form10k-98038_meridian.htm
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,
2008
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OR
[ ]
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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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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
|
Securities
Registered Pursuant to Section 12(g) of the
Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of 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).
Yes o No x
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,
2008 was approximately $88,676,532. As of March 1, 2009, there were
23,000,000 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 2009 Annual Meeting of Stockholders of the
Registrant are incorporated by reference in Part III of this Form
10-K.
MERIDIAN
INTERSTATE BANCORP
2008
FORM 10-K ANNUAL REPORT
TABLE
OF CONTENTS
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Forward
Looking Statements
This Annual 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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statements
regarding our business plans, prospects, growth and operating
strategies;
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statements
regarding the quality of our loan and investment portfolios;
and
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estimates
of our risks and future costs and
benefits.
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These
forward-looking statements are subject to significant risks and
uncertainties. Actual results may differ materially from those
contemplated by the forward-looking statements due to, among others, the
following factors:
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·
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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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increased
competitive pressures among financial services
companies;
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changes
in consumer spending, borrowing and savings
habits;
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our
ability to enter new markets successfully and take advantage of growth
opportunities, and the possible dilutive effect of potential acquisitions
or de novo
branches, if any;
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legislative
or regulatory changes that adversely affect our
business;
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adverse
changes in the securities markets;
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changes
in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the Financial Accounting Standards Board or the
Securities and Exchange Commission;
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inability
of third-party providers to perform their obligations to us;
and
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changes
in our organization, compensation and benefit
plans.
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Any of
the forward-looking statements that we make in this Annual 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, 2008, Hampshire First Bank had assets of
$121.3 million. At December 31, 2008, Meridian Interstate Bancorp had
total assets of $1.1 billion, deposits of $796.9 million and stockholders’
equity of $189.8 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
55.0% 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. All 11 directors of Meridian Interstate Bancorp are
also members of the Board of Trustees of Meridian Financial Services, which is
composed of 28 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 12 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, 2008, we had total assets of $1.0
billion, deposits of $796.9 million and stockholders’ equity of $129.2
million.
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 annual
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 12 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 (five 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.
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 and credit unions 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, TD Banknorth, Inc., 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.
Our
competition for loans comes from financial institutions and credit unions 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
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, 2008, one- to
four-family residential loans were $274.7 million, or 38.6% of our total loan
portfolio, consisting of $139.9 million and $134.8 million of fixed-rate and
adjustable-rate loans, respectively. We 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 $105.3
million at December 31, 2008. 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 do not make loans generally known as subprime loans or
Alt-A loans.
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, 2008, investment loans totaled $20.0 million.
To
a lesser extent we also originate land loans primarily to local contractors and
developers for making improvements on approved 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, 2008, land loans totaled $2.3
million.
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, 2008, commercial real estate and multi-family
real estate loans were $269.5 million and $31.2 million, or 37.7% and 4.4%,
respectively, of our total loan portfolio. The commercial real estate
and multi-family loan portfolio consisted of $19.9 million fixed-rate loans and
$280.8 million adjustable-rate loans at December 31, 2008. 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 multifamily 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 25 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 three years and amortize over a 20 year term. 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, 2008, loan participations purchased totaled $42.1 million,
including $17.0 million with Hampshire First Bank, in which the Company owns 40%
of the outstanding common stock. The properties securing these loans
are located primarily in New England. Our underwriting practices with
respect to loan participations generally do not differ from loans that we
originate.
Construction
Loans
At
December 31, 2008, construction loans were $91.7 million, or 12.9% of our total
loan portfolio, compared to $109.6 million, or 19.1%, at December 31,
2007. At the beginning of 2008, one of our lending goals was to
decrease the outstanding construction loans to no more than 15% of the loan
portfolio due to the increased risk inherent to construction
lending. In 2009, 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. We do not require any cash equity from the borrower if there is
sufficient equity in the land being used as collateral. 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 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, 2008, we had $2.5 million in construction loans for one- to
four-family properties that convert to permanent loans. Also at that date,
we had $89.2 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, 2008, home equity lines of
credit were $28.3 million, or 4.0% 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, 2008, commercial business loans were $15.4 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. Fixed-rate business loans are generally indexed to a
corresponding U.S. Treasury 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, and are
supported by personal guarantees. 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, 2008.
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, 2008, consumer loans were $1.4 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 1.10x. 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 purchase
participation loans 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, 2008 and December 31, 2007, we originated $312.8 and
$177.4 million of loans, and sold $10.5 million and $8.3 million of
loans. At December 31, 2008, we were servicing $83.6 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 our Board of Directors and
management. Our 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 $500,000 generally
must be authorized by the 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, 2008, our regulatory limit on
loans-to-one borrower was $25.8 million. At that date, our largest
lending relationship consisted of three loans totaling $16.3 million and was
secured by commercial real estate. This loan was performing in
accordance with its original repayment terms at December 31, 2008.
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, 2008.
At
December 31, 2008, 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. The Company does not hold any trust
preferred instruments, private label mortgage-backed securities, or FNMA or
FHLMC preferred stock.
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.
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,
spread differentials between the effective rates on instruments in the portfolio
compared to risk-free rates and issuer specific significant business
events.
At each
balance sheet date, management evaluates whether the declines in value of the
Company’s debt securities are temporary, and whether management expects to
collect the full amount of principal and interest payments within the
contractual period. Further, at each balance sheet date and in all
material respects, management determines if it has the intent and ability to
hold depreciated debt securities to the earlier of recovery or
maturity.
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 statement of operations or as realized
losses if a sale has been executed.
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. 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.
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. At December 31, 2008, we
had $709,000 of brokered deposits, or less than 1% of total deposits, all
maturing within one year.
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,
2008, 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. 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, 2008 the Bank has federal funds purchased from
Hampshire First Bank of $7.8 million. These purchases are currently a
source of low-cost funds for the Bank, at a rate of 0.91% at December 31,
2008.
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 $146,000, $118,000, and
$43,000 of non-interest income during the years ended December 31, 2008, 2007
and 2006, respectively.
Personnel
As of
December 31, 2008, we had 164 full-time and 63 part-time employees, none of whom
is represented by a collective bargaining unit. We believe our
relationship with our employees is excellent.
Subsidiaries
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, 2008, Meridian Interstate Funding
Corporation had total assets of $8.7 million and total equity of $8.6
million.
Meridian
Interstate Bancorp also owns 40% 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, 2008, 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.
In the future, we may realize gains
from our investment in Hampshire First Bank from the net income generated by the
business of Hampshire First Bank and, possibly, by the sale of this investment,
although we have no current intention to sell our investment. In
addition, Hampshire First Bank provides us with a source of loans via loan
participations. Due to the consolidation of financial institutions in
New Hampshire and in Hampshire First Bank’s primary market, Hillsborough County,
New Hampshire, we believe there is a significant opportunity for a
community-focused bank to provide a full range of financial services to small
and middle-market commercial and retail customers. In addition, we
believe Hampshire First Bank is led by a qualified and experienced executive
management team. As a result of the start-up expenditures that a new
bank must incur in relation to total revenue generated, Hampshire First Bank has
incurred operating losses since inception, and such losses may continue in the
future.
Hampshire
First Bank’s loan portfolio consists primarily of multi-family and commercial
real estate, commercial business and construction loans. At December
31, 2008, Hampshire First Bank had assets of $121.3 million, deposits of $80.8
million and equity of $25.9 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, 2008, Meridian
Interstate Bancorp had a $10.4 million investment in Hampshire First Bank and
recorded losses of $396,000 and $541,000, respectively, during the years ended
December 31, 2008 and 2007, from this investment.
East
Boston Savings Bank has one active wholly-owned subsidiary, Prospect, Inc., a
Massachusetts corporation. Prospect was formed in 2000 to engage in
buying, selling and holding securities on its own behalf. As a
Massachusetts securities corporation, the income earned on Prospect’s investment
securities is subject to a lower state tax rate than that assessed on income
earned on investment securities maintained at East Boston Savings
Bank. At December 31, 2008, Prospect had total assets of $99.3
million and total equity of $98.2 million.
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.
State
Bank Regulation
General
As a Massachusetts-chartered savings
bank, East Boston Savings Bank is subject to supervision, regulation and
examination by the Massachusetts Commissioner of Banks and to various
Massachusetts statutes and regulations which govern, among other things,
investment powers, lending and deposit-taking activities, borrowings,
maintenance of surplus and reserve accounts, distribution of earnings and
payment of dividends. In addition, East Boston Savings Bank is subject to
Massachusetts consumer protection and civil rights laws and regulations. The
approval of the Massachusetts Commissioner of Banks or the Board of Bank
Incorporation is required for a Massachusetts-chartered bank to establish or
close branches, merge with other financial institutions, organize a holding
company, issue stock and undertake certain other activities.
The Massachusetts Commissioner of
Banks adopted rules that generally allow Massachusetts banks to engage in
activities permissible for federally-chartered banks or banks chartered by
another state. The Commissioner also has adopted procedures reducing regulatory
burdens and expense and expediting branching by well-capitalized and
well-managed banks.
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.
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
Massachusetts which have pledged to the Massachusetts Commissioner of Banks that
such monies will be used for further development within the
Commonwealth. However, these powers are constrained by federal
law. See “—Federal
Bank Regulation—Investment Activities” for federal restrictions on equity
investments.
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.
The loans listed 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 Federal Deposit Insurance
Corporation’s 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 Federal Deposit Insurance
Corporation to not be anticipating or experiencing significant growth and to be,
in general, a strong banking organization rated composite 1 under 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 stockholder’s equity, non-cumulative 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 Federal Deposit Insurance
Corporation 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. For example, under the Federal Deposit Insurance Corporation’s
risk-weighting system, cash and securities backed by the full faith and credit
of the U.S. government are given a 0.0% risk weight, loans secured by one- to
four-family residential properties generally have a 50.0% risk weight, and
commercial loans have a risk weighting of 100.0%.
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 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 Federal Deposit Insurance Corporation, 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 Federal Deposit
Insurance Corporation 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.
As bank holding companies, Meridian
Financial Services and Meridian Interstate Bancorp are subject to capital
adequacy guidelines for bank holding companies substantially similar to those of
the Federal Deposit Insurance Corporation for state-chartered savings
banks. Meridian Financial Services and Meridian Interstate Bancorp
exceed those requirements at December 31, 2008.
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
Since the enactment of Federal Deposit
Insurance Corporation Improvement Act, all state-chartered Federal Deposit
Insurance Corporation-insured banks and savings banks have generally been
limited in their investment activities to principal and equity investments of
the type and in the amount authorized for national banks, notwithstanding state
law. Federal Deposit Insurance Corporation Improvement Act and the Federal
Deposit Insurance Corporation regulations permit exceptions to these
limitations. For example, state chartered banks may, with Federal Deposit
Insurance Corporation approval, continue to exercise state authority to invest
in common or preferred stocks listed on a national securities exchange or the
NASDAQ National 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 Federal Deposit
Insurance Corporation’s regulations, or the maximum amount permitted by
Massachusetts law, whichever is less. East Boston Savings Bank received approval
from the Federal Deposit Insurance Corporation to retain and acquire such equity
instruments equal to the lesser of 100.0% of East Boston Savings Banks’ Tier 1
capital or the maximum permissible amount specified by Massachusetts
law. Any such grandfathered authority may be terminated upon the
Federal Deposit Insurance Corporation’s determination that such investments pose
a safety and soundness risk or upon the occurrence of certain events such as the
savings bank’s conversion to a different charter. In addition, the Federal
Deposit Insurance Corporation 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 deposit insurance fund. The
Federal Deposit Insurance Corporation has adopted regulations governing the
procedures for institutions seeking approval to engage in such activities or
investments. The Gramm-Leach-Bliley Act of 1999 specifies that a non-member 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 and managed 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 Federal Deposit Insurance
Corporation 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%.
“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 Federal Deposit Insurance Corporation 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. No
institution may make any capital distribution if it would be undercapitalized on
a pro forma basis.
Transactions
with Affiliates
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 that are controlled by such parent
holding company are affiliates of the subsidiary 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. 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 and no low
quality assets may generally be purchased from affiliates.
The
Sarbanes-Oxley Act of 2002 generally prohibits loans by a company to its
executive officers and directors. However, the law contains a
specific exception for loans by a depository institution to its executive
officers and directors in compliance with federal banking laws. Under
such laws, East Boston Savings Bank’s authority to extend credit to executive
officers, directors and 10% shareholders (“insiders”), as well as entities such
persons control, is limited. The law limits both the individual and
aggregate amount of loans East Boston Savings Bank may make to insiders based,
in part, on East Boston Savings Bank’s capital position and requires certain
Board approval procedures to be followed. Such loans are required to
be made on terms substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of
repayment. There is an exception for loans made pursuant to a benefit
or compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other
employees. Loans to executive officers are further limited by
specific categories of loans that may be made. The federal
restrictions on insider lending are in addition to those imposed by state
law.
Enforcement
The Federal Deposit Insurance
Corporation has extensive enforcement authority over insured nonmember 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 Federal Deposit Insurance Corporation has
authority under federal law to appoint a conservator or receiver for an insured
bank under limited circumstances. The Federal Deposit Insurance Corporation 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 Federal Deposit
Insurance Corporation 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. Deposit accounts at East Boston Savings Bank are insured
by the Federal Deposit Insurance Corporation, generally up to a maximum of
$100,000 for each separately insured depositor and up to a maximum of $250,000
for self-directed retirement accounts. However, the Federal Deposit Insurance
Corporation increased the deposit insurance available on all deposit accounts to
$250,000, effective until December 31, 2009. In addition, certain
noninterest-bearing transaction accounts maintained with financial institutions
participating in the Federal Deposit Insurance Corporation’s Temporary Liquidity
Guarantee Program are fully insured regardless of the dollar amount until
December 31, 2009. The Bank has opted to participate in the Federal
Deposit Insurance Corporation’s Temporary Liquidity Guarantee
Program. See “Temporary Liquidity Guarantee Program.”
The Federal Deposit Insurance
Corporation imposes an assessment against all depository institutions for
deposit insurance. This assessment is based on the risk category of the
institution and, prior to 2009, ranged from five to 43 basis points of the
institution’s deposits. On February 27, 2009, the Federal Deposit Insurance
Corporation published a final rule raising the current deposit insurance
assessment rates to a range from 12 to 45 basis points beginning April 1,
2009. Additionally, the Federal Deposit Insurance Corporation issued
an interim final rule that would impose a special 20 basis points special
assessment on all insured deposits as of June 30, 2009, which would be payable
on September 30, 2009.
On February 27, 2009, the Federal
Deposit Insurance Corporation announced a one-time special assessment of 20
basis points on all insured deposits regardless of the risk or size of the
depository institution. This special assessment is payable by
September 30, 2009 based on deposits as of June 30, 2009, and if finalized
would result in additional non-interest expense of $1.6 million based on
our deposits as of December 31, 2008. In addition, the Federal
Deposit Insurance Corporation may assess additional special premiums in the
future.
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 might 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,
2008, the annualized FICO assessment was equal to 1.10 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. We 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 December 31,
2009. An annualized 10 basis point assessment on balances in noninterest-bearing
transaction accounts that exceed the existing deposit insurance limit of
$250,000 will be assessed on a quarterly basis to insured depository
institutions that have not opted out of this component of the Temporary
Liquidity Guarantee Program. We opted to participate in this
component of the Temporary Liquidity Guarantee Program.
U.S. Treasury’s
Troubled Asset Relief Program Capital Purchase Program.
On October 3,
2008, the Emergency Economic Stabilization Act of 2008 was enacted that 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. The CPP provides for a
minimum investment of one percent of total risk-weighted assets and a maximum
investment equal to the lesser of three percent of total risk-weighted assets or
$25 billion. Participation in the program is not automatic and is subject to
approval by the U.S. Treasury Department. We opted not to participate
in the CPP.
Privacy
Regulations
Pursuant to the Gramm-Leach-Bliley Act,
the Federal Deposit Insurance Corporation has published final regulations
implementing the privacy protection provisions of the Gramm-Leach-Bliley Act.
The regulations generally require that insured banks disclose their privacy
policies, including identifying with whom a customer’s “non-public personal
information” is shared, to customers at the time of establishing the customer
relationship and annually thereafter. In addition, customers are required to be
given the ability to “opt-out” of having their personal information shared with
unaffiliated third parties.
Community
Reinvestment Act
Pursuant to the Community Reinvestment
Act, (“CRA”), and similar provision of Massachusetts law, 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 Federal Deposit Insurance Corporation, 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
Federal Deposit Insurance Corporation to provide a written evaluation of an
institution’s CRA performance utilizing a four-tiered descriptive rating system.
East Boston Savings Bank’s latest Federal Deposit Insurance Corporation CRA
rating was “Outstanding.”
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 Bank’s most recent rating under Massachusetts
law was “Outstanding.”
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 attorney’s fees for certain types of violations.
Anti-Money
Laundering
USA Patriot Act of
2001
The
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT
Act”) significantly expanded the responsibilities of financial institutions,
including banks, in preventing the use of the U.S. financial system to fund
terrorist activities. Title III of the USA PATRIOT Act provides for a
significant overhaul of the U.S. anti-money laundering regime. Among
other provisions, Title III of the USA PATRIOT Act requires financial
institutions operating in the United States to develop new anti-money laundering
compliance programs, due diligence policies and controls to ensure the detection
and reporting of money laundering. Such required compliance programs
are intended to supplement existing compliance requirements, also
applicable to financial institutions, under the Bank Secrecy Act and the Office
of Foreign Assets Control Regulations.
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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·
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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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·
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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.
|
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;
and
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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;
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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). 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, 2008 of $4.3 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, 2008, 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
the first quarter dividend and indicated that it does not anticipate paying
dividends in 2009. In addition, the FHLB-Boston issued a
moratorium on the redemption of its stock in December 2008. There can
be no assurance that such dividends will resume in the future. The
Company’s net interest income will be negatively impacted in 2009 as a result of
the dividend cut. Likewise, if interest on future Federal Home Loan
Bank advances increased, a member bank affected by such reduction or 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 2008 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. Approximately $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 are not allowed to file consolidated income tax
returns. Instead, each entity in the consolidated group files a
separate annual income tax return. 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.
Meridian
Interstate Bancorp 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. As a security corporation, it established a subsidiary
for the purpose of making the loan to the Company’s employee stock ownership
plan in 2008, since making such a loan directly could disqualify it from
classification as a security corporation.
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 in the first quarter of 2009, economic conditions continued to worsen,
due in large part to the fallout from the collapse of the sub-prime mortgage
market. While we did not originate or invest in sub-prime mortgages, our lending
business is tied, in large part, to the housing market. Declines in
home prices, increases in foreclosures and higher unemployment have adversely
affected the credit performance of real estate-related loans, resulting in the
write-down of asset values. The continuing housing slump also has resulted in
reduced demand for the construction of new housing, further declines in home
prices, and increased delinquencies on our construction, residential and
commercial 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.
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.
In response to the financial crises
affecting the banking system and financial markets, the U.S. Congress has passed
legislation and the U.S. Treasury has promulgated programs designed to purchase
assets from, provide equity capital to, and guarantee the liquidity of the
financial services industry. Specifically, Congress adopted the
Emergency Economic Stabilization Act of 2008, under which the U.S. Treasury has
the authority to expend up to $700 billion to assist in stabilizing and
providing liquidity to the U.S. financial system. On October 14, 2008, the U.S.
Treasury announced the Capital Purchase Program, under which it will purchase up
to $250 billion of non-voting senior preferred shares of certain qualified
financial institutions in an attempt to encourage financial institutions to
build capital to increase the flow of financing to businesses and consumers and
to support the economy. In addition, Congress temporarily increased FDIC deposit
insurance from $100,000 to $250,000 per depositor through December 31, 2009. The
FDIC has also announced the creation of the Temporary Liquidity Guarantee
Program which is intended to strengthen confidence and encourage liquidity in
financial institutions by temporarily guaranteeing newly issued senior unsecured
debt of participating organizations and providing full insurance coverage for
noninterest-bearing transaction deposit accounts (such as business checking
accounts, interest-bearing transaction accounts paying 50 basis points or less
and lawyers’ trust accounts), regardless of dollar amount until December 31,
2009. Finally, in February 2009, the American Recovery and
Reinvestment Act of 2009 was enacted, which is intended to expand and establish
government spending programs and provide certain tax cuts to stimulate the
economy. The U.S. government continues to evaluate and develop various programs
and initiatives designed to stabilize the financial and housing markets and
stimulate the economy, including the U.S. Treasury’s recently announced
Financial Stability Plan and the recently announced foreclosure prevention
program.
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 will 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.
The
Federal Deposit Insurance Corporation is imposing an emergency assessment on
financial institutions, which will decrease our earnings in 2009.
On February 27, 2009, the Federal
Deposit Insurance Corporation announced a one-time special assessment of 20
basis points on all insured deposits regardless of the risk or size of the
depository institution. This special assessment is payable by
September 30, 2009 based on deposits as of June 30, 2009, and if finalized would
result in additional non-interest expense of $1.6 million based on our deposits
as of December 31, 2008. In addition, the Federal Deposit Insurance
Corporation may assess additional special premiums in the future.
Our
Expenses Will Increase as a Result of Increases in FDIC Insurance
Premiums.
The FDIC imposes an assessment against
financial institutions for deposit insurance. This assessment is based on the
risk category of the institution and currently ranges from 5 to 43 basis points
of the institution’s deposits. On February 27, 2009, the FDIC issued a final
rule that increases the current deposit insurance assessment rates to a range
from 12 to 45 basis points beginning April 1, 2009. The increase in
the assessment rates will increase our expenses.
If
our investment in 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, 2008 was $4.3
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
Federal Home Loan Bank of Boston suspended dividends during the fourth quarter
of 2008. This will negatively affect our earnings.
