31, 2008 was $25.9 million, an increase of $4.8 million, or 22.6%, from
the year ended December 31, 2007. An increase in loan interest income
of $3.0 million, or 8.5%, and a reduction in deposit expense of $1.2 million, or
4.6% were offset by a $5.2 million increase in the provision for loan losses.
For the year ended December 31, 2008, the net interest margin was 2.61%,
compared to 2.47% for 2007. The increase in the margin in 2008 is due
primarily to a decrease in the overall rate paid on deposits and borrowings,
caused in part by the end of promotional certificate of deposit rates offered in
2007.
Growth in the loan portfolio resulted
in increased interest income in 2008, from $35.7 million for the year ended
December 31, 2007, to $38.8 million for the year ended December 31, 2008, as
average loan balances increased from $550.5 million to $622.0 million, which
were affected, in part, by lower yields due to the lower interest rate
environment.
The average balance of interest-bearing
deposits increased from $699.5 million to $753.6 million for the years ended
December 31, 2007 and 2008, respectively, while deposit interest expense
decreased $1.2 million, or 4.6%. Borrowing expense increased $147,000, or 7.9%,
for the year ended December 31, 2008 compared to 2007 due to higher average
outstanding borrowings, which increased from $39.2 million to $55.9
million. Borrowings increased in 2008 as the Company opted to
supplement maturing FHLB debt with lower rate FHLB borrowings to support loan
growth.
Provision for
Loan Losses
The
Company’s loan loss provision was $4.1 million, $5.6 million and $465,000 for
the years ended December 31, 2009, 2008 and 2007,
respectively. Changes in the provision relate to loan growth,
specific reserves taken for impaired loans, and management’s assessment of
various factors affecting the portfolio, including, among others, an ongoing
evaluation of credit quality, local real estate market conditions, local and
national economic factors, and changes in delinquent and non-performing
loans. The reduction in the level of provision expense for 2009
compared to 2008 was due in part to lower provision expense related to specific
reserves recorded for impaired loans. In 2009, the Company recorded a
net expense for specific reserves on impaired loans of $2.0 million compared to
$2.6 million in 2008. The Company also experienced lower loan growth
in 2009 than in 2008.
A number
of factors contributed to the increase in the provision in 2008 compared to
2007. In 2008, total loans increased significantly, to $712.0 million
at December 31, 2008 from $572.8 million at December 31,
2007. Non-accrual loans increased to $14.2 million at December 31,
2008 from $5.0 million at December 31, 2007. Charge-offs increased from $270,000
in 2007 to $2.4 million in 2008. These increases, along with the
deterioration the economic environment and the financial services industry,
contributed to the increased provision for loan losses via specific impairment
reserves and increases to the general reserve factors for the
portfolio.
The
allowance for loan losses was $9.2 million, 1.12%, of total loans outstanding as
of December 31, 2009, as compared with $6.9 million, 0.97% of total loans as of
December 31, 2008. An analysis of the changes in the allowance for
loan losses is presented under “Risk Management – Analysis and
Determination of the Allowance for Loan Losses.”
Non-Interest
Income
|
|
Years
Ended December 31,
|
|
|
Change
2009/2008
|
|
|
Change
2008/2007
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Customer
service fees
|
|
$ |
3,219 |
|
|
$ |
2,796 |
|
|
$ |
2,733 |
|
|
$ |
423 |
|
|
|
15.1 |
% |
|
$ |
63 |
|
|
|
2.3 |
% |
Loan
fees
|
|
|
584 |
|
|
|
673 |
|
|
|
664 |
|
|
|
(89 |
) |
|
|
(13.2 |
) |
|
|
9 |
|
|
|
1.4 |
|
Gain
on sales of loans, net
|
|
|
560 |
|
|
|
39 |
|
|
|
49 |
|
|
|
521 |
|
|
|
1,335.9 |
|
|
|
(10 |
) |
|
|
(20.4 |
) |
Other-than-temporary
impairment losses on securities
|
|
|
(429 |
) |
|
|
- |
|
|
|
- |
|
|
|
(429 |
) |
|
|
(100.0 |
) |
|
|
- |
|
|
|
- |
|
Gain
(loss) on sales of securities
|
|
|
(158 |
) |
|
|
4,433 |
|
|
|
299 |
|
|
|
(4,591 |
) |
|
|
(103.6 |
) |
|
|
4,134 |
|
|
|
1,382.6 |
|
Income
from bank-owned life insurance
|
|
|
890 |
|
|
|
828 |
|
|
|
1,143 |
|
|
|
62 |
|
|
|
7.5 |
|
|
|
(315 |
) |
|
|
(27.6 |
) |
Equity
income (loss) on investment in affiliate bank
|
|
|
629 |
|
|
|
(396 |
) |
|
|
(541 |
) |
|
|
1,025 |
|
|
|
258.8 |
|
|
|
145 |
|
|
|
26.8 |
|
Litigation
settlement
|
|
|
- |
|
|
|
- |
|
|
|
305 |
|
|
|
- |
|
|
|
- |
|
|
|
(305 |
) |
|
|
(100.0 |
) |
Total non-interest
income
|
|
$ |
5,295 |
|
|
$ |
8,373 |
|
|
$ |
4,652 |
|
|
$ |
(3,078 |
) |
|
|
(36.8 |
)
% |
|
$ |
3,721 |
|
|
|
80.0 |
% |
Non-interest
income for the year ended December 31, 2009 was $5.3 million, compared to $8.4
million for the year ended December 31, 2008. The Company recorded a
loss on securities determined to be other than temporarily impaired of $429,000
and a loss on sale of securities of $158,000 in 2009, compared to a net gain on
sale of securities of $4.4 million in 2008. The Company recorded a
gain on sale of loans of $560,000 in 2009, compared to $39,000 in 2008, as
saleable residential loan origination volume increased in 2009 due to lower
rates. The Company recorded equity income on its investment in
affiliate bank of $629,000 in 2009, compared to a loss of $396,000 recorded for
2008, as the affiliate bank continued to grow, increasing net interest income
while maintaining expense levels.
Non-interest
income increased by $3.7 million, to $8.4 million for the year ended December
31, 2008 from 2007. In 2008, the Company recorded gain on sale of
securities of $4.4 million, compared to $299,000 in 2007, while income from
bank-owned life insurance decreased $315,000, or 27.6%, due to policy
redemptions received in 2007. In addition, the Company
received $305,000 of proceeds from a litigation settlement in
2007.
Non-Interest
Expense
|
|
Years
Ended December 31,
|
|
|
Change
2009/2008
|
|
|
Change
2008/2007
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Salaries
and employee benefits
|
|
$ |
18,726 |
|
|
$ |
17,678 |
|
|
$ |
14,486 |
|
|
$ |
1,048 |
|
|
|
5.9 |
% |
|
|
3,192 |
|
|
|
22.0 |
% |
Occupancy
and equipment
|
|
|
3,056 |
|
|
|
2,915 |
|
|
|
2,602 |
|
|
|
141 |
|
|
|
4.8 |
|
|
|
313 |
|
|
|
12.0 |
|
Data
processing
|
|
|
1,752 |
|
|
|
1,662 |
|
|
|
1,588 |
|
|
|
90 |
|
|
|
5.4 |
|
|
|
74 |
|
|
|
4.7 |
|
Marketing
and advertising
|
|
|
1,241 |
|
|
|
1,214 |
|
|
|
987 |
|
|
|
27 |
|
|
|
2.2 |
|
|
|
227 |
|
|
|
23.0 |
|
Professional
services
|
|
|
1,997 |
|
|
|
2,300 |
|
|
|
1,069 |
|
|
|
(303 |
) |
|
|
(13.2 |
) |
|
|
1,231 |
|
|
|
115.2 |
|
Contribution
to Meridian
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charitable
Foundation
|
|
|
- |
|
|
|
3,000 |
|
|
|
- |
|
|
|
(3,000 |
) |
|
|
- |
|
|
|
3,000 |
|
|
|
100.0 |
|
Foreclosed
real estate expense
|
|
|
373 |
|
|
|
675 |
|
|
|
19 |
|
|
|
(302 |
) |
|
|
(44.7 |
) |
|
|
656 |
|
|
|
3,452.6 |
|
Deposit
insurance
|
|
|
1,879 |
|
|
|
507 |
|
|
|
87 |
|
|
|
1,372 |
|
|
|
270.6 |
|
|
|
420 |
|
|
|
482.8 |
|
Other
general and administrative
|
|
|
2,542 |
|
|
|
2,015 |
|
|
|
1,782 |
|
|
|
527 |
|
|
|
26.2 |
|
|
|
233 |
|
|
|
13.1 |
|
Total non-interest
expense
|
|
$ |
31,566 |
|
|
$ |
31,966 |
|
|
$ |
22,620 |
|
|
$ |
(400 |
) |
|
|
(1.3 |
)
% |
|
|
9,346 |
|
|
|
41.3 |
% |
Non-interest expense was $31.6 million
and $32.0 million for the years ended December 31, 2009 and 2008,
respectively. Salary and employee benefit expenses increased $1.0
million, or 5.9%, to $18.7 million, for the year ended December 31, 2009, as a
result of expenses relating to the Company’s equity incentive plans. Consistent
with the terms of their employment agreements, the Bank entered into Separation
Agreements with two executives upon their retirement during 2009 and one
executive in 2008, which provided for the payment of certain
benefits. During 2009 and 2008, the Company recorded pre-tax charges
of $1,762,000 and $1,520,000, respectively as a result of the Separation
Agreements. In the first quarter of 2008, the Company made a pre-tax $3.0
million contribution to the Company’s charitable foundation in conjunction with
its stock offering and no such contribution was made in 2009. Deposit
insurance expense increased by $1.4 million, to $1.9 million in 2009, due to
deposit growth and increased rates levied on all FDIC insured institutions,
including a $502,000 special assessment. Foreclosed real estate
expense decreased to $373,000 from $675,000, due mainly to lower valuation
allowances recorded in 2009, and a net gain on sale of foreclosed real estate
recorded in 2009. Other general and administrative expense increased
by $527,000, or 26.2% primarily as a result of $429,000 of expenses related to
the Company’s acquisition of Mt. Washington.
Non-interest
expense increased $9.3 million, from $22.6 million to $32.0 million for the
years ended December 31, 2007, and 2008, respectively. Salary and
employee benefit costs increased from $14.5 million to $17.7 million, primarily
as a result of the $1.5 million retirement charge for the Bank’s President and
expense incurred for the Company’s Employee Stock Ownership Plan (ESOP) of
$400,000 and post-retirement benefits of $526,000. The Company
instituted a hiring freeze in late 2008, and the Company opted to outsource its
internal audit function for 2009. In 2008, the Company also
made a non-recurring $3.0 million pre-tax contribution to the Meridian
Charitable Foundation in conjunction with its stock offering, and incurred an
increase in professional service fees from $1.1 million to $2.3 million as a
result of our being a public company. Foreclosed real estate expense
increased $656,000 in 2008, as more properties were acquired through
foreclosure. Deposit insurance increased from $87,000 to $507,000
primarily due to an increase in FDIC insurance premiums as well as an FDIC
deposit insurance credit in 2007.
Income Tax
Expense
The
Company recorded income tax expense of $2.2 million for 2009, reflecting an
effective tax rate of 36.5% compared to tax benefit of $1.3 million, or 37.6%
for 2008. Included in the 2008 net operating loss is the Company’s
$3.0 million contribution to the Meridian Charitable Foundation, which
contributed to an increase in the Company’s deferred tax asset from prior
year. The Company recorded a valuation allowance against the deferred
tax asset of $500,000 in 2008, which was reduced to $441,000 as of December 31,
2009 as a result of its periodic analysis of the components of the deferred tax
asset.
The
increase in our effective tax rate from 14.4% in 2007 to a tax benefit of 37.6%
in 2008 was primarily attributable to the level of permanent differences to
pretax income in 2007. These differences relate to dividends from equity
securities and income from bank-owned life insurance. In 2007, we
also received proceeds of $501,000 from two bank-owned life insurance policies
due to the death of covered individuals that was not
taxable.
Risk
Management
Overview
Managing
risk is an essential part of successfully managing a financial
institution. Our most prominent risk exposures are credit risk,
interest rate risk and market risk. Credit risk is the risk of not
collecting the interest and/or the principal balance of a loan or investment
when it is due. Interest rate risk is the potential reduction of net
interest income as a result of changes in interest rates. Market risk
arises from fluctuations in interest rates that may result in changes in the
values of financial instruments, such as available-for-sale securities that are
accounted for on a mark-to-market basis. Other risks that we face are
operational risks, liquidity risks and reputation risk. Operational
risks include risks related to fraud, regulatory compliance, processing errors,
and technology and disaster recovery. Liquidity risk is the possible
inability to fund obligations to depositors, lenders or
borrowers. Reputation risk is the risk that negative publicity or
press, whether true or not, could cause a decline in our customer base or
revenue.
The
Company’s Risk Management Officer oversees the risk management process, with
responsibility for the overall risk program and strategy, determining risks and
implementing risk mitigation strategies in the following risk
areas: interest rates, operational/compliance, liquidity, strategic,
reputation, credit and legal/regulatory. This individual provides
counsel to members of our senior management team on all issues that effect our
risk positions. In addition, this position is responsible for the
following:
|
·
|
Develops,
implements and maintains a risk management program for the entire Bank to
withstand regulatory scrutiny and provides operational safety and
efficiency;
|
|
·
|
Recommends
policy to the Board of Directors;
|
|
·
|
Chairs
the Risk Management Committee;
|
|
·
|
Participates
in developing long-term strategic risk objectives for the
Company;
|
|
·
|
Coordinates
and reviews risk assessments and provides recommendations on risk
controls, testing and mitigation
strategies;
|
|
·
|
Reviews
and provides recommendations and approvals for all proposed business
initiatives;
|
|
·
|
Implements
and maintains the Vendor Management
Program;
|
|
·
|
Acts
as our Information Security Officer and provides comments and
recommendations in accordance with Gramm-Leach Bliley Act requirements;
and
|
|
·
|
Maintains
leading edge knowledge of risk management and regulatory trends and
mitigation strategies.
|
Asset/Liability
Management
Our earnings and the market value of
our assets and liabilities are subject to fluctuations caused by changes in the
level of interest rates. We manage the interest rate sensitivity of
our interest-bearing liabilities and interest-earning assets in an effort to
minimize the adverse effects of changes in the interest rate
environment. Deposit accounts typically react more quickly to changes
in market interest rates than mortgage loans because of the shorter maturities
of deposits. As a result, sharp increases in interest rates may
adversely affect our earnings while decreases in interest rates may beneficially
affect our earnings. To reduce the potential volatility of our
earnings, we have sought to improve the match between asset and liability
maturities and rates, while maintaining an acceptable interest rate
spread. Our strategy for managing interest rate risk
emphasizes: originating loans with adjustable interest rates; selling
the residential real estate fixed-rate loans with terms greater than 15 years
that we originate; and promoting core deposit products and short-term time
deposits.
We have an Asset/Liability Management
Committee to coordinate all aspects involving asset/liability
management. The committee establishes and monitors the volume,
maturities, pricing and mix of assets and funding sources with the objective of
managing assets and funding sources to provide results that are consistent with
liquidity, growth, risk limits and profitability goals.
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 table
below sets forth an approximation of our exposure as a percentage of estimated
net interest income for the next 12-month period using interest income
simulation. The simulation uses projected repricing of assets and liabilities at
December 31, 2009 on the basis of contractual maturities, anticipated repayments
and scheduled rate adjustments. Prepayment rates can have a significant impact
on interest income simulation. Because of the large percentage of loans we hold,
rising or falling interest rates have a significant impact on the prepayment
speeds of our earning assets that in turn affect the rate sensitivity position.
When interest rates rise, prepayments tend to slow. When interest rates fall,
prepayments tend to rise. Our asset sensitivity would be reduced if prepayments
slow and vice versa. While we believe such assumptions to be reasonable, there
can be no assurance that assumed prepayment rates will approximate actual future
mortgage-backed security and loan repayment activity.
The
following table reflects changes in estimated net interest income for the
Company at January 1, 2010 through December 31, 2010.
Interest
Rate Sensitivity
|
Increase
(Decrease)
|
|
|
|
in
Market Interest
|
|
Net
Interest Income
|
|
Rates
(Rate Shock)
|
|
Amount
|
|
|
Change
|
|
|
Percent
|
|
|
|
(Dollars
in Thousands)
|
|
300
|
|
$ |
35,173 |
|
|
$ |
(7,771 |
) |
|
|
(18.10 |
) % |
Flat
|
|
|
42,944 |
|
|
|
|
|
|
|
|
|
-50
|
|
|
43,701 |
|
|
|
757 |
|
|
|
1.76 |
|
The basis point changes in rates in the
above table are assumed to occur evenly over the following 12
months.
The Company has reviewed the interest
rate sensitivity of Mt. Washington as of December 31, 2009. Mt.
Washington was within its policy limitations for its interest income
simulation.
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 December 31, 2009, cash and cash equivalents totaled $20.0
million. We also hold $20.0 million of money market mutual funds that
could provide us with additional liquidity. In addition, at December
31, 2009, we had $118.7 million of available borrowing capacity with the Federal
Home Loan Bank of Boston, including a $9.4 million line of credit. On
December 31, 2009, we had $62.3 million of advances outstanding.
A significant use of our liquidity is
the funding of loan originations. At December 31, 2009 and 2008 we
had total loan commitments outstanding, as follows:
|
|
December
31,
|
|
|
December
31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
Unadvanced
portion of existing loans:
|
|
|
|
|
|
|
Construction
|
|
$ |
72,218 |
|
|
$ |
82,041 |
|
Home
equity line of credit
|
|
|
25,623 |
|
|
|
27,168 |
|
Other
lines and letters of credit
|
|
|
4,038 |
|
|
|
3,658 |
|
Commitments
to originate:
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
|
1,844 |
|
|
|
4,567 |
|
Commercial
real estate
|
|
|
18,711 |
|
|
|
36,738 |
|
Construction
|
|
|
27,460 |
|
|
|
17,729 |
|
Other
loans
|
|
|
4,457 |
|
|
|
1,037 |
|
Total
loan commitments outstanding
|
|
$ |
154,351 |
|
|
$ |
172,938 |
|
Historically, some of the commitments
expire without being fully drawn; therefore the total amount of commitment does
not necessarily represent future cash requirement. The Bank provides
participating checking accounts with overdraft account protection covering $7.7
million of balances as of December 31, 2009. We also have a seven
year contract with our core data processing provider with an outstanding
commitment of $5.2 million as of December 31, 2009, and an annual payment of
$1.3 million.
Another significant use of our
liquidity is the funding of deposit withdrawals. Certificates of
deposit due within one year of December 31, 2009 totaled $260.7 million, or
58.6% of certificates of deposit. The large percentage of
certificates of deposit that mature within one year reflects customers’
hesitancy to invest their funds for long periods in the recent low interest rate
environment. If these maturing deposits do not remain with us, we
will be required to seek other sources of funds, including other certificates of
deposit and borrowings. We believe, however, based on past experience
that a significant portion of our certificates of deposit will remain with
us. We have the ability to attract and retain deposits by adjusting
the interest rates offered.
