form10q-100758_meridian.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended March 31, 2009
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ______________ to _____________
Commission
file number: 001-33898
Meridian Interstate Bancorp,
Inc.
(Exact
name of registrant as specified in its charter)
Massachusetts
|
20-4652200
|
(State
or other jurisdiction of incorporation or
|
(I.R.S.
Employer Identification No.)
|
organization)
|
|
10 Meridian Street, East
Boston, Massachusetts 02128
(Address
of principal executive offices)
(617)
567-1500
(Registrant’s
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes T No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes £ No
£
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
(Check
one): Large Accelerated Filer £ Accelerated
Filer T Non-accelerated
Filer £ Smaller
Reporting Company£
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No
T
At May 1,
2009, the registrant had 22,586,000 shares of no par value common stock
outstanding.
MERIDIAN
INTERSTATE BANCORP, INC.
FORM
10-Q
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27
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28
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PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
MERIDIAN INTERSTATE BANCORP, INC.
|
|
Consolidated
Balance Sheets
|
(Unaudited)
|
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|
|
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|
March
31,
|
|
|
December
31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
ASSETS
|
Cash
and due from banks
|
|
$ |
11,284 |
|
|
$ |
10,354 |
|
Federal
funds sold
|
|
|
18,521 |
|
|
|
9,911 |
|
Total
cash and cash equivalents
|
|
|
29,805 |
|
|
|
20,265 |
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit - affiliate bank
|
|
|
2,000 |
|
|
|
7,000 |
|
Securities
available for sale, at fair value
|
|
|
278,707 |
|
|
|
252,529 |
|
Federal
Home Loan Bank stock, at cost
|
|
|
4,303 |
|
|
|
4,303 |
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
745,378 |
|
|
|
711,016 |
|
Less
allowance for loan losses
|
|
|
(7,456 |
) |
|
|
(6,912 |
) |
Loans,
net
|
|
|
737,922 |
|
|
|
704,104 |
|
|
|
|
|
|
|
|
|
|
Bank-owned
life insurance
|
|
|
23,045 |
|
|
|
22,831 |
|
Investment
in affiliate bank
|
|
|
10,349 |
|
|
|
10,376 |
|
Premises
and equipment, net
|
|
|
22,587 |
|
|
|
22,710 |
|
Accrued
interest receivable
|
|
|
5,415 |
|
|
|
6,036 |
|
Foreclosed
real estate, net
|
|
|
2,449 |
|
|
|
2,604 |
|
Deferred
tax asset, net
|
|
|
10,462 |
|
|
|
10,057 |
|
Other
assets
|
|
|
1,723 |
|
|
|
2,537 |
|
Total
assets
|
|
$ |
1,128,767 |
|
|
$ |
1,065,352 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$ |
60,560 |
|
|
$ |
55,216 |
|
Interest-bearing
|
|
|
798,700 |
|
|
|
741,636 |
|
Total
deposits
|
|
|
859,260 |
|
|
|
796,852 |
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings - affiliate bank
|
|
|
7,546 |
|
|
|
7,811 |
|
Long-term
debt
|
|
|
57,675 |
|
|
|
57,675 |
|
Accrued
expenses and other liabilities
|
|
|
17,240 |
|
|
|
13,174 |
|
Total
liabilities
|
|
|
941,721 |
|
|
|
875,512 |
|
|
|
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Stockholders'
equity:
|
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Common
stock, no par value 50,000,000 shares authorized;
|
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23,000,000
shares issued; 22,586,000 and 22,750,000 shares
|
|
|
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|
outstanding
at March 31, 2009 and December 31, 2008, respectively
|
|
|
- |
|
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|
- |
|
Additional
paid-in capital
|
|
|
100,779 |
|
|
|
100,684 |
|
Retained
earnings
|
|
|
104,318 |
|
|
|
105,426 |
|
Accumulated
other comprehensive loss
|
|
|
(6,723 |
) |
|
|
(6,205 |
) |
Unearned
compensation - ESOP - 776,250 and 786,600 shares
|
|
|
|
|
|
|
|
|
at
March 31, 2009 and December 31, 2008, respectively
|
|
|
(7,762 |
) |
|
|
(7,866 |
) |
Unearned
compensation - restricted shares - 414,000
|
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|
|
|
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|
and
250,000 shares at March 31, 2009 and
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|
December
31, 2008, respectively
|
|
|
(3,566 |
) |
|
|
(2,199 |
) |
Total
stockholders' equity
|
|
|
187,046 |
|
|
|
189,840 |
|
Total
liabilities and stockholders' equity
|
|
$ |
1,128,767 |
|
|
$ |
1,065,352 |
|
See
accompanying notes to unaudited consolidated financial
statements.