The
Federal Home Loan Bank of Boston suspended dividend payments for the first
quarter of 2009, and has stated that resuming payment of dividends in 2009 is
unlikely. We received $138,000 in dividends from the Federal Home
Loan Bank of Boston during the year ended December 31, 2008, and the failure of
the Federal Home Loan Bank of Boston to pay dividends for any quarter will
reduce our earnings during that quarter.
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
contributed to operating losses in 2008. 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 level of non-performing loans and provision for loan
losses in 2008 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
Nonperforming 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 size 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 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. Consideration is given to (1) the
length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair
value. Unrealized losses on securities that are determined to be
other-than-temporarily impaired are charged to earnings as impairment losses, or
realized through sale of the security. Due to the significant
decreases in value in 2008 for some common stock and debt issuers, our
securities portfolio has likewise declined in value. Continued
weakness in the market for these securities could result in impairment charges
on some issues in the portfolio. Refer to “Management’s Discussion and
Analysis of Results of Operations and Financial Condition – Securities
Portfolio.”
Our
emphasis on commercial real estate and construction lending involves
risks.
In recent years, the Company has
focused on shifting its asset mix to reduce the residential loan portfolio and
increase commercial real estate and construction loans. 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 single-family 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 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 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 single-family 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, construction and commercial business 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 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 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 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.
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.”
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.
We
may continue to record losses from our 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. Hampshire
First Bank has incurred operating losses during its initial years of operation
and may continue to record losses in the future. We cannot guarantee that these
losses may not significantly affect our profitability.
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 five de novo branches, the most
recent in October 2008. 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 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. The
Company has a new President who commenced employment on March 4,
2009. Also, in February 2009, the Company announced the resignation
of its Chief Lending Officer, and the assignment of the Group Vice President of
Commercial Lending as an interim replacement for this
position.
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.
Item 1b. unresolved
staff comments
Not
applicable.
At
December 31, 2008, we conducted business through our twelve full service offices
and one loan center located in East Boston, Everett, Lynnfield, Melrose,
Peabody, Revere, Saugus, Winthrop and Wakefield, Massachusetts. In
October 2008 we opened our branch office in Wakefield,
Massachusetts. We own all of our offices except our Saugus and
Wakefield offices (both subject to renewable leases). At December 31,
2008, the total net book value of our land, buildings, furniture, fixtures and
equipment was $22.7 million.
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
4. submission of
matters to a vote of security holders
During
the fourth quarter of 2008, we did not submit any matters to the vote of
security holders.
Item
5. market
for registrant’s common equity, related stockholder matters and
issuer purchases of equity securities
(a) 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 January 30, 2009 was
624. 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. Meridian
Interstate Bancorp, Inc. common stock began trading on the NASDAQ Global Select
Market on January 23, 2008. Accordingly, no information prior to this
date is available.
The
following table sets forth for each quarter of 2008 the intra-day high and low
sales prices per share of common stock as reported by
Nasdaq. No cash dividends were declared during the year. On
March 9, 2009, the closing market price of the Company’s common stock was
$6.34.
2008
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
Fourth
quarter
|
|
$ |
10.17 |
|
|
$ |
7.93 |
|
Third
quarter
|
|
|
10.40 |
|
|
|
9.15 |
|
Second
quarter
|
|
|
10.40 |
|
|
|
9.50 |
|
First
quarter
|
|
|
9.80 |
|
|
|
8.21 |
|
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.
(b) 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
Prospectus.
(c) The
following table provides information regarding the Company’s purchase of its
equity securities during the three months ended December 31, 2008.
Period
|
(a)
|
(b)
|
(c)
|
(d)
|
|
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, 2008
|
-
|
$ -
|
-
|
414,000
|
|
|
|
|
|
November
1 – 30, 2008
|
-
|
-
|
-
|
414,000
|
|
|
|
|
|
December
1 – 31, 2008
|
250,000
|
$ 9.05
|
250,000
|
164,000
|
Total
|
250,000
|
$ 9.05
|
250,000
|
164,000
|
|
|
|
|
|
(1)
|
On
November 28, 2008 the Company announced that its Board of Directors
authorized a stock repurchase program (the “Stock Repurchase Program”) for
the purchase of up to 414,000 shares of the Company’s common stock to fund
restricted share awards under the Company’s 2008 Equity Incentive
Plan. Any purchase of common stock under the Stock Repurchase
Program will be made through open market purchase transactions from time
to time or privately negotiated transactions. The amount and exact timing
of any repurchases will depend on market conditions and other factors, at
the discretion of management of the Company. Repurchased shares will be
held in treasury until used for awards under the Equity Incentive
Plan. As of December 31, 2008, 250,000 shares had been
repurchased at an average price per share of $9.05. The
remaining 164,000 shares had been repurchased as of February 3, 2009, at
an average price per share of
$8.95.
|
(d) Information
regarding stock-based compensation awards outstanding and available for future
grants as of December 31, 2008, 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.
(e) 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
|
|
|
03/31/08
|
|
|
06/30/08
|
|
|
09/30/08
|
|
|
12/31/08
|
|
Meridian
Interstate Bancorp, Inc. (MHC)
|
|
$ |
100.00 |
|
|
$ |
97.70 |
|
|
$ |
97.20 |
|
|
$ |
102.10 |
|
|
$ |
92.50 |
|
SNL
Bank and Thrift
|
|
|
100.00 |
|
|
|
101.27 |
|
|
|
77.44 |
|
|
|
95.85 |
|
|
|
63.90 |
|
NASDAQ
Composite
|
|
|
100.00 |
|
|
|
99.43 |
|
|
|
100.03 |
|
|
|
91.26 |
|
|
|
68.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source
: SNL Financial LC, Charlottesville, VA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Financial
Condition Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
1,065,352 |
|
|
$ |
1,003,226 |
|
|
$ |
899,563 |
|
|
$ |
824,500 |
|
|
$ |
794,008 |
|
Securities
|
|
|
252,529 |
|
|
|
267,058 |
|
|
|
281,662 |
|
|
|
264,174 |
|
|
|
298,492 |
|
Loans
receivable, net
|
|
|
704,104 |
|
|
|
568,104 |
|
|
|
529,650 |
|
|
|
480,833 |
|
|
|
424,418 |
|
Deposits
|
|
|
796,852 |
|
|
|
774,446 |
|
|
|
736,989 |
|
|
|
672,544 |
|
|
|
642,714 |
|
Borrowings
|
|
|
65,486 |
|
|
|
36,527 |
|
|
|
40,589 |
|
|
|
37,108 |
|
|
|
38,482 |
|
Total
stockholders' equity
|
|
|
189,840 |
|
|
|
115,684 |
|
|
|
110,275 |
|
|
|
104,243 |
|
|
|
102,076 |
|
Operating
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividend income
|
|
$ |
52,897 |
|
|
$ |
49,175 |
|
|
$ |
45,235 |
|
|
$ |
40,186 |
|
|
$ |
38,260 |
|
Interest
expense
|
|
|
27,044 |
|
|
|
28,096 |
|
|
|
21,828 |
|
|
|
14,545 |
|
|
|
11,937 |
|
Net
interest income
|
|
|
25,853 |
|
|
|
21,079 |
|
|
|
23,407 |
|
|
|
25,641 |
|
|
|
26,323 |
|
Provision
(credit) for loan losses
|
|
|
5,638 |
|
|
|
465 |
|
|
|
434 |
|
|
|
456 |
|
|
|
(113 |
) |
Net
interest income after provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
loan losses
|
|
|
20,215 |
|
|
|
20,614 |
|
|
|
22,973 |
|
|
|
25,185 |
|
|
|
26,436 |
|
Non-interest
income
|
|
|
8,373 |
|
|
|
4,652 |
|
|
|
3,342 |
|
|
|
3,555 |
|
|
|
4,331 |
|
Non-interest
expenses
|
|
|
31,966 |
|
|
|
22,620 |
|
|
|
21,894 |
|
|
|
20,637 |
|
|
|
20,104 |
|
Income
(loss) before income taxes
|
|
|
(3,378 |
) |
|
|
2,646 |
|
|
|
4,421 |
|
|
|
8,103 |
|
|
|
10,663 |
|
Income
taxes
|
|
|
(1,270 |
) |
|
|
380 |
|
|
|
1,127 |
|
|
|
2,700 |
|
|
|
3,894 |
|
Net
income (loss)
|
|
$ |
(2,108 |
) |
|
$ |
2,266 |
|
|
$ |
3,294 |
|
|
$ |
5,403 |
|
|
$ |
6,769 |
|
Key
Performance Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
(loss) on average assets
|
|
|
(0.20 |
)
% |
|
|
0.25
|
% |
|
|
0.38
|
% |
|
|
0.68
|
% |
|
|
0.88 |
|
Return
(loss) on average equity
|
|
|
(1.09 |
) |
|
|
2.01 |
|
|
|
3.12 |
|
|
|
5.31 |
|
|
|
6.85 |
|
Interest
rate spread (1)
|
|
|
2.01 |
|
|
|
1.97 |
|
|
|
2.60 |
|
|
|
3.23 |
|
|
|
3.48 |
|
Net
interest margin (2)
|
|
|
2.61 |
|
|
|
2.47 |
|
|
|
2.92 |
|
|
|
3.47 |
|
|
|
3.67 |
|
Non-interest
expense to average assets
|
|
|
2.99 |
|
|
|
2.47 |
|
|
|
2.55 |
|
|
|
2.58 |
|
|
|
2.60 |
|
Efficiency
ratio (3)
|
|
|
107.29 |
|
|
|
88.94 |
|
|
|
81.72 |
|
|
|
70.97 |
|
|
|
66.75 |
|
Average
interest-earning assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
interest-bearing liabilities
|
|
|
122.16 |
|
|
|
115.31 |
|
|
|
111.47 |
|
|
|
111.97 |
|
|
|
111.68 |
|
Capital
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
equity to average assets
|
|
|
18.17
|
% |
|
|
12.32
|
% |
|
|
12.26
|
% |
|
|
12.72
|
% |
|
|
12.80 |
|
Total
capital to risk weighted assets (4)
|
|
|
15.26 |
|
|
|
12.97 |
|
|
|
13.44 |
|
|
|
15.49 |
|
|
|
15.05 |
|
Tier
I capital to risk weighted assets (4)
|
|
|
14.50 |
|
|
|
11.93 |
|
|
|
12.39 |
|
|
|
14.77 |
|
|
|
14.35 |
|
Tier
I capital to average assets (4)
|
|
|
12.82 |
|
|
|
10.21 |
|
|
|
10.46 |
|
|
|
12.77 |
|
|
|
12.53 |
|
Asset
Quality Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses/total loans
|
|
|
0.97
|
% |
|
|
0.63
|
% |
|
|
0.63
|
% |
|
|
0.61
|
% |
|
|
0.58 |
|
Allowance
for loan losses/non-performing loans
|
|
|
48.57 |
|
|
|
73.00 |
|
|
|
126.06 |
|
|
|
926.50 |
|
|
|
1,301.05 |
|
Net
charge-offs/average loans outstanding
|
|
|
0.38 |
|
|
|
0.03 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.01 |
|
Non-performing
loans/total loans
|
|
|
2.00 |
|
|
|
0.87 |
|
|
|
0.50 |
|
|
|
0.07 |
|
|
|
0.04 |
|
Non-performing
assets/total assets
|
|
|
1.58 |
|
|
|
0.55 |
|
|
|
0.30 |
|
|
|
0.04 |
|
|
|
0.02 |
|
Other data: Number of
offices
|
|
|
12 |
|
|
|
11 |
|
|
|
11 |
|
|
|
10 |
|
|
|
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, 2008, 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
Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis and more frequently when economic or market conditions warrant such an
evaluation. Consideration is given to
(1) the length of time and the extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer, and (3)
the intent and ability of the Company to retain its investment in the issuer for
a period of time sufficient to allow for any anticipated recovery in fair value.
Continued weakness in the market for these securities could result in impairment
charges or additional losses on any sale of these securities.
Foreclosed
Real Estate
Assets acquired through, or in lieu of,
loan foreclosure are held for sale and are initially recorded at fair value 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 and changes in the valuation allowance are included in foreclosed
real estate expenses. 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
Deferred
tax assets and liabilities are reflected at currently enacted income tax rates
applicable to the period in which the deferred tax assets or liabilities are
expected to be realized or settled. As changes in tax laws or rates
are enacted, deferred tax assets and liabilities are adjusted accordingly
through the provision for income taxes. A valuation reserve is
established related to the deferred tax assets when, in the judgment of
management, it is more likely than not that all or a portion of such deferred
tax assets will not be realized. The Bank’s base amount of its
federal income tax reserve for loan losses is a permanent difference for which
there is no recognition of a deferred tax liability. However, the
loan loss allowance maintained for financial reporting purposes is a temporary
difference with allowable recognition of a related deferred tax asset, if deemed
realizable
Certain
aspects of income tax accounting require management judgment, including
determining the expected realization of deferred tax assets. Such judgments are
subjective and involve estimates and assumption about matters that are
inherently uncertain. Should actual factors and conditions differs materially
from those used by management, the actual realization of the net deferred tax
assets could differ materially from the amounts recorded in the financial
statements.
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 2009 as determined to be appropriate in accordance with our risk
management policies and our funding needs. In 2008, the Company
increased its investment in money market mutual funds significantly, from $1.3
million to $25.0 million, obtaining an improved yield compared to federal funds
sold, after due diligence regarding the fund sponsors, which are primarily
Fidelity and Vanguard. We expect to continue to utilize these money
market accounts as an alternative to investing all of the Company’s excess funds
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; and promoting core deposit products and short-term time
deposits.
In order
to improve our risk management, in 2006 we hired a Risk Management Specialist 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 five de novo branches, the most recent in October
2008. 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. In addition to branching, 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, organized in 2006 and
headquartered in Manchester, New Hampshire. Due to the consolidation
of financial institutions in New Hampshire and in Hampshire First Bank’s primary
market, Hillsborough County, New Hampshire, we believe there is a significant
opportunity for a community-focused bank to provide a full range of financial
services to small and middle-market commercial and retail
customers. 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. However, as a new financial
institution, Hampshire First Bank has incurred operating losses during its
initial years of operations. During the years ended December 31, 2008
and 2007, Meridian Interstate Bancorp recorded losses of $396,000 and $541,000,
respectively, from this investment. 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.
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 48.0% of our total deposits at
December 31, 2008. 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. In 2005, we introduced a courtesy overdraft
protection program that generated fee income of $1.0 million, $970,000 and
$746,000 in 2008, 2007 and 2006 respectively. In addition during
2005, we began originating reverse mortgages for sale which generated $168,000,
$233,000 and $348,000 of non-interest income in 2008, 2007 and 2006,
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 $146,000 $118,000
and $43,000 of non-interest income during the years ended December 31, 2008,
2007 and 2006, respectively.
Balance
Sheet Analysis
Assets
The
Company’s total assets increased by $62.1 million, or 6.2%, to $1.1 billion at
December 31, 2008 from December 31, 2007. Net loans increased by
$136.0 million, or 23.9%, with the most significant growth in residential and
commercial real estate loans. Securities available for sale decreased
$14.5 million, or 5.4%, and federal funds sold decreased by $81.4 million, as
these funds were utilized to fund loan growth. Asset growth reflects, in
part, the utilization of $89.4 million of net offering proceeds and the
conversion of $62.5 million of stock subscriptions from an escrow account to
paid in capital. Loan growth was primarily funded by net stock offering proceeds
and borrowings.
Deposits
increased by $22.4 million, or 2.9%, for the year ended December 31, 2008, due
mainly to an increase in money market balances of $34.2 million, or
24.7%. Outstanding borrowings also increased $29.0 million, to $65.5
million, as the Company opted to replace some higher rate maturing advances with
lower cost borrowings to help fund loan growth.
Loans
At December 31, 2008, total loans, net,
were $704.1 million, or 66.1% of total assets. During the year ended
December 31, 2008, the loan portfolio increased $136.0 million, or
23.9%. Growth in total real estate loans was $135.9 million, or
24.3%, and included increases of $50.6 million, or 22.6% in one- to four- family
real estate and $92.2 million, or 52.0%, in commercial real estate
loans. One- to four- family real estate loans increased due to customers,
new to the Bank, who refinanced existing loans, as well as a moderation of
competition from non-bank residential lenders in the local market. The
commercial real estate portfolio increased as a result of increased
marketing by the Company and an increase in loan participations. At
December 31, 2008, loan participations were $42.6 million, compared to $16.1
million at December 31, 2007. The increase in participations was due to
an increase in participations with the Company’s 40%-owned
affiliate, Hampshire First Bank (“HFB”). Participations
with HFB were $17.0 million and $3.0 million, respectively, at December 31, 2008
and 2007. The construction loan portfolio decreased by $18.0 million, or
16.4%. Commercial business loans increased by $3.5 million, or
29.5%. Loan growth was supported by net proceeds received from our
offering as well as an increased level of Federal Home Loan Bank
borrowings.
Loan
Portfolio Analysis
Loan
Portfolio Composition at December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
(Dollars
in thousands)
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to
four-family
|
|
$ |
274,716 |
|
|
|
38.6
|
% |
|
$ |
224,109 |
|
|
|
39.1
|
% |
|
$ |
204,559 |
|
|
|
38.3
|
% |
|
$ |
205,044 |
|
|
|
42.2
|
% |
|
$ |
189,586 |
|
|
|
44.2 |
|
Multi-family
|
|
|
31,212 |
|
|
|
4.4 |
|
|
|
26,855 |
|
|
|
4.7 |
|
|
|
26,781 |
|
|
|
5.0 |
|
|
|
19,392 |
|
|
|
4.0 |
|
|
|
20,633 |
|
|
|
4.8 |
|
Commercial
real estate
|
|
|
269,454 |
|
|
|
37.7 |
|
|
|
177,233 |
|
|
|
30.9 |
|
|
|
169,422 |
|
|
|
31.7 |
|
|
|
156,995 |
|
|
|
32.3 |
|
|
|
150,181 |
|
|
|
35.1 |
|
Home
equity lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
credit
|
|
|
28,253 |
|
|
|
4.0 |
|
|
|
21,541 |
|
|
|
3.8 |
|
|
|
20,663 |
|
|
|
3.9 |
|
|
|
16,794 |
|
|
|
3.5 |
|
|
|
13,305 |
|
|
|
3.1 |
|
Construction
|
|
|
91,652 |
|
|
|
12.9 |
|
|
|
109,635 |
|
|
|
19.1 |
|
|
|
101,495 |
|
|
|
19.0 |
|
|
|
76,041 |
|
|
|
15.7 |
|
|
|
44,106 |
|
|
|
10.3 |
|
Total
real estate loans
|
|
|
695,287 |
|
|
|
97.6 |
|
|
|
559,373 |
|
|
|
97.6 |
|
|
|
522,920 |
|
|
|
97.9 |
|
|
|
474,266 |
|
|
|
97.7 |
|
|
|
417,811 |
|
|
|
97.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business loans
|
|
|
15,355 |
|
|
|
2.2 |
|
|
|
11,859 |
|
|
|
2.1 |
|
|
|
10,220 |
|
|
|
1.9 |
|
|
|
10,149 |
|
|
|
2.1 |
|
|
|
9,695 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
loans
|
|
|
1,379 |
|
|
|
0.2 |
|
|
|
1,576 |
|
|
|
0.3 |
|
|
|
1,330 |
|
|
|
0.2 |
|
|
|
999 |
|
|
|
0.2 |
|
|
|
1,034 |
|
|
|
0.2 |
|
Total
loans
|
|
|
712,021 |
|
|
|
100.0
|
% |
|
|
572,808 |
|
|
|
100.0
|
% |
|
|
534,470 |
|
|
|
100.0
|
% |
|
|
485,414 |
|
|
|
100.0
|
% |
|
|
428,540 |
|
|
|
100.0 |
% |
Net
deferred loan origination fees
|
|
|
(1,005 |
) |
|
|
|
|
|
|
(1,067 |
) |
|
|
|
|
|
|
(1,458 |
) |
|
|
|
|
|
|
(1,644 |
) |
|
|
|
|
|
|
(1,637 |
) |
|
|
|
|
Allowance
for loan losses
|
|
|
(6,912 |
) |
|
|
|
|
|
|
(3,637 |
) |
|
|
|
|
|
|
(3,362 |
) |
|
|
|
|
|
|
(2,937 |
) |
|
|
|
|
|
|
(2,485 |
) |
|
|
|
|
Loans,
net
|
|
$ |
704,104 |
|
|
|
|
|
|
$ |
568,104 |
|
|
|
|
|
|
$ |
529,650 |
|
|
|
|
|
|
$ |
480,833 |
|
|
|
|
|
|
$ |
424,418 |
|
|
|
|
|
Loan
Maturity
The following tables set forth certain
information at December 31, 2008 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
due in:
|
|
|
|
|
|
|
|
|
|
|
|
|
One
year or less
|
|
$ |
120,661 |
|
|
$ |
5,318 |
|
|
$ |
282 |
|
|
$ |
126,261 |
|
More
than one to five years
|
|
|
354,543 |
|
|
|
8,150 |
|
|
|
1,097 |
|
|
|
363,790 |
|
More
than five to ten years
|
|
|
81,239 |
|
|
|
92 |
|
|
|
- |
|
|
|
81,331 |
|
More
than ten years
|
|
|
138,844 |
|
|
|
1,795 |
|
|
|
- |
|
|
|
140,639 |
|
Total
|
|
$ |
695,287 |
|
|
$ |
15,355 |
|
|
$ |
1,379 |
|
|
$ |
712,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate terms on amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
due
after one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
loans
|
|
$ |
191,742 |
|
|
$ |
8,396 |
|
|
$ |
1,097 |
|
|
$ |
201,235 |
|
Adjustable-rate
loans
|
|
|
382,884 |
|
|
|
1,641 |
|
|
|
- |
|
|
|
384,525 |
|
Total
|
|
$ |
574,626 |
|
|
$ |
10,037 |
|
|
$ |
1,097 |
|
|
$ |
585,760 |
|
At December 31, 2008, our loan
portfolio consisted of $262.7 million of fixed-rate loans and $449.3 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
market value at the date of foreclosure. Holding costs and declines in fair
value after acquisition of the property result in charges against
income. The following table provides information with respect to our
non-performing assets at the dates indicated.
|
At
December 31,
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Loans
accounted for on a non-accrual basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to
four-family
|
|
$ |
3,962 |
|
|
$ |
2,059 |
|
|
$ |
824 |
|
|
$ |
167 |
|
|
$ |
168 |
|
Multi-family
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
real estate
|
|
|
883 |
|
|
|
1,561 |
|
|
|
- |
|
|
|
123 |
|
|
|
- |
|
Home
equity lines of credit
|
|
|
- |
|
|
|
98 |
|
|
|
29 |
|
|
|
27 |
|
|
|
14 |
|
Construction
|
|
|
9,387 |
|
|
|
1,218 |
|
|
|
1,814 |
|
|
|
- |
|
|
|
- |
|
Total
real estate loans
|
|
|
14,232 |
|
|
|
4,936 |
|
|
|
2,667 |
|
|
|
317 |
|
|
|
182 |
|
Commercial
business loans
|
|
|
- |
|
|
|
45 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Consumer
loans
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
8 |
|
Total
non-accrual loans
|
|
|
14,232 |
|
|
|
4,982 |
|
|
|
2,667 |
|
|
|
317 |
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
14,232 |
|
|
|
4,982 |
|
|
|
2,667 |
|
|
|
317 |
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets
|
|
|
2,604 |
|
|
|
560 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
non-performing assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
non-performing assets
|
|
$ |
16,836 |
|
|
$ |
5,542 |
|
|
$ |
2,667 |
|
|
$ |
317 |
|
|
$ |
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans
|
|
$ |
4,273 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans to total loans
|
|
|
2.00 |
% |
|
|
0.87 |
% |
|
|
0.50 |
% |
|
|
0.07 |
% |
|
|
0.04 |
% |
Non-performing
loans to total assets
|
|
|
1.34 |
% |
|
|
0.55 |
% |
|
|
0.30 |
% |
|
|
0.04 |
% |
|
|
0.02 |
% |
Non-performing
assets (non-accrual loans and property acquired through foreclosure) were $16.8
million, or 1.58% of total assets at December 31, 2008, compared to 0.55% at
December 31, 2007. The increase in non-performing assets from 2007
resulted primarily from two construction loans totaling $9.4 million which
became non-performing in 2008. Such contructions loans
consist of a loan for the development of a 45-unit townhouse development located
in Massachusets and a 32-unit over-55 residential development located in
Massachusets. These loans had a carrying value of $9.4 million as of December
31, 2008, reflecting the charge-off of a specific impairment reserve of $1.1
million during 2008 for one of these loans.