The following table presents our
contractual obligations as of December 31, 2009.
Contractual
Obligations
|
|
Payments
Due by Period
|
|
(In
thousands)
|
|
Total
|
|
|
Less
than One Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More
Than 5 Years
|
|
Contractual
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt obligations
|
|
$ |
50,200 |
|
|
$ |
5,200 |
|
|
$ |
30,000 |
|
|
$ |
15,000 |
|
|
$ |
- |
|
Operating
lease obligations
|
|
|
1,069 |
|
|
|
197 |
|
|
|
349 |
|
|
|
205 |
|
|
|
318 |
|
Other
long-term obligations (1)
|
|
|
5,220 |
|
|
|
1,305 |
|
|
|
2,610 |
|
|
|
1,305 |
|
|
|
- |
|
Total
|
|
$ |
56,489 |
|
|
$ |
6,702 |
|
|
$ |
32,959 |
|
|
$ |
16,510 |
|
|
$ |
318 |
|
(1)
Consists entirely of expenses related to obligations under a data
processing agreement.
|
|
Our primary investing activities are
the origination of loans and the purchase of securities. Our primary
financing activities consist of activity in deposit accounts and Federal Home
Loan Bank advances. Deposit flows are affected by the overall level
of interest rates, the interest rates and products offered by us and our local
competitors and other factors. We generally manage the pricing of our
deposits to be competitive. Occasionally, we offer promotional rates
on certain deposit products to attract deposits.
Capital
Management
Both
Meridian Interstate Bancorp and East Boston Savings Bank are subject to various
regulatory capital requirements administered by the Federal Reserve Board and
Federal Deposit Insurance Corporation, respectively, including a risk-based
capital measure. The risk-based capital guidelines include both a
definition of capital and a framework for calculating risk-weighted assets by
assigning balance sheet assets and off-balance sheet items to broad risk
categories. At December 31, 2009, both Meridian Interstate Bancorp
and East Boston Savings Bank exceeded all of their respective regulatory capital
requirements. East Boston Saving Bank is considered “well
capitalized” under
regulatory
guidelines. See “Regulation and Supervision—Federal
Bank Regulation—Capital Requirements,” “Regulatory Capital
Compliance” and Note 15 Minimum Regulatory Capital
Requirements in Notes to the Consolidated Financial Statements included
in Item 8 Financial Statements
and Supplementary Data within this report.
The
capital raised in our offering has significantly increased our liquidity and
capital resources. Over time, the initial level of liquidity will be
reduced as net proceeds from the stock offering are used for general corporate
purposes, including the funding of lending activities. We may also
use capital management tools such as cash dividends and common share
repurchases. Massachusetts regulations restrict stock repurchases by
Meridian Interstate Bancorp within three years of the stock offering unless the
repurchase: (i) is part of a general repurchase made on a pro rata basis
pursuant to an offering approved by the Commissioner of the Banks and made to
all stockholders of Meridian Interstate Bancorp (other than Meridian Financial
Services with the approval of the Commissioner of Banks); (ii) is limited to the
repurchase of qualifying shares of a director; (iii) is purchased in the open
market by a tax-qualified or 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 will also be subject to the Federal Reserve Board’s notice
provisions for stock repurchases.
Off-Balance Sheet
Arrangements
In the normal course of operations, we
engage in a variety of financial transactions that, in accordance with generally
accepted accounting principles in the United States of America are not recorded
in our financial statements. These transactions involve, to varying
degrees, elements of credit, interest rate and liquidity risk. Such transactions
are used primarily to manage customers’ requests for funding and take the form
of loan commitments and lines of credit. For information about our
loan commitments and unused lines of credit, see Note 12 Other Commitments and Contingencies
in Notes to Consolidated Financial Statements included in Item 8 Financial Statements and
Supplementary Data within this report. We had no investment in
derivative securities at December 31, 2009.
For the year ended December 31, 2009,
we did not engage in any off-balance sheet transactions reasonably likely to
have a material effect on our financial condition, results of operations or cash
flows.
Impact
of Recent Accounting Pronouncements
For a
discussion of the impact of recent accounting pronouncements, see Note 1
Summary of Significant
Accounting Policies in Notes to Consolidated Financial Statements
included in Item 8 Financial
Statements and Supplementary Data within this report.
Effect
of Inflation and Changing Prices
The
financial statements and related financial data presented in this Annual Report
have been prepared in accordance with generally accepted accounting principles
in the United States of America, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. The primary impact of inflation on our operations is
reflected in increased operating costs. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution’s performance than do general
levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and
services.
Item 7a. quantitative and qualitative
disclosures about market risk
Information
regarding quantitative and qualitative disclosures about market risk appears
under Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” under the caption “Asset/Liability
Management”.
Item 8. financial statements and
supplementary data
Index
to Consolidated Financial Statements
|
Page
|
Management’s
Annual Report on Internal Control Over Financial Reporting
|
62
|
Report
of Independent Registered Public Accounting Firm
|
63
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
65
|
Consolidated
Statements of Operations for the Years Ended December 31, 2009, 2008 and
2007
|
66
|
Consolidated
Statements of Changes in Stockholders’ Equity for the
Years
|
|
Ended
December 31, 2009, 2008 and 2007
|
67
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
2007
|
68
|
Notes
to Consolidated Financial Statements
|
70
|
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of Meridian Interstate Bancorp, Inc. (the “Company”), is responsible
for establishing and maintaining effective internal control over financial
reporting. The internal control process has been designed under our
supervision to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
reporting purposes in accordance with accounting principles generally accepted
in the United States of America.
Management
conducted an assessment of the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2009, utilizing the framework
established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this
assessment, management has determined that the Company’s internal control over
financial reporting as of December 31, 2009 is effective.
Our
internal control over financial reporting includes policies and procedures that
(a) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company; (b) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles
in the United States of America, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and
directors of the Company; and (c) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the Company's assets that could have a material effect on
the Company’s financial statements.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems designed to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2009 has been audited by Wolf & Company, P.C., an independent
registered public accounting firm, as stated in their report, which
follows. This report expresses an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2009.
/s/ Richard J. Gavegnano
|
|
March 15,
2010 |
Richard
J. Gavegnano
|
|
|
Chairman
of the Board and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Mark L. Abbate
|
|
March
15, 2010 |
Mark
L. Abbate
|
|
|
Chief
Financial Officer and Treasurer
|
|
|
(Principal
Financial and Accounting Officer)
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Meridian
Interstate Bancorp, Inc.
We have
audited the accompanying consolidated balance sheets of Meridian Interstate
Bancorp, Inc., (the “Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, changes in stockholders’ equity and cash
flows for each of the years in the three-year period ended December 31,
2009. We also have audited Meridian Interstate Bancorp, Inc.’s
internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Meridian Interstate Bancorp, Inc.’s management
is responsible for these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on these
financial statements and an opinion on the Company's internal control over
financial reporting based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of
America. Also, because management’s assessment and our audit were
conducted to meet the reporting requirements of Section 112 of the Federal
Deposit Insurance Corporation Improvement Act (FDICIA), our audit of Meridian
Interstate Bancorp, Inc.’s internal control over financial reporting included
controls over the preparation of financial statements in accordance with the
instructions to the Consolidated Financial Statements for Bank Holding Companies
(Form FR Y-9C) and to the Federal Financial Institutions Examination Council
Instructions for Consolidated Reports of Condition and Income. A company's
internal control over financial reporting includes those policies and procedures
that (a) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (b) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles
in the United States of America, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (c) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company's assets that could have a material effect on
the company’s financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Meridian Interstate Bancorp,
Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2009 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion,
Meridian Interstate Bancorp, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
/s/ Wolf & Company.
P.C.
Boston,
Massachusetts
March 15,
2010
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
Cash
and due from banks
|
|
$ |
9,010 |
|
|
$ |
10,354 |
|
Federal
funds sold
|
|
|
10,956 |
|
|
|
9,911 |
|
Total
cash and cash equivalents
|
|
|
19,966 |
|
|
|
20,265 |
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit - affiliate bank
|
|
|
3,000 |
|
|
|
7,000 |
|
Securities
available for sale, at fair value
|
|
|
293,367 |
|
|
|
252,529 |
|
Federal
Home Loan Bank stock, at cost
|
|
|
4,605 |
|
|
|
4,303 |
|
Loans
held for sale
|
|
|
955 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
822,542 |
|
|
|
711,016 |
|
Less
allowance for loan losses
|
|
|
(9,242 |
) |
|
|
(6,912 |
) |
Loans,
net
|
|
|
813,300 |
|
|
|
704,104 |
|
|
|
|
|
|
|
|
|
|
Bank-owned
life insurance
|
|
|
23,721 |
|
|
|
22,831 |
|
Foreclosed
real estate, net
|
|
|
2,869 |
|
|
|
2,604 |
|
Investment
in affiliate bank
|
|
|
11,005 |
|
|
|
10,376 |
|
Premises
and equipment, net
|
|
|
23,195 |
|
|
|
22,710 |
|
Accrued
interest receivable
|
|
|
6,231 |
|
|
|
6,036 |
|
Prepaid
deposit insurance
|
|
|
5,114 |
|
|
|
- |
|
Deferred
tax asset, net
|
|
|
1,523 |
|
|
|
10,057 |
|
Other
assets
|
|
|
2,535 |
|
|
|
2,537 |
|
Total
assets
|
|
$ |
1,211,386 |
|
|
$ |
1,065,352 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non
interest-bearing
|
|
$ |
63,606 |
|
|
$ |
55,216 |
|
Interest-bearing
|
|
|
858,869 |
|
|
|
741,636 |
|
Total
deposits
|
|
|
922,475 |
|
|
|
796,852 |
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings - affiliate bank
|
|
|
3,102 |
|
|
|
7,811 |
|
Short-term
borrowings - other
|
|
|
22,108 |
|
|
|
- |
|
Long-term
debt
|
|
|
50,200 |
|
|
|
57,675 |
|
Accrued
expenses and other liabilities
|
|
|
13,086 |
|
|
|
13,174 |
|
Total
liabilities
|
|
|
1,010,971 |
|
|
|
875,512 |
|
Commitments
and contingencies (Notes 6, 8 and 12)
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock, no par value, 50,000,000 shares
|
|
|
|
|
|
|
|
|
authorized;
23,000,000 shares issued
|
|
|
- |
|
|
|
- |
|
Additional
paid-in capital
|
|
|
100,972 |
|
|
|
100,684 |
|
Retained
earnings
|
|
|
109,189 |
|
|
|
105,426 |
|
Accumulated
other comprehensive income (loss)
|
|
|
5,583 |
|
|
|
(6,205 |
) |
Treasury
stock, at cost, 517,500 shares at December 31, 2009
|
|
|
(4,535 |
) |
|
|
- |
|
Unearned
compensation - ESOP, 745,200 and 786,600
|
|
|
|
|
|
|
|
|
shares
at December 31, 2009 and 2008, respectively
|
|
|
(7,452 |
) |
|
|
(7,866 |
) |
Unearned
compensation - restricted shares, 383,935 and
|
|
|
|
|
|
|
|
|
250,000
shares at December 31, 2009 and 2008, respectively
|
|
|
(3,342 |
) |
|
|
(2,199 |
) |
Total
stockholders' equity
|
|
|
200,415 |
|
|
|
189,840 |
|
Total
liabilities and stockholders' equity
|
|
$ |
1,211,386 |
|
|
$ |
1,065,352 |
|
See
accompanying notes to consolidated financial statements.
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
(Dollars
in thousands, except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Interest
and dividend income:
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
45,050 |
|
|
$ |
38,781 |
|
|
$ |
35,745 |
|
Interest
on debt securities
|
|
|
10,432 |
|
|
|
10,460 |
|
|
|
11,039 |
|
Dividends
on equity securities
|
|
|
1,071 |
|
|
|
1,816 |
|
|
|
1,131 |
|
Interest
on certificates of deposit
|
|
|
89 |
|
|
|
157 |
|
|
|
- |
|
Interest
on federal funds sold
|
|
|
25 |
|
|
|
1,683 |
|
|
|
1,260 |
|
Total
interest and dividend income
|
|
|
56,667 |
|
|
|
52,897 |
|
|
|
49,175 |
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
18,386 |
|
|
|
25,040 |
|
|
|
26,239 |
|
Interest
on short-term borrowings
|
|
|
61 |
|
|
|
132 |
|
|
|
370 |
|
Interest
on long-term debt
|
|
|
1,945 |
|
|
|
1,872 |
|
|
|
1,487 |
|
Total
interest expense
|
|
|
20,392 |
|
|
|
27,044 |
|
|
|
28,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
36,275 |
|
|
|
25,853 |
|
|
|
21,079 |
|
Provision
for loan losses
|
|
|
4,082 |
|
|
|
5,638 |
|
|
|
465 |
|
Net
interest income, after provision
|
|
|
|
|
|
|
|
|
|
|
|
|
for
loan losses
|
|
|
32,193 |
|
|
|
20,215 |
|
|
|
20,614 |
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
service fees
|
|
|
3,219 |
|
|
|
2,796 |
|
|
|
2,733 |
|
Loan
fees
|
|
|
584 |
|
|
|
673 |
|
|
|
664 |
|
Gain
on sales of loans, net
|
|
|
560 |
|
|
|
39 |
|
|
|
49 |
|
Other-than-temporary
impairment losses on securities
|
|
|
(429 |
) |
|
|
- |
|
|
|
- |
|
Gain
(loss) on sales of securities, net
|
|
|
(158 |
) |
|
|
4,433 |
|
|
|
299 |
|
Income
from bank-owned life insurance
|
|
|
890 |
|
|
|
828 |
|
|
|
1,143 |
|
Equity
income (loss) on investment in affiliate bank
|
|
|
629 |
|
|
|
(396 |
) |
|
|
(541 |
) |
Litigation
settlement
|
|
|
- |
|
|
|
- |
|
|
|
305 |
|
Total
non-interest income
|
|
|
5,295 |
|
|
|
8,373 |
|
|
|
4,652 |
|
Non-interest
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
18,726 |
|
|
|
17,678 |
|
|
|
14,486 |
|
Occupancy
and equipment
|
|
|
3,056 |
|
|
|
2,915 |
|
|
|
2,602 |
|
Data
processing
|
|
|
1,752 |
|
|
|
1,662 |
|
|
|
1,588 |
|
Marketing
and advertising
|
|
|
1,241 |
|
|
|
1,214 |
|
|
|
987 |
|
Professional
services
|
|
|
1,997 |
|
|
|
2,300 |
|
|
|
1,069 |
|
Contribution
to Charitable Foundation
|
|
|
- |
|
|
|
3,000 |
|
|
|
- |
|
Foreclosed
real estate
|
|
|
373 |
|
|
|
675 |
|
|
|
19 |
|
Deposit
insurance
|
|
|
1,879 |
|
|
|
507 |
|
|
|
87 |
|
Other
general and administrative
|
|
|
2,542 |
|
|
|
2,015 |
|
|
|
1,782 |
|
Total
non-interest expenses
|
|
|
31,566 |
|
|
|
31,966 |
|
|
|
22,620 |
|
Income
(loss) before income taxes
|
|
|
5,922 |
|
|
|
(3,378 |
) |
|
|
2,646 |
|
Provision
(benefit) for income taxes
|
|
|
2,159 |
|
|
|
(1,270 |
) |
|
|
380 |
|
Net
income (loss)
|
|
$ |
3,763 |
|
|
$ |
(2,108 |
) |
|
$ |
2,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.17 |
|
|
|
N/A |
|
|
|
N/A |
|
Diluted
|
|
$ |
0.17 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,820,860 |
|
|
|
N/A |
|
|
|
N/A |
|
Diluted
|
|
|
21,821,038 |
|
|
|
N/A |
|
|
|
N/A |
|
See
accompanying notes to consolidated financial statements.
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
|
Years
Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
Shares
of Common Stock Outstanding
|
|
|
Additional
Paid-in Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
Treasury
Stock
|
|
|
Unearned
Compensation - ESOP
|
|
|
Unearned
Compensation - Restricted Shares
|
|
|
Total
|
|
Balance
at December 31, 2006
|
|
|
- |
|
|
$ |
- |
|
|
$ |
106,911 |
|
|
$ |
3,364 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
110,275 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
2,266 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,266 |
|
Change
in net unrealized gain on securities available for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sale,
net of reclassification adjustment and tax effects
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,720 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,720 |
|
Change
in prior service costs and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
actuarial
losses, net of tax effects
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
94 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
94 |
|
Termination
of supplemental executive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
retirement
plan, net of tax effects
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
329 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
329 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,409 |
|
Balance
at December 31, 2007
|
|
|
- |
|
|
|
- |
|
|
|
109,177 |
|
|
|
6,507 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
115,684 |
|
Adjustment
to initially apply guidance on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
split
dollar life insurance
|
|
|
- |
|
|
|
- |
|
|
|
(1,643 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
(1,643 |
) |
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
(2,108 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,108 |
) |
Change
in net unrealized gain on securities available for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sale,
net of reclassification adjustment and tax effects
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(12,384 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(12,384 |
) |
Change
in prior service costs and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
actuarial
losses, net of tax effects
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25 |
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,467 |
) |
Adjustment
to initially apply plan accounting for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
long-term
health care plan, net of tax effects
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(353 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(353 |
) |
Issuance
of 12,650,000 shares to the mutual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
holding
company
|
|
|
12,650,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Issuance
of 10,050,000 shares in the initial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
public
offering, net of expenses of $2,867
|
|
|
10,050,000 |
|
|
|
97,633 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
97,633 |
|
Issuance
and contribution of 300,000 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
the Meridian Charitable Foundation
|
|
|
300,000 |
|
|
|
3,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,000 |
|
Purchase
of 828,000 shares of common stock by the ESOP
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(8,280 |
) |
|
|
- |
|
|
|
(8,280 |
) |
ESOP
shares earned (41,400 shares)
|
|
|
- |
|
|
|
(14 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
414 |
|
|
|
- |
|
|
|
400 |
|
Purchase
of 250,000 shares for restricted stock awards
|
|
|
(250,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,262 |
) |
|
|
(2,262 |
) |
Share-based
compensation expense
|
|
|
- |
|
|
|
65 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
63 |
|
|
|
128 |
|
Balance
at December 31, 2008
|
|
|
22,750,000 |
|
|
|
100,684 |
|
|
|
105,426 |
|
|
|
(6,205 |
) |
|
|
- |
|
|
|
(7,866 |
) |
|
|
(2,199 |
) |
|
|
189,840 |
|
Comprehensive
income :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
3,763 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,763 |
|
Change
in net unrealized gain on securities available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
sale, net of reclassification adjustment and tax effects
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11,826 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11,826 |
|
Change
in prior service costs and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
actuarial
losses, net of tax effects
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(38 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(38 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,551 |
|
Purchase
of treasury stock (517,500 shares)
|
|
|
(517,500 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,535 |
) |
|
|
- |
|
|
|
- |
|
|
|
(4,535 |
) |
ESOP
shares earned (41,400 shares)
|
|
|
- |
|
|
|
(59 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
414 |
|
|
|
- |
|
|
|
355 |
|
Purchase
of 164,000 shares for restricted stock awards
|
|
|
(164,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,468 |
) |
|
|
(1,468 |
) |
Share-based
compensation expense
|
|
|
30,065 |
|
|
|
347 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
325 |
|
|
|
672 |
|
Balance
at December 31, 2009
|
|
|
22,098,565 |
|
|
$ |
100,972 |
|
|
$ |
109,189 |
|
|
$ |
5,583 |
|
|
$ |
(4,535 |
) |
|
$ |
(7,452 |
) |
|
$ |
(3,342 |
) |
|
$ |
200,415 |
|
See
accompanying notes to consolidated financial statements.