MERIDIAN
INTERSTATE BANCORP, INC.
|
Consolidated
Statements of Loss
|
(Unaudited)
|
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|
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|
|
Three
Months Ended March 31
|
|
(Dollars
in thousands, except per share amounts)
|
|
2009
|
|
|
2008
|
|
Interest
and dividend income:
|
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|
|
|
|
|
Interest
and fees on loans
|
|
$ |
10,645 |
|
|
$ |
9,183 |
|
Interest
on debt securities
|
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|
2,455 |
|
|
|
2,612 |
|
Dividends
on equity securities
|
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|
293 |
|
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|
265 |
|
Interest
on certificates of deposit
|
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|
42 |
|
|
|
- |
|
Interest
on federal funds sold
|
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|
12 |
|
|
|
1,063 |
|
Total
interest and dividend income
|
|
|
13,447 |
|
|
|
13,123 |
|
|
|
|
|
|
|
|
|
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Interest
expense:
|
|
|
|
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Interest
on deposits
|
|
|
5,263 |
|
|
|
6,911 |
|
Interest
on short-term borrowings
|
|
|
35 |
|
|
|
62 |
|
Interest
on long-term debt
|
|
|
497 |
|
|
|
312 |
|
Total
interest expense
|
|
|
5,795 |
|
|
|
7,285 |
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
7,652 |
|
|
|
5,838 |
|
Provision
for loan losses
|
|
|
546 |
|
|
|
131 |
|
Net
interest income, after provision
|
|
|
|
|
|
|
|
|
for
loan losses
|
|
|
7,106 |
|
|
|
5,707 |
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
Customer
service fees
|
|
|
697 |
|
|
|
696 |
|
Loan
fees
|
|
|
150 |
|
|
|
178 |
|
Gain
on sales of loans, net
|
|
|
183 |
|
|
|
19 |
|
Gain
(loss) on securities, net
|
|
|
(124 |
) |
|
|
2,266 |
|
Income
from bank-owned life insurance
|
|
|
214 |
|
|
|
185 |
|
Equity
loss on investment in affiliate bank
|
|
|
(27 |
) |
|
|
(168 |
) |
Total
non-interest income
|
|
|
1,093 |
|
|
|
3,176 |
|
|
|
|
|
|
|
|
|
|
Non-interest
expenses:
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
6,314 |
|
|
|
4,092 |
|
Occupancy
and equipment
|
|
|
864 |
|
|
|
780 |
|
Data
processing
|
|
|
438 |
|
|
|
387 |
|
Marketing
and advertising
|
|
|
234 |
|
|
|
246 |
|
Professional
services
|
|
|
652 |
|
|
|
309 |
|
Contribution
to the Meridian
|
|
|
|
|
|
|
|
|
Charitable
Foundation
|
|
|
- |
|
|
|
3,000 |
|
Foreclosed
real estate expense
|
|
|
255 |
|
|
|
29 |
|
Other
general and administrative
|
|
|
920 |
|
|
|
469 |
|
Total
non-interest expenses
|
|
|
9,677 |
|
|
|
9,312 |
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(1,478 |
) |
|
|
(429 |
) |
|
|
|
|
|
|
|
|
|
Benefit
for income taxes
|
|
|
(370 |
) |
|
|
(108 |
) |
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,108 |
) |
|
$ |
(321 |
) |
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.05 |
) |
|
|
N/A |
|
Diluted
|
|
$ |
(0.05 |
) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,868,565 |
|
|
|
N/A |
|
Diluted
|
|
|
22,050,960 |
|
|
|
N/A |
|
See
accompanying notes to unaudited consolidated financial
statements.