Total
property acquired through foreclosure at December 31, 2008 was $2.6 million,
compared to $560,000 at December 31, 2007. 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 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. Interest income that would have been recorded for the year
ended December 31, 2008 had non-accruing loans been current according to their
original repayment terms was $1.3 million. Income related to
non-accrual loans included in interest income for the year ended December 31,
2008 was $1.2 million.
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 three
troubled debt restructure loans totaling $4.3 million of as of December 31,
2008, including the $3.8 million non-performing loan for an
over-55 construction development, and including two one-to-four family
residential loans.
Delinquencies
The
following table provides information about delinquencies in our loan portfolio
at the dates indicated.
|
At
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
2006
|
|
|
|
30-59
|
|
|
60-89
|
|
|
90
days
|
|
|
30-59
|
|
|
60-89
|
|
|
90
days
|
|
|
30-59
|
|
|
60-89
|
|
|
90
days
|
|
|
|
Days
|
|
|
Days
|
|
|
or
more
|
|
|
Days
|
|
|
Days
|
|
|
or
more
|
|
|
Days
|
|
|
Days
|
|
|
or
more
|
|
(In
thousands)
|
|
Past
Due
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
Past
Due
|
|
Real
estate loans :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to
four-family
|
|
$ |
1,352 |
|
|
$ |
842 |
|
|
$ |
1,413 |
|
|
$ |
1,489 |
|
|
$ |
856 |
|
|
$ |
1,036 |
|
|
$ |
313 |
|
|
$ |
284 |
|
|
$ |
540 |
|
Multi-family
|
|
|
840 |
|
|
|
- |
|
|
|
80 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
real estate
|
|
|
1,193 |
|
|
|
348 |
|
|
|
230 |
|
|
|
526 |
|
|
|
- |
|
|
|
623 |
|
|
|
992 |
|
|
|
- |
|
|
|
- |
|
Home
equity lines of credit
|
|
|
40 |
|
|
|
- |
|
|
|
- |
|
|
|
41 |
|
|
|
- |
|
|
|
70 |
|
|
|
153 |
|
|
|
- |
|
|
|
29 |
|
Construction
|
|
|
348 |
|
|
|
- |
|
|
|
- |
|
|
|
4,576 |
|
|
|
- |
|
|
|
- |
|
|
|
335 |
|
|
|
760 |
|
|
|
1,054 |
|
Total
real estate loans
|
|
|
3,773 |
|
|
|
1,190 |
|
|
|
1,723 |
|
|
|
6,632 |
|
|
|
856 |
|
|
|
1,729 |
|
|
|
1,793 |
|
|
|
1,044 |
|
|
|
1,623 |
|
Commercial
business loans
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
25 |
|
|
|
|
|
|
|
250 |
|
|
|
116 |
|
|
|
- |
|
|
|
- |
|
Consumer loans
|
|
|
1 |
|
|
|
- |
|
|
|
4 |
|
|
|
1 |
|
|
|
- |
|
|
|
1 |
|
|
|
3 |
|
|
|
5 |
|
|
|
- |
|
Total
|
|
$ |
3,774 |
|
|
$ |
1,190 |
|
|
$ |
1,727 |
|
|
$ |
6,658 |
|
|
$ |
856 |
|
|
$ |
1,980 |
|
|
$ |
1,912 |
|
|
$ |
1,049 |
|
|
$ |
1,623 |
|
At
December 31, 2008, non-accrual loans exceed loans ninety days or more past due
primarily because of two construction loans totaling $3.8 million and $5.6
million for which payments were made through December 31, 2008. These
loans are impaired and were placed on non-accrual status due to the uncertainty
relating to the ultimate collection of all principal and interest due for both
loans.
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.
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)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Beginning
Balance
|
|
$ |
3,637 |
|
|
$ |
3,362 |
|
|
$ |
2,937 |
|
|
$ |
2,485 |
|
|
$ |
2,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
(credit) for loan losses
|
|
|
5,638 |
|
|
|
465 |
|
|
|
434 |
|
|
|
456 |
|
|
|
(113 |
) |
Charge
offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
|
2,265 |
|
|
|
207 |
|
|
|
- |
|
|
|
- |
|
|
|
12 |
|
Commercial
business loans
|
|
|
98 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Consumer
loans
|
|
|
3 |
|
|
|
63 |
|
|
|
12 |
|
|
|
11 |
|
|
|
18 |
|
Total
charge-offs
|
|
|
2,366 |
|
|
|
270 |
|
|
|
12 |
|
|
|
11 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
|
- |
|
|
|
16 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
business
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Consumer
loans
|
|
|
3 |
|
|
|
64 |
|
|
|
3 |
|
|
|
7 |
|
|
|
9 |
|
Total
recoveries
|
|
|
3 |
|
|
|
80 |
|
|
|
3 |
|
|
|
7 |
|
|
|
9 |
|
Net
charge-offs
|
|
|
(2,363 |
) |
|
|
(190 |
) |
|
|
(9 |
) |
|
|
(4 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
at end of year
|
|
$ |
6,912 |
|
|
$ |
3,637 |
|
|
$ |
3,362 |
|
|
$ |
2,937 |
|
|
$ |
2,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
to nonperforming loans
|
|
|
48.57 |
% |
|
|
73.00 |
% |
|
|
126.06 |
% |
|
|
926.50 |
% |
|
|
1301.05 |
% |
Allowance
to total loans outstanding
|
|
|
0.97 |
% |
|
|
0.63 |
% |
|
|
0.63 |
% |
|
|
0.61 |
% |
|
|
0.58 |
% |
Net
charge-offs to average
|
|
|
0.38 |
% |
|
|
0.03 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.01 |
% |
loans
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
allowance for loan losses was $6.9 million, or 0.97% of total loans outstanding
as of December 31, 2008, compared to $3.6 million, or 0.63% as of December 31,
2007. The increase in the allowance for loan losses from the prior year is due
to continued growth of the loan portfolio, increases in commercial real estate
loan delinquencies, increases in loan charge-offs, and increases in 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, 2008, there was $12.5 million of impaired loans, including loans of
$1.9 million with an impairment allowance of $418,000. At December 31, 2007,
there was $5.1 million of impaired loans, including loans of $621,000 with an
impairment allowance of $89,000. The increase in the balance of
impaired loans is due primarily to two construction loans that became
impaired and non-performing during 2008. Management belives that the
collectibility of all amounts due according to the original loan of both loans
terms is doubtful due to the financial condition of the
borrowers. No additional funds are committed to be advanced on
impaired loans as of December 31, 2008.
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, 2008 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,
2008.
Included
in the balance of impaired loans at December 31, 2008 are troubled debt
restructure loans of $4.3 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 2008 to
be indicative of the local real estate market and economy. The level
of residential real estate activity in the local market has slowed considerably
during 2008, affecting both the residential portfolio and the construction
portfolio. In addition, in the over-55 residential construction
category, the Company foreclosed on one $2.4 million project and has another
$3.8 million impaired loan in this category as of December 31,
2008. The Company also has two other over-55 construction projects in
one town in its immediate market, both of which are performing according to
terms at December 31, 2008. While the Company also has similar
projects that are for the construction of single family residential developments
and townhouses, they are located in a number of locations in our
market. The Company believes it does not have any other significant
concentrations within the construction loan portfolio.
The
following table sets forth the breakdown of the allowance for loan losses by
loan category at the dates indicated.
At
December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(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 toTotal Allowance
|
|
|
%
of
Loans
in
Category
to
Total
Loans
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$ |
1,481 |
|
|
|
21.4
|
% |
|
|
38.6
|
% |
|
$ |
668 |
|
|
|
18.4
|
% |
|
|
39.1
|
% |
|
$ |
550 |
|
|
|
16.4
|
% |
|
|
38.3
|
% |
Multi-family
|
|
|
259 |
|
|
|
3.8 |
|
|
|
4.4 |
|
|
|
201 |
|
|
|
5.5 |
|
|
|
4.7 |
|
|
|
201 |
|
|
|
6.0 |
|
|
|
5.0 |
|
Commercial real estate
|
|
|
2,544 |
|
|
|
36.8 |
|
|
|
37.7 |
|
|
|
1,313 |
|
|
|
36.1 |
|
|
|
30.5 |
|
|
|
1,271 |
|
|
|
37.8 |
|
|
|
31.7 |
|
Home equity lines of credit
|
|
|
110 |
|
|
|
1.6 |
|
|
|
4.0 |
|
|
|
82 |
|
|
|
2.2 |
|
|
|
3.8 |
|
|
|
52 |
|
|
|
1.5 |
|
|
|
3.9 |
|
Construction
|
|
|
2,019 |
|
|
|
29.2 |
|
|
|
12.9 |
|
|
|
1,007 |
|
|
|
27.7 |
|
|
|
19.5 |
|
|
|
974 |
|
|
|
29.0 |
|
|
|
19.0 |
|
Total real estate loans
|
|
|
6,413 |
|
|
|
92.8 |
|
|
|
97.6 |
|
|
|
3,271 |
|
|
|
89.9 |
|
|
|
97.6 |
|
|
|
3,048 |
|
|
|
90.7 |
|
|
|
97.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business loans
|
|
|
490 |
|
|
|
7.1 |
|
|
|
2.2 |
|
|
|
355 |
|
|
|
9.8 |
|
|
|
2.1 |
|
|
|
306 |
|
|
|
9.1 |
|
|
|
1.9 |
|
Consumer loans
|
|
|
9 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
11 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
8 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Total
|
|
$ |
6,912 |
|
|
|
100.0
|
% |
|
|
100.0
|
% |
|
$ |
3,637 |
|
|
|
100.0
|
% |
|
|
100.0
|
% |
|
$ |
3,362 |
|
|
|
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, 2008, the securities portfolio was $252.5 million, or 23.7% of
total assets. At that date, 82.6% of the securities portfolio, or
$210.1 million, was invested in corporate bonds. The carrying and fair
value of corporate bonds in the financial services sector was $67.2 million and
$61.4 million, respectively. The remainder of the corporate bond portfolio
includes companies from a variety of industries. The remainder of the
portfolio was invested primarily in debt securities issued by
government-sponsored enterprises and marketable equity
securities. 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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
(In
thousands)
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
– sponsored
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
enterprises
|
|
$ |
1,000 |
|
|
$ |
1,003 |
|
|
$ |
7,002 |
|
|
$ |
6,975 |
|
|
$ |
9,005 |
|
|
$ |
8,831 |
|
Corporate
bonds
|
|
|
210,079 |
|
|
|
203,687 |
|
|
|
219,626 |
|
|
|
220,629 |
|
|
|
235,823 |
|
|
|
233,142 |
|
Mortgage-backed
securities
|
|
|
40 |
|
|
|
40 |
|
|
|
43 |
|
|
|
43 |
|
|
|
46 |
|
|
|
46 |
|
Total
debt securities
|
|
|
211,119 |
|
|
|
204,730 |
|
|
|
226,671 |
|
|
|
227,647 |
|
|
|
244,874 |
|
|
|
242,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
equity securities :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
26,142 |
|
|
|
22,854 |
|
|
|
27,498 |
|
|
|
38,066 |
|
|
|
27,013 |
|
|
|
36,897 |
|
Money
market mutual funds
|
|
|
24,945 |
|
|
|
24,945 |
|
|
|
1,345 |
|
|
|
1,345 |
|
|
|
2,746 |
|
|
|
2,746 |
|
Total
marketable equity securities
|
|
|
51,087 |
|
|
|
47,799 |
|
|
|
28,843 |
|
|
|
39,411 |
|
|
|
29,759 |
|
|
|
39,643 |
|
Total
|
|
$ |
262,206 |
|
|
$ |
252,529 |
|
|
$ |
255,514 |
|
|
$ |
267,058 |
|
|
$ |
274,633 |
|
|
$ |
281,662 |
|
At December 31, 2008, 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,
2008. All of the securities listed have fixed rates.
|
|
One
Year or Less
|
|
|
Total
|
|
|
More
than One Year to Five Years
|
|
|
More
than Five Years to Ten Years
|
|
|
More
than Ten Years
|
|
(Dollars
in thousands)
|
|
Amortized Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortize Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized Cost
|
|
|
Weighted
Average
Yield
|
|
Government
– sponsored
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
enterprises
|
|
$ |
1,000 |
|
|
|
3.21 |
% |
|
$ |
- |
|
|
|
- |
% |
|
$ |
- |
|
|
|
- |
% |
|
$ |
- |
|
|
|
- |
% |
|
$ |
1,000 |
|
|
|
3.21 |
% |
Corporate
bonds
|
|
|
47,533 |
|
|
|
4.49 |
|
|
|
162,546 |
|
|
|
5.14 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
210,079 |
|
|
|
4.99 |
|
Mortgage-backed
securities
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
10.72 |
|
|
|
14 |
|
|
|
2.36 |
|
|
|
25 |
|
|
|
8.59 |
|
|
|
40 |
|
|
|
6.46 |
|
Total
debt securities
|
|
$ |
48,533 |
|
|
|
4.46 |
% |
|
$ |
162,547 |
|
|
|
5.14 |
% |
|
$ |
14 |
|
|
|
2.36 |
% |
|
$ |
25 |
|
|
|
8.59 |
% |
|
$ |
211,119 |
|
|
|
4.97 |
% |
The
available-for-sale securities portfolio decreased $14.5 million, or 5.4% to
$252.5 million at December 31, 2008 from $267.1 million December 31, 2007 due to
the Company’s
perference for utilizing available funds for loan growth. Money
market mutual funds included in the marketable equity securities portfolio
totaled $24.9 million and $1.3 million at December 31, 2008 and December 31,
2007, respectively. Management continues to hold the money
market mutual funds and monitor available investment opportunities in light of
the current issues in the debt and equity markets.
Management evaluates securities for
other-than-temporary impairment on a monthly basis, with more frequent
evaluation for selected issues. Consideration is given to (1) the
length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair
value. At December 31, 2008, unrealized losses in our debt portfolio
ranged from 0% to 40%, and unrealized losses in our equity portfolio ranged from
0% to 51%.
As of
December 31, 2008, the net unrealized loss on the total equity portfolio was
$3.3 million. Twenty equity securities had market value declines of
20% or more, with net unrealized losses of $3.2 million. The most
significant market valuation decrease related to any one equity security at
December 31, 2008 is $387,000. As of June 30, 2008, three
equity securities had a market value decline of 20% or more, with net
unrealized losses of $428,000. No equity security had a market
valuation decrease of 20% or more as of December 31,
2007. 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, 2008, the aggregate
amortized cost of debt obligations owned by the Company was $211.1 million and
the aggregate market value was $204.7 million. Six corporate bonds,
from four issuers, had a market decline of greater than 20% of amortized cost,
with declines ranging from 25.5% to 39.9%. The aggregate unrealized
loss on these bonds at December 31, 2008 was $4.1 million and is presently
considered to be temporary.
Three of the bonds, from two issuers,
had been impaired greater than 20% for approximately four months, reflecting the
rapid changes in the market during 2008. The issuers are
consumer and commercial finance subsidiaries of AIG. The bonds had an amortized
cost of $7.0 million and unrealized losses of $2.7 million at December 31,
2008. These bonds have maturity dates of May 2010 to May
2012.
Two
bonds, from one issuer, had been impaired greater than 20% for approximately
three months. The amortized cost and aggregate unrealized loss on
these bonds was $2.4 million and $695,000, respectively. These bonds
were issued by a national media company that has seen its revenue decline
significantly in 2008. These bonds mature in June of
2011.
Another bond, with a
decline of $765,000, was issued by a national insurer, and has been impaired for
approximately one month. At December 31, 2008, the amortized
cost of this bond, which matures in July 2012, was $3.0
million.
Due to the relatively short length of
time of the impairment of these securities, with no indication that the issuers
will be unable to continue to service the obligations based on ongoing
operations, and management’s ability and intent to hold the obligations until
the earlier of recovery or maturity, management considers the decline in market
valuation to be temporary.
Refer to Note 4 Securities
Available for Sale in
the 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, 2008, core deposits were 48.0% of total
deposits. Deposits increased $22.4 million, or 2.9%, in the year
ended December 31, 2008, primarily as a result of a $34.2 million, or 24.7%,
increase in money market deposits resulting from the movement of customer funds
from longer-term to shorter-term deposits.
The
following table sets forth the average balances of deposits for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
(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
|
|
$ |
54,503 |
|
|
|
-
|
% |
|
|
6.7
|
% |
|
$ |
54,051 |
|
|
|
-
|
% |
|
|
7.2
|
% |
|
$ |
25,358 |
|
|
|
-
|
% |
|
|
3.6
|
% |
NOW
deposits
|
|
|
39,351 |
|
|
|
0.76 |
|
|
|
4.9 |
|
|
|
34,355 |
|
|
|
0.36 |
|
|
|
4.6 |
|
|
|
67,228 |
|
|
|
0.14 |
|
|
|
9.6 |
|
Money
market deposits
|
|
|
149,827 |
|
|
|
2.68 |
|
|
|
18.5 |
|
|
|
113,392 |
|
|
|
3.67 |
|
|
|
15.0 |
|
|
|
105,071 |
|
|
|
3.03 |
|
|
|
14.9 |
|
Regular
and other deposits
|
|
|
127,250 |
|
|
|
1.14 |
|
|
|
15.7 |
|
|
|
129,153 |
|
|
|
1.16 |
|
|
|
17.1 |
|
|
|
142,698 |
|
|
|
1.17 |
|
|
|
20.3 |
|
Certificates
of deposit
|
|
|
437,183 |
|
|
|
4.41 |
|
|
|
54.2 |
|
|
|
422,588 |
|
|
|
4.84 |
|
|
|
56.1 |
|
|
|
362,990 |
|
|
|
4.15 |
|
|
|
51.6 |
|
Total
|
|
$ |
808,114 |
|
|
|
3.32
|
% |
|
|
100.0
|
% |
|
$ |
753,539 |
|
|
|
3.75
|
% |
|
|
100.0
|
% |
|
$ |
703,345 |
|
|
|
2.95
|
% |
|
|
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, 2008.