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Years Ended
December 31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Change
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
3,763 |
|
|
$ |
(2,108 |
) |
|
$ |
2,266 |
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
4,082 |
|
|
|
5,638 |
|
|
|
465 |
|
Contribution
of stock to charitable foundation
|
|
|
- |
|
|
|
3,000 |
|
|
|
- |
|
Amortization
of net deferred loan origination fees
|
|
|
(60 |
) |
|
|
(286 |
) |
|
|
(464 |
) |
Net
amortization of securities available for sale
|
|
|
1,226 |
|
|
|
1,118 |
|
|
|
649 |
|
Depreciation
and amortization expense
|
|
|
1,287 |
|
|
|
1,270 |
|
|
|
1,200 |
|
Loss
(gain) on sales of securities, net
|
|
|
158 |
|
|
|
(4,433 |
) |
|
|
(299 |
) |
Other-than-temporary
impairment losses on securities
|
|
|
429 |
|
|
|
- |
|
|
|
- |
|
Net loss and provision for foreclosed
real estate
|
|
|
188 |
|
|
|
480 |
|
|
|
- |
|
Deferred
income tax provision (benefit)
|
|
|
671 |
|
|
|
(2,463 |
) |
|
|
(316 |
) |
Income
from bank-owned life insurance
|
|
|
(890 |
) |
|
|
(828 |
) |
|
|
(1,143 |
) |
Equity
(income) loss on investment in affiliate bank
|
|
|
(629 |
) |
|
|
396 |
|
|
|
541 |
|
Earned
ESOP shares
|
|
|
355 |
|
|
|
400 |
|
|
|
- |
|
Share-based
compensation expense
|
|
|
672 |
|
|
|
128 |
|
|
|
- |
|
Net
changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
|
(955 |
) |
|
|
- |
|
|
|
745 |
|
Accrued
interest receivable
|
|
|
(195 |
) |
|
|
(272 |
) |
|
|
(262 |
) |
Prepaid
deposit insurance
|
|
|
(5,114 |
) |
|
|
- |
|
|
|
- |
|
Other
assets
|
|
|
2 |
|
|
|
1,354 |
|
|
|
(2,005 |
) |
Accrued
expenses and other liabilities
|
|
|
(141 |
) |
|
|
(1,605 |
) |
|
|
1,647 |
|
Net
cash provided by operating activities
|
|
|
4,849 |
|
|
|
1,789 |
|
|
|
3,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities
of certificates of deposit
|
|
|
7,000 |
|
|
|
- |
|
|
|
- |
|
Purchases
of certificates of deposit
|
|
|
(3,000 |
) |
|
|
(7,000 |
) |
|
|
- |
|
Activity
in securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from maturities, calls and principal payments
|
|
|
49,198 |
|
|
|
121,131 |
|
|
|
97,441 |
|
Proceeds
from redemption of mutual funds
|
|
|
31,789 |
|
|
|
57,000 |
|
|
|
- |
|
Proceeds
from sales
|
|
|
9,203 |
|
|
|
18,359 |
|
|
|
44,091 |
|
Purchases
|
|
|
(113,137 |
) |
|
|
(199,867 |
) |
|
|
(122,763 |
) |
Redemption
(purchase) of Federal Home Loan Bank stock
|
|
|
(302 |
) |
|
|
(1,138 |
) |
|
|
206 |
|
Loans
originated, net of principal payments received
|
|
|
(114,303 |
) |
|
|
(145,280 |
) |
|
|
(36,386 |
) |
Purchase
of bank-owned life insurance
|
|
|
- |
|
|
|
(4,000 |
) |
|
|
- |
|
Decrease
in cash surrender value from life insurance proceeds
|
|
|
- |
|
|
|
- |
|
|
|
2,169 |
|
Purchases
of premises and equipment
|
|
|
(1,772 |
) |
|
|
(1,164 |
) |
|
|
(4,316 |
) |
Proceeds
from sales of foreclosed real estate
|
|
|
2,245 |
|
|
|
1,463 |
|
|
|
220 |
|
Capitalized
costs on foreclosed real estate
|
|
|
(1,613 |
) |
|
|
(59 |
) |
|
|
- |
|
Net
cash used in investing activities
|
|
|
(134,692 |
) |
|
|
(160,555 |
) |
|
|
(19,338 |
) |
(continued)
See
accompanying notes to consolidated financial statements.
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Concluded)
|
|
Years Ended
December 31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
125,623 |
|
|
|
22,406 |
|
|
|
37,457 |
|
Net
change in stock subscriptions
|
|
|
- |
|
|
|
(62,518 |
) |
|
|
62,518 |
|
Proceeds
from sale of common stock
|
|
|
- |
|
|
|
97,633 |
|
|
|
- |
|
Common
stock purchased by ESOP
|
|
|
- |
|
|
|
(8,280 |
) |
|
|
- |
|
Purchase
of stock for restricted stock awards
|
|
|
(1,468 |
) |
|
|
(2,262 |
) |
|
|
- |
|
Purchase
of treasury stock
|
|
|
(4,535 |
) |
|
|
- |
|
|
|
- |
|
Net
change in borrowings with maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
less
than three months
|
|
|
17,399 |
|
|
|
(1,343 |
) |
|
|
(212 |
) |
Proceeds
from Federal Home Loan Bank advances
|
|
|
|
|
|
|
|
|
|
|
|
|
with
maturities of three months or more
|
|
|
- |
|
|
|
45,150 |
|
|
|
150 |
|
Repayment
of Federal Home Loan Bank advances
|
|
|
|
|
|
|
|
|
|
|
|
|
with
maturities of three months or more
|
|
|
(7,475 |
) |
|
|
(14,848 |
) |
|
|
(4,000 |
) |
Net
cash provided by financing activities
|
|
|
129,544 |
|
|
|
75,938 |
|
|
|
95,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents |
|
|
(299 |
) |
|
|
(82,828 |
) |
|
|
79,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
20,265 |
|
|
|
103,093 |
|
|
|
23,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$ |
19,966 |
|
|
$ |
20,265 |
|
|
$ |
103,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid on deposits
|
|
$ |
18,714 |
|
|
$ |
25,237 |
|
|
$ |
26,171 |
|
Interest
paid on borrowed funds
|
|
|
2,031 |
|
|
|
1,948 |
|
|
|
1,872 |
|
Income
taxes paid, net of refunds
|
|
|
635 |
|
|
|
647 |
|
|
|
455 |
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
from loans held for sale to loans
|
|
|
- |
|
|
|
- |
|
|
|
2,849 |
|
Transfers
from loans to foreclosed real estate
|
|
|
1,085 |
|
|
|
3,928 |
|
|
|
780 |
|
See
accompanying notes to consolidated financial statements.
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2009, 2008 and 2007
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation and Consolidation
The
consolidated financial statements include the accounts of Meridian Interstate
Bancorp, Inc. and all other entities in which it has a controlling financial
interest (collectively referred to as the “Company”), a 57.2%-owned subsidiary
of Meridian Financial Services, Incorporated (“Meridian”), a mutual holding
company. The Company was formed in a corporate reorganization in 2006
and owns East Boston Savings Bank and its subsidiaries (the
“Bank”). The Bank’s subsidiaries include Prospect, Inc., which
engages in securities transactions on its own behalf, EBOSCO, LLC and Berkeley
Riverbend Estates LLC, both of which hold foreclosed real estate; and East
Boston Investment Services, Inc., which is authorized for third-party investment
sales and is currently inactive. The Company has another subsidiary,
Meridian Funding Corporation, which was established in 2008 to fund a loan to
the Company’s Employee Stock Ownership Plan (“ESOP”). All significant
intercompany balances and transactions have been eliminated in
consolidation.
As of
December 31, 2009, Meridian holds 12,650,000 shares or 57.2% of the Company’s
outstanding common stock. In conjunction with its acquisition of Mt.
Washington Cooperative Bank (“Mt. Washington”), the Company issued shares of
stock to Meridian increasing Meridian’s ownership of the Company to 58.2% on
January 4, 2010. Refer to Note 2 for additional information regarding
the acquisition of Mt. Washington.
The
Company also holds a 40% share in Hampshire First Bank, and is accounting for
this investment by the equity method of accounting, under which the Company’s
share of the net income or loss of the affiliate is recognized as income or loss
in the Company’s consolidated statement of operations.
Business
and Operating Segments
The Bank
provides loan and deposit services to its customers through its local banking
offices in the greater Boston metropolitan area. The Bank is subject
to competition from other financial institutions including commercial banks,
other savings banks, credit unions, mortgage banking companies and other
financial service providers.
Generally,
financial information is to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. Management evaluates the Company’s performance and allocates resources
based on a single segment concept. Accordingly, there is no separately
identified material operating segment for which discrete financial information
is available. The Company does not derive revenues from, or have
assets located in foreign countries, nor does it derive revenues from any single
customer that represents 10% or more of the Company’s total
revenues.
Use
of Estimates
In
preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the consolidated balance sheet and
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for loan losses, other-than-temporary impairment of securities and the valuation
of deferred tax assets and foreclosed real estate.
Reclassification
Certain
amounts in the 2008 and 2007 consolidated financial statements have been
reclassified to conform to the 2009 presentation.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
Significant
Concentrations of Credit Risk
Most of
the Company’s activities are with customers located within
Massachusetts. Note 4 includes the types of securities in which the
Company invests and Note 5 includes the types of lending in which the Company
engages. The Company believes that it does not have any significant
concentration in any one industry or customer. Within the securities
portfolio, the Company has a significant amount of corporate debt and marketable
equity securities issued by companies in the financial services
sector. Given the current market conditions, this sector continues to
have an enhanced level of credit risk. As of December 31, 2009, the
fair value of corporate debt and marketable equity securities in the financial
services sector amounted to $60,723,000 and $3,505,000,
respectively. See Note 4.
Cash
and Cash Equivalents
For
purposes of the consolidated statements of cash flows, cash and cash equivalents
include amounts due from banks and federal funds sold on a daily basis, which
mature overnight or on demand. The Bank may from time to time have
deposits in financial institutions which exceed the federally insured
limits.
Certificates
of Deposit
Certificates
of deposits are purchased from FDIC-insured depository institutions, have an
original maturity of greater than ninety days and are carried at
cost. The Company’s balance in certificates of deposit at December
31, 2009 and 2008 exceeded the FDIC insurance limit of $250,000.
Fair
Value Hierarchy
The
Company groups its assets and liabilities that are 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.
Securities
Available for Sale
Securities
are classified as “available for sale” and recorded at fair value, with
unrealized gains and losses excluded from earnings and reported in other
comprehensive income/loss, net of tax effects. Purchase premiums and
discounts are recognized in interest income using the interest method over the
terms of the securities. Gains and losses on the sale of securities
are recorded on the trade date and are determined using the specific
identification method.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
Securities
Available for Sale (concluded)
Each
reporting period, the Company evaluates all securities with a decline in fair
value below the amortized cost of the investment to determine whether or not the
impairment is deemed to be other-than-temporary ("OTTI"). Marketable
equity securities are evaluated for OTTI based on the severity and duration of
the impairment and, if deemed to be other than temporary, the declines in fair
value are reflected in earnings as realized losses. For debt securities, OTTI is
required to be recognized (1) if the Company intends to sell the security; (2)
if it is “more likely than not” that the Company will be required to sell the
security before recovery of its amortized cost basis; or (3) if the present
value of expected cash flows is not sufficient to recover the entire amortized
cost basis. For all impaired debt securities that the Company intends to sell,
or more likely than not will be required to sell, the full amount of the
depreciation is recognized as OTTI through earnings. Credit-related OTTI for all
other impaired debt securities is recognized through earnings. Non-credit
related OTTI for such debt securities is recognized in other comprehensive
income/loss, net of applicable taxes.
Federal
Home Loan Bank Stock
The Bank,
as a member of the Federal Home Loan Bank (“FHLB”) system, is required to
maintain an investment in capital stock of the FHLB. Based on
redemption provisions of the FHLB, the stock has no quoted market value and is
carried at cost. At its discretion, the FHLB may declare dividends on
the stock. The FHLB announced the suspension of its dividend
payment in the first quarter of 2009. The FHLB also announced a
moratorium on redemption of its stock. The Company reviews for
impairment based on the ultimate recoverability of the cost basis on the FHLB
stock. As of December 31, 2009 and 2008, no impairment has been
recognized.
Loans
Held For Sale
Loans
originated and intended for sale in the secondary market are carried at the
lower of cost or estimated fair value in the aggregate. Net
unrealized losses, if any, are recognized through a valuation allowance by
charges to income. Loan origination fees, net of certain direct
origination costs, are deferred, and, upon sale, included in the determination
of the gain on sale of loans.
Loans
The Bank
grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans
throughout eastern Massachusetts. The ability of the Bank’s debtors
to honor their contracts is dependent upon the real estate and general economic
conditions in this area.
Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off generally are reported at their outstanding unpaid
principal balances adjusted for charge-offs, the allowance for loan losses, and
net deferred loan origination fees. Interest income is accrued on the
unpaid principal balance. Loan origination fees, net of certain
direct origination costs, are deferred and recognized as an adjustment of the
related loan yield using the interest method over the terms of the
loans.
The
accrual of interest on mortgage and commercial loans is discontinued at the time
the loan is 90 days past due, unless the credit is well secured and in process
of collection. Past-due status is based on contractual terms of the
loan. In all cases, loans are placed on non-accrual or charged-off at
an earlier date if collection of principal or interest is considered
doubtful.
All
interest accrued but not collected for loans that are placed on non-accrual or
charged off is reversed against interest income. The interest on
these loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual
status when all the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
Allowance
for Loan Losses
The
allowance for loan losses represents management’s estimate of the probable
losses inherent in the loan portfolio and is established as losses are estimated
to have occurred through a provision for loan losses charged to
earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The
adequacy of the allowance for loan losses is evaluated on a regular basis by
management and is based upon management’s periodic review of the collectibility
of the loans in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrower’s ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
The
allowance consists of specific and general components. The specific
component relates to loans that are classified as impaired, whereby an allowance
is established when the discounted cash flows, collateral value or observable
market price of the impaired loan is lower than the carrying value of that
loan. The general component relates to pools of non-impaired loans
and is based on historical loss experience adjusted for qualitative
factors.
A loan is
considered impaired when, based on current information and events, it is
probable that the Bank 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.
The
Company periodically may agree to modify the contractual terms of loans. When a
loan is modified and a concession is made to a borrower experiencing financial
difficulty, the modification is considered a troubled debt restructuring
("TDR"). All TDRs are initially classified as impaired.
Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify
individual consumer loans for impairment disclosures unless such loans are
subject to a troubled debt restructuring agreement.
Bank-Owned
Life Insurance
The Bank
has purchased insurance policies on the lives of certain directors, executive
officers and employees. Bank-owned life insurance policies are
reflected on the consolidated balance sheets at cash surrender
value. Changes in net cash surrender value of the policies, as well
as insurance proceeds received, are reflected in non-interest income on the
consolidated statements of operations and are not subject to income
taxes.
Premises
and Equipment
Land is
carried at cost. Buildings, equipment and leasehold improvements are
stated at cost, less accumulated depreciation and amortization, computed on the
straight-line method over the estimated useful lives of the assets or the
expected terms of the leases, if shorter. Expected terms include
lease option periods to the extent that the exercise of such options is
reasonably assured. It is general practice to charge the cost of
maintenance and repairs to earnings when incurred; major expenditures for
improvements are capitalized and depreciated.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
Foreclosed
Assets
Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at fair value less costs to sell at the date of foreclosure,
establishing a new cost basis. The excess, if any, of the loan
balance over the fair value of the asset at the time of transfer from loans to
foreclosed assets is charged to the allowance for loan
losses. Subsequent to foreclosure, valuations are periodically
performed by management and the assets are carried at the lower of carrying
amount or fair value less costs to sell. Revenue and expenses from
operations, changes in the valuation allowance and any direct write-downs are
included in foreclosed real estate expense.
Transfers
of Financial Assets
Transfers
of financial assets are accounted for as sales when control over the assets has
been surrendered. Control over financial assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right to pledge or exchange the transferred assets, and
(3) the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Advertising
Advertising
costs are expensed as incurred.
Supplemental
Executive Retirement Plans
The Bank
accounts for certain supplemental executive retirement benefits on the net
periodic pension cost method using an actuarial model that allocates pension
costs over the service period of employees in the plan. The Company accounts for
the over-funded or under-funded status of its defined benefit plan as an asset
or liability in its consolidated balance sheets and recognizes changes in the
funded status in the year in which the changes occur through other comprehensive
income or loss.
Share-Based
Compensation Plans
The
Company measures and recognizes compensation cost relating to share-based
payment transactions based on the grant-date fair value of the equity
instruments issued. Share-based compensation is recognized over the
period the employee is required to provide service for the
award. Reductions in compensation expense associated with forfeited
options are estimated at the date of grant, and this estimated forfeiture rate
is adjusted quarterly based on actual forfeiture experience. The
Company uses the Black-Scholes option-pricing model to determine the fair value
of stock options granted.
Employee
Stock Ownership Plan
Compensation
expense for the Employee Stock Ownership Plan is recorded at an amount equal to
the shares allocated by the ESOP multiplied by the average fair market value of
the shares during the period. The Company recognizes compensation
expense ratably over the year based upon the Company’s estimate of the number of
shares expected to be allocated by the ESOP. Unearned
compensation applicable to the ESOP is reflected as a reduction of stockholder’s
equity in the consolidated balance sheets. The difference between the
average fair market value and the cost of the shares allocated by the ESOP is
recorded as an adjustment to additional paid-in capital.