MERIDIAN
INTERSTATE BANCORP, INC.
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
Three
Months Ended March 31, 2009 and 2008
|
|
(Dollars
in thousands)
|
|
Shares
of No Par Common Stock Outstanding
|
|
|
Additional Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
Unearned
Compensation ESOP
|
|
|
Unearned
Compensation Restricted Shares
|
|
|
Total
|
|
Three
Months Ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
- |
|
|
$ |
- |
|
|
$ |
109,177 |
|
|
$ |
6,507 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
115,684 |
|
Adjustment
to initially apply EITF 06-4
|
|
|
- |
|
|
|
- |
|
|
|
(1,642 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
(1,642 |
) |
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
(321 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(321 |
) |
Change
in net unrealized gain on securities available for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sale,
net of reclassification adjustment and tax effects
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,713 |
) |
|
|
- |
|
|
|
- |
|
|
|
(2,713 |
) |
Change
in prior service costs and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
actuarial
losses, net of tax effects
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5 |
|
|
|
- |
|
|
|
- |
|
|
|
5 |
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,029 |
) |
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 |
) |
|
|
- |
|
|
|
- |
|
ESOP
shares earned (10,350 shares)
|
|
|
- |
|
|
|
(5 |
) |
|
|
- |
|
|
|
- |
|
|
|
104 |
|
|
|
- |
|
|
|
(8,280 |
) |
Balance
at March 31, 2008
|
|
|
23,000,000 |
|
|
$ |
100,628 |
|
|
$ |
107,214 |
|
|
$ |
3,799 |
|
|
$ |
(8,176 |
) |
|
$ |
- |
|
|
$ |
203,465 |
|
Three
Months Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
22,750,000 |
|
|
$ |
100,684 |
|
|
$ |
105,426 |
|
|
$ |
(6,205 |
) |
|
$ |
(7,866 |
) |
|
$ |
(2,199 |
) |
|
$ |
189,840 |
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
(1,108 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,108 |
) |
Change
in net unrealized loss on securities available for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sale,
net of reclassification adjustment and tax effects
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(518 |
) |
|
|
- |
|
|
|
- |
|
|
|
(518 |
) |
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,626 |
) |
ESOP
shares earned (10,350 shares)
|
|
|
- |
|
|
|
(17 |
) |
|
|
- |
|
|
|
- |
|
|
|
104 |
|
|
|
- |
|
|
|
87 |
|
Purchase
of 164,000 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
restricted share plan
|
|
|
(164,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,468 |
) |
|
|
(1,468 |
) |
Share-based
compensation expense
|
|
|
- |
|
|
|
112 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
101 |
|
|
|
213 |
|
Balance
at March 31, 2009
|
|
|
22,586,000 |
|
|
$ |
100,779 |
|
|
$ |
104,318 |
|
|
$ |
(6,723 |
) |
|
$ |
(7,762 |
) |
|
$ |
(3,566 |
) |
|
$ |
187,046 |
|
See
accompanying notes to unaudited consolidated financial
statements.
MERIDIAN
INTERSTATE BANCORP, INC.