Time
Deposit Maturities of $100,000 or more
|
|
(In
thousands)
|
|
Certificates
of
Deposit
|
|
Maturity
Period:
|
|
|
|
Three
months or less
|
|
$ |
33,900 |
|
Over
three through six months
|
|
|
46,785 |
|
Over
six through twelve months
|
|
|
51,201 |
|
Over
twelve months
|
|
|
31,807 |
|
Total
|
|
$ |
163,693 |
|
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 2008 as, in early 2008, the Company opted to
supplement maturing FHBL 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 for 2008, is detailed in the following table.
|
|
Years
Ended
|
|
|
|
December
31,
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Balance
outstanding at end of year
|
|
$ |
65,486 |
|
|
$ |
36,527 |
|
|
$ |
40,589 |
|
|
$ |
37,108 |
|
Average
amount outstanding during the year
|
|
$ |
55,882 |
|
|
$ |
39,193 |
|
|
$ |
41,039 |
|
|
$ |
35,665 |
|
Weighted
average interest rate during the year
|
|
|
3.59
|
% |
|
|
4.74
|
% |
|
|
4.43
|
% |
|
|
3.76
|
% |
Maximum
outstanding at any month end
|
|
$ |
73,227 |
|
|
$ |
49,188 |
|
|
$ |
52,649 |
|
|
$ |
56,030 |
|
Weighted
average interest rate at end of year
|
|
|
3.15
|
% |
|
|
4.49
|
% |
|
|
4.69
|
% |
|
|
4.00
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased at December 31, 2008 totaling $7.8 million had a weighted
average rate of 0.91%. Outstanding FHLB borrowings at December 31,
2008 totaling $57.7 million had a weighted average rate of 3.45%. At
December 31, 2008, 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 by $74.2
million, to $189.8 million at December 31, 2008 from $115.7 million at December
31, 2007, mainly due to the Company’s stock offering. The Company also
recorded a decrease to other comprehensive income of $12.7 million due to an
increase in unrecognized losses on the available for sale portfolio due to
general market conditions.
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,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(Dollars
in thousands)
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
621,985 |
|
|
$ |
38,781 |
|
|
|
6.24
|
% |
|
$ |
550,494 |
|
|
$ |
35,745 |
|
|
|
6.49
|
% |
|
$ |
507,143 |
|
|
$ |
32,661 |
|
|
|
6.44
|
% |
Securities
|
|
|
297,645 |
|
|
|
12,433 |
|
|
|
4.18 |
|
|
|
275,055 |
|
|
|
12,170 |
|
|
|
4.42 |
|
|
|
278,621 |
|
|
|
11,781 |
|
|
|
4.23 |
|
Other
interest-earning assets
|
|
|
69,275 |
|
|
|
1,683 |
|
|
|
2.43 |
|
|
|
26,244 |
|
|
|
1,260 |
|
|
|
4.80 |
|
|
|
15,753 |
|
|
|
793 |
|
|
|
5.03 |
|
Total
interest-earning assets
|
|
|
988,905 |
|
|
|
52,897 |
|
|
|
5.35 |
|
|
|
851,793 |
|
|
|
49,175 |
|
|
|
5.77 |
|
|
|
801,517 |
|
|
|
45,235 |
|
|
|
5.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets
|
|
|
79,250 |
|
|
|
|
|
|
|
|
|
|
|
65,348 |
|
|
|
|
|
|
|
|
|
|
|
58,643 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
1,068,155 |
|
|
|
|
|
|
|
|
|
|
$ |
917,141 |
|
|
|
|
|
|
|
|
|
|
$ |
860,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
deposits
|
|
$ |
39,351 |
|
|
$ |
301 |
|
|
|
0.76 |
|
|
$ |
34,355 |
|
|
$ |
123 |
|
|
|
0.36
|
% |
|
$ |
67,228 |
|
|
$ |
96 |
|
|
|
0.14
|
% |
Money
market deposits
|
|
|
149,827 |
|
|
|
4,019 |
|
|
|
2.68 |
|
|
|
113,392 |
|
|
|
4,164 |
|
|
|
3.67 |
|
|
|
105,071 |
|
|
|
3,188 |
|
|
|
3.03 |
|
Regular
and other deposits
|
|
|
127,250 |
|
|
|
1,445 |
|
|
|
1.14 |
|
|
|
129,153 |
|
|
|
1,500 |
|
|
|
1.16 |
|
|
|
142,698 |
|
|
|
1,673 |
|
|
|
1.17 |
|
Certificates
of deposit
|
|
|
437,183 |
|
|
|
19,275 |
|
|
|
4.41 |
|
|
|
422,588 |
|
|
|
20,452 |
|
|
|
4.84 |
|
|
|
362,990 |
|
|
|
15,052 |
|
|
|
4.15 |
|
Total
interest-bearing deposits
|
|
|
753,611 |
|
|
|
25,040 |
|
|
|
3.32 |
|
|
|
699,488 |
|
|
|
26,239 |
|
|
|
3.75 |
|
|
|
677,987 |
|
|
|
20,009 |
|
|
|
2.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
55,882 |
|
|
|
2,004 |
|
|
|
3.59 |
|
|
|
39,193 |
|
|
|
1,857 |
|
|
|
4.74 |
|
|
|
41,039 |
|
|
|
1,819 |
|
|
|
4.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
|
809,493 |
|
|
|
27,044 |
|
|
|
3.34 |
|
|
|
738,681 |
|
|
|
28,096 |
|
|
|
3.80 |
|
|
|
719,026 |
|
|
|
21,828 |
|
|
|
3.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
|
|
54,503 |
|
|
|
|
|
|
|
|
|
|
|
54,051 |
|
|
|
|
|
|
|
|
|
|
|
25,358 |
|
|
|
|
|
|
|
|
|
Other
noninterest-bearing liabilities
|
|
|
10,070 |
|
|
|
|
|
|
|
|
|
|
|
11,429 |
|
|
|
|
|
|
|
|
|
|
|
10,358 |
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
874,066 |
|
|
|
|
|
|
|
|
|
|
|
804,161 |
|
|
|
|
|
|
|
|
|
|
|
754,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity
|
|
|
194,089 |
|
|
|
|
|
|
|
|
|
|
|
112,980 |
|
|
|
|
|
|
|
|
|
|
|
105,418 |
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$ |
1,068,155 |
|
|
|
|
|
|
|
|
|
|
$ |
917,141 |
|
|
|
|
|
|
|
|
|
|
$ |
860,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
$ |
25,853 |
|
|
|
|
|
|
|
|
|
|
$ |
21,079 |
|
|
|
|
|
|
|
|
|
|
$ |
23,407 |
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
|
2.01 |
% |
|
|
|
|
|
|
|
|
|
|
1.97 |
% |
|
|
|
|
|
|
|
|
|
|
2.60 |
% |
Net
interest margin
|
|
|
|
|
|
|
|
2.61 |
% |
|
|
|
|
|
|
|
|
|
|
2.47 |
% |
|
|
|
|
|
|
|
|
|
|
2.92 |
% |
Average
interest-earning assets to
average
interest-bearing liabilities
|
|
|
|
122.16 |
% |
|
|
|
|
|
|
|
|
|
|
115.31 |
% |
|
|
|
|
|
|
|
|
|
|
111.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table sets forth the effects of changing rates and volumes on our net
interest income. The rate column shows the effects attributable to
changes in rate (changes in rate multiplied by prior volume). The
volume column shows the effects attributable to changes in volume (changes in
volume multiplied by prior rate). The net column represents the sum
of the prior columns. For purposes of this table, changes
attributable to changes in both rate and volume that cannot be segregated have
been allocated proportionally based on the changes due to rate and the changes
due to volume.
|
|
Years
Ended December 31,
|
|
|
Years
Ended December 31,
|
|
|
|
2008
Compared to 2007
|
|
|
2007
Compared to 2006
|
|
|
|
Increase
(Decrease) Due to
|
|
|
Increase
(Decrease) Due to
|
|
(In
thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
4,398 |
|
|
$ |
(1,362 |
) |
|
$ |
3,036 |
|
|
$ |
2,670 |
|
|
$ |
414 |
|
|
$ |
3,084 |
|
Securities
|
|
|
824 |
|
|
|
(561 |
) |
|
|
263 |
|
|
|
(340 |
) |
|
|
729 |
|
|
|
389 |
|
Other
interest-earning assets
|
|
|
605 |
|
|
|
(182 |
) |
|
|
423 |
|
|
|
502 |
|
|
|
(35 |
) |
|
|
467 |
|
Total
|
|
|
5,827 |
|
|
|
(2,105 |
) |
|
|
3,722 |
|
|
|
2,832 |
|
|
|
1,108 |
|
|
|
3,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,517 |
|
|
|
(3,716 |
) |
|
|
(1,199 |
) |
|
|
2,767 |
|
|
|
3,463 |
|
|
|
6,230 |
|
Borrowings
|
|
|
343 |
|
|
|
(196 |
) |
|
|
147 |
|
|
|
(71 |
) |
|
|
109 |
|
|
|
38 |
|
Total
|
|
|
2,860 |
|
|
|
(3,912 |
) |
|
|
(1,052 |
) |
|
|
2,696 |
|
|
|
3,572 |
|
|
|
6,268 |
|
Change
in net interest income
|
|
$ |
2,967 |
|
|
$ |
1,807 |
|
|
$ |
4,774 |
|
|
$ |
136 |
|
|
$ |
(2,464 |
) |
|
$ |
(2,328 |
) |
Results
of Operations for the Years Ended December 31, 2008, 2007 and 2006
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, 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. Return (loss) on average assets and return (loss) on
average equity was (0.20)% and (1.09)%, respectively, for the year ended
December 31, 2008 compared to 0.25% and 2.01%, respectively, for the year ended
December 31, 2007. 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, or 41.3%.
Net
income was $2.3 million for the year ended December 31, 2007 compared to $3.3
million for the year ended December 31, 2006. Net income decreased
during 2007 due to a decrease in net interest income, primarily resulting from
increases in the average balance and average cost of certificates of deposit.
The increase in interest expense was partially offset by an increase in the
average balance of loans. Return on average assets and return on
average equity was 0.38% and 3.12%, respectively, for the year ended December
31, 2006.
Net
Income (Loss)
Net
income (loss) information is as follows:
|
|
Years
Ended December 31,
|
|
|
Change
2008/2007
|
|
|
Change
2007/2006
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Net
interest income
|
|
$ |
25,853 |
|
|
$ |
21,079 |
|
|
$ |
23,407 |
|
|
$ |
4,774 |
|
|
|
22.65
|
% |
|
$ |
(2,328 |
) |
|
|
(9.95 |
)
% |
Provision
for loan losses
|
|
|
5,638 |
|
|
|
465 |
|
|
|
434 |
|
|
|
5,173 |
|
|
|
1,112.47 |
|
|
|
31 |
|
|
|
7.14 |
|
Non-interest
income
|
|
|
8,373 |
|
|
|
4,652 |
|
|
|
3,342 |
|
|
|
3,721 |
|
|
|
79.99 |
|
|
|
1,310 |
|
|
|
39.20 |
|
Non-interest
expenses
|
|
|
31,966 |
|
|
|
22,620 |
|
|
|
21,894 |
|
|
|
9,346 |
|
|
|
41.32 |
|
|
|
726 |
|
|
|
3.32 |
|
Net
income (loss)
|
|
|
(2,108 |
) |
|
|
2,266 |
|
|
|
3,294 |
|
|
|
(4,374 |
) |
|
|
(193.03 |
) |
|
|
(1,028 |
) |
|
|
(31.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
(loss) on average equity
|
|
|
(1.09 |
)% |
|
|
2.01 |
% |
|
|
3.12 |
% |
|
|
|
|
|
|
(154.23 |
) |
|
|
|
|
|
|
(35.58 |
) |
Return
(loss) on average assets
|
|
|
(0.20 |
)% |
|
|
0.25 |
% |
|
|
0.38 |
% |
|
|
|
|
|
|
(180.00 |
) |
|
|
|
|
|
|
(34.21 |
) |
Net
Interest Income
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. The Company’s net
interest margin increased for each of the last three quarters and was 2.97% for
the quarter ended December 31, 2008, compared to 2.70% and 2.35% for the
quarters ended September 30, 2008 and June 30, 2008.
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 yeilds due to the lower interest rate
environment. While the loan portfolio yield has decreased to 6.24%
for 2008 from 6.49% for 2007, the Company benefited from a decrease to deposit
rates 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%. The Company has been able to lower
deposit rates throughout 2008, despite increased competition and some
competitors’ use of promotional certificate of deposits rates. The
2008 annual increase in money market balances of $34.2 million, or 24.7%, offset
a reduction in certificate of deposit balances of $17.9 million, or
4.1%. This increase in more quickly repricing account balances has
also contributed to the annual interest margin increase.
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.
Net
interest income for 2007 was $21.1 million, a decrease of $2.3 million, or
10.0%, from $23.4 million for 2006. Net interest income decreased
primarily due to the increase in the average balance and average costs of
deposits, particularly certificates of deposit and money market accounts.
Certificates of deposit balances increased as we promoted competitive higher
rates starting in October 2007. In addition, the introduction of an
aggressive money market campaign in the second quarter of 2007 motivated some
customers to transfer funds from lower cost savings accounts to the higher
yielding money market instrument. The average rate paid on
certificates of deposit and money market deposits increased due to these
promotions.
The
increase in deposit expense from 2006 was partially offset by an increase in the
interest earned on loans, due to an increase in the average balance of loans
outstanding. The average outstanding loan balance increased 8.5%, to
$550.5 million in 2007, from $507.1 million in 2006.
Provision for
Loan Losses
The
Company’s loan loss provision was $5.6 million, $465,000 and $434,000 for the
years ended December 31, 2008, 2007 and 2006, respectively. The
increase in the provision relates 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
increased charge-offs and non-performing loans.
Total
loans increased significantly in 2008, from $572.8 million at December 31,
2007 to $712.0 million at December 31, 2008. Non-accrual loans
increased from $5.0 million at December 31, 2007 to $14.2 million at December
31, 2008. 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 $6.9 million, 0.97%, of total loans outstanding as
of December 31, 2008, as compared with $3.6 million, 0.63% of total loans as of
December 31, 2007. 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
2008/2007
|
|
|
Change
2007/2006
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Customer
service fees
|
|
$ |
2,796 |
|
|
$ |
2,733 |
|
|
$ |
2,378 |
|
|
$ |
63 |
|
|
|
2.31
|
% |
|
$ |
355 |
|
|
|
14.93
|
% |
Loan
fees
|
|
|
673 |
|
|
|
664 |
|
|
|
721 |
|
|
|
9 |
|
|
|
1.36 |
|
|
|
(57 |
) |
|
|
(7.91 |
) |
Gain
on sales of loans, net
|
|
|
39 |
|
|
|
49 |
|
|
|
69 |
|
|
|
(10 |
) |
|
|
(20.41 |
) |
|
|
(20 |
) |
|
|
(28.99 |
) |
Gain
(loss) on securities, net
|
|
|
4,433 |
|
|
|
299 |
|
|
|
(44 |
) |
|
|
4,134 |
|
|
|
1,382.61 |
|
|
|
343 |
|
|
|
(779.55 |
) |
Income
from bank-owned life insurance
|
|
|
828 |
|
|
|
1,143 |
|
|
|
796 |
|
|
|
(315 |
) |
|
|
(27.56 |
) |
|
|
347 |
|
|
|
43.59 |
|
Equity
loss on investment in affiliate bank
|
|
|
(396 |
) |
|
|
(541 |
) |
|
|
(578 |
) |
|
|
145 |
|
|
|
(26.80 |
) |
|
|
37 |
|
|
|
(6.40 |
) |
Litigation
settlement
|
|
|
- |
|
|
|
305 |
|
|
|
- |
|
|
|
(305 |
) |
|
|
(100.00 |
) |
|
|
305 |
|
|
|
100.00 |
|
Total non-interest
income
|
|
$ |
8,373 |
|
|
$ |
4,652 |
|
|
$ |
3,342 |
|
|
$ |
3,721 |
|
|
|
79.99
|
% |
|
$ |
1,310 |
|
|
|
39.20
|
% |
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 proceeds
received in 2007. In addition, the company received $305,000 of
proceeds from a litigation settlement in 2007.
Non-interest income increased by 39.2%,
to $4.7 million in 2007, from $3.3 million in 2006. In addition to an
increase in gains on securities of $343,000, customer service fees increased by
$355,000, or 14.9%, to $2.7 million, primarily as a result of the introduction
of a courtesy overdraft program. Loan fee income includes reverse
mortgage fees of $233,000 in 2007, compared to $348,000 in 2006, reflecting less
demand for this product in 2007. Income from bank-owned life
insurance increased $347,000, or 43.6%, primarily due to the receipt of proceeds
from life insurance for two insured individuals which resulted in $501,000 of
income in 2007. Other income includes the recovery of $305,000 of
insurance proceeds from a prior year litigation settlement in
2007. For the years ended December 31, 2008, 2007, and 2006, we
realized losses of $396,000, $541,000 and $578,000, respectively, on our
investment in our affiliate bank, Hampshire First Bank.
Non-Interest
Expense
|
|
Years
Ended December 31,
|
|
|
Change
2008/2007
|
|
|
Change
2007/2006
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Salaries
and employee benefits
|
|
$ |
17,678 |
|
|
$ |
14,486 |
|
|
$ |
13,225 |
|
|
$ |
3,192 |
|
|
|
22.04
|
% |
|
$ |
1,261 |
|
|
|
9.53
|
% |
Occupancy
and equipment
|
|
|
2,915 |
|
|
|
2,602 |
|
|
|
2,630 |
|
|
|
313 |
|
|
|
12.03 |
|
|
|
(28 |
) |
|
|
(1.06 |
) |
Data
processing
|
|
|
1,662 |
|
|
|
1,588 |
|
|
|
1,578 |
|
|
|
74 |
|
|
|
4.66 |
|
|
|
10 |
|
|
|
0.63 |
|
Marketing
and advertising
|
|
|
1,214 |
|
|
|
987 |
|
|
|
1,017 |
|
|
|
227 |
|
|
|
23.00 |
|
|
|
(30 |
) |
|
|
(2.95 |
) |
Professional
services
|
|
|
2,300 |
|
|
|
1,069 |
|
|
|
1,036 |
|
|
|
1,231 |
|
|
|
115.15 |
|
|
|
33 |
|
|
|
3.19 |
|
Contribution
to Meridian
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charitable
Foundation
|
|
|
3,000 |
|
|
|
- |
|
|
|
- |
|
|
|
3,000 |
|
|
|
100.00 |
|
|
|
- |
|
|
|
- |
|
Litigation
settlement
|
|
|
- |
|
|
|
- |
|
|
|
575 |
|
|
|
- |
|
|
|
- |
|
|
|
(575 |
) |
|
|
(100.00 |
) |
Other
real estate owned expense
|
|
|
675 |
|
|
|
19 |
|
|
|
5 |
|
|
|
656 |
|
|
|
3,452.63 |
|
|
|
14 |
|
|
|
280.00 |
|
Other
general and administrative
|
|
|
2,522 |
|
|
|
1,869 |
|
|
|
1,828 |
|
|
|
653 |
|
|
|
34.94 |
|
|
|
41 |
|
|
|
2.24 |
|
Total non-interest
expense
|
|
$ |
31,966 |
|
|
$ |
22,620 |
|
|
$ |
21,894 |
|
|
$ |
9,346 |
|
|
|
41.32
|
% |
|
$ |
726 |
|
|
|
3.32
|
% |
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, which will reduce staff. 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. The Company does
not anticipate a significant contribution to the Charitable Foundation in
2009. Professional service fees increased 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. Other expenses increased from $1.9 million to
$2.5 million primarily due to an increase in FDIC insurance
premiums. The Company benefited from an FDIC deposit insurance credit
in 2007.
For 2007,
non-interest expense increased by $726,000, or 3.3%. The increase was
primarily due to increases in salaries and employee benefits expense of $1.3
million, or 9.5%. We opened new branch offices in late 2007 and
mid-2007, which increased staff levels and occupancy costs. Increases
in health care costs, as well as modest salary increases and new staff additions
reflect the remaining increases. Partially offsetting the
compensation increase was a decrease of $30,000 for marketing expense, as
management had instituted various budget initiatives aimed at reducing expenses,
as well as a non-recurring litigation settlement charge of $575,000 in
2006.
Income Tax
Expense
The
Company recorded an income tax benefit of $1.3 million for 2008, reflecting an
effective tax benefit rate of 37.6% compared to tax expense of $380,000, or
14.4% for 2007. Items affecting the increase in the effective tax
rate include the unexpected retirement of the Bank’s president, and an increase
in the gain on sale of securities and provision for loan losses which resulted
in changes to projected taxable income. 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. After an analysis of the components of the deferred
tax asset, the Company recorded a valuation allowance against the deferred tax
asset of $500,000 as of December 31, 2008.
The
decline in our effective tax rate from 25.5% in 2006 to 14.4% in 2007 from 2006
was primarily attributable to the benefits derived from the receipt of dividends
from equity securities and income from bank-owned life insurance. In
2007, we received the proceeds from two bank-owned life insurance policies due
to the death of covered individuals of $501,000. In addition, because
of the decrease in both the net interest margin and net income in 2007, these
income sources with lower tax rates represented a greater percentage of our net
taxable income than in 2006.
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.
We hired
a Risk Management Specialist in 2006 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. 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, 2008 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, 2009 through December 31, 2009.
Interest
Rate Sensitivity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
Market Interest
|
|
Net
Interest Income
|
|
|
Net
Portfolio Value Estimate
|
|
Rates
(Rate Shock)
|
|
Amount
|
|
|
Change
|
|
|
Percent
|
|
|
Amount
|
|
|
Change
|
|
|
Percent
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
200 |
|
|
$ |
36,782 |
|
|
$ |
2,252 |
|
|
|
6.52
|
% |
|
$ |
134,811 |
|
|
$ |
(57,556 |
) |
|
|
(29.92 |
)
% |
|
100 |
|
|
|
35,931 |
|
|
|
1,401 |
|
|
|
4.06 |
|
|
|
165,400 |
|
|
|
(26,967 |
) |
|
|
(14.02 |
) |
|
0 |
|
|
|
34,530 |
|
|
|
|
|
|
|
|
|
|
|
192,367 |
|
|
|
|
|
|
|
|
|
|
(100 |
) |
|
|
31,628 |
|
|
|
(2,902 |
) |
|
|
(8.40 |
) |
|
|
202,805 |
|
|
|
10,438 |
|
|
|
5.43 |
|
|
(200 |
) |
|
|
28,014 |
|
|
|
(6,516 |
) |
|
|
(18.87 |
) |
|
|
209,967 |
|
|
|
17,600 |
|
|
|
9.15 |
|
The basis point changes in rates in the
above table are assumed to occur evenly over the following 12
months.