Income
Taxes
Deferred
income tax assets and liabilities are determined using the liability (or balance
sheet) method. Under this method, the net deferred tax asset or liability is
determined based on the tax effects of the temporary differences between the
book and tax bases of the various balance sheet assets and liabilities and gives
current recognition to changes in tax rates and laws. A valuation allowance is
established against deferred tax assets when, based upon the available evidence
including historical and projected taxable income, it is more likely than not
that some or all of the deferred tax assets will not be realized. The
Company does not have any uncertain tax positions at December 31, 2009 which
require accrual or disclosure.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
Income
Taxes (concluded)
Income
tax benefits related to stock compensation in excess of grant date fair value,
less any proceeds on exercise, are recognized as an increase to additional
paid-in capital upon vesting or exercising and delivery of the stock. Any income
tax effects related to stock compensation that are less than grant date fair
value less any proceeds on exercise would be recognized as a reduction of
additional paid in capital to the extent of previously recognized income tax
benefits and then through income tax expense for the remaining
amount.
Treasury
Stock
Common
stock shares repurchased are recorded as treasury stock at cost.
Earnings
Per Share
Basic
earnings per share represents net income available to common stockholders
divided 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 reflects
additional common shares that would have been outstanding if dilutive potential
common shares had been issued, as well as any adjustment to income that would
result from the assumed issuance. Potential common shares that may be
issued by the Company relate to outstanding stock options and restricted stock
awards and are determined using the treasury stock method. Treasury
shares and unallocated ESOP shares are not deemed outstanding for earnings per
share calculations.
Earnings
per common share have been computed based on the following:
|
|
Year
Ended December 31,
|
|
(Net
income in thousands)
|
|
2009
|
|
Net
income applicable to common stock
|
|
$ |
3,763 |
|
|
|
|
|
|
Weighted
average common shares outstanding—basic
|
|
|
21,820,860 |
|
Dilutive
effect of stock-based compensation
|
|
|
178 |
|
Weighted
average common shares outstanding
|
|
|
|
|
used
to calculate diluted earnings per share
|
|
|
21,821,038 |
|
Earnings
per share are not applicable for the years ended December 31, 2008 and
2007, as the Company did not issue stock until January 22,
2008. Options for 593,000 shares were not included in the computation
of diluted earnings per share because to do so would have been anti-dilutive for
the year ended December 31, 2009.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
Comprehensive
Income
Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and
liabilities are reported as a separate component of the equity section of the
consolidated balance sheets, such items, along with net income, are components
of comprehensive income/loss. The components of other comprehensive
income/loss and related tax effects are as follows:
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Unrealized
holding gains (losses) on
|
|
|
|
|
|
|
|
|
|
securities
available for sale
|
|
$ |
19,117 |
|
|
$ |
(16,788 |
) |
|
$ |
4,814 |
|
Reclassification
adjustments for losses (gains)
|
|
|
|
|
|
|
|
|
|
|
|
|
realized
in income
|
|
|
587 |
|
|
|
(4,433 |
) |
|
|
(299 |
) |
Unrealized
gains (losses)
|
|
|
19,704 |
|
|
|
(21,221 |
) |
|
|
4,515 |
|
Tax
effect
|
|
|
(7,878 |
) |
|
|
8,837 |
|
|
|
(1,795 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net-of-tax
amount
|
|
|
11,826 |
|
|
|
(12,384 |
) |
|
|
2,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of net actuarial loss and prior service
|
|
|
|
|
|
|
|
|
|
|
|
|
cost
- supplemental director retirement plan
|
|
|
28 |
|
|
|
27 |
|
|
|
159 |
|
Tax
effect
|
|
|
(11 |
) |
|
|
(11 |
) |
|
|
(65 |
) |
Net-of-tax
amount
|
|
|
17 |
|
|
|
16 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of net actuarial loss and prior
|
|
|
|
|
|
|
|
|
|
|
|
|
service
cost - long-term health care plan
|
|
|
(81 |
) |
|
|
18 |
|
|
|
- |
|
Tax
effect
|
|
|
26 |
|
|
|
(9 |
) |
|
|
- |
|
Net-of-tax
amount
|
|
|
(55 |
) |
|
|
9 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
of supplemental executive
|
|
|
|
|
|
|
|
|
|
|
|
|
retirement
plan
|
|
|
- |
|
|
|
- |
|
|
|
557 |
|
Tax
effect
|
|
|
- |
|
|
|
- |
|
|
|
(228 |
) |
Net-of-tax
amount
|
|
|
- |
|
|
|
- |
|
|
|
329 |
|
|
|
$ |
11,788 |
|
|
$ |
(12,359 |
) |
|
$ |
3,143 |
|
Unrecognized
prior service costs amounting to $28,000 and $26,000, included in accumulated
other comprehensive income at December 31, 2009, are expected to be recognized
as a component of net periodic retirement plan cost and long-term health care
cost, respectively, for the year ending December 31, 2010.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
Comprehensive Income
(concluded)
The
components of accumulated other comprehensive income (loss), included in
stockholders’ equity, are as follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
Net
unrealized gain (loss) on securities
|
|
|
|
|
|
|
available
for sale
|
|
$ |
10,027 |
|
|
$ |
(9,677 |
) |
Tax
effect
|
|
|
(3,916 |
) |
|
|
3,962 |
|
Net-of-tax
amount
|
|
|
6,111 |
|
|
|
(5,715 |
) |
Unrecognized
net actuarial loss pertaining
|
|
|
|
|
|
|
|
|
to
supplemental executive retirement plans
|
|
|
(48 |
) |
|
|
(40 |
) |
Unrecognized
prior service cost pertaining
|
|
|
|
|
|
|
|
|
to
supplemental executive retirement plans
|
|
|
(173 |
) |
|
|
(209 |
) |
Total
|
|
|
(221 |
) |
|
|
(249 |
) |
Tax
effect
|
|
|
92 |
|
|
|
103 |
|
Net-of-tax
amount
|
|
|
(129 |
) |
|
|
(146 |
) |
Unrecognized
prior service cost pertaining
|
|
|
|
|
|
|
|
|
to
long-term health care plan
|
|
|
(603 |
) |
|
|
(522 |
) |
Tax
effect
|
|
|
204 |
|
|
|
178 |
|
Net-of-tax
amount
|
|
|
(399 |
) |
|
|
(344 |
) |
|
|
$ |
5,583 |
|
|
$ |
(6,205 |
) |
Recent
Accounting Pronouncements
In June
2009, the Financial Accounting Standards Board (“FASB”) approved the FASB Accounting Standards
Codification (Codification) as the single
source of authoritative nongovernmental U.S. Generally Accepted Accounting
Principles (U.S. GAAP).
The Codification does not change current U.S. GAAP but is intended to simplify
user access to all authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. All existing accounting
standard documents will be superseded and all other accounting literature not
included in the Codification will be considered non authoritative. The
Codification is effective for interim and annual periods ending after September
15, 2009. The Codification was effective for the Company during its interim
period ending September 30, 2009 and did not have an impact on its financial
condition or results of operations.
In
December 2007, the FASB issued guidance that establishes principles and
requirements for how the acquirer in a business combination recognizes and
measures identifiable assets acquired, liabilities assumed, and non-controlling
interests in the acquiree. This guidance further addresses how goodwill acquired
or a gain from a bargain purchase is to be recognized and measured and
determines what disclosures are needed to enable users of the financial
statements to evaluate the effects of the business combination. This guidance is
effective prospectively for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008.
In June
2008, the FASB issued guidance that clarifies that share-based payment awards
that entitle their holders to receive non-forfeitable dividends or dividend
equivalents before vesting should be considered participation securities. The
adoption of this guidance on January 1, 2009 did not have a significant impact
on the Company’s consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
Recent
Accounting Pronouncements (concluded)
In April
2009, the FASB issued guidance on how to determine the fair value of assets and
liabilities in an environment where the volume and level of activity for the
asset or liability have significantly decreased and re-emphasizes that the
objective of a fair value measurement remains an exit price. The guidance is
effective for periods ending after June 15, 2009. The adoption of
this guidance on April 1, 2009 did not have any impact on the Company’s
consolidated financial statements.
In April
2009, the FASB issued guidance that modifies the requirements for recognizing
other-than-temporary-impairment on debt securities and significantly changes the
impairment model for such securities. Under this guidance, a security is
considered to be other-than-temporarily impaired if the present value of cash
flows expected to be collected are less than the security’s amortized cost basis
(the difference being defined as the credit loss) or if the fair value of the
security is less than the security’s amortized cost basis and the investor
intends, or more-likely-than-not will be required, to sell the security before
recovery of the security’s amortized cost basis. If an other-than-temporary
impairment exists, the charge to earnings is limited to the amount of credit
loss if the investor does not intend to sell the security, and it is
more-likely-than-not that it will not be required to sell the security, before
recovery of the security’s amortized cost basis. Any remaining difference
between fair value and amortized cost is recognized in other comprehensive
income, net of applicable taxes. Otherwise, the entire difference between fair
value and amortized cost is charged to earnings. Upon adoption of this guidance,
an entity reclassifies from retained earnings to other comprehensive income the
non-credit portion of an other-than-temporary impairment loss previously
recognized on a security it holds if the entity does not intend to sell the
security, and it is more-likely-than-not that it will not be required to sell
the security, before recovery of the security’s amortized cost basis. This
guidance also modifies the presentation of other-than-temporary impairment
losses and increases related disclosure requirements. This guidance is effective
for periods ending after June 15, 2009. The adoption of this guidance on April
1, 2009 did not have a significant impact on the Company’s consolidated
financial statements.
In June
2009, the FASB issued guidance changing the accounting principles and
disclosures requirements related to securitizations and special-purpose
entities. Specifically, this guidance eliminates the concept of a qualifying
special-purpose entity, changes the requirements for derecognizing financial
assets and changes how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. This guidance also expands existing disclosure
requirements to include more information about transfers of financial assets,
including securitization transactions, and where companies have continuing
exposure to the risks related to transferred financial assets. This guidance
will be effective as of the beginning of each reporting entity’s first annual
reporting period that begins after November 15, 2009, for interim periods within
that first annual reporting period and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The recognition and measurement
provisions regarding transfers of financial assets shall be applied to transfers
that occur on or after the effective date. The Company will adopt this new
guidance on January 1, 2010, as required. Management does not expect
such adoption to have a material effect on the Company’s consolidated financial
statements.
In August
2009, the FASB issued guidance for measuring the fair value of a liability in
circumstances in which a quoted price in an active market for the identical
liability is not available. In such instances, a reporting entity is required to
measure fair value utilizing a valuation technique that uses (i) the quoted
price of the identical liability when traded as an asset, (ii) quoted prices for
similar liabilities or similar liabilities when traded as assets, or (iii)
another valuation technique that is consistent with the existing principles for
measuring fair value, such as an income approach or market approach. The new
guidance also clarifies that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents the
transfer of the liability. The guidance was adopted on September 30, 2009 and
did not have any impact on the Company’s consolidated financial
statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In an
effort to expand and diversify its market area, the Company completed its
acquisition of 100% of Mt. Washington Cooperative Bank, a
Massachusetts-chartered mutual bank, on January 4, 2010. Pursuant to
the merger agreement, upon completion of the transaction the Company issued
514,109 shares of its common stock to Meridian Financial Services,
Incorporated. The shares issued reflect the value of Mt. Washington
as determined by two independent appraisals. The Company recorded
merger and acquisition expenses of $449,000 in 2009, which are included in other
general and administrative expenses. Current accounting guidance
requires an acquirer to recognize the assets acquired and the liabilities
assumed at their fair values as of the acquisition date and to report
supplemental pro forma financial information. However, after making every
reasonable effort to do so, the Company has not completed the process of
obtaining the fair values of the assets acquired and the liabilities assumed in
the acquisition of Mt. Washington. The Company expects to recognize the fair
value of the transaction and report the required financial information by March
22, 2010.
3.
|
RESTRICTIONS
ON CASH AND AMOUNTS DUE FROM BANKS
|
The Bank
is required to maintain average balances on hand or with the Federal Reserve
Bank. At both December 31, 2009 and 2008, these reserve balances
amounted to $400,000.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4.
|
SECURITIES
AVAILABLE FOR SALE
|
The
amortized cost and fair values of securities available for sale, with gross
unrealized gains and losses, follows:
(In
thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
services
|
|
$ |
59,219 |
|
|
$ |
1,786 |
|
|
$ |
(282 |
) |
|
$ |
60,723 |
|
Industry
and manufacturing
|
|
|
54,522 |
|
|
|
2,106 |
|
|
|
(481 |
) |
|
|
56,147 |
|
Consumer
products and services
|
|
|
50,402 |
|
|
|
2,205 |
|
|
|
- |
|
|
|
52,607 |
|
Other
|
|
|
48,136 |
|
|
|
2,394 |
|
|
|
- |
|
|
|
50,530 |
|
Total
corporate bonds
|
|
|
212,279 |
|
|
|
8,491 |
|
|
|
(763 |
) |
|
|
220,007 |
|
Residential
mortgage-backed securities
|
|
|
23,659 |
|
|
|
148 |
|
|
|
(29 |
) |
|
|
23,778 |
|
Total
debt securities
|
|
|
235,938 |
|
|
|
8,639 |
|
|
|
(792 |
) |
|
|
243,785 |
|
Marketable
equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stocks
|
|
|
26,698 |
|
|
|
3,001 |
|
|
|
(821 |
) |
|
|
28,878 |
|
Money
market mutual funds
|
|
|
20,704 |
|
|
|
- |
|
|
|
- |
|
|
|
20,704 |
|
Total
marketable equity securities
|
|
|
47,402 |
|
|
|
3,001 |
|
|
|
(821 |
) |
|
|
49,582 |
|
Total
securities available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
sale
|
|
$ |
283,340 |
|
|
$ |
11,640 |
|
|
$ |
(1,613 |
) |
|
$ |
293,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
services
|
|
$ |
61,762 |
|
|
$ |
129 |
|
|
$ |
(5,528 |
) |
|
$ |
56,363 |
|
Industry
and manufacturing
|
|
|
43,752 |
|
|
|
112 |
|
|
|
(1,017 |
) |
|
|
42,847 |
|
Consumer
products and services
|
|
|
36,456 |
|
|
|
491 |
|
|
|
(160 |
) |
|
|
36,787 |
|
Other
|
|
|
68,109 |
|
|
|
672 |
|
|
|
(1,091 |
) |
|
|
67,690 |
|
Total
corporate bonds
|
|
|
210,079 |
|
|
|
1,404 |
|
|
|
(7,796 |
) |
|
|
203,687 |
|
Government-sponsored
enterprises
|
|
|
1,000 |
|
|
|
3 |
|
|
|
- |
|
|
|
1,003 |
|
Residential
mortgage-backed securities
|
|
|
40 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
40 |
|
Total
debt securities
|
|
|
211,119 |
|
|
|
1,410 |
|
|
|
(7,799 |
) |
|
|
204,730 |
|
Marketable
equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stocks
|
|
|
26,142 |
|
|
|
1,185 |
|
|
|
(4,473 |
) |
|
|
22,854 |
|
Money
market mutual funds
|
|
|
24,945 |
|
|
|
- |
|
|
|
- |
|
|
|
24,945 |
|
Total
marketable equity securities
|
|
|
51,087 |
|
|
|
1,185 |
|
|
|
(4,473 |
) |
|
|
47,799 |
|
Total
securities available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
sale
|
|
$ |
262,206 |
|
|
$ |
2,595 |
|
|
$ |
(12,272 |
) |
|
$ |
252,529 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4.
|
SECURITIES
AVAILABLE FOR SALE (Continued)
|
The
amortized cost and fair value of debt securities by contractual maturity at
December 31, 2009 follows. Expected maturities may differ from
contractual maturities because of scheduled payments received on residential
mortgage-backed securities and because issuers may have the right to call or
prepay obligations with or without prepayment penalties.
(In
thousands)
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
Within
1 year
|
|
|
Over
1 year to 5 years
|
|
|
Over
5 years
|
|
|
Total
|
|
Corporate
bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
services
|
|
$ |
11,556 |
|
|
$ |
11,771 |
|
|
$ |
47,663 |
|
|
$ |
48,952 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
59,219 |
|
|
$ |
60,723 |
|
Industry
and manufacturing
|
|
|
6,544 |
|
|
|
6,705 |
|
|
|
47,978 |
|
|
|
49,442 |
|
|
|
- |
|
|
|
- |
|
|
|
54,522 |
|
|
|
56,147 |
|
Consumer
products and services
|
|
|
9,499 |
|
|
|
9,638 |
|
|
|
40,903 |
|
|
|
42,969 |
|
|
|
- |
|
|
|
- |
|
|
|
50,402 |
|
|
|
52,607 |
|
Other
|
|
|
3,511 |
|
|
|
3,526 |
|
|
|
44,625 |
|
|
|
47,004 |
|
|
|
- |
|
|
|
- |
|
|
|
48,136 |
|
|
|
50,530 |
|
Total
corporate bonds
|
|
|
31,110 |
|
|
|
31,640 |
|
|
|
181,169 |
|
|
|
188,367 |
|
|
|
- |
|
|
|
- |
|
|
|
212,279 |
|
|
|
220,007 |
|
Residential
mortgage-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
backed
securities
|
|
|
- |
|
|
|
- |
|
|
|
3,045 |
|
|
|
3,029 |
|
|
|
20,614 |
|
|
|
20,749 |
|
|
|
23,659 |
|
|
|
23,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
31,110 |
|
|
$ |
31,640 |
|
|
$ |
184,214 |
|
|
$ |
191,396 |
|
|
$ |
20,614 |
|
|
$ |
20,749 |
|
|
$ |
235,938 |
|
|
$ |
243,785 |
|
For the
years ended December 31, 2009, 2008 and 2007, proceeds from sales of securities
available for sale amounted to $9,203,000, $18,359,000 and $44,091,000
respectively. Gross gains of $1,291,000, $5,133,000 and $2,493,000
and gross losses of $1,449,000, $700,000 and $2,194,000, respectively, were
realized on those sales.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4.
|
SECURITIES AVAILABLE FOR SALE
(Continued)
|
Information
pertaining to securities available for sale as of December 31, 2009 and 2008,
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
|
|
(In
thousands)
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
services
|
|
$ |
24 |
|
|
$ |
6,059 |
|
|
$ |
258 |
|
|
$ |
6,736 |
|
Industry
and manufacturing
|
|
|
- |
|
|
|
- |
|
|
|
481 |
|
|
|
5,519 |
|
Total
corporate bonds
|
|
|
24 |
|
|
|
6,059 |
|
|
|
739 |
|
|
|
12,255 |
|
Residential
mortgage-backed securities
|
|
|
26 |
|
|
|
8,163 |
|
|
|
3 |
|
|
|
9 |
|
Total
debt securities
|
|
|
50 |
|
|
|
14,222 |
|
|
|
742 |
|
|
|
12,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
- |
|
|
|
- |
|
|
|
821 |
|
|
|
6,890 |
|
Total
temporarily impaired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
$ |
50 |
|
|
$ |
14,222 |
|
|
$ |
1,563 |
|
|
$ |
19,154 |
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
services
|
|
$ |
2,289 |
|
|
$ |
19,127 |
|
|
$ |
3,239 |
|
|
$ |
27,160 |
|
Industry
and manufacturing
|
|
|
1,008 |
|
|
|
26,660 |
|
|
|
9 |
|
|
|
1,490 |
|
Consumer
products and services
|
|
|
84 |
|
|
|
11,484 |
|
|
|
76 |
|
|
|
3,445 |
|
Other
|
|
|
1,050 |
|
|
|
19,874 |
|
|
|
41 |
|
|
|
4,007 |
|
Total
corporate bonds
|
|
|
4,431 |
|
|
|
77,145 |
|
|
|
3,365 |
|
|
|
36,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage-backed securities
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
11 |
|
Total
debt securities
|
|
|
4,431 |
|
|
|
77,145 |
|
|
|
3,368 |
|
|
|
36,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
3,728 |
|
|
|
14,979 |
|
|
|
745 |
|
|
|
2,281 |
|
Total
temporarily impaired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
$ |
8,159 |
|
|
$ |
92,124 |
|
|
$ |
4,113 |
|
|
$ |
38,394 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4.
|
SECURITIES
AVAILABLE FOR SALE (Concluded)
|
At
December 31, 2009, ten debt securities have unrealized losses with aggregate
depreciation of 2.9% 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. Management evaluates securities for other-than-temporary impairment
at least on a quarterly basis, and more frequently when economic or market
concerns warrant such evaluation.