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
(In
thousands)
|
|
2009
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,108 |
) |
|
$ |
(321 |
) |
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Contribution
of stock to charitable foundation
|
|
|
- |
|
|
|
3,000 |
|
Earned
ESOP shares
|
|
|
87 |
|
|
|
99 |
|
Provision
for loan losses
|
|
|
546 |
|
|
|
131 |
|
Amortization
of net deferred loan origination fees
|
|
|
(57 |
) |
|
|
(78 |
) |
Net
amortization of securities available for sale
|
|
|
302 |
|
|
|
150 |
|
Depreciation
and amortization expense
|
|
|
329 |
|
|
|
324 |
|
Loss
(gain) on securities, net
|
|
|
124 |
|
|
|
(2,266 |
) |
Loss
and provision for foreclosed real estate
|
|
|
148 |
|
|
|
5 |
|
Deferred
income tax provision (benefit)
|
|
|
14 |
|
|
|
(1,152 |
) |
Income
from bank-owned life insurance
|
|
|
(214 |
) |
|
|
(185 |
) |
Equity
loss on investment in affiliate bank
|
|
|
27 |
|
|
|
168 |
|
Share-based
compensation expense
|
|
|
213 |
|
|
|
- |
|
Net
changes in:
|
|
|
|
|
|
|
|
|
Accrued
interest receivable
|
|
|
621 |
|
|
|
514 |
|
Other
assets
|
|
|
814 |
|
|
|
3,666 |
|
Accrued
expenses and other liabilities
|
|
|
4,066 |
|
|
|
(1,131 |
) |
Net
cash provided by operating activities
|
|
|
5,912 |
|
|
|
2,924 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Maturities
(purchases) of certifictes of deposit
|
|
|
5,000 |
|
|
|
(2,000 |
) |
Activity
in securities available for sale:
|
|
|
|
|
|
|
|
|
Proceeds
from maturities, calls and principal payments
|
|
|
17,751 |
|
|
|
25,750 |
|
Proceeds
from sales
|
|
|
- |
|
|
|
9,804 |
|
Purchases
|
|
|
(45,292 |
) |
|
|
(22,203 |
) |
Loans
originated, net of principal payments received
|
|
|
(34,632 |
) |
|
|
(12,257 |
) |
Purchase
of bank-owned life insurance
|
|
|
- |
|
|
|
(4,000 |
) |
Purchases
of premises and equipment
|
|
|
(206 |
) |
|
|
(137 |
) |
Capitalized
cost on foreclosed real estate
|
|
|
(180 |
) |
|
|
- |
|
Proceeds
from sales of foreclosed real estate
|
|
|
512 |
|
|
|
290 |
|
Net
cash used in investing activities
|
|
|
(57,047 |
) |
|
|
(4,753 |
) |
(continued)
MERIDIAN
INTERSTATE BANCORP, INC.
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
Three
Months Ended March 31,
|
|
(In
thousands)
|
|
2009
|
|
2008
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
62,408 |
|
|
|
31,148 |
|
Proceeds
from sale of common stock
|
|
|
- |
|
|
|
97,633 |
|
Common
stock purchased by ESOP
|
|
|
- |
|
|
|
(8,280 |
) |
Decrease
in stock subscriptions
|
|
|
- |
|
|
|
(62,518 |
) |
Purchase
of stock for equity incentive plan
|
|
|
(1,468 |
) |
|
|
- |
|
Net
change in borrowings with maturities
|
|
|
|
|
|
|
|
|
less
than three months
|
|
|
(265 |
) |
|
|
- |
|
Repayment
of Federal Home Loan Bank advances
|
|
|
|
|
|
|
|
|
with
maturities of three months or more
|
|
|
- |
|
|
|
(6,300 |
) |
Net
cash provided by financing activities
|
|
|
60,675 |
|
|
|
51,683 |
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
9,540 |
|
|
|
49,854 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
20,265 |
|
|
|
103,093 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
29,805 |
|
|
$ |
152,947 |
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid on deposits
|
|
$ |
5,332 |
|
|
$ |
6,917 |
|
Interest
paid on borrowings
|
|
|
532 |
|
|
|
404 |
|
Income
taxes paid
|
|
|
170 |
|
|
|
20 |
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Transfers
from loans to foreclosed real estate
|
|
|
325 |
|
|
|
908 |
|
See
accompanying notes to unaudited consolidated financial
statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of Presentation
Meridian Interstate Bancorp,
Inc. (the “Company” or “Meridian Interstate”) is a Massachusetts
mid-tier stock holding company that was formed in 2006 by East Boston Savings
Bank (the “Bank”) to be its holding company. Meridian Interstate owns
all of East Boston Savings Bank’s capital stock and directs, plans and
coordinates East Boston Savings Bank’s business activities. In
addition, Meridian Interstate owns 40% of the capital stock of Hampshire First
Bank, a New Hampshire chartered bank, organized in 2006 and headquartered in
Manchester, New Hampshire. Meridian Financial Services, Inc.