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. As a result of the Company’s stock
offering closed on January 22, 2008, the Company significantly increased its
liquidity in the first part of 2008.
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, 2008, cash and cash equivalents totaled $20.3
million. In addition, at December 31, 2008, we had $108.5 million of
available borrowing capacity with the Federal Home Loan Bank of Boston,
including a $9.4 million line of credit. On December 31, 2008, we had
$57.7 million of advances outstanding.
A significant use of our liquidity is
the funding of loan originations. At December 31, 2008, we had $172.9
million in total loan commitments outstanding. Historically, some of
the commitments expire without being fully drawn; therefore the total amount of
commitment does not necessarily represent future cash
requirements. Unused
portions
of existing loans include $82.0 million in unadvanced portions of construction
loans, $27.2 million in unused home equity lines of credit, $1.8 million in
unused business lines of credit, $1.2 million in unused commercial letters of
credit, and $623,000 in unadvanced revolving lines of credit. Commitments to
fund new loans include $4.6 million in commitments to fund one- to four-family
residential real estate loans, $36.7 million in commitments to fund commercial
real estate loans, $17.6 million in commitments to originate commercial
construction loans, $500,000 in commitments to originate commercial lines of
credit, $537,000 in commitments to originate home equity lines of credit, and
$173,000 in commitments to originate residential construction
loans. We also have a seven year contract with our core data
processing provider with an outstanding commitment of approximately $6.1 million
as of December 31, 2008, and an annual payment of approximately $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, 2008 totaled $328.7 million, or
79.4% 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.
The following table presents certain of
our contractual obligations as of December 31, 2008.
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
|
|
$ |
57,675 |
|
|
$ |
7,475 |
|
|
$ |
20,200 |
|
|
$ |
30,000 |
|
|
$ |
- |
|
Operating
lease obligations
|
|
|
430 |
|
|
|
115 |
|
|
|
232 |
|
|
|
83 |
|
|
|
- |
|
Other
long-term obligations (1)
|
|
|
6,090 |
|
|
|
1,305 |
|
|
|
2,610 |
|
|
|
2,175 |
|
|
|
- |
|
Total
|
|
$ |
64,195 |
|
|
$ |
8,895 |
|
|
$ |
23,042 |
|
|
$ |
32,258 |
|
|
$ |
- |
|
(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, 2008, 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 the Notes to
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 the 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, 2008.
For the year ended December 31, 2008,
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 the 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
|
58
|
|
|
Report
of Independent Registered Public Accounting Firm
|
59
|
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
61
|
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2008, 2007 and
2006
|
62
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the
Years
|
|
Ended
December 31, 2008, 2007 and 2006
|
63
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006
|
64
|
|
|
Notes
to Consolidated Financial Statements
|
66
|
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of Meridian Interstate Bancorp (“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, 2008, 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, 2008 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, 2008 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, 2008.
/s/
Richard J. Gavegnano
|
|
Richard
J. Gavegnano
|
|
Chairman
of the Board and Chief Executive Officer
|
|
|
|
|
|
|
|
/s/
Leonard V. Siuda
|
|
Leonard
V. Siuda
|
|
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, 2008 and 2007, 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,
2008. We also have audited Meridian Interstate Bancorp, Inc.’s
internal control over financial reporting as of December 31, 2008, 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, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2008 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, 2008,
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 5,
2009
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
December
31,
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
ASSETS
|
Cash
and due from banks
|
|
$ |
10,354 |
|
|
$ |
11,821 |
|
Federal
funds sold
|
|
|
9,911 |
|
|
|
91,272 |
|
Total
cash and cash equivalents
|
|
|
20,265 |
|
|
|
103,093 |
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit - affiliate bank
|
|
|
7,000 |
|
|
|
- |
|
Securities
available for sale, at fair value
|
|
|
252,529 |
|
|
|
267,058 |
|
Federal
Home Loan Bank stock, at cost
|
|
|
4,303 |
|
|
|
3,165 |
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
711,016 |
|
|
|
571,741 |
|
Less
allowance for loan losses
|
|
|
(6,912 |
) |
|
|
(3,637 |
) |
Loans,
net
|
|
|
704,104 |
|
|
|
568,104 |
|
|
|
|
|
|
|
|
|
|
Bank-owned
life insurance
|
|
|
22,831 |
|
|
|
18,003 |
|
Foreclosed
real estate, net
|
|
|
2,604 |
|
|
|
560 |
|
Investment
in affiliate bank
|
|
|
10,376 |
|
|
|
10,772 |
|
Premises
and equipment, net
|
|
|
22,710 |
|
|
|
22,816 |
|
Accrued
interest receivable
|
|
|
6,036 |
|
|
|
5,764 |
|
Deferred
tax asset, net
|
|
|
10,057 |
|
|
|
- |
|
Other
assets
|
|
|
2,537 |
|
|
|
3,891 |
|
Total
assets
|
|
$ |
1,065,352 |
|
|
$ |
1,003,226 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
Deposits:
|
|
|
|
|
|
|
|
|
Non
interest-bearing
|
|
$ |
55,216 |
|
|
$ |
51,396 |
|
Interest-bearing
|
|
|
741,636 |
|
|
|
723,050 |
|
Total
deposits
|
|
|
796,852 |
|
|
|
774,446 |
|
|
|
|
|
|
|
|
|
|
Stock
subscriptions
|
|
|
- |
|
|
|
62,518 |
|
Short-term
borrowings - affiliate bank
|
|
|
7,811 |
|
|
|
- |
|
Short-term
borrowings - other
|
|
|
- |
|
|
|
9,154 |
|
Long-term
debt
|
|
|
57,675 |
|
|
|
27,373 |
|
Accrued
expenses and other liabilities
|
|
|
13,174 |
|
|
|
14,051 |
|
Total
liabilities
|
|
|
875,512 |
|
|
|
887,542 |
|
Commitments
and contingencies (Notes 6, 8 and 12)
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock, no par value 50,000,000 shares
|
|
|
|
|
|
|
|
|
authorized;
23,000,000 and 0 shares issued
|
|
|
|
|
|
|
|
|
at
December 31, 2008 and December 31, 2007
|
|
|
- |
|
|
|
- |
|
Additional
paid-in capital
|
|
|
100,684 |
|
|
|
- |
|
Retained
earnings
|
|
|
105,426 |
|
|
|
109,177 |
|
Accumulated
other comprehensive income (loss)
|
|
|
(6,205 |
) |
|
|
6,507 |
|
Unearned
compensation - ESOP, 786,600 shares and 0
|
|
|
|
|
|
|
|
|
shares
at December 31, 2008 and 2007, respectively
|
|
|
(7,866 |
) |
|
|
- |
|
Unearned
compensation - restricted shares, 250,000 and 0
|
|
|
|
|
|
|
|
|
shares
at December 31, 2008 and 2007, respectively
|
|
|
(2,199 |
) |
|
|
- |
|
Total
stockholders' equity
|
|
|
189,840 |
|
|
|
115,684 |
|
Total
liabilities and stockholders' equity
|
|
$ |
1,065,352 |
|
|
$ |
1,003,226 |
|
See
accompanying notes to consolidated financial statements.
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
Years Ended
December 31,
|
|
(In
thousands)
|
|
2008
|
|
2007
|
|
2006
|
|
Interest
and dividend income:
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
38,781 |
|
|
$ |
35,745 |
|
|
$ |
32,661 |
|
Interest
on debt securities
|
|
|
10,460 |
|
|
|
11,039 |
|
|
|
10,577 |
|
Dividends
on equity securities
|
|
|
1,816 |
|
|
|
1,131 |
|
|
|
1,204 |
|
Interest
on certificates of deposit
|
|
|
157 |
|
|
|
- |
|
|
|
- |
|
Interest
on federal funds sold
|
|
|
1,683 |
|
|
|
1,260 |
|
|
|
793 |
|
Total
interest and dividend income
|
|
|
52,897 |
|
|
|
49,175 |
|
|
|
45,235 |
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
25,040 |
|
|
|
26,239 |
|
|
|
20,009 |
|
Interest
on short-term borrowings
|
|
|
132 |
|
|
|
370 |
|
|
|
392 |
|
Interest
on long-term debt
|
|
|
1,872 |
|
|
|
1,487 |
|
|
|
1,427 |
|
Total
interest expense
|
|
|
27,044 |
|
|
|
28,096 |
|
|
|
21,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
25,853 |
|
|
|
21,079 |
|
|
|
23,407 |
|
Provision
for loan losses
|
|
|
5,638 |
|
|
|
465 |
|
|
|
434 |
|
Net
interest income, after provision
|
|
|
|
|
|
|
|
|
|
|
|
|
for
loan losses
|
|
|
20,215 |
|
|
|
20,614 |
|
|
|
22,973 |
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
service fees
|
|
|
2,796 |
|
|
|
2,733 |
|
|
|
2,378 |
|
Loan
fees
|
|
|
673 |
|
|
|
664 |
|
|
|
721 |
|
Gain
on sales of loans, net
|
|
|
39 |
|
|
|
49 |
|
|
|
69 |
|
Gain
(loss) on sales of securities, net
|
|
|
4,433 |
|
|
|
299 |
|
|
|
(44 |
) |
Income
from bank-owned life insurance
|
|
|
828 |
|
|
|
1,143 |
|
|
|
796 |
|
Equity
loss on investment in affiliate bank
|
|
|
(396 |
) |
|
|
(541 |
) |
|
|
(578 |
) |
Litigation
settlement
|
|
|
- |
|
|
|
305 |
|
|
|
- |
|
Total
non-interest income
|
|
|
8,373 |
|
|
|
4,652 |
|
|
|
3,342 |
|
Non-interest
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
17,678 |
|
|
|
14,486 |
|
|
|
13,225 |
|
Occupancy
and equipment
|
|
|
2,915 |
|
|
|
2,602 |
|
|
|
2,630 |
|
Data
processing
|
|
|
1,662 |
|
|
|
1,588 |
|
|
|
1,578 |
|
Marketing
and advertising
|
|
|
1,214 |
|
|
|
987 |
|
|
|
1,017 |
|
Professional
services
|
|
|
2,300 |
|
|
|
1,069 |
|
|
|
1,036 |
|
Contribution
to Meridian
|
|
|
|
|
|
|
|
|
|
|
|
|
Charitable
Foundation
|
|
|
3,000 |
|
|
|
- |
|
|
|
- |
|
Litigation
settlement
|
|
|
- |
|
|
|
- |
|
|
|
575 |
|
Foreclosed
real estate expense
|
|
|
675 |
|
|
|
19 |
|
|
|
5 |
|
Other
general and administrative
|
|
|
2,522 |
|
|
|
1,869 |
|
|
|
1,828 |
|
Total
non-interest expenses
|
|
|
31,966 |
|
|
|
22,620 |
|
|
|
21,894 |
|
Income
(loss) before income taxes
|
|
|
(3,378 |
) |
|
|
2,646 |
|
|
|
4,421 |
|
Provision
(benefit) for income taxes
|
|
|
(1,270 |
) |
|
|
380 |
|
|
|
1,127 |
|
Net
income (loss)
|
|
$ |
(2,108 |
) |
|
$ |
2,266 |
|
|
$ |
3,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share- basic
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Loss
per share - diluted
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares - basic
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Weighted
average shares - diluted
|
|
|
N/A |
|
|
|
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, 2008, 2007 and 2006
|
|
(Dollars
in thousands)
|
|
Shares
of Common Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
Unearned
Compensation ESOP
|
|
|
Unearned
Compensation Restricted Shares
|
|
|
Total
|
|
Balance
at December 31, 2005
|
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
103,617 |
|
|
$ |
626 |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
104,243 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,294 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,294 |
|
Change
in net unrealized gain on securities available for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sale,
net of reclassification adjustment and tax effects
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,323 |
|
|
|
- |
|
|
|
- |
|
|
|
3,323 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,617 |
|
Adjustment
to initially apply SFAS No. 158,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax effects
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(585 |
) |
|
|
- |
|
|
|
- |
|
|
|
(585 |
) |
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 (Note 13)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
329 |
|
|
|
- |
|
|
|
- |
|
|
|
329 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,409 |
|
Balance
at December 31, 2007
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
109,177 |
|
|
|
6,507 |
|
|
|
- |
|
|
|
- |
|
|
|
115,684 |
|
Adjustment
to initially apply EITF 06-4
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,643 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
(1,643 |
) |
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,108 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,108 |
) |
Change
in net unrealized gain/loss 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 SFAS No. 158 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 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 share plan
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,262 |
) |
|
|
(2,262 |
) |
Share-based
compensation expense
|
|
|
|
|
|
|
- |
|
|
|
65 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
63 |
|
|
|
128 |
|
Balance
at December 31, 2008
|
|
|
23,000,000 |
|
|
$ |
- |
|
|
$ |
100,684 |
|
|
$ |
105,426 |
|
|
$ |
(6,205 |
) |
|
$ |
(7,866 |
) |
|
$ |
(2,199 |
) |
|
$ |
189,840 |
|
See
accompanying notes to consolidated financial statements.
MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
Years Ended
December 31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Change
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(2,108 |
) |
|
$ |
2,266 |
|
|
$ |
3,294 |
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
5,638 |
|
|
|
465 |
|
|
|
434 |
|
Earned
ESOP shares
|
|
|
400 |
|
|
|
- |
|
|
|
- |
|
Contribution
of stock to charitable foundation
|
|
|
3,000 |
|
|
|
- |
|
|
|
- |
|
Amortization
of net deferred loan origination fees
|
|
|
(286 |
) |
|
|
(464 |
) |
|
|
(608 |
) |
Gain
on sale of loans held in portfolio
|
|
|
- |
|
|
|
- |
|
|
|
(14 |
) |
Net
amortization of securities available for sale
|
|
|
1,118 |
|
|
|
649 |
|
|
|
1,017 |
|
Depreciation
and amortization expense
|
|
|
1,270 |
|
|
|
1,200 |
|
|
|
1,178 |
|
Loss
(gain) on securities, net
|
|
|
(4,433 |
) |
|
|
(299 |
) |
|
|
44 |
|
Provision
for foreclosed real estate
|
|
|
475 |
|
|
|
- |
|
|
|
- |
|
Loss
on sales of foreclosed real estate
|
|
|
5 |
|
|
|
- |
|
|
|
- |
|
Deferred
income tax benefit
|
|
|
(2,463 |
) |
|
|
(316 |
) |
|
|
(390 |
) |
Income
from bank-owned life insurance
|
|
|
(828 |
) |
|
|
(1,143 |
) |
|
|
(796 |
) |
Equity
loss on investment in affiliate bank
|
|
|
396 |
|
|
|
541 |
|
|
|
578 |
|
Share-based
compensation expense
|
|
|
128 |
|
|
|
- |
|
|
|
- |
|
Net
changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
|
- |
|
|
|
745 |
|
|
|
- |
|
Accrued
interest receivable
|
|
|
(272 |
) |
|
|
(262 |
) |
|
|
(832 |
) |
Other
assets
|
|
|
1,354 |
|
|
|
(2,005 |
) |
|
|
(780 |
) |
Accrued
expenses and other liabilities
|
|
|
(1,605 |
) |
|
|
1,647 |
|
|
|
113 |
|
Net
cash provided by operating activities
|
|
|
1,789 |
|
|
|
3,024 |
|
|
|
3,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of certificates of deposit
|
|
|
(7,000 |
) |
|
|
- |
|
|
|
- |
|
Activity
in securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from maturities, calls and principal payments
|
|
|
121,131 |
|
|
|
97,441 |
|
|
|
91,909 |
|
Proceeds
from redemption of mutual funds
|
|
|
57,000 |
|
|
|
- |
|
|
|
- |
|
Proceeds
from sales
|
|
|
18,359 |
|
|
|
44,091 |
|
|
|
14,975 |
|
Purchases
|
|
|
(199,867 |
) |
|
|
(122,763 |
) |
|
|
(119,748 |
) |
Investment
in affiliate bank
|
|
|
- |
|
|
|
- |
|
|
|
(11,400 |
) |
Redemption
(purchase) of Federal Home Loan Bank stock
|
|
|
(1,138 |
) |
|
|
206 |
|
|
|
99 |
|
Loans
originated, net of principal payments received
|
|
|
(145,280 |
) |
|
|
(36,386 |
) |
|
|
(55,540 |
) |
Purchase
of bank-owned life insurance
|
|
|
(4,000 |
) |
|
|
- |
|
|
|
- |
|
Proceeds
from sales of loans held in portfolio
|
|
|
- |
|
|
|
- |
|
|
|
3,317 |
|
Decrease
in cash surrender value from life insurance proceeds
|
|
|
- |
|
|
|
2,169 |
|
|
|
- |
|
Purchases
of premises and equipment
|
|
|
(1,164 |
) |
|
|
(4,316 |
) |
|
|
(2,949 |
) |
Proceeds
from sales of foreclosed real estate
|
|
|
1,463 |
|
|
|
220 |
|
|
|
- |
|
Capitalized
costs on foreclosed real estate
|
|
|
(59 |
) |
|
|
- |
|
|
|
- |
|
Net
cash used in investing activities
|
|
|
(160,555 |
) |
|
|
(19,338 |
) |
|
|
(79,337 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(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)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
22,406 |
|
|
|
37,457 |
|
|
|
64,445 |
|
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 equity incentive plan
|
|
|
(2,262 |
) |
|
|
- |
|
|
|
- |
|
Net
change in borrowings with maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
less
than three months
|
|
|
(1,343 |
) |
|
|
(212 |
) |
|
|
1,983 |
|
Proceeds
from Federal Home Loan Bank advances
|
|
|
|
|
|
|
|
|
|
|
|
|
with
maturities of three months or more
|
|
|
45,150 |
|
|
|
150 |
|
|
|
14,013 |
|
Repayment
of Federal Home Loan Bank advances
|
|
|
|
|
|
|
|
|
|
|
|
|
with
maturities of three months or more
|
|
|
(14,848 |
) |
|
|
(4,000 |
) |
|
|
(12,515 |
) |
Net
cash provided by financing activities
|
|
|
75,938 |
|
|
|
95,913 |
|
|
|
67,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(82,828 |
) |
|
|
79,599 |
|
|
|
(8,173 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
103,093 |
|
|
|
23,494 |
|
|
|
31,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$ |
20,265 |
|
|
$ |
103,093 |
|
|
$ |
23,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid on deposits
|
|
$ |
25,237 |
|
|
$ |
26,171 |
|
|
$ |
19,631 |
|
Interest
paid on borrowed funds
|
|
|
1,948 |
|
|
|
1,872 |
|
|
|
1,798 |
|
Income
taxes paid, net of refunds
|
|
|
647 |
|
|
|
455 |
|
|
|
2,497 |
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
from loans to loans held for sale
|
|
|
- |
|
|
|
- |
|
|
|
3,594 |
|
Transfers
from loans held for sale to loans
|
|
|
- |
|
|
|
2,849 |
|
|
|
- |
|
Transfers
from loans to foreclosed real estate
|
|
|
3,928 |
|
|
|
780 |
|
|
|
- |
|
See
accompanying notes to consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Consolidation
The
consolidated financial statements include the accounts of Meridian Interstate
Bancorp, Inc. (the “Company”), a 55%-owned subsidiary of Meridian Financial
Services, Incorporated (“Meridian”), a mutual holding company. The
Company was formed in a corporate reorganization in July 2006 to invest in
Hampshire First Bank, and to own East Boston Savings Bank and its subsidiary
(the “Bank”). The Company also has another subsidiary, Meridian
Funding Corporation, which was established in 2008 to fund a loan to the
Company’s Employee Stock Ownership Plan “ESOP”. Meridian holds
12,650,000 shares or 55% of the Company’s outstanding common stock.
The
Company is accounting for its investment in Hampshire First Bank, a 40% owned
de novo bank affiliate, 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. The Bank’s subsidiary is Prospect, Inc., which engages in
the buying, selling and holding of securities on its own behalf. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Business
and Operating Segments
The Bank
provides loan and deposit services to its customers through banking offices in
Peabody, Lynnfield, Melrose, Revere, Saugus, Winthrop, Everett, Lynn, and
Wakefield, as well as branches in East Boston. 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.
Statement
of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments
of an Enterprise and Related Information,” establishes standards for the way
that public business enterprises report information about operating segments in
annual and interim financial statements. It also establishes standards for
related disclosures about products and services, geographical areas, and major
customers. 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 relates 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 2007 and 2006 consolidated financial statements have been
reclassified to conform to the 2008 presentation.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (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. 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 has an
enhanced level of credit risk. As of December 31, 2008, the fair
value of corporate debt and marketable equity securities in the financial
services sector amounted to $61,382,000 and $1,500,000,
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. Certificates of deposit held at December 31, 2008 consist of
two certificates, both above the FDIC insurance limit of $250,000, held at the
Company’s 40%-owned affiliate, Hampshire First Bank.
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, net of tax effects.
Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities. Declines in the fair value
of securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses. Management evaluates
securities for other-than-temporary impairment at least on a quarterly basis and
more frequently when economic or market conditions warrant such an
evaluation. Consideration is given to
(1) the length of time and the extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer, and (3)
the intent and ability of the Company to retain its investment in the issuer for
a period of time sufficient to allow for any anticipated recovery in fair value.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
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, 2008 and 2007, 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. There were no loans held for sale at
December 31, 2008 and 2007.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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.
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.
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.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Foreclosed
Assets
Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at fair value 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 and changes in the
valuation allowance 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 for financial reporting purposes. This
method recognizes the compensation cost of an employee’s pension benefit over
the employee’s approximate service period.