The
unrealized losses are primarily caused by (a) recent declines in profitability
and near-term profit forecasts by industry analysts resulting from a decline in
the level of business activity and (b) recent downgrades by several industry
analysts. The contractual terms of these investments do not permit
the companies to settle the security at a price less than the par value of the
investment. The Company currently does not believe it is probable
that it will be unable to collect all amounts due according to the contractual
terms of the investments. Therefore, it is expected that the bonds
would not be settled at a price less than the par value of the
investment. Because (1) the Company does not intend to sell the
securities; (2) the Company does not believe it is “more likely than not” that
the Company will be required to sell the securities before recovery of its
amortized cost basis; and (3) the present value of expected cash flows is
sufficient to recover the entire amortized cost basis of the
securities, the Company does not consider these investments to be
other-than-temporarily impaired at December 31, 2009.
From time
to time, management’s intent to hold depreciated debt securities to recovery or
maturity may change as a result of prudent portfolio management. If
management’s intent changes, unrealized losses are recognized either as
impairment charges to the consolidated income statement or as realized losses if
a sale has been executed. In most instances, management sells the
securities at the time their intent changes.
At
December 31, 2009, twelve marketable equity securities have unrealized losses
with aggregate depreciation of 10.6% 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.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary
of loans follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
Mortgage
loans on real estate:
|
|
|
|
|
|
|
Residential
real estate
|
|
$ |
276,122 |
|
|
$ |
274,716 |
|
Commercial
real estate
|
|
|
350,648 |
|
|
|
269,454 |
|
Construction
|
|
|
94,102 |
|
|
|
91,652 |
|
Multi-family
|
|
|
53,402 |
|
|
|
31,212 |
|
Home
equity lines of credit
|
|
|
29,979 |
|
|
|
28,253 |
|
|
|
|
804,253 |
|
|
|
695,287 |
|
Other
loans:
|
|
|
|
|
|
|
|
|
Commercial
non-real estate
|
|
|
18,029 |
|
|
|
15,355 |
|
Consumer
|
|
|
1,205 |
|
|
|
1,379 |
|
|
|
|
19,234 |
|
|
|
16,734 |
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
823,487 |
|
|
|
712,021 |
|
Less:
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(9,242 |
) |
|
|
(6,912 |
) |
Net
deferred loan origination fees
|
|
|
(945 |
) |
|
|
(1,005 |
) |
|
|
|
|
|
|
|
|
|
Loans,
net
|
|
$ |
813,300 |
|
|
$ |
704,104 |
|
An
analysis of the allowance for loan losses follows:
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$ |
6,912 |
|
|
$ |
3,637 |
|
|
$ |
3,362 |
|
Provision
for loan losses
|
|
|
4,082 |
|
|
|
5,638 |
|
|
|
465 |
|
Recoveries
|
|
|
273 |
|
|
|
3 |
|
|
|
80 |
|
Loans
charged-off
|
|
|
(2,025 |
) |
|
|
(2,366 |
) |
|
|
(270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
$ |
9,242 |
|
|
$ |
6,912 |
|
|
$ |
3,637 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
following is a summary of information pertaining to impaired and non-accrual
loans:
|
|
December
31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans without a valuation allowance
|
|
$ |
27,171 |
|
|
$ |
10,538 |
|
Impaired
loans with a valuation allowance
|
|
|
2,172 |
|
|
|
1,929 |
|
|
|
|
|
|
|
|
|
|
Total
impaired loans
|
|
$ |
29,343 |
|
|
$ |
12,467 |
|
|
|
|
|
|
|
|
|
|
Valuation
allowance related to impaired loans
|
|
$ |
472 |
|
|
$ |
418 |
|
|
|
|
|
|
|
|
|
|
Total
non-accrual loans
|
|
$ |
21,698 |
|
|
$ |
14,232 |
|
|
|
|
|
|
|
|
|
|
Total
loans past-due ninety days or more and still accruing
|
|
$ |
- |
|
|
$ |
- |
|
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Average
investment in impaired loans
|
|
$ |
18,061 |
|
|
$ |
8,058 |
|
|
$ |
4,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income recognized on
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired
loans
|
|
$ |
1,362 |
|
|
$ |
299 |
|
|
$ |
227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income recognized on a cash basis
|
|
|
|
|
|
|
|
|
|
|
|
|
on
impaired loans
|
|
$ |
1,008 |
|
|
$ |
299 |
|
|
$ |
227 |
|
At
December 31, 2009, additional funds of $1,024,000 are committed to be advanced
in connection with an impaired construction loan.
All
borrowings from the FHLB are secured by a blanket lien on qualified collateral,
defined principally as 75% of the carrying value of certain first mortgage loans
on owner-occupied residential property.
Based on
a decision by management in January 2010 to reduce the Bank’s exposure
to interest-rate risk, fixed-rate bi-weekly one- to four-family residential
loans with an aggregate principal balance of $32.0 million were sold on February
26, 2010 for a gain of $564,000. The Bank also transferred $2.7
million of fixed-rate bi-weekly loans from its portfolio to loans held for sale
on February 28, 2010 with the intention of completing another sale by March
31, 2010. Management has the intent and ability to hold the remaining fixed-rate
bi-weekly loans in the Bank’s portfolio for the foreseeable future or until
maturity or pay-off.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Loans
serviced for others by the Bank are not included in the accompanying
consolidated balance sheets. The Bank retains servicing on most loan
sales and generally earns a fee of 0.25% per annum based on the monthly
outstanding balances of the loans serviced. The unpaid principal
balances of mortgage loans serviced for others amounted to $102,920,000 and
$83,589,000 at December 31, 2009 and 2008, respectively.
Included
in loans serviced for others at December 31, 2009 and 2008 is $70,653,000 and
$73,606,000, respectively, of loans serviced for the Federal Home Loan Bank of
Boston with a recourse provision whereby the Bank may be obligated to
participate in potential losses on a limited basis when a realized loss on
foreclosure occurs. Losses are borne in priority order by the
borrower, PMI insurance, the Federal Home Loan Bank and the Bank. At
December 31, 2009 and 2008, the maximum contingent liability associated with
loans sold with recourse is $2,174,000 and $1,635,000 respectively, which is not
recorded in the consolidated financial statements. The Bank has never
repurchased any loans or incurred any losses under these recourse
provisions.
7.
|
FORECLOSED
REAL ESTATE
|
Foreclosed
real estate is presented net of an allowance for losses. An analysis
of the allowance for losses on foreclosed real estate is as
follows:
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of year
|
|
$ |
475 |
|
|
$ |
- |
|
|
$ |
- |
|
Provision
for losses
|
|
|
286 |
|
|
|
475 |
|
|
|
- |
|
Charge-offs
|
|
|
(361 |
) |
|
|
- |
|
|
|
- |
|
Balance
at end of year
|
|
$ |
400 |
|
|
$ |
475 |
|
|
$ |
- |
|
Expenses
applicable to foreclosed real estate include the following:
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Net
(gain) loss on sales of real estate
|
|
$ |
(98 |
) |
|
$ |
5 |
|
|
$ |
- |
|
Provision
for losses
|
|
|
286 |
|
|
|
475 |
|
|
|
- |
|
Operating
expenses, net of rental income
|
|
|
185 |
|
|
|
195 |
|
|
|
19 |
|
Total
foreclosed real estate expense
|
|
$ |
373 |
|
|
$ |
675 |
|
|
$ |
19 |
|
At
December 31, 2009 and 2008, foreclosed assets consist of one townhouse
construction development project and residential properties held for
sale.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8.
|
PREMISES
AND EQUIPMENT
|
A summary
of the cost and accumulated depreciation and amortization of premises and
equipment follows:
|
|
December
31,
|
|
|
Estimated
Useful
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
Lives
|
|
|
|
|
|
|
|
|
|
|
|
Land
and land improvements
|
|
$ |
6,228 |
|
|
$ |
5,007 |
|
|
|
- |
|
Buildings
|
|
|
17,764 |
|
|
|
17,699 |
|
|
40
years
|
|
Leasehold
improvements
|
|
|
866 |
|
|
|
866 |
|
|
5-15
years
|
|
Equipment
|
|
|
6,808 |
|
|
|
6,311 |
|
|
3-10
years
|
|
|
|
|
31,666 |
|
|
|
29,883 |
|
|
|
|
|
Less
accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
and
amortization
|
|
|
(8,471 |
) |
|
|
(7,173 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,195 |
|
|
$ |
22,710 |
|
|
|
|
|
Depreciation
and amortization expense for the years ended December 31, 2009, 2008 and 2007
amounted to $1,287,000, $1,270,000 and $1,200,000 respectively.
Lease
Commitments
The Bank
is obligated under non-cancelable operating lease agreements for banking offices
and facilities. These leases have terms with renewal options, the
cost of which is not included below. The leases generally provide
that real estate taxes, insurance, maintenance and other related costs are to be
paid by the Bank. At December 31, 2009, future minimum lease payments
are as follows:
Year
Ending
December
31,
|
|
Amount
|
|
|
|
(In
thousands)
|
|
2010
|
|
$ |
197 |
|
2011
|
|
|
197 |
|
2012
|
|
|
152 |
|
2013
|
|
|
112 |
|
2014
|
|
|
93 |
|
Thereafter
|
|
|
318 |
|
|
|
$ |
1,069 |
|
Total
rent expense for all operating leases amounted to $156,000, $108,000, and
$100,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary
of deposit balances, by type, follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
Demand
deposits
|
|
$ |
63,606 |
|
|
$ |
55,216 |
|
NOW
deposits
|
|
|
38,780 |
|
|
|
36,835 |
|
Money
market deposits
|
|
|
247,006 |
|
|
|
172,876 |
|
Regular
and other deposits
|
|
|
128,016 |
|
|
|
117,913 |
|
Total
non-certificate accounts
|
|
|
477,408 |
|
|
|
382,840 |
|
|
|
|
|
|
|
|
|
|
Term
certificates less than $100,000
|
|
|
255,139 |
|
|
|
250,319 |
|
Term
certificates $100,000 and greater
|
|
|
189,928 |
|
|
|
163,693 |
|
Total
term certificates
|
|
|
445,067 |
|
|
|
414,012 |
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
$ |
922,475 |
|
|
$ |
796,852 |
|
A summary
of term certificates, by maturity, follows:
(Dollars
in thousands)
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
Within
1 year
|
|
$ |
260,669 |
|
|
|
2.20 |
% |
|
$ |
328,715 |
|
|
|
3.96 |
% |
Over
1 year to 2 years
|
|
|
95,277 |
|
|
|
2.60 |
|
|
|
59,161 |
|
|
|
3.38 |
|
Over
2 years to 3 years
|
|
|
46,965 |
|
|
|
2.66 |
|
|
|
18,652 |
|
|
|
3.39 |
|
Over
3 years to 4 years
|
|
|
11,317 |
|
|
|
3.41 |
|
|
|
2,192 |
|
|
|
4.52 |
|
Over
4 years to 5 years
|
|
|
30,839 |
|
|
|
3.00 |
|
|
|
5,292 |
|
|
|
3.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
445,067 |
|
|
|
2.42 |
% |
|
$ |
414,012 |
|
|
|
3.86 |
% |
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At
December 31, 2009, short-term borrowings consisted of federal funds purchased
from our affiliate bank of $3,102,000, federal funds purchased from a
non-affiliate institution of $10,008,000, both with a weighted average rate of
0.35%, and $12,100,000 of Federal Home Loan Bank (“FHLB”) advances with a
weighted average rate of 0.27%. At December 31, 2008, short-term
borrowings consisted of federal funds purchased from our affiliate bank
amounting to $7,811,000, with a weighted average rate of 0.91%.
Long-term
debt consists of FHLB advances as follows:
(Dollars
in thousands)
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
Maturing
During the
Year
Ending December 31,
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
2009
|
|
$ |
- |
|
|
|
- |
% |
|
$ |
7,475 |
|
|
|
4.00 |
% |
2010
|
|
|
5,200 |
|
|
|
4.20 |
|
|
|
5,200 |
|
|
|
4.20 |
|
2011
|
|
|
15,000 |
|
|
|
2.99 |
|
|
|
15,000 |
|
|
|
2.99 |
|
2012
|
|
|
15,000 |
|
|
|
3.29 |
|
|
|
15,000 |
|
|
|
3.29 |
|
2013
|
|
|
15,000 |
|
|
|
3.54 |
|
|
|
15,000 |
|
|
|
3.54 |
|
|
|
$ |
50,200 |
|
|
|
3.37 |
% |
|
$ |
57,675 |
|
|
|
3.45 |
% |
As of
December 31, 2009, the Bank also has an available line of credit of $9,400,000
with the Federal Home Loan Bank of Boston at an interest rate that adjusts
daily. No amounts were drawn on the line of credit as of December 31,
2009 and 2008. All borrowings from the FHLB are secured by a blanket
lien on qualified collateral, defined principally as 75% of the carrying value
of certain first mortgage loans on owner-occupied residential
property.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Allocation
of federal and state income taxes between current and deferred portions is as
follows:
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Current
tax provision:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
1,333 |
|
|
$ |
1,081 |
|
|
$ |
625 |
|
State
|
|
|
155 |
|
|
|
112 |
|
|
|
71 |
|
Total
current provision
|
|
|
1,488 |
|
|
|
1,193 |
|
|
|
696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
597 |
|
|
|
(2,239 |
) |
|
|
(281 |
) |
State
|
|
|
133 |
|
|
|
(830 |
) |
|
|
(35 |
) |
|
|
|
730 |
|
|
|
(3,069 |
) |
|
|
(316 |
) |
Change
in enacted state tax rate - deferred
|
|
|
- |
|
|
|
106 |
|
|
|
- |
|
Change
in valuation reserve
|
|
|
(59 |
) |
|
|
500 |
|
|
|
- |
|
Total
deferred provision (benefit)
|
|
|
671 |
|
|
|
(2,463 |
) |
|
|
(316 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
tax provision (benefit)
|
|
$ |
2,159 |
|
|
$ |
(1,270 |
) |
|
$ |
380 |
|
The
reasons for the differences between the statutory federal income tax rate and
the effective tax rates are summarized as follows:
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
federal tax rate
|
|
|
34.0 |
% |
|
|
(34.0 |
)
% |
|
|
34.0 |
% |
Increase
(decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State
taxes, net of federal tax benefit
|
|
|
3.6 |
|
|
|
(14.0 |
) |
|
|
0.9 |
|
Dividends
received deduction
|
|
|
(3.3 |
) |
|
|
(5.8 |
) |
|
|
(7.0 |
) |
Bank-owned
life insurance
|
|
|
(1.5 |
) |
|
|
(3.0 |
) |
|
|
(14.7 |
) |
Non-deductible
acquisition expenses
|
|
|
2.6 |
|
|
|
- |
|
|
|
- |
|
Stock-based
compensation
|
|
|
1.9 |
|
|
|
- |
|
|
|
- |
|
Change
in state tax rate
|
|
|
- |
|
|
|
3.1 |
|
|
|
- |
|
Change
in valuation reserve
|
|
|
(1.0 |
) |
|
|
14.8 |
|
|
|
- |
|
Other,
net
|
|
|
0.2 |
|
|
|
1.3 |
|
|
|
1.2 |
|
Effective
tax rates
|
|
|
36.5
|
% |
|
|
(37.6 |
)
% |
|
|
14.4 |
% |
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11.
|
INCOME
TAXES (Continued)
|
The
components of the net deferred tax asset are as follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Federal
|
|
$ |
4,661 |
|
|
$ |
8,810 |
|
State
|
|
|
1,356 |
|
|
|
2,584 |
|
|
|
|
6,017 |
|
|
|
11,394 |
|
Valuation
reserve on assets
|
|
|
(441 |
) |
|
|
(500 |
) |
|
|
|
5,576 |
|
|
|
10,894 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(3,266 |
) |
|
|
(649 |
) |
State
|
|
|
(787 |
) |
|
|
(188 |
) |
|
|
|
(4,053 |
) |
|
|
(837 |
) |
Net
deferred tax asset
|
|
$ |
1,523 |
|
|
$ |
10,057 |
|
The tax
effects of each item that give rise to deferred tax assets (liabilities) are as
follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
Net
unrealized (gain) loss on securities available for sale
|
|
$ |
(3,916 |
) |
|
$ |
3,962 |
|
Depreciation
and amortization
|
|
|
(204 |
) |
|
|
(352 |
) |
Allowance
for loan losses
|
|
|
3,691 |
|
|
|
2,760 |
|
Employee
benefit plans
|
|
|
893 |
|
|
|
2,102 |
|
Employee
retirement plans
|
|
|
296 |
|
|
|
281 |
|
Charitable
contribution carryforward
|
|
|
944 |
|
|
|
1,198 |
|
Equity
loss on investment in affiliate bank
|
|
|
398 |
|
|
|
649 |
|
Other,
net
|
|
|
(138 |
) |
|
|
(43 |
) |
Valuation
reserve
|
|
|
(441 |
) |
|
|
(500 |
) |
Net
deferred tax asset
|
|
$ |
1,523 |
|
|
$ |
10,057 |
|
The
Company reduces deferred tax assets by a valuation allowance if, based on the
weight of available evidence, it is not “more likely than not” that some portion
or all of the deferred tax assets will be realized. The Company
assesses the realizability of its deferred tax assets by assessing the
likelihood of the Company generating federal and state tax income, as
applicable, in future periods in amounts sufficient to offset the deferred tax
charges in the periods they are expected to reverse. Based on this
assessment, management concluded that a valuation allowance of $441,000 and
$500,000 was required as of December 31, 2009 and 2008, respectively, due
primarily to the limited future taxable income projected for federal and state
tax purposes that can be utilized to offset a charitable contribution
carryforward of $2,400,000 which will expire in 2013.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11.
|
INCOME
TAXES (Concluded)
|
A summary
of the change in the net deferred tax asset (liability) is as
follows:
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of year
|
|
$ |
10,057 |
|
|
$ |
(1,410 |
) |
|
$ |
362 |
|
Deferred
tax provision (benefit) from operations
|
|
|
(730 |
) |
|
|
3,069 |
|
|
|
316 |
|
Deferred
tax effects of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in net unrealized gain (loss) on
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
available for sale
|
|
|
(7,878 |
) |
|
|
8,837 |
|
|
|
(1,795 |
) |
Adjustment
to initially apply plan
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
for long-term care plan
|
|
|
- |
|
|
|
187 |
|
|
|
- |
|
Termination
of supplemental
|
|
|
|
|
|
|
|
|
|
|
|
|
executive
retirement plan
|
|
|
- |
|
|
|
- |
|
|
|
(228 |
) |
Change
in enacted state tax rate
|
|
|
- |
|
|
|
(106 |
) |
|
|
- |
|
Amortization
of net actuarial loss and
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
service cost
|
|
|
15 |
|
|
|
(20 |
) |
|
|
(65 |
) |
Change
in valuation reserve
|
|
|
59 |
|
|
|
(500 |
) |
|
|
- |
|
Balance
at end of year
|
|
$ |
1,523 |
|
|
$ |
10,057 |
|
|
$ |
(1,410 |
) |
The
federal income tax reserve for loan losses at the Bank’s base year is
$7,500,000. If any portion of the reserve is used for purposes other
than to absorb loan losses, approximately 150% of the amount actually used
(limited to the amount of the reserve) would be subject to taxation in the year
in which used. As the Bank intends to use the reserve to absorb only
loan losses, a deferred tax liability of $3,000,000 has not been
provided.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12.
|
OTHER
COMMITMENTS AND CONTINGENCIES
|
In the
normal course of business, there are outstanding commitments and contingencies
which are not reflected in the accompanying consolidated financial
statements.