(“Meridian Financial Services”) is the mutual holding company for Meridian
Interstate and holds 12,650,000 shares or 56% of Meridian Interstate’s
outstanding common stock.
The
accompanying unaudited interim consolidated financial statements of Meridian
Interstate Bancorp, Inc. have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Such
adjustments were of a normal recurring nature. The results of
operations for the three months ended March 31, 2009 are not necessarily
indicative of the results that may be expected for the entire year or any other
interim period. For additional information, refer to the financial
statements and footnotes thereto of Meridian Interstate included in Meridian
Interstate’s Form 10-K for the year ended December 31, 2008 which was filed with
the Securities and Exchange Commission (“SEC”) on March 15, 2009, as
subsequently amended, and is available through the SEC’s website at www.sec.gov.
In preparing financial statements in
conformity with U. S. generally accepted accounting principles, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and income and expenses during the
reporting period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to determination of the allowance for
loan losses, other-than-temporary impairment of securities, foreclosed real
estate, income taxes and the fair values of financial instruments.
2.
Recent Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards “SFAS” No. 141
(revised), ‘‘Business Combinations’’, which replaces SFAS No. 141, and applies
to all business entities, including mutual entities that previously used the
pooling-of-interests method of accounting for certain business combinations.
This Statement makes significant amendments to other Statements and other
authoritative guidance, and applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.
In April
2009, the FASB issued FASB Staff Position (“FSP”) No. 141(R)-1
("FSP 141(R)-1"), Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies. FSP 141(R)-1 amends
and clarifies FASB Statement No. 141 (revised 2007), Business Combinations, to
address application issues raised by preparers, auditors, and members of the
legal profession on initial recognition and measurement, subsequent measurement
and accounting, and disclosure of assets and liabilities arising from
contingencies in a business combination. FSP 141(R)-1 is effective for
assets or liabilities arising from contingencies in business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The adoption of
this FSP by the Company on January 1, 2009 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. 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. The adoption of this Statement by the Company on January
1, 2009 did not have an impact on the Company’s consolidated financial
statements.
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. The adoption of this Statement by the Company on January
1, 2009 did not have an impact on the Company’s consolidated financial
statements.
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.
In
January 2009, the FASB issued a FASB Staff Position on the Emerging Issues
Task Force (“EITF”) Issue No. 03-06-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities,” (FSP
EITF 03-06-1). Under FSP EITF 03-06-1, unvested share-based awards which include
the right to receive nonforfeitable dividends or dividend equivalents are
considered to participate with common stock in undistributed earnings. Companies
that issue share-based awards considered to be participating securities under
FSP EITF 03-06-1 are required to calculate basic and diluted earnings per common
share amounts under the two-class method. The two-class method excludes from
earnings per common share calculations any dividends paid or owed to
participating securities and any undistributed earnings considered to be
attributable to participating securities. FSP EITF 03-06-1 requires
retrospective application to all prior-period earnings per share data
presented. The adoption of this EITF by the Company on January
1, 2009 did not have an impact on the Company’s consolidated financial
statements.
On
January 12, 2009, FASB issued FSP Emerging Issues Task Force (EITF) 99-20-1,
“Amendments to the Impairment Guidance of EITF Issue No. 99-20”. FSP EITF
99-20-1 addresses certain practice issues in EITF No. 99-20, Recognition of
Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests That Continue to Be Held by a Transferor in Securitized Financial
Assets, by making its other-than-temporary impairment assessment guidance
consistent with SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. FSP EITF 99-20-1 removes the reference to the consideration
of a market participant's estimates
of cash
flows in EITF 99-20, and instead requires an assessment of whether it is
probable, based on current information and events, that the holder of the
security will be unable to collect all amounts due according to the contractual
terms. If it is probable that there has been an adverse change in
estimated cash flows, an other-than-temporary impairment is deemed to exist, and
a corresponding loss shall be recognized in earnings equal to the entire
difference between the investment’s carrying value and its fair value at the
balance sheet date of the reporting period for which the assessment is
made. This FSP is effective for interim and annual reporting periods
ending after December 15, 2008, and shall be applied
prospectively. The adoption of this Statement by the Company on
January 1, 2009 did not have an impact on the Company’s consolidated financial
statements.