On
December 31, 2006, the Company adopted Financial Accounting Standards Board
(“FASB”) Statement No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans” (“SFAS No. 158”), which requires an employer to
(a) recognize in its consolidated balance sheets the funded status of a
benefit plan, (b) measure a plan’s assets and its obligations that
determine its funded status as of the end of the employer’s fiscal year,
(c) recognize, through other comprehensive income, net of tax, changes in
the funded status of the benefit plan that are not recognized as net periodic
benefit cost, and (d) disclose additional information about certain effects
on net periodic benefit cost for the next fiscal year that relate to the delayed
recognition of certain benefit cost elements.
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. 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 (“ESOP”) 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
sheet. 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.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income
Taxes
Deferred
tax assets and liabilities are reflected at currently enacted income tax rates
applicable to the period in which the deferred tax assets or liabilities are
expected to be realized or settled. As changes in tax laws or rates
are enacted, deferred tax assets and liabilities are adjusted accordingly
through the provision for income taxes. A valuation reserve is
established related to the deferred tax assets when, in the judgment of
management, it is more likely than not that all or a portion of such deferred
tax assets will not be realized. The Bank’s base amount of its
federal income tax reserve for loan losses is a permanent difference for which
there is no recognition of a deferred tax liability. However, the
loan loss allowance maintained for financial reporting purposes is a temporary
difference with allowable recognition of a related deferred tax asset, if deemed
realizable.
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. 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. Unallocated common shares
held by the ESOP are shown as a reduction in stockholders’ equity and are not
included in the weighted-average number of common shares outstanding for either
basic or diluted earnings per share calculations. Earnings per share
are not applicable for year ended December 31, 2008 and for quarterly periods
prior to June 30, 2008 as the Company did not issue stock until January 22,
2008.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (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)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Unrealized
holding gains (losses) on
|
|
|
|
|
|
|
|
|
|
securities
available for sale
|
|
$ |
(16,788 |
) |
|
$ |
4,814 |
|
|
$ |
5,641 |
|
Reclassification
adjustments for losses (gains)
|
|
|
|
|
|
|
|
|
|
|
|
|
realized
in income
|
|
|
(4,433 |
) |
|
|
(299 |
) |
|
|
44 |
|
Unrealized
gains (losses)
|
|
|
(21,221 |
) |
|
|
4,515 |
|
|
|
5,685 |
|
Tax
effect
|
|
|
8,837 |
|
|
|
(1,795 |
) |
|
|
(2,362 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net-of-tax
amount
|
|
|
(12,384 |
) |
|
|
2,720 |
|
|
|
3,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of net actuarial loss and prior
|
|
|
|
|
|
service
cost - supplemental director retirement plan
|
|
|
27 |
|
|
|
159 |
|
|
|
- |
|
Tax
effect
|
|
|
(11 |
) |
|
|
(65 |
) |
|
|
- |
|
Net-of-tax
amount
|
|
|
16 |
|
|
|
94 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of net actuarial loss and prior
|
|
|
|
|
|
service
cost - long-term health care plan
|
|
|
18 |
|
|
|
- |
|
|
|
- |
|
Tax
effect
|
|
|
(9 |
) |
|
|
- |
|
|
|
- |
|
Net-of-tax
amount
|
|
|
9 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
of supplemental executive
|
|
|
|
|
|
|
|
|
|
|
|
|
retirement
plan
|
|
|
- |
|
|
|
557 |
|
|
|
- |
|
Tax
effect
|
|
|
- |
|
|
|
(228 |
) |
|
|
- |
|
Net-of-tax
amount
|
|
|
- |
|
|
|
329 |
|
|
|
- |
|
|
|
$ |
(12,359 |
) |
|
$ |
3,143 |
|
|
$ |
3,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized
prior service costs amounting to $28,000 and $26,000, included in accumulated
other comprehensive income at December 31, 2008, 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, 2009.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
components of accumulated other comprehensive income (loss), included in
stockholders’ equity, are as follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Net
unrealized gain (loss) on securities
|
|
|
|
|
|
|
available
for sale
|
|
$ |
(9,677 |
) |
|
$ |
11,544 |
|
Tax
effect
|
|
|
3,962 |
|
|
|
(4,875 |
) |
Net-of-tax
amount
|
|
|
(5,715 |
) |
|
|
6,669 |
|
Unrecognized
net actuarial loss pertaining
|
|
|
|
|
|
|
|
|
to
supplemental executive retirement plans
|
|
|
(40 |
) |
|
|
(47 |
) |
Unrecognized
prior service cost pertaining
|
|
|
|
|
|
|
|
|
to
supplemental executive retirement plans
|
|
|
(209 |
) |
|
|
(229 |
) |
Total
|
|
|
(249 |
) |
|
|
(276 |
) |
Tax
effect
|
|
|
103 |
|
|
|
114 |
|
Net-of-tax
amount
|
|
|
(146 |
) |
|
|
(162 |
) |
Unrecognized
prior service cost pertaining
|
|
|
|
|
|
|
|
|
to
long-term health care plan
|
|
|
(522 |
) |
|
|
- |
|
Tax
effect
|
|
|
178 |
|
|
|
- |
|
Net-of-tax
amount
|
|
|
(344 |
) |
|
|
- |
|
|
|
$ |
(6,205 |
) |
|
$ |
6,507 |
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In
September 2006, the FASB issued Statement No. 157, "Fair Value Measurements,"
which defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. The definition of fair value retains
the exchange price notion in earlier definitions of fair value. This Statement
clarifies that the exchange price is the price in an orderly transaction between
market participants to sell the asset or transfer the liability in the market in
which the reporting entity would transact for the asset or liability, that is,
the principal or most advantageous market for the asset or liability. Emphasis
is placed on fair value being a market-based measurement, not an entity-specific
measurement, and therefore a fair value measurement should be determined based
on the assumptions that market participants would use in pricing the asset or
liability. As a basis for considering these market participant assumptions, a
fair value hierarchy has been established to distinguish between (1) market
participant assumptions developed based on market data obtained from sources
independent of the reporting entity (observable inputs) and (2) the reporting
entity's own assumptions about market participant assumptions developed based on
the best information available in the circumstances (unobservable
inputs). In February 2008, the FASB issued a Staff Position which
delays the implementation of Statement No. 157 for non-financial assets and
non-financial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis, to fiscal years
beginning after November 15, 2008. The Company adopted this
statement, except for items covered by the Staff Position, on January 1, 2008,
and the adoption did not have a material impact on the Company’s consolidated
financial statements. See Note 17.
In
October 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-3, “Determining the Fair
Value of a Financial Asset When the Market for that Asset Is Not Active.” The
FSP clarifies the application of SFAS No. 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. FSP 157-3 was effective immediately upon issuance, and
includes prior periods for which financial statements have not been
issued. The Company applied the guidance contained in FSP 157-3 in
determining fair values at December 31, 2008, and it did not have a material
impact on the Company’s consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115,” which permits entities to choose to measure many financial
instruments and certain other items at fair value, with the objective of
improving financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions, and is expected to expand the use of fair value measurement. An
entity will report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. The fair
value option may generally be applied instrument by instrument and is
irrevocable. The adoption of this Statement by the Company on January
1, 2008 did not have an impact on the Company’s consolidated financial
statements.
Effective
January 1, 2008, the Company adopted EITF 06-04, “Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements.” The Company is the sole owner of life
insurance policies pertaining to certain of the Company’s
employees. The Company has entered into agreements with these
individuals whereby the Company will pay to the individual’s estate or
beneficiaries a portion of the death benefit that the Company will receive as
beneficiary of such policies. EITF 06-04 addresses accounting for
split-dollar life insurance arrangements whereby the employer purchases a policy
to insure the life of an employee, and separately enters into an agreement to
split the policy benefits between the employer and the employee. This
EITF states that an obligation arises as a result of a substantive agreement
with an employee to provide future postretirement benefits. Under
EITF 06-04, the obligation is not settled upon entering into an insurance
arrangement. Since the obligation is not settled, a liability should
be recognized in accordance with applicable authoritative
guidance. The implementation of this guidance on January 1, 2008
resulted in other liabilities increasing by $1.6 million with a corresponding
decrease in retained earnings on the consolidated balance sheet.
In
December 2007, the FASB issued Statement No. 141 (revised 2007), “Business
Combinations” (“Statement No. 141(R)”), which 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. Statement No. 141(R) 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. Statement No.
141(R) is effective prospectively for business combinations or which the
acquisition date is on or after December 15, 2008.
In
December 2007, the FASB issued Statement No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51,” which
establishes accounting and reporting standards for the non-controlling interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This Statement is effective for fiscal years beginning on
or after December 15, 2008 and is not expected to have a material impact on the
consolidated financial statements of the Company.
In March
of 2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133,”
which changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement No. 133
and its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. This Statement is effective for fiscal years and interim
periods beginning after November 15, 2008 and is not expected to have a material
impact on the consolidated financial statements of the Company.
In
December 2008, the FASB issued FASB Staff Position No. FAS 132(R)-1, “Employers’
Disclosures about Postretirement Benefit Plan Assets” (“FSP 132(R)-1”), which
amends FASB Statement No. 132 (revised 2003), “Employers’ Disclosures about
Pensions and Other Postretirement Benefits,” to provide guidance on an
employer’s disclosures about plan assets of a defined benefit pension or other
postretirement plan. This staff position requires disclosure of
information about how investment allocation decisions are made, the fair value
of each major category of plan assets and the inputs and valuation techniques
used to develop fair value measurements. Also, an employer shall provide
users of financial statements with an understanding of significant
concentrations of risk in plan assets. The disclosures about plan assets are
required for years ending after December 15, 2009. Upon initial adoption
of FSP 132(R)-1, disclosures are not required for earlier periods that are
presented for comparative purposes.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. STOCK
OFFERING
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
after the charitable foundation contribution amounted to $89,353,000, after the
ESOP loan and the contribution to the Charitable Foundation.
Part
of the offering included the establishment of an employee stock ownership
plan (“the ESOP”) which acquired 828,000 shares of stock in the
offering. The ESOP borrowed the funds to acquire these shares
from the net offering proceeds retained by Meridian Interstate
Bancorp. The borrowing has an interest rate of 6.5% and a term
of 20 years. East Boston Savings Bank intends to make
contributions to the employee stock ownership plan in amounts at least
equal to the principal and interest requirement of the debt. As
the debt is paid down, shares will be released for allocation to
participants’ accounts and stockholders’ equity will be
increased. The amount of this borrowing has been reflected as a
reduction from gross proceeds to determine estimated net investable
proceeds.
|
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 $73,636,000 at December 31,
2008. 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.
Meridian
Interstate Bancorp may not declare or pay dividends on, and may not repurchase,
any of its shares of common stock if the effect thereof would cause
stockholders’ equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration, payment or repurchase would
otherwise violate regulatory requirements.
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, 2008 and 2007, 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:
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
(In
thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored
enterprises
|
|
$ |
1,000 |
|
|
$ |
3 |
|
|
$ |
- |
|
|
$ |
1,003 |
|
Corporate
bonds
|
|
|
210,079 |
|
|
|
1,404 |
|
|
|
(7,796 |
) |
|
|
203,687 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored
enterprises
|
|
$ |
7,002 |
|
|
$ |
- |
|
|
$ |
(27 |
) |
|
$ |
6,975 |
|
Corporate
bonds
|
|
|
219,626 |
|
|
|
1,697 |
|
|
|
(694 |
) |
|
|
220,629 |
|
Mortgage-backed
securities
|
|
|
43 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
43 |
|
Total
debt securities
|
|
|
226,671 |
|
|
|
1,700 |
|
|
|
(724 |
) |
|
|
227,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stocks
|
|
|
27,498 |
|
|
|
10,819 |
|
|
|
(251 |
) |
|
|
38,066 |
|
Money
market mutual funds
|
|
|
1,345 |
|
|
|
- |
|
|
|
- |
|
|
|
1,345 |
|
Total
marketable equity securities
|
|
|
28,843 |
|
|
|
10,819 |
|
|
|
(251 |
) |
|
|
39,411 |
|
Total
securities available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
sale
|
|
$ |
255,514 |
|
|
$ |
12,519 |
|
|
$ |
(975 |
) |
|
$ |
267,058 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
amortized cost and fair value of debt securities by contractual maturity at
December 31, 2008 and 2007 follows. Expected maturities may differ
from contractual maturities because issuers may have the right to call or prepay
obligations with or without prepayment penalties.
|
|
December
31, 2008
|
|
|
December
31, 2007
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
(In
thousands)
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
1 year
|
|
$ |
48,533 |
|
|
$ |
48,430 |
|
|
$ |
77,870 |
|
|
$ |
77,669 |
|
Over
1 year to 5 years
|
|
|
162,546 |
|
|
|
156,260 |
|
|
|
148,758 |
|
|
|
149,935 |
|
Mortgage-backed
securities
|
|
|
40 |
|
|
|
40 |
|
|
|
43 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
211,119 |
|
|
$ |
204,730 |
|
|
$ |
226,671 |
|
|
$ |
227,647 |
|
For the
years ended December 31, 2008, 2007 and 2006 proceeds from sales of securities
available for sale amounted to $18,359,000, $44,091,000 and $14,975,000
respectively. Gross gains of $5,133,000, $2,493,000 and $1,243,000
and gross losses of $700,000, $2,194,000 and $1,287,000, respectively, were
realized on those sales.
Information
pertaining to securities available for sale as of December 31, 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
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
(In
thousands)
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
$ |
4,431 |
|
|
$ |
77,145 |
|
|
$ |
3,365 |
|
|
$ |
36,102 |
|
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)
Information
pertaining to securities available for sale as of December 31, 2007 with gross
unrealized losses aggregated by investment category and length of time that
individual securities have been in a continuous loss position,
follows:
|
|
Less
Than Twelve Months
|
|
|
Over
Twelve Months
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
(In
thousands)
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored
enterprises
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
27 |
|
|
$ |
6,975 |
|
Corporate
bonds
|
|
|
160 |
|
|
|
30,256 |
|
|
|
534 |
|
|
|
77,576 |
|
Mortgage-backed
securities
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
12 |
|
Total
debt securities
|
|
|
160 |
|
|
|
30,256 |
|
|
|
564 |
|
|
|
84,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
221 |
|
|
|
3,931 |
|
|
|
30 |
|
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily impaired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
$ |
381 |
|
|
$ |
34,187 |
|
|
$ |
594 |
|
|
$ |
84,848 |
|
At
December 31, 2008, fifty-six debt securities have unrealized losses with
aggregate depreciation of 6.4% from the Company’s amortized cost
basis. These unrealized losses relate principally to deterioration in
value attributable to changes in market conditions and not to deterioration in
credit quality of the issuer. 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.
At
December 31, 2008, the average time to maturity of the Company’s depreciated
debt securities was 27 months. 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.
The
Company’s most significant unrealized losses on corporate bonds relate to
investments in companies within the financial services and media
sectors. The unrealized losses are primarily caused by (a) recent
declines in profitability and near-term profit forecasts by industry analysts
resulting from the sub-prime mortgage market 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. While some of the companies’ credit ratings
have decreased from (A to BB) (S&P), 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 investment. Therefore, it is expected
that the bonds would not be settled at a price less than the par value of the
investment. Because the Company has the ability and intent to hold
these investments until a recovery of fair value, which may be maturity, it does
not consider these investments to be other-than-temporarily impaired at December
31, 2008.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At
December 31, 2008, forty marketable equity securities have unrealized losses
with aggregate depreciation of 21% 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.
5. LOANS
A summary
of loans follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Mortgage
loans on real estate:
|
|
|
|
|
|
|
Residential
real estate
|
|
$ |
274,716 |
|
|
$ |
224,109 |
|
Commercial
real estate
|
|
|
269,454 |
|
|
|
177,233 |
|
Construction
|
|
|
91,652 |
|
|
|
109,635 |
|
Multi-family
|
|
|
31,212 |
|
|
|
26,855 |
|
Home
equity lines of credit
|
|
|
28,253 |
|
|
|
21,541 |
|
|
|
|
695,287 |
|
|
|
559,373 |
|
Other
loans:
|
|
|
|
|
|
|
|
|
Commercial
non-real estate
|
|
|
15,355 |
|
|
|
11,859 |
|
Passbook
and stock secured
|
|
|
508 |
|
|
|
440 |
|
Personal
|
|
|
871 |
|
|
|
1,136 |
|
|
|
|
16,734 |
|
|
|
13,435 |
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
712,021 |
|
|
|
572,808 |
|
Less:
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(6,912 |
) |
|
|
(3,637 |
) |
Net
deferred loan origination fees
|
|
|
(1,005 |
) |
|
|
(1,067 |
) |
|
|
|
|
|
|
|
|
|
Loans,
net
|
|
$ |
704,104 |
|
|
$ |
568,104 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
An
analysis of the allowance for loan losses follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$ |
3,637 |
|
|
$ |
3,362 |
|
|
$ |
2,937 |
|
Provision
for loan losses
|
|
|
5,638 |
|
|
|
465 |
|
|
|
434 |
|
Recoveries
|
|
|
3 |
|
|
|
80 |
|
|
|
3 |
|
Loans
charged-off
|
|
|
(2,366 |
) |
|
|
(270 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
$ |
6,912 |
|
|
$ |
3,637 |
|
|
$ |
3,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following is a summary of information pertaining to impaired and non-accrual
loans:
|
|
December
31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans without a valuation allowance
|
|
$ |
10,538 |
|
|
$ |
4,495 |
|
Impaired
loans with a valuation allowance
|
|
|
1,929 |
|
|
|
621 |
|
|
|
|
|
|
|
|
|
|
Total
impaired loans
|
|
$ |
12,467 |
|
|
$ |
5,116 |
|
|
|
|
|
|
|
|
|
|
Valuation
allowance related to impaired loans
|
|
$ |
418 |
|
|
$ |
89 |
|
|
|
|
|
|
|
|
|
|
Total
non-accrual loans
|
|
$ |
14,232 |
|
|
$ |
4,982 |
|
|
|
|
|
|
|
|
|
|
Total
loans past-due ninety days or more and still accruing
|
|
$ |
- |
|
|
$ |
- |
|
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Average
investment in impaired loans
|
|
$ |
8,058 |
|
|
$ |
4,605 |
|
|
$ |
701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income recognized on
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired
loans
|
|
$ |
299 |
|
|
$ |
227 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income recognized on a cash basis
|
|
|
|
|
|
|
|
|
|
|
|
|
on
impaired loans
|
|
$ |
299 |
|
|
$ |
227 |
|
|
$ |
- |
|
At
December 31, 2008 and 2007, no additional funds are committed to be advanced in
connection with impaired loans.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. SERVICING
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 $83,589,000 and
$84,234,000 at December 31, 2008 and 2007, respectively.
Included
in loans serviced for others at December 31, 2008 and 2007 is $73,606,000 and
$72,578,000, 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, 2008 and 2007, the maximum contingent liability associated with
loans sold with recourse is $1,635,000 and $1,450,000 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
At
December 31, 2008, foreclosed real estate is presented net of the allowance for
losses of $475,000 which was provided in 2008. There was no other
activity in the allowance for losses on foreclosed real estate for the years
ended December 31, 2008, 2007 and 2006.
Expenses
applicable to foreclosed real estate include the following:
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
loss on sales of real estate
|
|
$ |
5 |
|
|
$ |
- |
|
|
$ |
- |
|
Provision
for losses
|
|
|
475 |
|
|
|
- |
|
|
|
- |
|
Operating
expenses
|
|
|
195 |
|
|
|
19 |
|
|
|
5 |
|
Total
foreclosed real estate expense
|
|
$ |
675 |
|
|
$ |
19 |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. PREMISES
AND EQUIPMENT
A summary
of the cost and accumulated depreciation and amortization of premises and
equipment follows:
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
December
31,
|
|
|
Useful
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
Lives
|
|
|
|
|
|
|
|
|
|
|
|
Land
and land improvements
|
|
$ |
5,007 |
|
|
$ |
5,007 |
|
|
-
|
|
Buildings
|
|
|
17,699 |
|
|
|
18,435 |
|
|
40
years
|
|
Leasehold
improvements
|
|
|
866 |
|
|
|
411 |
|
|
5-15
years
|
|
Equipment
|
|
|
6,311 |
|
|
|
6,633 |
|
|
3-10
years
|
|
|
|
|
29,883 |
|
|
|
30,486 |
|
|
|
|
|
Less
accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
and
amortization
|
|
|
(7,173 |
) |
|
|
(7,670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,710 |
|
|
$ |
22,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense for the years ended December 31, 2008, 2007 and 2006
amounted to $1,270,000, $1,200,000 and $1,178,000 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, 2008, future minimum lease payments
are as follows:
Year
Ending
|
|
|
|
December
31,
|
|
Amount
|
|
|
|
(In
thousands)
|
|
2009
|
|
$ |
115 |
|
2010
|
|
|
116 |
|
2011
|
|
|
116 |
|
2012
|
|
|
64 |
|
2013
|
|
|
19 |
|
|
|
$ |
430 |
|
|
|
|
|
|
Total
rent expense for all operating leases amounted to $108,000, $100,000 and
$153,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. DEPOSITS
A summary
of deposit balances, by type, follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
$ |
55,216 |
|
|
$ |
51,396 |
|
NOW
deposits
|
|
|
36,835 |
|
|
|
33,649 |
|
Money
market deposits
|
|
|
172,876 |
|
|
|
138,688 |
|
Regular
and other deposits
|
|
|
117,913 |
|
|
|
118,837 |
|
Total
non-certificate accounts
|
|
|
382,840 |
|
|
|
342,570 |
|
|
|
|
|
|
|
|
|
|
Term
certificates less than $100,000
|
|
|
250,319 |
|
|
|
266,095 |
|
Term
certificates $100,000 and greater
|
|
|
163,693 |
|
|
|
165,781 |
|
Total
term certificates
|
|
|
414,012 |
|
|
|
431,876 |
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
$ |
796,852 |
|
|
$ |
774,446 |
|
A summary
of term certificates, by maturity, follows:
(Dollars
in thousands)
|
|
December
31, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
1 year
|
|
$ |
328,715 |
|
|
|
3.96
|
% |
|
$ |
261,209 |
|
|
|
4.82
|
% |
Over
1 year to 2 years
|
|
|
59,161 |
|
|
|
3.38 |
|
|
|
156,602 |
|
|
|
4.97 |
|
Over
2 years to 3 years
|
|
|
18,652 |
|
|
|
3.39 |
|
|
|
9,114 |
|
|
|
4.26 |
|
Over
3 years to 4 years
|
|
|
2,192 |
|
|
|
4.52 |
|
|
|
2,363 |
|
|
|
4.02 |
|
Over
4 years to 5 years
|
|
|
5,292 |
|
|
|
3.91 |
|
|
|
2,588 |
|
|
|
4.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
414,012 |
|
|
|
3.86
|
% |
|
$ |
431,876 |
|
|
|
4.86
|
% |
Brokered
certificates of deposit, included in the above table, amounted to $709,000 and
$897,000 at December 31, 2008 and 2007, respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. BORROWINGS
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%. At December 31, 2007, short-term borrowings consisted of
Federal Home Loan Bank (“FHLB”) advances amounting to $9,154,000, with a
weighted average rate of 4.52%.