Loan
Commitments
The Bank
is party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers and to reduce
its own exposure to fluctuations in interest rates. The instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the accompanying consolidated balance
sheets. The contract amounts of those instruments reflect the extent
of involvement the Bank has in particular classes of financial
instruments.
The
Bank’s exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for loan commitments is represented by the
contractual amount of those instruments. The Bank uses the same
credit policies in making commitments as it does for on-balance sheet
instruments. A summary of outstanding financial instruments whose
contract amounts represent credit risk is as follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
Unadvanced
portion of existing loans:
|
|
|
|
|
|
|
Construction
|
|
$ |
72,218 |
|
|
$ |
82,041 |
|
Home
equity line of credit
|
|
|
25,623 |
|
|
|
27,168 |
|
Other
lines and letters of credit
|
|
|
4,038 |
|
|
|
3,658 |
|
Commitments
to originate:
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
|
1,844 |
|
|
|
4,567 |
|
Commercial
real estate
|
|
|
18,711 |
|
|
|
36,738 |
|
Construction
|
|
|
27,460 |
|
|
|
17,729 |
|
Other
loans
|
|
|
4,457 |
|
|
|
1,037 |
|
Total
loan commitments outstanding
|
|
$ |
154,351 |
|
|
$ |
172,938 |
|
Commitments
to originate loans are agreements to lend to a customer provided there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since a portion of the commitments are
expected to expire without being drawn upon, the total commitments do not
necessarily represent future cash requirements. The Bank evaluates
each customer’s credit worthiness on a case by case basis. The amount
of collateral obtained, if deemed necessary by the Bank for the extension of
credit, is based upon management’s credit evaluation of the
borrower. Collateral held includes, but is not limited to,
residential real estate and deposit accounts.
Unfunded
commitments under lines of credit are commitments for possible future extensions
of credit to existing customers. These lines of credit are
collateralized if deemed necessary and usually do not contain a specified
maturity date and may not be drawn upon to the total extent to which the Bank is
committed. Letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third
party. Those letters of credit are primarily issued to support
borrowing arrangements. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities
to customers.
Other
Commitments
The Bank
provides participating checking accounts with overdraft account protection
covering $7.7 million of balances as of December 31, 2009. We also
have a seven year contract with our core data processing provider with an
outstanding commitment of $5.2 million as of December 31, 2009, and an annual
payment of $1.3 million.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12.
|
OTHER
COMMITMENTS AND CONTINGENCIES
(concluded)
|
Employment
Agreements
The Bank
has entered into employment agreements with certain senior executives which
provide for a minimum annual salary, subject to increase at the discretion of
the Board of Directors, and other benefits. The agreements may be
terminated for cause by the Bank without further liability on the part of the
Bank, or by the executives with prior written notice to the Board of
Directors.
Legal
Claims
Various
legal claims may arise from time to time in the normal course of business, but
in the opinion of management, these claims are not expected to have a material
effect on the Company’s consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13.
|
EMPLOYEE
BENEFIT PLANS
|
401(k)
Plan
The Bank
has a 401(k) plan to provide retirement benefits for eligible
employees. Under this plan, each employee reaching the age of
eighteen and having completed at least three months of service in any one
twelve-month period, beginning with such employee’s date of employment, can
elect to be a participant in the retirement plan. All participants
are fully vested upon entering the plan. The Bank contributes three
percent of an employee’s compensation regardless of the employee’s contributions
and makes matching contributions equal to fifty percent of the first six percent
of an employee’s compensation contributed to the Plan. For the years
ended December 31, 2009, 2008 and 2007, expense attributable to the plan
amounted to $556,000, $558,000 and $522,000, respectively.
Supplemental
Executive Retirement Plans – Officers and Directors
The Bank
has Supplemental Executive Retirement Plans for certain senior officers and
directors which provide for a defined benefit obligation, based on the
executive’s or director’s final average compensation. The plans are
unfunded for tax purposes. The Bank does not expect to contribute
assets to the plan in 2010. Information pertaining to the activity in
the plans is as follows:
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(In
thousands)
|
|
Directors
|
|
|
Directors
|
|
|
Directors
|
|
|
Officers
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning
|
|
|
|
|
|
|
|
|
|
|
|
|
of
year
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Employer
contribution
|
|
|
190 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Benefits
payments
|
|
|
(190 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Fair
value of plan assets at end of year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
|
762 |
|
|
|
668 |
|
|
|
646 |
|
|
|
3,547 |
|
Service
cost
|
|
|
73 |
|
|
|
66 |
|
|
|
103 |
|
|
|
39 |
|
Interest
cost
|
|
|
33 |
|
|
|
38 |
|
|
|
37 |
|
|
|
155 |
|
Benefit
payments
|
|
|
(190 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Actuarial
loss (gain)
|
|
|
(4 |
) |
|
|
(10 |
) |
|
|
(118 |
) |
|
|
16 |
|
Plan
termination
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,757 |
) |
Benefit
obligation at end of year
|
|
|
674 |
|
|
|
762 |
|
|
|
668 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status
|
|
$ |
(674 |
) |
|
$ |
(762 |
) |
|
$ |
(668 |
) |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
benefit obligation
|
|
$ |
(674 |
) |
|
$ |
(762 |
) |
|
$ |
(668 |
) |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligation
|
|
$ |
(575 |
) |
|
$ |
(657 |
) |
|
$ |
(567 |
) |
|
$ |
- |
|
In 2007,
in anticipation of the minority stock offering, the Bank revised the agreements
for the senior officers. This resulted in the termination of the
officers’ plan which had been accounted for under plan accounting, and the
establishment of a liability for individual contracts. The present
value of the estimated future benefits is accrued over the required service
periods. At December 31, 2009 and 2008, the accrued liability for
these agreements amounted to $809,000 and $2,252,000,
respectively. Supplemental executive retirement benefit expense for
officers and directors amounted to $1,346,000, $1,233,000 and $713,000 for the
years ended December 31, 2009, 2008 and 2007.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13.
|
EMPLOYEE
BENEFIT PLANS (Continued)
|
Supplemental
Executive Retirement Plans – Officers and Directors (concluded)
The
components of net periodic benefit cost are as follows:
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Directors
|
|
|
Directors
|
|
|
Directors
|
|
|
Officers
|
|
Service
cost
|
|
$ |
73 |
|
|
$ |
66 |
|
|
$ |
103 |
|
|
$ |
39 |
|
Interest
cost
|
|
|
33 |
|
|
|
38 |
|
|
|
37 |
|
|
|
155 |
|
Recognized
net actuarial loss
|
|
|
- |
|
|
|
- |
|
|
|
13 |
|
|
|
16 |
|
Recognition
of prior service cost
|
|
|
28 |
|
|
|
28 |
|
|
|
28 |
|
|
|
- |
|
|
|
$ |
134 |
|
|
$ |
132 |
|
|
$ |
181 |
|
|
$ |
210 |
|
The
assumptions used to determine benefit obligations and net periodic benefit costs
are as follows:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Directors
|
|
|
Directors
|
|
|
Directors
|
|
|
Officers
|
|
Discount
rate
|
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
5.75 |
% |
Rate
of compensation increase
|
|
|
3.00 |
% |
|
|
3.00 |
% |
|
|
3.00 |
% |
|
|
4.00 |
% |
Expected
return on plan assets
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Retirement
age
|
|
|
72 |
|
|
|
72 |
|
|
|
72 |
|
|
|
65 |
|
The
expected future benefit payments for the directors’ plan are as
follows:
Year
Ending December 31,
|
|
Amount
|
|
|
|
(In
thousands)
|
|
2010
|
|
$ |
- |
|
2011
|
|
|
- |
|
2012
|
|
|
282 |
|
2013
|
|
|
161 |
|
2014
|
|
|
- |
|
2015-2019
|
|
|
1,057 |
|
Separation
Agreements
Consistent
with the terms of their employment agreements, the Bank entered into Separation
Agreements with two executives upon their retirement during 2009 and one
executive in 2008, which provided for the payment of certain
benefits. During 2009 and 2008, the Company recorded pre-tax charges
of $1,762,000 and $1,520,000, respectively as a result of the Separation
Agreements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13.
|
EMPLOYEE
BENEFIT PLANS (Continued)
|
Long-Term
Health Care Plan
The
Company provides long-term health care policies for certain directors and
executives. The Bank established a liability for the present value of
the premiums due for the long-term care policies in 2008. The
adjustment to stockholders’ equity was an after-tax reduction of
$353,000. The plan is unfunded and has no
assets. Information pertaining to activity in the plan is as
follows:
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
Change
in plan assets:
|
|
|
|
|
|
|
Fair
value of plan assets at beginning
|
|
|
|
|
|
|
of
year
|
|
$ |
- |
|
|
$ |
- |
|
Employer
contribution
|
|
|
44 |
|
|
|
44 |
|
Benefits
payments
|
|
|
(44 |
) |
|
|
(44 |
) |
Fair
value of plan assets at end of year
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
|
729 |
|
|
|
540 |
|
Interest
cost
|
|
|
42 |
|
|
|
42 |
|
Benefit
payments
|
|
|
(44 |
) |
|
|
(44 |
) |
Actuarial
gain
|
|
|
(33 |
) |
|
|
191 |
|
Benefit
obligation at end of year
|
|
|
694 |
|
|
|
729 |
|
Funded
status
|
|
$ |
(694 |
) |
|
$ |
(729 |
) |
Accrued
benefit obligation
|
|
$ |
(694 |
) |
|
$ |
(729 |
) |
The
components of net periodic benefit cost are as follows:
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
- |
|
|
$ |
- |
|
Interest
cost
|
|
|
42 |
|
|
|
42 |
|
Recognition
of prior service cost
|
|
|
108 |
|
|
|
26 |
|
|
|
$ |
150 |
|
|
$ |
68 |
|
In 2009,
the Company incurred $82,000 of prior service cost as a result of retirements of
plan participants.
The
assumptions used to determine benefit obligations and net periodic benefit
costs are as follows:
|
|
2009
|
|
|
2008
|
|
Discount
rate
|
|
|
6.00 |
% |
|
|
6.50 |
% |
Rate
of premium increases
|
|
|
4.00 |
% |
|
|
4.00 |
% |
Expected
return on plan assets
|
|
|
N/A |
|
|
|
N/A |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13.
|
EMPLOYEE
BENEFIT PLANS (Continued)
|
Long-Term
Health Care Plan (concluded)
The
expected future contributions and benefit payments for this plan are as
follows:
Year
Ending December 31,
|
|
Amount
|
|
|
|
(In
thousands)
|
|
2010
|
|
$ |
46 |
|
2011
|
|
|
47 |
|
2012
|
|
|
49 |
|
2013
|
|
|
51 |
|
2014
|
|
|
53 |
|
2015-2019
|
|
|
301 |
|
Share-Based
Compensation Plan
On August
19, 2008, stockholders of the Company approved the 2008 Equity Incentive Plan
(the "Equity Incentive Plan"). The Equity Incentive Plan provides for
the award of up to 1,449,000 shares of common stock pursuant to grants of
restricted stock awards, incentive stock options, non-qualified stock options,
and stock appreciation rights; provided, however, that no more than 1,035,000
shares may be issued or delivered in the aggregate pursuant to the exercise of
stock options or stock appreciation rights, and no more than 414,000 shares may
be issued or delivered pursuant to restricted stock awards.
In 2008,
the Company announced that it would repurchase up to 414,000 shares of the
Company’s common stock through a stock repurchase program to fund restricted
stock awards under the plan. As of December 31, 2009, 414,000 shares
had been repurchased at a cost of $3,730,000. Pursuant to terms of
the Equity Incentive Plan, the Board of Directors granted stock options and
restricted shares to employees and directors in 2008 and 2009. The
options may be treated as stock appreciation rights that are settled in stock at
the option of the vested participant. All of the awards granted to
date vest evenly over a five year period from the date of the
grant.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes Option-Pricing Model. The expected volatility is based on
historical volatility of the stock price. The dividend yield
assumption is based on the Company’s expectation of dividend
payouts. The Company uses historical employee turnover data to
determine the expected forfeiture rate in the valuation model. The
risk-free rate for periods within the contractual life of the option is based on
the U.S. Treasury yield curve in effect at the date of grant.
The
Company utilized the simplified method of calculating the expected term of the
options granted in 2008 and 2009 because limited historical data specific to the
shares exists at the present time. The simplified method is an
appropriate method because the option awards are “plain vanilla” shares that are
valued utilizing the Black-Scholes method. The weighted-average
assumptions used for options granted during the years ended December 31,
2009 and 2008 are as follows:
|
|
Weighted
Average Assumptions
|
|
|
|
2009
|
|
|
2008
|
|
Expected
term (years)
|
|
|
6.5 |
|
|
|
6.5 |
|
Expected
dividend yield
|
|
|
0.90 |
% |
|
|
0.84 |
% |
Expected
volatility
|
|
|
36.21 |
% |
|
|
18.83 |
% |
Expected
forfeiture rate
|
|
|
7.23 |
% |
|
|
9.00 |
% |
Risk-free
interest rate
|
|
|
3.08 |
% |
|
|
3.48 |
% |
Fair
value of options granted
|
|
$ |
3.38 |
|
|
$ |
2.37 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13.
|
EMPLOYEE
BENEFIT PLANS (Continued)
|
Share-Based
Compensation Plan (continued)
A summary
of options under the plan as of December 31, 2009, and activity during the
year then ended, is presented below:
2009
|
|
Number
of Shares
|
|
|
Weighted-Average
Exercise
Price
|
|
Options
outstanding at beginning of year
|
|
|
622,000 |
|
|
$ |
9.50 |
|
Options
granted
|
|
|
331,100 |
|
|
|
8.91 |
|
Options
excercised
|
|
|
- |
|
|
|
- |
|
Options
forfeited
|
|
|
(85,500 |
) |
|
|
9.50 |
|
Options
outstanding at end of year
|
|
|
867,600 |
|
|
$ |
9.27 |
|
|
|
|
|
|
|
|
|
|
Options
excerisable at end of year
|
|
|
107,300 |
|
|
$ |
9.50 |
|
The
weighted average grant date fair value of options granted in 2009 and 2008 was
$1,119,000 and $1,474,000 respectively.
The
following table summarizes information about options outstanding and options
exercisable at December 31, 2009:
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Range
of Exercise Prices
|
|
Number
of
Shares
|
|
|
Weighted-Average
Remaining
Contractual Life
(in
years)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Number
of
Shares
|
|
|
Weighted-Average
Remaining
Contractual Life
(in
years)
|
|
|
Weighted-
Average
Exercise
Price
|
|
$8.50
- 9.00
|
|
|
331,100 |
|
|
|
9.70 |
|
|
$ |
8.91 |
|
|
|
- |
|
|
|
N/A |
|
|
|
N/A |
|
$9.00
- 9.50
|
|
|
536,500 |
|
|
|
8.83 |
|
|
$ |
9.50 |
|
|
|
107,300 |
|
|
|
8.83 |
|
|
$ |
9.50 |
|
|
|
|
867,600 |
|
|
|
|
|
|
|
|
|
|
|
107,300 |
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value, which fluctuates based on changes in the fair market
value of the Company’s stock, is $8,000 for all outstanding options based on a
closing stock price of $8.70 on December 31, 2009. For options
exercisable as of December 31, 2009, there was no aggregate intrinsic
value. The aggregate intrinsic value represents the total pretax
intrinsic value (i.e., the difference between the Company’s closing stock price
on the last trading day of 2009 and the weighted-average exercise price,
multiplied by the number of shares) that would have been received by the option
holders had all option holders exercised their options on December 31,
2009.
Shares
for the exercise of stock options are expected to come from the Company’s
authorized and unissued shares or treasury shares.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13.
|
EMPLOYEE
BENEFIT PLANS (Continued)
|
Share-Based
Compensation Plan (concluded)
The
following table summarizes the Company’s non-vested restricted stock activity
for the year ended December 31, 2009:
|
|
Number
of
Shares
|
|
|
Weighted-
Average
Grant
Date
Fair Value
|
|
Non-vested
restricted stock at beginning of year
|
|
|
182,625 |
|
|
$ |
9.50 |
|
Granted
|
|
|
140,800 |
|
|
|
8.95 |
|
Vested
|
|
|
(30,065 |
) |
|
|
9.50 |
|
Forfeited
|
|
|
(32,440 |
) |
|
|
9.50 |
|
Non-vested
restricted stock at end of year
|
|
|
260,920 |
|
|
$ |
9.20 |
|
The total
fair value of restricted shares vested in 2009 was $262,000.
For the
years ended December 31, 2009 and 2008, compensation expense and the related tax
benefit for the plan totaled $672,000 and $183,000 and $128,000 and $35,000,
respectively.
As of
December 31, 2009, there was $3,896,000 of total unrecognized compensation
expense related to non-vested options and restricted shares granted under the
plan. This cost is expected to be recognized over a weighted-average
period of 4.3 years.