In
April 2009, the FASB issued the following three FSPs intended to provide
additional application guidance and enhance disclosures regarding fair value
measurements and impairments of securities:
FSP FAS
157-4, “Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly,” provides additional guidance for estimating fair value in
accordance with SFAS No. 157 when the volume and level of activity for the
asset or liability have decreased significantly. FSP FAS 157-4 also
provides guidance on identifying circumstances that indicate a transaction is
not orderly. The provisions of FSP FAS 157-4 are effective for the Company’s interim
period ending on June 30, 2009. Management is currently evaluating
the effect that the provisions of FSP FAS 157-4 may have on the Company’s
consolidated financial statements.
FSP FAS
107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments,” requires
disclosures about fair value of financial instruments in interim reporting
periods of publicly traded companies that were previously only required to be
disclosed in annual financial statements. The provisions of FSP FAS 107-1
and APB 28-1 are effective for the Company’s interim
period ending on June 30, 2009. The adoption of this EITF by the
Company is not expected to have a material impact on the Company’s consolidated
financial statements.
FSP FAS
115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments,” amends current other-than-temporary
impairment guidance in GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. This FSP does not amend existing recognition and measurement
guidance related to other-than-temporary impairments of equity securities.
The provisions of FSP FAS 115-2 and FAS 124-2 are effective for the Company’s
interim period ending on June 30, 2009. Management is currently
evaluating the effect that the provisions of FSP FAS 115-2 and FAS 124-2 may
have on the Company’s consolidated financial statements.
3.
Fair Value Measurement
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.
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.
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.
|
March
31, 2009
|
|
|
|
|
(In
thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Securities
available for sale
|
|
$ |
73,589 |
|
|
$ |
205,118 |
|
|
|
- |
|
|
$ |
278,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
(In
thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Securities
available for sale
|
|
$ |
47,799 |
|
|
$ |
204,730 |
|
|
|
- |
|
|
$ |
252,529 |
|
The
Company may also be required, from time to time, to measure certain other
financial assets and non-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 tables summarize the fair value hierarchy used to determine each
adjustment and the carrying value of the related individual assets.
|
March
31, 2009
|
|
|
Quarter
Ended
March
31,
2009
|
|
(In
thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
Losses
|
|
Impaired
loans
|
|
|
- |
|
|
|
- |
|
|
|
2,156 |
|
|
|
109 |
|
Foreclosed
real esate
|
|
|
- |
|
|
|
- |
|
|
|
2,449 |
|
|
|
60 |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,605 |
|
|
$ |
169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
Quarter
Ended
March
31,
2008
|
|
(In
thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
Losses
|
|
Impaired
loans
|
|
|
- |
|
|
|
- |
|
|
|
1,511 |
|
|
|
59 |
|
Foreclosed
real esate
|
|
|
- |
|
|
|
- |
|
|
|
2,604 |
|
|
|
- |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,115 |
|
|
$ |
59 |
|
At March
31, 2009 and December 31, 2008, the amount of foreclosed real estate in
Level 3 represents the carrying value and related charge-offs for which
adjustments are based on appraised value of the collateral, considering
discounting factors and adjusted for selling costs. The loss on foreclosed real
estate represents the adjustment in valuation recorded during the time periods
indicated, and not for losses incurred on the sale of the
property. At March 31, 2009 and December 31, 2008, the amount of
impaired loans in Level 3 represents the carrying value and related FASB
Statement No. 114 allocated reserves on impaired loans for which adjustments are
based on the appraised value of the underlying collateral, considering
discounting factors and adjusted for selling costs. The loss on
impaired loans 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.
4.
Stock Offering
The
Company completed its initial public stock offering on January 22, 2008 and sold
10,050,000 shares of its outstanding common stock to subscribers in the offering
at a price of $10.00 per share, including 828,000 shares sold to the company’s
employee stock ownership plan. Concurrent with the initial public
offering, Meridian Financial Services was issued 12,650,000 shares, or 55.0% of
the Company’s outstanding common stock.