Long-term
FHLB advances outstanding are as follows:
(Dollars
in thousands)
|
|
December
31, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Maturing
During the
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Year
Ending December 31,
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$ |
- |
|
|
|
- |
% |
|
$ |
14,848 |
|
|
|
4.80 |
% |
2009
|
|
|
7,475 |
|
|
|
4.00 |
|
|
|
7,475 |
|
|
|
4.00 |
|
2010
|
|
|
5,200 |
|
|
|
4.22 |
|
|
|
5,050 |
|
|
|
4.22 |
|
2011
|
|
|
15,000 |
|
|
|
2.99 |
|
|
|
- |
|
|
|
- |
|
2012
|
|
|
15,000 |
|
|
|
3.29 |
|
|
|
- |
|
|
|
- |
|
2013
|
|
|
15,000 |
|
|
|
3.54 |
|
|
|
- |
|
|
|
- |
|
|
|
$ |
57,675 |
|
|
|
3.45 |
% |
|
$ |
27,373 |
|
|
|
4.48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2008, the Bank also has an available line of credit of $9,430,000
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,
2008 and 2007. 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)
11. INCOME
TAXES
Allocation
of federal and state income taxes between current and deferred portions is as
follows:
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Current
tax provision:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
1,081 |
|
|
$ |
625 |
|
|
$ |
1,314 |
|
State
|
|
|
112 |
|
|
|
71 |
|
|
|
203 |
|
Total
current provision
|
|
|
1,193 |
|
|
|
696 |
|
|
|
1,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,239 |
) |
|
|
(281 |
) |
|
|
(350 |
) |
State
|
|
|
(830 |
) |
|
|
(35 |
) |
|
|
(40 |
) |
|
|
|
(3,069 |
) |
|
|
(316 |
) |
|
|
(390 |
) |
Change
in enacted state tax rate
|
|
|
106 |
|
|
|
- |
|
|
|
- |
|
Change
in valuation reserve
|
|
|
500 |
|
|
|
- |
|
|
|
- |
|
Total
deferred benefit
|
|
|
(2,463 |
) |
|
|
(316 |
) |
|
|
(390 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
tax provision (benefit)
|
|
$ |
(1,270 |
) |
|
$ |
380 |
|
|
$ |
1,127 |
|
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)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
federal tax rate
|
|
|
(34.0 |
)
% |
|
|
34.0
|
% |
|
|
34.0
|
% |
Increase
(decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State
taxes, net of federal tax benefit
|
|
|
(14.0 |
) |
|
|
0.9 |
|
|
|
2.4 |
|
Dividends
received deduction
|
|
|
(5.8 |
) |
|
|
(7.0 |
) |
|
|
(5.0 |
) |
Bank-owned
life insurance
|
|
|
(3.0 |
) |
|
|
(14.7 |
) |
|
|
(6.2 |
) |
Change
in state tax rate
|
|
|
3.1 |
|
|
|
- |
|
|
|
- |
|
Change
in valuation reserve
|
|
|
14.8 |
|
|
|
- |
|
|
|
- |
|
Other,
net
|
|
|
1.3 |
|
|
|
1.2 |
|
|
|
0.3 |
|
Effective
tax rates
|
|
|
(37.6 |
)
% |
|
|
14.4
|
% |
|
|
25.5
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
components of the net deferred tax asset (liability) are as
follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Federal
|
|
$ |
8,810 |
|
|
$ |
3,146 |
|
State
|
|
|
2,584 |
|
|
|
942 |
|
|
|
|
11,394 |
|
|
|
4,088 |
|
Valuation
reserve on assets
|
|
|
(500 |
) |
|
|
- |
|
Net
deferred tax asset
|
|
|
10,894 |
|
|
|
4,088 |
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(649 |
) |
|
|
(3,975 |
) |
State
|
|
|
(188 |
) |
|
|
(1,523 |
) |
|
|
|
(837 |
) |
|
|
(5,498 |
) |
Net
deferred tax asset (liability)
|
|
$ |
10,057 |
|
|
$ |
(1,410 |
) |
|
|
|
|
|
|
|
|
|
The net
deferred tax liability at December 31, 2007 is included in accrued expenses and
other liabilities.
The tax
effects of each item that give rise to deferred tax assets (liabilities) are as
follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Net
unrealized loss (gain) on securities available for sale
|
|
$ |
3,962 |
|
|
$ |
(4,875 |
) |
Depreciation
and amortization
|
|
|
(352 |
) |
|
|
(360 |
) |
Allowance
for loan losses
|
|
|
2,760 |
|
|
|
1,488 |
|
Employee
benefit plans
|
|
|
2,383 |
|
|
|
2,002 |
|
Charitable
contribution carryforward
|
|
|
1,198 |
|
|
|
- |
|
Equity
loss on investment in affiliate bank
|
|
|
649 |
|
|
|
417 |
|
Other,
net
|
|
|
(43 |
) |
|
|
(82 |
) |
Valuation
reserve
|
|
|
(500 |
) |
|
|
- |
|
Net
deferred tax asset (liability)
|
|
$ |
10,057 |
|
|
$ |
(1,410 |
) |
|
|
|
|
|
|
|
|
|
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 $500,000 was
required for the year ended December 31, 2008 due to the limited future taxable
income projected for federal and state tax purposes that can be utilized to
offset a charitable contribution carryforward of $2,800,000 which will expire in
2013.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary
of the change in the net deferred tax asset (liability) is as
follows:
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Balance
at beginning of year
|
|
$ |
(1,410 |
) |
|
$ |
362 |
|
|
$ |
1,927 |
|
Deferred
tax benefit from operations
|
|
|
3,069 |
|
|
|
316 |
|
|
|
390 |
|
Change
in net unrealized gain (loss) on
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
available for sale
|
|
|
8,837 |
|
|
|
(1,795 |
) |
|
|
(2,362 |
) |
Adjustment
to initially apply
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS
No. 158 for retirement plans
|
|
|
- |
|
|
|
- |
|
|
|
407 |
|
Adjustment
to initially apply
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS
No. 158 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
|
|
|
(20 |
) |
|
|
(65 |
) |
|
|
- |
|
Change
in valuation reserve
|
|
|
(500 |
) |
|
|
- |
|
|
|
- |
|
Balance
at end of year
|
|
$ |
10,057 |
|
|
$ |
(1,410 |
) |
|
$ |
362 |
|
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 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)
|
|
2008
|
|
|
2007
|
|
Commitments
to originate loans
|
|
$ |
60,071 |
|
|
$ |
37,674 |
|
Unadvanced
funds on construction loans
|
|
|
56,254 |
|
|
|
35,293 |
|
Unadvanced
funds on home equity lines of credit
|
|
|
27,168 |
|
|
|
20,475 |
|
Unadvanced
funds on construction revolving lines of credit
|
|
|
25,787 |
|
|
|
23,800 |
|
Unadvanced
funds on commercial and revolving lines of credit
|
|
|
2,410 |
|
|
|
3,660 |
|
Commercial
letters of credit
|
|
|
1,248 |
|
|
|
1,574 |
|
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.
Employment
Agreements
The Bank
has entered into employment agreements with certain senior
executives. The agreements 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 basic and supplemental 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 entrance to 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, 2008, 2007 and 2006, expense
attributable to the plan amounted to $558,000, $522,000 and $484,000,
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 and have no assets. The Bank does not expect to contribute
assets to the plan in 2009. Information pertaining to the activity in
the plans is as follows:
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
(In
thousands)
|
|
Directors
|
|
|
Officers
|
|
|
Directors
|
|
|
Officers
|
|
|
Directors
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
year
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Employer
contribution
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
784 |
|
|
|
- |
|
Benefits
payments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(784 |
) |
|
|
- |
|
Fair
value of plan assets at end of year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
|
668 |
|
|
|
3,547 |
|
|
|
646 |
|
|
|
3,922 |
|
|
|
386 |
|
Service
cost
|
|
|
66 |
|
|
|
39 |
|
|
|
103 |
|
|
|
63 |
|
|
|
59 |
|
Interest
cost
|
|
|
38 |
|
|
|
155 |
|
|
|
37 |
|
|
|
226 |
|
|
|
22 |
|
Benefit
payments
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
(784 |
) |
|
|
- |
|
Actuarial
loss (gain)
|
|
|
(10 |
) |
|
|
16 |
|
|
|
(118 |
) |
|
|
120 |
|
|
|
179 |
|
Plan
termination
|
|
|
- |
|
|
|
(3,757 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Benefit
obligation at end of year
|
|
|
762 |
|
|
|
- |
|
|
|
668 |
|
|
|
3,547 |
|
|
|
646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status
|
|
$ |
(762 |
) |
|
$ |
- |
|
|
$ |
(668 |
) |
|
$ |
(3,547 |
) |
|
$ |
(646 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
benefit obligation
|
|
$ |
(762 |
) |
|
$ |
- |
|
|
$ |
(668 |
) |
|
$ |
(3,547 |
) |
|
$ |
(646 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligation
|
|
$ |
657 |
|
|
$ |
- |
|
|
$ |
567 |
|
|
$ |
2,905 |
|
|
$ |
517 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
components of net periodic pension cost are as follows:
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Directors
|
|
|
Officers
|
|
|
Directors
|
|
|
Officers
|
|
|
Directors
|
|
Service
cost
|
|
$ |
66 |
|
|
$ |
39 |
|
|
$ |
103 |
|
|
$ |
63 |
|
|
$ |
59 |
|
Interest
cost
|
|
|
38 |
|
|
|
155 |
|
|
|
37 |
|
|
|
226 |
|
|
|
22 |
|
Recognized
net actuarial loss
|
|
|
- |
|
|
|
16 |
|
|
|
13 |
|
|
|
5 |
|
|
|
- |
|
Recognition
of prior service cost
|
|
|
28 |
|
|
|
- |
|
|
|
28 |
|
|
|
- |
|
|
|
28 |
|
|
|
$ |
132 |
|
|
$ |
210 |
|
|
$ |
181 |
|
|
$ |
294 |
|
|
$ |
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
assumptions used to determine benefit obligations and net periodic pension costs
are as follows:
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Directors
|
|
|
Officers
|
|
|
Directors
|
|
|
Officers
|
|
|
Directors
|
|
Discount
rate
|
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
5.75 |
% |
Rate
of compensation increase
|
|
|
3.00 |
% |
|
|
4.00 |
% |
|
|
3.00 |
% |
|
|
4.00 |
% |
|
|
3.00 |
% |
Expected
return on plan assets
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Retirement
age
|
|
|
72 |
|
|
|
65 |
|
|
|
72 |
|
|
|
65 |
|
|
|
72 |
|
The
expected future benefit payments for the directors’ plan are as
follows:
Year
Ending December 31,
|
|
Amount
|
|
|
|
|
(In
thousands)
|
|
2009
|
|
|
$ 190
|
|
2010
|
|
|
-
|
|
2011
|
|
|
-
|
|
2012
|
|
|
222
|
|
2013
|
|
|
141
|
2014-2018
|
|
316
|
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 SFAS No. 158, 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, 2008 and 2007 the accrued liability for
these agreements amounted to $2,252,000 and $3,563,000,
respectively.
Supplemental
executive retirement benefit expense for officers and directors amounted to
$1,233,000, $713,000 and $403,000 for the years ended December 31, 2008, 2007
and 2006.
Separation
Agreement
Consistent
with the terms of his employment agreement, the Bank entered into a Separation
Agreement with its past President upon his retirement during 2008 which provided
for the payment of certain benefits. During 2008, the Company
recorded pre-tax charges of $1.5 million as a result of the Separation
Agreement.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-Term
Health Care Plan
The
Company provides long-term health care policies for certain directors and
executives. In accordance with SFAS No. 158, “Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB
Statements No. 87, 88, 106, and 132(R),” 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:
|
|
Year
Ended December 31,
|
|
(In
thousands)
|
|
2008
|
|
Change
in plan assets:
|
|
|
|
Fair
value of plan assets at beginning
|
|
|
|
of
year
|
|
$ |
- |
|
Employer
contribution
|
|
|
44 |
|
Benefits
payments
|
|
|
(44 |
) |
Fair
value of plan assets at end of year
|
|
|
- |
|
|
|
|
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
|
- |
|
Adjustment
to initially apply FAS 158
|
|
|
|
|
for
long-term health care plan
|
|
|
(540 |
) |
Interest
cost
|
|
|
(42 |
) |
Benefit
payments
|
|
|
44 |
|
Actuarial
loss
|
|
|
(191 |
) |
Benefit
obligation at end of year
|
|
$ |
(729 |
) |
The
components of net periodic pension cost are as follows:
|
|
Year
Ended December 31,
|
|
(In
thousands)
|
|
2008
|
|
Service
cost
|
|
$ |
- |
|
Interest
cost
|
|
|
42 |
|
Recognized
net actuarial loss
|
|
|
- |
|
Recognition
of prior service cost
|
|
|
26 |
|
|
|
$ |
68 |
|
|
|
|
|
|
The
assumptions used to determine benefit obligations and net periodic pension costs
are as follows:
|
|
|
|
|
|
2008
|
|
Discount
rate
|
|
|
6.50 |
% |
Rate
of premium increases
|
|
|
4.00 |
% |
Expected
return on plan assets
|
|
|
N/A |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
expected future contributions and benefit payments for this plan are as
follows:
Year
Ending December 31,
|
|
Amount
|
|
|
|
|
(In
thousands)
|
|
2009
|
|
|
$ 45
|
|
2010
|
|
|
48
|
|
2011
|
|
|
49
|
|
2012
|
|
|
51
|
|
2013
|
|
|
53
|
2014-2018
|
|
381
|
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.
On November
28, 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
share awards under the plan. As of December 31, 2008, 250,000 shares
had been repurchased at a cost of $2,262,000 and the remaining 164,000 shares
were repurchased on February 3, 2009 at a cost of
$1,473,000. Pursuant to terms of the Equity Incentive Plan, the Board
of Directors granted stock options and restricted shares to employees and
directors on October 13, 2008. A total of 622,000 stock options and
182,625 restricted shares were granted, both with vesting dates evenly over a
period of five years. The options may be treated as stock appreciation rights
that are settled in stock at the option of the vested participant.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes Option-Pricing Model. The weighted-average assumptions used for
options granted during the years ended December 31, 2008 are listed in the
following table. 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 because as a newly listed public company, no 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.
|
|
Weighted
Average Assumptions
|
|
|
|
2008
|
|
Expected
term (years)
|
|
|
6.5 |
|
Expected
dividend yield
|
|
|
0.84
|
% |
Expected
volatility
|
|
|
18.83
|
% |
Expected
forfeiture rate
|
|
|
9.00
|
% |
Risk-free
interest rate
|
|
|
3.48
|
% |
Fair
value of options granted
|
|
$ |
2.37 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary
of options under the plan as of December 31, 2008, and activity during the
year then ended, is presented below:
|
|
|
|
|
Weighted-Average
|
|
2008
|
|
Shares
|
|
|
Exercise
Price
|
|
Options
outstanding at beginning of year
|
|
|
- |
|
|
$ |
- |
|
Options
granted
|
|
|
622,000 |
|
|
|
9.50 |
|
Options
exercised
|
|
|
- |
|
|
|
- |
|
Options
outstanding at end of year
|
|
|
622,000 |
|
|
$ |
9.50 |
|
Options
exercisable at end of year
|
|
|
- |
|
|
$ |
- |
|
Weighted-average
remaining contractual life
|
|
|
|
|
|
9.8
years
|
|
None of
the outstanding options are currently exercisable, and there is no aggregate
intrinsic value to the outstanding options based on a closing stock price of
$9.25 on December 31, 2008. 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 2008 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, 2008.
The
following table summarizes the Company’s restricted stock activity for the year
ended December 31, 2008:
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
Grant
|
|
|
|
of
|
|
Date
|
|
|
|
Shares
|
|
Fair Value
|
|
Restricted
stock at beginning of year
|
|
|
- |
|
|
$ |
- |
|
Granted
|
|
|
182,625 |
|
|
|
9.50 |
|
Vested
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
Restricted
stock at end of year
|
|
|
182,625 |
|
|
$ |
9.50 |
|
For the
year ended December 31, 2008, share-based compensation expense applicable to the
plan was $128,000. Shares for the exercise of stock options are
expected to come from the Company’s authorized and unissued shares or treasury
shares.
As of
December 31, 2008, there was $2,916,000 million of total unrecognized
compensation cost related to non-vested share-based compensation granted under
the plan. This cost is expected to be recognized over a
weighted-average period of 4.8 years.
Employee
Stock Ownership Plan (“ESOP”)
The
Company established an ESOP for its eligible employees effective January 1,
2008 to provide eligible employees the opportunity to own company
stock. The plan is a tax-qualified retirement plan for the benefit of
all Company employees. Contributions are allocated to eligible
participants on the basis of compensation, subject to federal tax law
limits.
The ESOP
acquired 828,000 shares in the stock offering with the proceeds of a loan
totaling $8,280,000 from the Company’s subsidiary, Meridian Funding
Corporation. The loan is payable annually over 20 years at a rate of
6.5%.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2008, the remaining principal balance on the ESOP debt is payable
as follows:
Year
Ending December 31,
|
|
Amount
|
|
|
|
(In
thousands)
|
|
2009
|
|
|
227 |
|
2010
|
|
|
241 |
|
2011
|
|
|
257 |
|
2012
|
|
|
272 |
|
2013
|
|
|
291 |
|
Thereafter
|
|
|
6,750 |
|
|
|
$ |
8,038 |
|
Shares
held by the ESOP include the following:
|
|
December
31,
|
|
(In
thousands)
|
|
2008
|
|
Allocated
|
|
|
- |
|
Committed
to be allocated
|
|
|
41 |
|
Unallocated
|
|
|
787 |
|
|
|
|
828 |
|
The fair
value of the unallocated shares was $7,659,000 at December 31,
2008. Total compensation expense recognized in connection with the
ESOP for 2008 was $400,000.
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 September 2006, the Emerging Issues Task Force
reached a consensus on Issue No. 06-04 “Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements” 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
applicable to these agreements amounted to $526,000 for the year ended December
31, 2008 and the accrued liability amounted to $2,169,000 at December 31,
2008.
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, 2008, 2007 and 2006 amounted to $410,000, $710,000 and $573,000,
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)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$ |
9,782 |
|
|
$ |
9,748 |
|
Additions
|
|
|
889 |
|
|
|
1,955 |
|
Reductions
|
|
|
(1,548 |
) |
|
|
(1,921 |
) |
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
$ |
9,123 |
|
|
$ |
9,782 |
|
|
|
|
|
|
|
|
|
|
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 $7,140,000 and $4,474,000 at December 31, 2008 and
2007, 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, 2007 and 2006, revenue recorded by the Company for providing such services
amounted to $1,000, $8,000 and $12,000 respectively. 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, 2008, the Company has loan participations
originated by HFB of $17,039,000, of which the Company services
$9,239,000. The Company also has $7,811,000 of federal funds
purchased, and $7,000,000 in certificates of deposit with Hampshire First Bank
as of December 31, 2008.