In
January 2010, the Company granted options for 36,000 shares and 13,500 shares of
restricted stock to employees and directors pursuant to the terms of the Equity
Incentive Plan.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13.
|
EMPLOYEE
BENEFIT PLANS (Concluded)
|
Employee
Stock Ownership Plan (“ESOP”)
The
Company established an ESOP for its eligible employees effective January 1,
2008 to provide eligible employees the opportunity to own Company
stock. The plan is a tax-qualified retirement plan for the benefit of
all Company employees. Contributions are allocated to eligible
participants on the basis of compensation, subject to federal tax law
limits. The ESOP acquired 828,000 shares in the stock offering
with the proceeds of a loan totaling $8,280,000 from the Company’s subsidiary,
Meridian Funding Corporation. The loan is payable annually over 20
years at a rate of 6.5%. The loan is secured by the shares
purchased, which are held in a suspense account for allocation among
participants as the loan is repaid. The Company’s annual cash
contributions to the ESOP at a minimum will be sufficient to service the annual
debt of the ESOP. Shares used as collateral to secure the loan are
released and available for allocation to eligible employees as the principal and
interest on the loan is paid.
At
December 31, 2009, the remaining principal balance on the ESOP debt is payable
as follows:
Year
Ending December 31,
|
|
Amount
|
|
|
|
(In
thousands)
|
|
2010
|
|
|
241 |
|
2011
|
|
|
257 |
|
2012
|
|
|
272 |
|
2013
|
|
|
291 |
|
2014
|
|
|
310 |
|
Thereafter
|
|
|
6,440 |
|
|
|
$ |
7,811 |
|
Shares
held by the ESOP include the following:
|
|
December
31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
Allocated
|
|
|
41 |
|
|
|
- |
|
Committed
to be allocated
|
|
|
41 |
|
|
|
41 |
|
Unallocated
|
|
|
746 |
|
|
|
787 |
|
|
|
|
828 |
|
|
|
828 |
|
The fair
value of the unallocated shares was $6,490,000 at December 31,
2009. Total compensation expense recognized in connection with the
ESOP for 2009 and 2008 was $355,000 and $400,000, respectively.
Bank-Owned
Life Insurance
The
Company is the sole owner of life insurance policies pertaining to certain
employees. The Company has entered into agreements with these
executive whereby the Company will pay to the employees’ estate or beneficiaries
a portion of the death benefit that the Company will receive as beneficiary of
such policies. In 2008, the Company adopted guidance that requires
the Company to accrue for these post-retirement benefits over the expected
service period of the employee. As a result, the Company recognized a
liability for future death benefits in the amount of $1,643,000 as of January 1,
2008. Expense associated with this post-retirement benefit for the
years ended December 31, 2009 and 2008 amounted to $628,000 and $526,000,
respectively.
Incentive
Compensation Plan
Eligible
officers and employees of the Bank participate in an incentive compensation plan
which is based on various factors as set forth by the Executive
Committee. Incentive compensation plan expense for the years ended
December 31, 2009, 2008 and 2007 amounted to $940,000, $410,000 and $710,000,
respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14.
|
RELATED
PARTY TRANSACTIONS
|
Loans
The
following summarizes the activity with respect to loans made to officers and
directors of the Company, their affiliates, and members of their immediate
families.
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$ |
9,123 |
|
|
$ |
9,782 |
|
Additions
|
|
|
1,543 |
|
|
|
889 |
|
Reductions
|
|
|
(4,398 |
) |
|
|
(1,548 |
) |
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
$ |
6,268 |
|
|
$ |
9,123 |
|
Such
loans are made in the normal course of business at the Bank’s normal credit
terms, including interest rate and collateral requirements, and do not represent
more than a normal risk of collection.
Deposits
Deposits
from related parties totaled $5,786,000 and $7,140,000 at December 31, 2009 and
2008, respectively. All such deposits were accepted in the ordinary
course of business on substantially the same terms as those prevailing at the
time for comparable transactions with other persons.
Other
– Affiliate Bank
In
connection with the Company’s investment in Hampshire First Bank (“HFB”), East
Boston Savings Bank has entered into a Master Services Agreement whereby certain
services are provided to HFB. During the years ended December 31,
2008 and 2007 revenue recorded by the Company for providing such services
amounted to $1,000 and $8,000, respectively. The Company did not
provide any services under this agreement in 2009. Additionally,
three out of ten of the directors of HFB also serve as directors of the Company,
including one who serves as the Chairman of the Board of both
entities. At December 31, 2009 and 2008, the Company has loan
participations with HFB of $47,815,000 and $17,039,000, respectively, of which
the Company services $27,049,000 and $9,239,000, respectively. The
Company also has $3,102,000 and $7,811,000 of federal funds purchased, and
$3,000,000 and $7,000,000 in certificates of deposit with Hampshire First Bank
as of December 31, 2009 and 2008, respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15.
|
MINIMUM
REGULATORY CAPITAL REQUIREMENTS
|
The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company’s and Bank’s consolidated financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Prompt corrective action provisions
are not applicable to mutual holding companies.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the
table) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31,
2009 and 2008, that the Company and the Bank meet all capital adequacy
requirements to which they are subject. As of December 31, 2009, the
most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the
Bank must maintain minimum total risk-based, Tier 1 risk-based, and
Tier 1 leverage ratios as set forth in the following
table. There are no conditions or events since that notification that
management believes have changed the Bank’s category. The Company’s and the
Bank’s actual capital amounts and ratios follow:
|
|
Actual
|
|
|
Minimum
Capital
Requirement
|
|
|
Minimum
To
Be Well
Capitalized
Under
Prompt
Corrective
Action
Provisions
|
|
(Dollars
in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$ |
205,011 |
|
|
|
19.4 |
% |
|
$ |
84,322 |
|
|
|
8.0 |
% |
|
|
N/A |
|
|
|
N/A |
|
Bank
|
|
|
145,113 |
|
|
|
14.2 |
|
|
|
81,930 |
|
|
|
8.0 |
|
|
$ |
102,413 |
|
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital (to Risk Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
194,788 |
|
|
|
18.5 |
|
|
|
42,161 |
|
|
|
4.0 |
|
|
|
N/A |
|
|
|
N/A |
|
Bank
|
|
|
134,844 |
|
|
|
13.2 |
|
|
|
40,965 |
|
|
|
4.0 |
|
|
|
61,448 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital (to Average Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
194,788 |
|
|
|
16.2 |
|
|
|
48,147 |
|
|
|
4.0 |
|
|
|
N/A |
|
|
|
N/A |
|
Bank
|
|
|
134,844 |
|
|
|
11.2 |
|
|
|
48,145 |
|
|
|
4.0 |
|
|
|
60,181 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$ |
199,648 |
|
|
|
21.5 |
% |
|
$ |
74,383 |
|
|
|
8.0 |
% |
|
|
N/A |
|
|
|
N/A |
|
Bank
|
|
|
138,568 |
|
|
|
15.3 |
|
|
|
72,651 |
|
|
|
8.0 |
|
|
$ |
90,814 |
|
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital (to Risk Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
192,736 |
|
|
|
20.7 |
|
|
|
37,192 |
|
|
|
4.0 |
|
|
|
N/A |
|
|
|
N/A |
|
Bank
|
|
|
131,656 |
|
|
|
14.5 |
|
|
|
36,326 |
|
|
|
4.0 |
|
|
|
54,488 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital (to Average Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
192,736 |
|
|
|
18.0 |
|
|
|
42,785 |
|
|
|
4.0 |
|
|
|
N/A |
|
|
|
N/A |
|
Bank
|
|
|
131,656 |
|
|
|
12.8 |
|
|
|
41,091 |
|
|
|
4.0 |
|
|
|
51,364 |
|
|
|
5.0 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15.
|
MINIMUM
REGULATORY CAPITAL REQUIREMENTS
(Concluded)
|
A
reconciliation of the Company’s and Bank’s stockholders’ equity to regulatory
capital follows:
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
(In
thousands)
|
|
Consolidated
|
|
|
Bank
|
|
|
Consolidated
|
|
|
Bank
|
|
Total
stockholders' equity per financial statements
|
|
$ |
200,415 |
|
|
$ |
141,066 |
|
|
$ |
189,840 |
|
|
$ |
129,162 |
|
Adjustments
to Tier 1 capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive (income) loss
|
|
|
(5,583 |
) |
|
|
(6,178 |
) |
|
|
6,205 |
|
|
|
5,664 |
|
Net
unrealized loss on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
marketable
equity securities
|
|
|
- |
|
|
|
- |
|
|
|
(3,288 |
) |
|
|
(3,149 |
) |
Servicing
assets disallowed
|
|
|
(44 |
) |
|
|
(44 |
) |
|
|
(21 |
) |
|
|
(21 |
) |
Total
Tier 1 capital
|
|
|
194,788 |
|
|
|
134,844 |
|
|
|
192,736 |
|
|
|
131,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to total capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
9,242 |
|
|
|
9,242 |
|
|
|
6,912 |
|
|
|
6,912 |
|
45%
of net unrealized gains on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
marketable
equity securities
|
|
|
981 |
|
|
|
1,027 |
|
|
|
- |
|
|
|
- |
|
Total
regulatory capital
|
|
$ |
205,011 |
|
|
$ |
145,113 |
|
|
$ |
199,648 |
|
|
$ |
138,568 |
|
Federal
and state banking regulations place certain restrictions on dividends paid and
loans or advances made by the Bank to the Company. The total amount
for dividends which may be paid in any calendar year cannot exceed the Bank’s
net income for the current year, plus the Bank’s net income retained for the two
previous years, without regulatory approval. At December 31, 2009,
the Bank’s retained earnings available for the payment of dividends was
$6,163,000. Loans or advances are limited to 10 percent of the Bank’s capital
stock and surplus on a secured basis. Funds available for loans or
advances by the Bank to the Company amounted to $14,107,000. In
addition, dividends paid by the Bank to the Company would be prohibited if the
effect thereof would cause the Bank’s capital to be reduced below applicable
minimum capital requirements.
17.
|
FAIR
VALUES OF ASSETS AND LIABILITIES
|
Determination
of Fair Value
The
Company uses fair value measurements to record fair value adjustments to certain
assets and liabilities and to determine fair value disclosures. The
fair value of a financial instrument is the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Fair value is best
determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Company’s various financial
instruments. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by
the assumptions used including the discount rate and estimates of future cash
flows. Accordingly, the fair value estimates may not be realized in
an immediate settlement of the instrument.
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.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17.
|
FAIR
VALUES OF ASSETS AND LIABILITIES
(continued)
|
Determination
of Fair Value (concluded)
Securities available for
sale – The securities measured at fair value in Level 1 are based on
quoted market prices in an active exchange market. These securities generally
include marketable equity securities and money market mutual
funds. Securities measured at fair value in Level 2 are based on
pricing models that consider standard input factors such as observable market
data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit
spreads and new issue data. These securities include government-sponsored
enterprise obligations, corporate bonds and other securities.
Federal Home Loan Bank
stock - The carrying value of Federal Home Loan Bank stock approximates
fair value based on the redemption provisions of the Federal Home Loan
Bank.
Loans receivable -
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.
Loans held for sale –
Fair values are based on commitments in effect from investors or prevailing
market prices.
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.
Short-term borrowings
– For short-term borrowings maturing within ninety days, carrying values
approximate fair values. Fair values of other short-term borrowings are
estimated using discounted cash flow analyses based on the current incremental
borrowing rates in the market for similar types of borrowing
arrangements.
Long-term borrowings
- The fair values of the Company’s long-term borrowings are 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.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17.
|
FAIR
VALUES OF ASSETS AND LIABILITIES
(Continued)
|
Assets Measured at Fair Value on a
Recurring Basis
Assets
measured at fair value on a recurring basis are summarized as
follows.
|
|
December
31, 2009
|
|
(In
thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
Fair Value
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
$ |
- |
|
|
$ |
220,007 |
|
|
$ |
- |
|
|
$ |
220,007 |
|
Residential
mortgage-backed securities
|
|
|
- |
|
|
|
23,778 |
|
|
|
- |
|
|
|
23,778 |
|
Total
debt securities
|
|
|
- |
|
|
|
243,785 |
|
|
|
- |
|
|
|
243,785 |
|
Marketable
equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stocks
|
|
|
28,878 |
|
|
|
- |
|
|
|
- |
|
|
|
28,878 |
|
Money
market mutual funds
|
|
|
20,704 |
|
|
|
- |
|
|
|
- |
|
|
|
20,704 |
|
Total
marketable equity securities
|
|
|
49,582 |
|
|
|
- |
|
|
|
- |
|
|
|
49,582 |
|
Total
securities available for sale
|
|
$ |
49,582 |
|
|
$ |
243,785 |
|
|
$ |
- |
|
|
$ |
293,367 |
|
|
|
December
31, 2008
|
|
(In
thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
Fair Value
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
$ |
- |
|
|
$ |
203,687 |
|
|
$ |
- |
|
|
$ |
203,687 |
|
Government
sponsored enterprises
|
|
|
- |
|
|
|
1,003 |
|
|
|
- |
|
|
|
1,003 |
|
Residential
mortgage-backed securities
|
|
|
- |
|
|
|
40 |
|
|
|
- |
|
|
|
40 |
|
Total
debt securities
|
|
|
- |
|
|
|
204,730 |
|
|
|
- |
|
|
|
204,730 |
|
Marketable
equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stocks
|
|
|
22,854 |
|
|
|
- |
|
|
|
- |
|
|
|
22,854 |
|
Money
market mutual funds
|
|
|
24,945 |
|
|
|
- |
|
|
|
- |
|
|
|
24,945 |
|
Total
marketable equity securities
|
|
|
47,799 |
|
|
|
- |
|
|
|
- |
|
|
|
47,799 |
|
Total
securities available for sale
|
|
$ |
47,799 |
|
|
$ |
204,730 |
|
|
$ |
- |
|
|
$ |
252,529 |
|
There
were no liabilities measured at fair value on a recurring basis as of December
31, 2009 or 2008.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17.
|
FAIR
VALUES OF ASSETS AND LIABILITIES
(Continued)
|
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 table summarizes the fair value hierarchy used
to determine each adjustment and the carrying value of the related individual
assets as of December 31, 2009 and 2008. The gain/loss represents the
amount of write-down recorded during 2009 and 2008 on the assets held at
December 31, 2009 and 2008, respectively.
|
|
December
31, 2009
|
|
|
Year
Ended December 31, 2009
|
|
(In
thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
Losses
|
|
Impaired
loans
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,700 |
|
|
$ |
(315 |
) |
Foreclosed
real estate
|
|
|
- |
|
|
|
- |
|
|
|
2,869 |
|
|
|
(198 |
) |
Total
assets
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,569 |
|
|
$ |
(513 |
) |
|
|
December
31, 2008
|
|
|
Year
Ended December 31, 2008
|
|
(In
thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
Losses
|
|
Impaired
loans
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,511 |
|
|
$ |
(418 |
) |
Foreclosed
real estate
|
|
|
- |
|
|
|
- |
|
|
|
2,604 |
|
|
|
(475 |
) |
Total
assets
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,115 |
|
|
$ |
(893 |
) |
Losses
applicable to impaired loans are estimated using the appraised value of the
underlying collateral considering discounting factors and adjusted for selling
costs. The loss is not recorded directly as an adjustment to current
earnings or comprehensive income, but rather as a component in determining the
overall adequacy of the allowance for loan losses. Adjustments to the
estimated fair value of impaired loans may result in increases or decreases to
the provision for loan losses. Certain properties in foreclosed
assets were adjusted to fair value based on appraisals that utilize prices in
observed transactions involving similar assets, considering discount factors and
adjusted for selling costs. There were no liabilities measured at
fair value on a non-recurring basis as of December 31, 2009 or
2008.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17.
|
FAIR
VALUES OF ASSETS AND LIABILITIES
(Concluded)
|
Summary
of Fair Value 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 may not necessarily represent the underlying fair value of the
Company.
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
(In
thousands)
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
19,966 |
|
|
$ |
19,966 |
|
|
$ |
20,265 |
|
|
$ |
20,265 |
|
Certificates
of deposit
|
|
|
3,000 |
|
|
|
3,028 |
|
|
|
7,000 |
|
|
|
7,010 |
|
Securities
available for sale
|
|
|
293,367 |
|
|
|
293,367 |
|
|
|
252,529 |
|
|
|
252,529 |
|
Federal
Home Loan Bank stock
|
|
|
4,605 |
|
|
|
4,605 |
|
|
|
4,303 |
|
|
|
4,303 |
|
Loans
and loans held for sale, net
|
|
|
814,255 |
|
|
|
813,393 |
|
|
|
704,104 |
|
|
|
705,956 |
|
Accrued
interest receivable
|
|
|
6,231 |
|
|
|
6,231 |
|
|
|
6,036 |
|
|
|
6,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
922,475 |
|
|
|
927,385 |
|
|
|
796,852 |
|
|
|
799,378 |
|
Borrowings
|
|
|
75,410 |
|
|
|
76,782 |
|
|
|
65,486 |
|
|
|
66,509 |
|
Accrued
interest payable
|
|
|
728 |
|
|
|
728 |
|
|
|
1,081 |
|
|
|
1,081 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18.
|
CONDENSED
FINANCIAL STATEMENTS OF PARENT
COMPANY
|
Financial
information pertaining only to Meridian Interstate Bancorp, Inc. is as
follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
BALANCE SHEET
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents - subsidiary
|
|
$ |
578 |
|
|
$ |
10,523 |
|
Cash
and cash equivalents - other
|
|
|
9,427 |
|
|
|
2,525 |
|
Total
cash and cash equivalents
|
|
|
10,005 |
|
|
|
13,048 |
|
Certificates
of deposit - affiliate bank
|
|
|
3,000 |
|
|
|
7,000 |
|
Securities
available for sale, at fair value
|
|
|
20,649 |
|
|
|
16,338 |
|
Investment
in subsidiaries
|
|
|
149,953 |
|
|
|
135,299 |
|
Investment
in affiliate bank
|
|
|
11,005 |
|
|
|
10,376 |
|
Bank-owned
life insurance
|
|
|
4,333 |
|
|
|
4,144 |
|
Due
from bank subsidiary
|
|
|
- |
|
|
|
2,262 |
|
Other
assets
|
|
|
2,262 |
|
|
|
1,737 |
|
Total
assets
|
|
$ |
201,207 |
|
|
$ |
190,204 |
|
Liabilities and Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses and other liabilities
|
|
$ |
792 |
|
|
$ |
364 |
|
Stockholders'
equity
|
|
|
200,415 |
|
|
|
189,840 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
201,207 |
|
|
$ |
190,204 |
|
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
Interest
and dividend income
|
|
$ |
227 |
|
|
$ |
812 |
|
|
$ |
113 |
|
Equity
income (loss) on investment in affliate bank
|
|
|
629 |
|
|
|
(396 |
) |
|
|
(541 |
) |
Bank-owned
life insurance income
|
|
|
189 |
|
|
|
144 |
|
|
|
- |
|
Total
income (loss)
|
|
|
1,045 |
|
|
|
560 |
|
|
|
(428 |
) |
Contribution
to Meridian Charitable Foundation
|
|
|
- |
|
|
|
3,000 |
|
|
|
- |
|
Operating
expenses
|
|
|
736 |
|
|
|
1,354 |
|
|
|
412 |
|
Income
(loss) before income taxes and equity in
|
|
|
|
|
|
|
|
|
|
|
|
|
undistributed
earnings of subsidiaries
|
|
|
309 |
|
|
|
(3,794 |
) |
|
|
(840 |
) |
Applicable
income tax provision (benefit)
|
|
|
49 |
|
|
|
(1,339 |
) |
|
|
(184 |
) |
|
|
|
260 |
|
|
|
(2,455 |
) |
|
|
(656 |
) |
Equity
in undistributed earnings of subsidiaries
|
|
|
3,503 |
|
|
|
347 |
|
|
|
2,922 |
|
Net
income (loss)
|
|
$ |
3,763 |
|
|
$ |
(2,108 |
) |
|
$ |
2,266 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18.
|
CONDENSED
FINANCIAL STATEMENTS OF PARENT COMPANY
(Concluded)
|
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
3,763 |
|
|
$ |
(2,108 |
) |
|
$ |
2,266 |
|
Adjustments
to reconcile net income (loss) to net
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
provided (used) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in undistributed earnings of subsidiaries
|
|
|
(3,503 |
) |
|
|
(347 |
) |
|
|
(2,922 |
) |
Contribution
of stock to charitable foundation
|
|
|
- |
|
|
|
3,000 |
|
|
|
- |
|
Equity
(income) loss on investment in affliate bank
|
|
|
(629 |
) |
|
|
396 |
|
|
|
541 |
|
Income
from bank-owned life insurance
|
|
|
(189 |
) |
|
|
(144 |
) |
|
|
- |
|
Share-based
compensation expense
|
|
|
171 |
|
|
|
45 |
|
|
|
- |
|
Increase
in other assets
|
|
|
(538 |
) |
|
|
(112 |
) |
|
|
(1,374 |
) |
Increase
in other liabilities
|
|
|
428 |
|
|
|
135 |
|
|
|
229 |
|
Net
cash provided (used) by operating activities
|
|
|
(497 |
) |
|
|
865 |
|
|
|
(1,260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of certificates of deposit
|
|
|
(3,000 |
) |
|
|
(7,000 |
) |
|
|
- |
|
Maturity
of certificates of deposit
|
|
|
7,000 |
|
|
|
- |
|
|
|
- |
|
Proceeds
from redemption of mutual funds
|
|
|
859 |
|
|
|
5,250 |
|
|
|
- |
|
Sales
and maturities of securities available for sale
|
|
|
- |
|
|
|
- |
|
|
|
1,523 |
|
Purchase
of securities available for sale
|
|
|
(5,132 |
) |
|
|
(20,634 |
) |
|
|
(112 |
) |
Investment
in subsidiary
|
|
|
- |
|
|
|
(8,280 |
) |
|
|
- |
|
Loan
to subsidiary
|
|
|
2,262 |
|
|
|
(2,262 |
) |
|
|
- |
|
Purchase
of bank-owned life insurance
|
|
|
- |
|
|
|
(4,000 |
) |
|
|
- |
|
Net
cash provided (used) by investing activities
|
|
|
1,989 |
|
|
|
(36,926 |
) |
|
|
1,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
offering
|
|
|
- |
|
|
|
97,633 |
|
|
|
- |
|
Offering
proceeds to bank subsidiary
|
|
|
- |
|
|
|
(48,701 |
) |
|
|
- |
|
Treasury
stock purchases
|
|
|
(4,535 |
) |
|
|
- |
|
|
|
|
|
Net
cash provided (used) by financing activities
|
|
|
(4,535 |
) |
|
|
48,932 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(3,043 |
) |
|
|
12,871 |
|
|
|
151 |
|
Cash
and cash equivalents at beginning of year
|
|
|
13,048 |
|
|
|
177 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$ |
10,005 |
|
|
$ |
13,048 |
|
|
$ |
177 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On July
2, 2007, the Board of Directors of the Company and the Board of Directors of the
Bank unanimously adopted the Plan of Stock Issuance (the “Plan”) pursuant to
which the Company sold common stock representing a minority ownership of the
estimated pro forma market value of the Company, as determined by an independent
appraisal, to eligible depositors of the Bank and the Company’s qualified
employee benefit plans in a stock subscription offering and to the general
public in a syndicated community offering. The majority of the common
stock is owned by the Company’s parent company, Meridian Financial Services,
Incorporated (a mutual holding company).
The
minority stock offering was completed on January 22, 2008 at the midpoint of the
stock offering range, and 10,350,000 shares of common stock were issued in the
offering at a price of $10.00 per share, including 828,000 shares sold to the
employee stock ownership plan and 300,000 shares contributed to the Meridian
Charitable Foundation, Inc. Net investable proceeds from the offering
amounted to $89,353,000, after the ESOP loan and the contribution to the
Charitable Foundation.
As part
of the offering, the Company established a liquidation account of $114,216,000,
which is equal to the net worth of the Company as of the date of the latest
consolidated balance sheet appearing in the final prospectus distributed in
connection with the offering. The liquidation account is maintained
for the benefit of the eligible account holders and supplemental eligible
account holders who maintain their accounts at East Boston Savings Bank after
the offering. The liquidation account is reduced annually to the
extent that such account holders have reduced their qualifying deposits as of
each anniversary date and amounted to $69,165,000 at December 31,
2009. Subsequent increases will not restore an account holder’s
interest in the liquidation account. In the event of a complete
liquidation, each eligible account holder will be entitled to receive balances
for accounts held then.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
20.
|
SELECTED
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
|
The
selected quarterly financial data presented below should be read in conjunction
with the Consolidated Financial Statements and related notes.
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
(In thousands)
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividend income
|
|
$ |
14,875 |
|
|
$ |
14,426 |
|
|
$ |
13,919 |
|
|
$ |
13,447 |
|
|
$ |
13,521 |
|
|
$ |
13,344 |
|
|
$ |
12,909 |
|
|
$ |
13,123 |
|
Interest
expense
|
|
|
4,239 |
|
|
|
4,911 |
|
|
|
5,447 |
|
|
|
5,795 |
|
|
|
6,184 |
|
|
|
6,579 |
|
|
|
6,996 |
|
|
|
7,285 |
|
Net
interest income
|
|
|
10,636 |
|
|
|
9,515 |
|
|
|
8,472 |
|
|
|
7,652 |
|
|
|
7,337 |
|
|
|
6,765 |
|
|
|
5,913 |
|
|
|
5,838 |
|
Provision
for loan losses
|
|
|
2,274 |
|
|
|
694 |
|
|
|
568 |
|
|
|
546 |
|
|
|
2,907 |
|
|
|
403 |
|
|
|
2,197 |
|
|
|
131 |
|
Net
interest income, after provision for loan
losses
|
|
|
8,362 |
|
|
|
8,821 |
|
|
|
7,904 |
|
|
|
7,106 |
|
|
|
4,430 |
|
|
|
6,362 |
|
|
|
3,716 |
|
|
|
5,707 |
|
Non-interest
income (1)
|
|
|
2,069 |
|
|
|
1,098 |
|
|
|
1,035 |
|
|
|
1,093 |
|
|
|
339 |
|
|
|
3,808 |
|
|
|
1,050 |
|
|
|
3,176 |
|
Non-interest
expenses (2)
|
|
|
7,038 |
|
|
|
7,167 |
|
|
|
7,684 |
|
|
|
9,677 |
|
|
|
7,379 |
|
|
|
6,799 |
|
|
|
8,476 |
|
|
|
9,312 |
|
Income
(loss) before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
3,393 |
|
|
|
2,752 |
|
|
|
1,255 |
|
|
|
(1,478 |
) |
|
|
(2,610 |
) |
|
|
3,371 |
|
|
|
(3,710 |
) |
|
|
(429 |
) |
Provision
(benefit) for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
1,372 |
|
|
|
864 |
|
|
|
293 |
|
|
|
(370 |
) |
|
|
(896 |
) |
|
|
1,228 |
|
|
|
(1,494 |
) |
|
|
(108 |
) |
Net
income (loss)
|
|
$ |
2,021 |
|
|
$ |
1,888 |
|
|
$ |
962 |
|
|
$ |
(1,108 |
) |
|
$ |
(1,714 |
) |
|
$ |
2,143 |
|
|
$ |
(2,216 |
) |
|
$ |
(321 |
) |
(1)
|
Non-interest
income fluctuates each quarter primarily due to securities
gains.
|
(2)
|
Non-interest
expenses for the first quarter of 2009 and the second quarter of 2008
include charges of $1,762,000 and $1,520,000, repectively, as a
result of the the Separation Agreements. Non-interest expenses for the
first quarter of 2008 include a $3,000,000 contribution to the Company's
charitable foundation.
|
Item 9. Changes in and disagreements
with accountants on accounting and financial disclosure
None.
Item 9a. Controls and
Procedures
Conclusion Regarding the
Effectiveness of Disclosure Controls and Procedures The
Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, including the Company’s Chief
Executive Officer along with the Company’s Chief Financial Officer, of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures, as such term is defined under Rule 13a-15(e) and
15(d)-15(e) promulgated under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). Based upon that evaluation, the Company’s Chief
Executive Officer along with the Company’s Chief Financial Officer concluded
that the Company’s disclosure controls and procedures are effective as of the
end of the period covered by this Annual Report.
Changes in Internal Controls over
Financial Reporting There were no changes in our internal
control over financial reporting that occurred during the fourth quarter that
have materially affected, or are, reasonably likely to materially affect, the
Company’s internal controls over financial reporting.
Item 9b. other
information
Not
applicable.
Item 10. Directors and Executive
Officers of the Registrant and Corporate Governance
The
information in the Corporation’s definitive Proxy Statement, prepared for the
2010 Annual Meeting of Shareholders, which contains information concerning
directors of the Corporation under the captions “Election of Directors” and
“Information About the Board of Directors”; information concerning executive
officers of the Corporation under the caption “Information About the Executive
Officers,”; and information concerning Section 16(a) compliance under the
caption “Section 16(a) Beneficial Ownership Reporting Compliance” will be
incorporated herein by reference or will be filed by an amendment to this Annual
Report.
Item 11. Executive
Compensation
The
information in the Corporation’s definitive Proxy Statement, prepared for the
2010 Annual Meeting of Shareholders, which contains information concerning this
item, under the caption “Executive Compensation,” will be incorporated herein by
reference or will be filed by an amendment to this Annual Report.
Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters
The
information in the Corporation’s definitive Proxy Statement, prepared for the
2010 Annual Meeting of Shareholders, which contains information concerning this
item, under the caption “Stock Ownership,” is incorporated herein by reference
or will be filed by an amendment to this Annual Report.
Equity
Compensation Plan Information
The
following table provides information as of December 31, 2009, regarding
shares outstanding and available for issuance under the Company’s equity
compensation plan. Additional information regarding stock-based
compensation is presented in Note 13, “Employee Benefit Plans” of the notes
to consolidated financial statements within Part II, Item 8,
“Financial Statements and Supplementary Data.”
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Plan
Category
|
|
Number
of
Securities
to be
Issued
Upon
Exercise
of
Outstanding
Options,
Warrants
and
Rights
|
|
|
Weighted-Average
Exercise
Price of
Outstanding
Options,
Warrants
and
Rights
|
|
|
Number
of
Securities
Remaining
Available
for
Future Issuance
Under
Equity
Compensation
Plans
(excluding
securities
reflected
in column
(a))
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved
|
|
|
|
|
|
|
|
|
|
by
security holders
|
|
|
867,600 |
|
|
$ |
9.27 |
|
|
|
290,415 |
|
Equity
compensation plans not
|
|
|
|
|
|
|
|
|
|
|
|
|
approved
by security holders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
867,600 |
|
|
$ |
9.27 |
|
|
|
290,415 |
|
Item 13. Certain Relationships and
Related Transactions, and Director Independence
The
“Transactions with Certain Related Persons” section of the 2010 Proxy Statement
will be incorporated herein by reference or filed by an amendment to this Annual
Report.
Item 14. Principal Accounting Fees
and Services
The
“Proposal II – Ratification of Appointment of Independent Registered Public
Accounting Firm” Section of the 2010 Proxy Statement will be incorporated herein
by reference or filed by an amendment to this Annual Report.
PART IV
Item 15. Exhibits and Financial
Statement Schedules
(a)(1) Financial
Statements
The
following documents are filed as part of this Form 10-K.
|
(A)
|
Report
of Independent Registered Public Accounting
Firm
|
|
(B)
|
Consolidated
Balance Sheets - at December 31, 2009 and
2008
|
|
(C)
|
Consolidated
Statements of Operations - Years ended December 31, 2009, 2008 and
2007
|
|
(D)
|
Consolidated
Statements of Changes in Stockholders’ Equity - Years ended December 31,
2009, 2008 and 2007
|
|
(E)
|
Consolidated
Statements of Cash Flows - Years ended December 31, 2009, 2008 and
2007
|
|
(F)
|
Notes
to Consolidated Financial
Statements.
|
(a)(2) Financial Statement
Schedules
None.
3.1
|
Amended
and Restated Articles of Organization of Meridian Interstate Bancorp,
Inc.*
|
3.2
|
Amended
and Restated Bylaws of Meridian Interstate Bancorp,
Inc.*
|
3.3
|
Articles
of Correction of Meridian Interstate Bancorp,
Inc.
|
4
|
Form
of Common Stock Certificate of Meridian Interstate Bancorp,
Inc.*
|
10.1
|
Form
of East Boston Savings Bank Employee Stock Ownership
Plan*
|
10.2
|
Form
of East Boston Savings Bank Employee Stock Ownership Plan Trust
Agreement*
|
10.3
|
East
Boston Savings Bank Employee Stock Ownership Plan Loan Agreement, Pledge
Agreement and Promissory Note*
|
10.4
|
Form
of Amended and Restated Employment
Agreement*
|
10.5
|
Form
of East Boston Savings Bank Employee Severance Compensation
Plan*
|
10.6
|
Form
of Supplemental Executive Retirement Agreements with certain
directors*
|
10.7
|
Form of Separation Agreement with
Robert F. Verdonck incorporated by reference to the Form 8-K filed on
June11, 2008
|
10.8
|
Form
of Separation Agreement with Leonard V. Siuda filed on April 7,
2009
|
10.9
|
Form of Separation Agreement with
Philip F. Freehan filed on April 7,
2009
|
10.10
|
Form
of Supplemental Executive Retirement Agreement with Richard J. Gavegnano
filed as an exhibit to Form 10-Q filed on May 14,
2008
|
10.11
|
Form
of Employment Agreement with Richard J. Gavegnano incorporated by
reference to the Form 8-K filed on January 12,
2009
|
10.12
|
Form
of Employment Agreement with Deborah J. Jackson incorporated by reference
to the Form 8-K filed on January 22,
2009
|
10.13
|
Form
of Supplemental Executive Retirement Agreement with Deborah J. Jackson
incorporated by reference to the Form 8-K filed on January 22,
2009
|
10.14
|
2008 Equity Incentive
Plan**
|
10.15
|
Amendment
to Supplemental Executive Retirement Agreements with Certain
Directors*
|
10.16
|
Agreement
and Plan of Merger incorporated by reference to the Form 8-K filed on July
24, 2009
|
10.17
|
Employment
Agreement between Edward J. Merritt and East Boston Savings
Bank
|
10.18
|
Supplemental
Executive Retirement Agreement between East Boston Savings Bank and Edward
J. Merritt
|
10.19
|
Joint
Beneficiary Designation Agreement between Edward J. Merritt and Mt.
Washington Cooperative Bank
|
10.20
|
First
Amendment to Joint Beneficiary Designation Agreement between Edward J.
Merritt and Mt. Washington Cooperative
Bank
|
10.21
|
Change
in Control Agreement between Mark Abbate and East Boston Savings Bank
incorporated by reference to the Form 8-K filed on December 15,
2009
|
21
|
Subsidiary
Information is incorporated herein by reference to Part I, Item 1,
“Business — Subsidiaries”
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of
2002
|
_______________________________
*
|
Incorporated
by reference to the Registration Statement on Form S-1 of Meridian
Interstate Bancorp, Inc. (File No. 333-146373), originally filed with the
Securities and Exchange Commission on September 28,
2007.
|
**
|
Incorporated
by reference to Appendix A to the Company’s Definitive
Proxy Statement for its 2008 Annual Meeting, as filed with the Securities
and Exchange Commission on July 11,
2008.
|
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.
|
|
|
|
|
Date: March
16, 2010
|
By: /s/ Richard J.
Gavegnano
|
|
Richard
J. Gavegnano
|
|
Chairman
of the Board and Chief Executive Officer
|
|
(Duly
Authorized Representative)
|
Pursuant to the requirements of the
Securities Exchange of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Richard J. Gavegnano
|
|
Chairman
of the Board and Chief
|
|
March
16, 2010
|
Richard
J. Gavegnano
|
|
Executive
Officer (Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ Mark L. Abbate
|
|
Senior
Vice President, Treasurer and
|
|
March
16, 2010
|
Mark
L. Abbate
|
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
|
|
|
|
|
|
|
/s/ Vincent D. Basile
|
|
Director
|
|
March
16, 2010
|
Vincent
D. Basile
|
|
|
|
|
|
|
|
|
|
/s/ Anna R. DiMaria
|
|
Director
|
|
March 16, 2010
|
Anna R. DiMaria
|
|
|
|
|
|
|
|
|
|
/s/ Domenic A. Gambardella
|
|
Director
|
|
March
16, 2010
|
Domenic
A. Gambardella
|
|
|
|
|
|
|
|
|
|
/s/ Edward L. Lynch
|
|
Director
|
|
March
16, 2010
|
Edward
L. Lynch
|
|
|
|
|
|
|
|
|
|
/s/ Gregory F. Natalucci
|
|
Director
|
|
March
16, 2010
|
Gregory
F. Natalucci
|
|
|
|
|
|
|
|
|
|
/s/ James G. Sartori
|
|
Director
|
|
March
16, 2010
|
James
G. Sartori
|
|
|
|
|
|
|
|
|
|
/s/ Paul T. Sullivan
|
|
Director
|
|
March
16, 2010
|
Paul
T. Sullivan
|
|
|
|
|
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Marilyn A. Censullo
|
|
Director
|
|
March
16, 2010
|
Marilyn
A. Censullo
|
|
|
|
|
|
|
|
|
|
/s/ Richard F. Fernandez
|
|
Director
|
|
March
16, 2010
|
Richard
F. Fernandez
|
|
|
|
|
|
|
|
|
|
/s/ Carl A. LaGreca
|
|
Director
|
|
March
16, 2010
|
Carl
A. LaGreca
|
|
|
|
|
|
|
|
|
|
/s/ Edward J. Merritt
|
|
Director
|
|
March
16, 2010
|
Edward
J. Merritt
|
|
|
|
|
|
|
|
|
|
/s/ Thomas J. Gunning
|
|
Director
|
|
March
16, 2010
|
Thomas
J. Gunning
|
|
|
|
|