15. MINIMUM
REGULATORY CAPITAL REQUIREMENT
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 possible 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.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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,
2008 and 2007, that the Company and the Bank meet all capital adequacy
requirements to which they are subject. As of December 31, 2008, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To
Be Well
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
Capitalized
Under
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Prompt
Corrective
|
|
|
|
Actual
|
|
|
Requirement
|
|
|
Action
Provisions
|
|
(Dollars
in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$ |
117,546 |
|
|
|
14.4
|
% |
|
$ |
65,236 |
|
|
|
8.0
|
% |
|
|
N/A |
|
|
|
N/A |
|
Bank
|
|
|
104,156 |
|
|
|
13.0 |
|
|
|
64,221 |
|
|
|
8.0 |
|
|
$ |
80,276 |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital (to Risk Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
109,154 |
|
|
|
13.4 |
|
|
|
32,618 |
|
|
|
4.0 |
|
|
|
N/A |
|
|
|
N/A |
|
Bank
|
|
|
95,764 |
|
|
|
11.9 |
|
|
|
32,110 |
|
|
|
4.0 |
|
|
|
48,165 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital (to Average Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
109,154 |
|
|
|
11.5 |
|
|
|
38,013 |
|
|
|
4.0 |
|
|
|
N/A |
|
|
|
N/A |
|
Bank
|
|
|
95,764 |
|
|
|
10.2 |
|
|
|
37,505 |
|
|
|
4.0 |
|
|
|
46,881 |
|
|
|
5.0 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A
reconciliation of the Company’s and Bank’s stockholders’ equity to regulatory
capital follows:
|
|
December
31, 2008
|
|
|
December
31, 2007
|
|
(In
thousands)
|
|
Consolidated
|
|
|
Bank
|
|
|
Consolidated
|
|
|
Bank
|
|
Total
stockholders' equity per financial statements
|
|
$ |
189,840 |
|
|
$ |
129,162 |
|
|
$ |
115,684 |
|
|
$ |
102,294 |
|
Adjustments
to Tier 1 capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive (income) loss
|
|
|
6,205 |
|
|
|
5,664 |
|
|
|
(6,507 |
) |
|
|
(6,507 |
) |
Net
unrealized loss on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
marketable
equity securities
|
|
|
(3,288 |
) |
|
|
(3,149 |
) |
|
|
- |
|
|
|
- |
|
Servicing
assets disallowed
|
|
|
(21 |
) |
|
|
(21 |
) |
|
|
(23 |
) |
|
|
(23 |
) |
Total
Tier 1 capital
|
|
|
192,736 |
|
|
|
131,656 |
|
|
|
109,154 |
|
|
|
95,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to total capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
6,912 |
|
|
|
6,912 |
|
|
|
3,637 |
|
|
|
3,637 |
|
45%
of net unrealized gains on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
marketable
equity securities
|
|
|
- |
|
|
|
- |
|
|
|
4,755 |
|
|
|
4,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
regulatory capital
|
|
$ |
199,648 |
|
|
$ |
138,568 |
|
|
$ |
117,546 |
|
|
$ |
104,156 |
|
16. DIVIDEND
RESTRICTION
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, 2008, the Bank’s retained
earnings available for the payment of dividends was $6,606,000. 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
$12,916,000.
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. In
accordance with FASB Statement No. 157, 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.
Fair
Value Hierarchy
In
accordance with Statement No. 157, the Company groups its financial assets and
financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value.
Level
1: Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the measurement
date.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Level
2: Significant other observable inputs other than Level 1 prices such
as quoted prices for similar assets or liabilities in active markets; quoted
prices for identical or similar assets or liabilities in markets that are not
active; or other inputs that are observable or can be derived from or
corroborated by observable market data by correlation or other means for
substantially the full term of the asset.
Level 3: Significant
unobservable inputs that reflect the reporting entity’s own assumptions about
the assumptions that market participants would use in pricing an asset or
liability.
The
following methods and assumptions were used by the Company in estimating fair
value disclosures:
Cash and cash
equivalents - The carrying amounts of cash and short-term instruments
approximate fair values, based on the short-term nature of the
assets.
Certificates of
deposit – Fair values of certificates of deposit are estimated
using discounted cash flow analyses based on current market rates for similar
types of deposits.
Securities available for
sale - Securities available for sale are recorded at fair value on a
recurring basis. Fair value measurement is based on quoted prices,
when available. If quoted prices are not available, fair values are
measured using pricing models. The Company utilizes a third-party
pricing service to obtain fair values for investment securities.
Marketable
equity securities are measured at fair value utilizing quoted market prices
(Level 1). Corporate bonds, obligations of government-sponsored
enterprises, including mortgage-backed securities are determined by pricing
models that consider standard input factors such as observable market data,
benchmark yields, reported trades, broker/dealer quotes, credit spreads,
benchmark securities, as well as new issue data, monthly payment information,
and collateral performance, among others (Level 2). The Company does
not currently have any securities in its portfolio that are measured using Level
3 inputs.
Federal Home Loan Bank
stock - The carrying value of Federal Home Loan Bank stock approximates
fair value based on the redemption provisions of the Federal Home Loan
Bank.
Loans - For
variable-rate loans that reprice frequently and with no significant change in
credit risk, fair values are based on carrying values. Fair values
for other loans are estimated using discounted cash flow analyses, using market
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. Fair values for non-performing loans are
estimated using discounted cash flow analyses or underlying collateral values,
where applicable.
Deposits - The fair
values disclosed for non-certificate accounts, by definition, equal to the
amount payable on demand at the reporting date which is their carrying
amounts. Fair values for certificates of deposit are estimated using
a discounted cash flow calculation that applies market interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Stock subscriptions -
The carrying amount
of stock subscriptions approximates fair value.
Borrowings - The fair
value is estimated using discounted cash flow analyses based on the Company’s
current incremental borrowing rates for similar types of borrowing
arrangements.
Accrued interest -
The carrying amounts of accrued interest approximate fair value.
Off-balance sheet
credit-related instruments - Fair values for off-balance-sheet,
credit-related financial instruments are based on fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties’ credit standing. The fair value of
these instruments is considered immaterial.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets
Measured at Fair Value on a Recurring Basis:
Assets
measured at fair value on a recurring basis are summarized as
follows. There were no liabilities measured at fair value on a
recurring basis.
|
|
December
31, 2008
|
|
(In
thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
Fair Value
|
|
Securities
available for sale
|
|
$ |
47,799 |
|
|
$ |
204,730 |
|
|
$ |
- |
|
|
$ |
252,529 |
|
Assets
Measured at Fair Value on a Non-recurring Basis:
The
Company may also be required, from time to time, to measure certain other
financial 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, 2008.
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(In
thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Losses
|
|
Impaired
Loans
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,511 |
|
|
$ |
(418 |
) |
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.
There
were no liabilities measured at fair value on a non-recurring
basis.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summary
of Fair Value of Financial Instruments
As
required under FASB Statement No. 107, ”Disclosures about Fair Value of
Financial Instruments,” the estimated fair values, and related carrying or
notional amounts, of the Company’s financial instruments are as follows.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented herein may not necessarily represent the underlying fair
value of the Company.
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
(In
thousands)
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
20,265 |
|
|
$ |
20,265 |
|
|
$ |
103,093 |
|
|
$ |
103,093 |
|
Certificates
of deposit
|
|
|
7,000 |
|
|
|
7,010 |
|
|
|
- |
|
|
|
- |
|
Securities
available for sale
|
|
|
252,529 |
|
|
|
252,529 |
|
|
|
267,058 |
|
|
|
267,058 |
|
Federal
Home Loan Bank stock
|
|
|
4,303 |
|
|
|
4,303 |
|
|
|
3,165 |
|
|
|
3,165 |
|
Loans
|
|
|
704,104 |
|
|
|
705,956 |
|
|
|
568,104 |
|
|
|
572,820 |
|
Accrued
interest receivable
|
|
|
6,036 |
|
|
|
6,036 |
|
|
|
5,764 |
|
|
|
5,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
796,852 |
|
|
|
799,378 |
|
|
|
774,446 |
|
|
|
776,037 |
|
Stock
subscriptions
|
|
|
- |
|
|
|
- |
|
|
|
62,518 |
|
|
|
62,518 |
|
Borrowings
|
|
|
65,486 |
|
|
|
66,509 |
|
|
|
36,527 |
|
|
|
36,556 |
|
Accrued
interest payable
|
|
|
1,081 |
|
|
|
1,081 |
|
|
|
1,222 |
|
|
|
1,222 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. CONDENSED
FINANCIAL STATEMENTS OF PARENT COMPANY
Financial
information pertaining only to Meridian Interstate Bancorp, funded in July 2006,
is as follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
BALANCE SHEET
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents - subsidiary
|
|
$ |
10,523 |
|
|
$ |
- |
|
Cash
and cash equivalents - other
|
|
|
2,525 |
|
|
|
177 |
|
Certificates
of deposit - affiliate bank
|
|
|
7,000 |
|
|
|
- |
|
Securities
available for sale, at fair value
|
|
|
16,338 |
|
|
|
1,093 |
|
Investment
in subsidiaries
|
|
|
135,299 |
|
|
|
102,294 |
|
Investment
in affiliate bank
|
|
|
10,376 |
|
|
|
10,772 |
|
Bank-owned
life insurance
|
|
|
4,144 |
|
|
|
- |
|
Due
from bank subsidiary
|
|
|
2,262 |
|
|
|
- |
|
Other
assets
|
|
|
1,737 |
|
|
|
1,577 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
190,204 |
|
|
$ |
115,913 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses and other liabilities
|
|
$ |
364 |
|
|
$ |
229 |
|
Stockholders'
equity
|
|
|
189,840 |
|
|
|
115,684 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
190,204 |
|
|
$ |
115,913 |
|
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
Interest
and dividend income
|
|
$ |
812 |
|
|
$ |
113 |
|
|
$ |
180 |
|
Equity
loss on investment in affliate bank
|
|
|
(396 |
) |
|
|
(541 |
) |
|
|
(578 |
) |
Bank-owned
life insurance income
|
|
|
144 |
|
|
|
- |
|
|
|
- |
|
Total
income (loss)
|
|
|
560 |
|
|
|
(428 |
) |
|
|
(398 |
) |
Contribution
to Meridian Charitable Foundation
|
|
|
3,000 |
|
|
|
- |
|
|
|
- |
|
Operating
expenses
|
|
|
1,354 |
|
|
|
412 |
|
|
|
58 |
|
Loss
before income taxes and equity in undistributed
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings
of subsidiaries
|
|
|
(3,794 |
) |
|
|
(840 |
) |
|
|
(456 |
) |
Applicable
income tax benefit
|
|
|
(1,339 |
) |
|
|
(184 |
) |
|
|
(113 |
) |
|
|
|
(2,455 |
) |
|
|
(656 |
) |
|
|
(343 |
) |
Equity
in undistributed earnings of subsidiaries
|
|
|
347 |
|
|
|
2,922 |
|
|
|
3,637 |
|
Net
income (loss)
|
|
$ |
(2,108 |
) |
|
$ |
2,266 |
|
|
$ |
3,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(2,108 |
) |
|
$ |
2,266 |
|
|
$ |
3,294 |
|
Adjustments
to reconcile net income (loss) to net
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
provided (used) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in undistributed earnings of subsidiaries
|
|
|
(347 |
) |
|
|
(2,922 |
) |
|
|
(3,637 |
) |
Contribution
of stock to charitable foundation
|
|
|
3,000 |
|
|
|
- |
|
|
|
- |
|
Equity
loss on investment in affliate bank
|
|
|
396 |
|
|
|
541 |
|
|
|
578 |
|
Net
accretion of securities available for sale
|
|
|
- |
|
|
|
- |
|
|
|
(125 |
) |
Income
from bank-owned life insurance
|
|
|
(144 |
) |
|
|
- |
|
|
|
- |
|
Share-based
compensation expense
|
|
|
45 |
|
|
|
- |
|
|
|
- |
|
Increase
in other assets
|
|
|
(112 |
) |
|
|
(1,374 |
) |
|
|
(203 |
) |
Increase
in other liabilities
|
|
|
135 |
|
|
|
229 |
|
|
|
- |
|
Net
cash provided (used) by operating activities
|
|
|
865 |
|
|
|
(1,260 |
) |
|
|
(93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of certificates of deposit
|
|
|
(7,000 |
) |
|
|
- |
|
|
|
- |
|
Proceeds
from redemption of mutual funds
|
|
|
5,250 |
|
|
|
- |
|
|
|
- |
|
Sales
and maturies of securities available for sale
|
|
|
- |
|
|
|
1,523 |
|
|
|
23,050 |
|
Purchase
of securities available for sale
|
|
|
(20,634 |
) |
|
|
(112 |
) |
|
|
(25,431 |
) |
Investment
in affiliate bank
|
|
|
- |
|
|
|
- |
|
|
|
(12,000 |
) |
Investment
in subsidiary
|
|
|
(8,280 |
) |
|
|
- |
|
|
|
- |
|
Dividend
from subsidiary
|
|
|
- |
|
|
|
- |
|
|
|
14,500 |
|
Loan
to subsidiary
|
|
|
(2,262 |
) |
|
|
- |
|
|
|
- |
|
Purchase
of bank-owned life insurance
|
|
|
(4,000 |
) |
|
|
- |
|
|
|
- |
|
Net
cash provided (used) by investing activities
|
|
|
(36,926 |
) |
|
|
1,411 |
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
offering
|
|
|
97,633 |
|
|
|
- |
|
|
|
- |
|
Offering
proceeds to bank subsidiary
|
|
|
(48,701 |
) |
|
|
- |
|
|
|
- |
|
Net
cash provided by financing activities
|
|
|
48,932 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
12,871 |
|
|
|
151 |
|
|
|
26 |
|
Cash
and cash equivalents at beginning of year
|
|
|
177 |
|
|
|
26 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$ |
13,048 |
|
|
$ |
177 |
|
|
$ |
26 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
19. 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,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
(In
thousands)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividend income
|
|
$ |
13,521 |
|
|
$ |
13,344 |
|
|
$ |
12,909 |
|
|
$ |
13,123 |
|
|
$ |
12,810 |
|
|
$ |
12,390 |
|
|
$ |
12,080 |
|
|
$ |
11,895 |
|
Interest
expense
|
|
|
6,184 |
|
|
|
6,579 |
|
|
|
6,996 |
|
|
|
7,285 |
|
|
|
7,501 |
|
|
|
7,203 |
|
|
|
6,800 |
|
|
|
6,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
7,337 |
|
|
|
6,765 |
|
|
|
5,913 |
|
|
|
5,838 |
|
|
|
5,309 |
|
|
|
5,187 |
|
|
|
5,280 |
|
|
|
5,303 |
|
Provision
for loan losses (1)
|
|
|
2,907 |
|
|
|
403 |
|
|
|
2,197 |
|
|
|
131 |
|
|
|
205 |
|
|
|
117 |
|
|
|
71 |
|
|
|
72 |
|
Net
interest income, after provision for loan
losses
|
|
|
4,430 |
|
|
|
6,362 |
|
|
|
3,716 |
|
|
|
5,707 |
|
|
|
5,104 |
|
|
|
5,070 |
|
|
|
5,209 |
|
|
|
5,231 |
|
Non-interest
income (2)
|
|
|
339 |
|
|
|
3,808 |
|
|
|
1,050 |
|
|
|
3,176 |
|
|
|
452 |
|
|
|
11 |
|
|
|
1,253 |
|
|
|
2,936 |
|
Non-interest
expenses (3)
|
|
|
7,379 |
|
|
|
6,799 |
|
|
|
8,476 |
|
|
|
9,312 |
|
|
|
6,140 |
|
|
|
5,707 |
|
|
|
5,237 |
|
|
|
5,536 |
|
Income
(loss) before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
(2,610 |
) |
|
|
3,371 |
|
|
|
(3,710 |
) |
|
|
(429 |
) |
|
|
(584 |
) |
|
|
(626 |
) |
|
|
1,225 |
|
|
|
2,631 |
|
Provision
(benefit) for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
(896 |
) |
|
|
1,228 |
|
|
|
(1,494 |
) |
|
|
(108 |
) |
|
|
(562 |
) |
|
|
(323 |
) |
|
|
429 |
|
|
|
836 |
|
Net
income (loss)
|
|
$ |
(1,714 |
) |
|
$ |
2,143 |
|
|
$ |
(2,216 |
) |
|
$ |
(321 |
) |
|
$ |
(22 |
) |
|
$ |
(303 |
) |
|
$ |
796 |
|
|
$ |
1,795 |
|
(1)
Increases in the provision for loan losses in 2008 are due to an increase
in impaired loans with specific reserves and management's assessment
of
|
various
factors affecting the portfolio, including further deterioration of the
economic environment.
|
|
(2) Non-interest
income fluctuates each quarter primarily due to securities
gains.
|
|
(3)
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.
Management’s Report on Internal
Control Over Financial Reporting The Company’s management is
responsible for establishing and maintaining effective internal control
over financial reporting. Internal control over financial reporting is defined
in Rule 13a-15(f) under the Exchange Act as a process designed by, or under
the supervision of, the Company’s principal executive and principal financial
officers and effected by the Company’s Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. The
Company’s internal control over financial reporting includes those policies and
procedures that:
(i) pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflects the transactions and disposition of the assets of the
Company;
(ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and
(iii) 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 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.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of year-end December 31, 2008. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.
Based on
our assessment and those criteria, management believes that the Company
maintained effective internal control over financial reporting as of year-end
December 31, 2008. Management’s report on internal control
over financial reporting is included in this Annual Report in Item 8, Financial Statements and
Supplementary Data.
The
Company’s independent registered public accounting firm has issued a report on
the effectiveness of the Company’s internal control over financial reporting as
of December 31, 2008. The report expresses an unqualified opinion on
the effectiveness of the Company’s internal control over financial reporting as
of December 31, 2008. This report is included in this Annual
Report in Item 8, Financial
Statements and Supplementary Data.
Item 9b. other information
Item 10. Directors and Executive
Officers of the Registrant and Corporate
Governance
The
“Proposal I—Election of Directors” section of the Company’s definitive proxy
statement for our 2009 Annual Meeting of Stockholders (the “2009 Proxy
Statement”) will be incorporated herein by reference or filed by an amendment to
this annual report.
Item 11. Executive Compensation
The
“Proposal I—Election of Directors” section of the Company’s 2009 Proxy Statement
will be incorporated herein by reference or filed by an amendment to this annual
report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The
“Proposal I—Election of Directors” section of the 2009 Proxy Statement will be
incorporated herein by reference or filed by an amendment to this annual
report.
We do not
have any equity compensation program that was not approved by stockholders,
other than our employee stock ownership plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The
“Transactions with Certain Related Persons” section of the 2009 Proxy Statement
will be incorporated herein by reference or filed by an amendment to this annual
report.
Item 14. Principal
Accountant Fees and
Services
The
“Proposal II – Ratification of Appointment of Independent Registered Public
Accounting Firm” Section of the 2009 Proxy Statement will be incorporated herein
by reference or filed by an amendment to this annual report.
Item 15. Exhibits and Financial
Statement Schedules
(a)(1) Financial
Statements
The following documents are filed as
part of this Form 10-K.
|
(A)
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Report
of Independent Registered Public Accounting
Firm
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(B)
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Consolidated
Balance Sheets - at December 31, 2008 and
2007
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(C)
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Consolidated
Statements of Operations - Years ended December 31, 2008, 2007 and
2006
|
|
(D)
|
Consolidated
Statements of Changes in Stockholders’ Equity - Years ended December 31,
2008, 2007 and 2006
|
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(E)
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Consolidated
Statements of Cash Flows - Years ended December 31, 2008, 2007 and
2006
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(F)
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Notes
to Consolidated Financial
Statements.
|
(a)(2) Financial Statement
Schedules
None.
(a)(3) Exhibits
3.1
|
Amended
and Restated Articles of Organization of Meridian Interstate Bancorp,
Inc.*
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3.2
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Amended
and Restated Bylaws of Meridian Interstate Bancorp,
Inc.*
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4
|
Form
of Common Stock Certificate of Meridian Interstate Bancorp,
Inc.*
|
10.1
|
Form
of East Boston Savings Bank Employee Stock Ownership
Plan*
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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
September 11, 2008.
|
10.8
|
Form of Amended and Restated
Supplemental Executive Retirement Agreement with Leonard V. Siuda filed as
an exhibit to Form 10-Q filed on May 14,
2008.
|
10.9
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Form of Amended and Restated
Supplemental Executive Retirement Agreement with Philip F. Freehan filed
as an exhibit to Form 10-Q filed on May 14,
2008.
|
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**
|
21
|
Subsidiaries
of Registrant*
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of
2002
|
_______________________________
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*
|
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.
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|
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|
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Date:
|
March
16, 2009
|
|
|
By:
|
/s/
Richard J. Gavegnano
|
|
|
|
|
Richard
J. Gavegnano
|
|
|
|
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Chairman
of the Board and Chief Executive Officer
|
|
|
|
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(Duly
Authorized Representative)
|
|
|
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|
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|
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
|
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Chairman
of the Board and Chief
|
|
March
16, 2009
|
Richard
J. Gavegnano
|
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Executive
Officer (Principal Executive Officer)
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|
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|
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/s/
Leonard V. Siuda
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Chief
Financial Officer and Treasurer
|
|
March
16, 2009
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Leonard
V. Siuda
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(Principal
Financial and Accounting Officer)
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|
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|
|
/s/
Vincent D. Basile
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Director
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|
March
16, 2009
|
Vincent
D. Basile
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|
|
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|
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|
|
|
|
/s/
Anna R. DiMaria
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|
Director
|
|
March
16, 2009
|
Anna
R. DiMaria
|
|
|
|
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|
/s/
Philip F. Freehan
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|
Director
|
|
March
16, 2009
|
Philip
F. Freehan
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|
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|
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|
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|
/s/
Domenic A. Gambardella
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|
Director
|
|
March
16, 2009
|
Domenic
A. Gambardella
|
|
|
|
|
|
|
|
|
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/s/
Edward L. Lynch
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|
Director
|
|
March
16, 2009
|
Edward
L. Lynch
|
|
|
|
|
|
|
|
|
|
/s/
Gregory F. Natalucci
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|
Director
|
|
March
16, 2009
|
Gregory
F. Natalucci
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|
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Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
James G. Sartori
|
|
Director
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|
March
16, 2009
|
James
G. Sartori
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|
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|
/s/
Paul T. Sullivan
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|
Director
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|
March
16, 2009
|
Paul
T. Sullivan
|
|
|
|
|
|
|
|
|
|
/s/
Marilyn A. Censullo
|
|
Director
|
|
March
16, 2009
|
Marilyn
A. Censullo
|
|
|
|
|
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|
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|
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/s/
Richard D. Fernandez
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|
Director
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|
March
16, 2009
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Richard
D. Fernandez
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|
|
|
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/s/
Carl A. LaGreca
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|
Director
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March
16, 2009
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Carl
A. LaGreca
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|
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107