Net
investable proceeds from the initial public offering were $89.4
million. In connection with the initial public offering, the
Company also issued and contributed 300,000 shares of common stock to the
Meridian Charitable Foundation, resulting in a pre-tax, non-interest expense
charge of $3.0 million, in the quarter ended March 31, 2008.
Meridian
Interstate 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.
5. Earnings
Per Share
Basic
earnings per share (“EPS”) excludes dilution and is calculated by dividing net
income available to common stockholders by the weighted-average number of shares
of common stock outstanding during the period. Diluted EPS is computed in
a manner similar to that of basic EPS except that the weighted-average number of
common shares outstanding is increased to include the number of incremental
common shares (computed using the treasury stock method) that would have been
outstanding if all potentially dilutive common stock equivalents (such as stock
options and unvested restricted stock) were issued during the
period.
For the
quarter ended March 31, 2009, potentially dilutive common stock equivalents
totaled 182,395 shares, representing the dilutive effect of the restricted
stock. Earnings per share are not applicable for year to date and
quarterly periods prior to June 30, 2008 as the Company did not issue stock
until January 23, 2008. 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.
The
following table is the reconciliation of basic and diluted earnings per share
for the three months ended March 31, 2009.
|
|
|
|
(Dollars
in thousands, except per share amounts)
|
|
Basic
|
|
|
Diluted
|
|
Net
Loss
|
|
$ |
(1,108 |
) |
|
$ |
(1,108 |
) |
Weighted
average shares outstanding
|
|
|
21,868,565 |
|
|
|
21,868,565 |
|
Effect
of dilutive securities
|
|
|
- |
|
|
|
182,395 |
|
Adjusted
weighted average shares outstanding
|
|
|
21,868,565 |
|
|
|
22,050,960 |
|
Loss
Per Share
|
|
$ |
(0.05 |
) |
|
$ |
(0.05 |
) |
Item
2. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
Management’s discussion
and analysis of the financial condition and results of operations is intended to
assist in understanding the financial condition and results of operations of
Meridian Interstate. The following
discussion should be read in conjunction with the consolidated financial
statements, notes and tables included in the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2008, filed with the Securities and
Exchange Commission.
Forward-Looking
Statements
Forward-Looking Statements
This report contains forward-looking
statements that are based on assumptions and may describe future plans,
strategies and expectations of Meridian Interstate Bancorp. These
forward-looking statements are generally identified by use of the words
“believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar
expressions. Meridian Interstate Bancorp’s ability to predict results
or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the
operations of Meridian Interstate Bancorp and its subsidiaries include, but are
not limited to:
|
·
|
significantly
increased competition among depository and other financial
institutions;
|
|
·
|
inflation
and changes in the interest rate environment or other changes that reduce
our interest margins or reduce the fair value of financial
instruments;
|
|
·
|
general
economic conditions, either nationally or in our market areas, that are
worse than expected;
|
|
·
|
adverse
changes in the securities markets;
|
|
·
|
legislative
or regulatory changes that adversely affect our
business;
|
|
·
|
our
ability to enter new markets successfully and take advantage of growth
opportunities, and the possible dilutive effect of potential acquisitions
or de novo
branches, if any;
|
|
·
|
changes
in consumer spending, borrowing and savings
habits;
|
|
·
|
changes
in accounting policies and practices, as may be adopted by bank regulatory
agencies, the Financial Accounting Standards Board, the Public Company
Accounting Oversight Board and other promulgating
authorities;
|
|
·
|
inability
of third-party providers to perform their obligations to
us;
|
|
·
|
changes
in our organization, compensation and benefit
plans;
|
|
·
|
changes
in real estate values in our market
areas;
|
|
·
|
the
effect of the current governmental effort to restructure the U.S.
financial and regulatory system;
|
|
·
|
the
effect of developments in the secondary market affecting our loan
pricing;
|
|
·
|
the
level of future deposit premiums;
and
|
|
·
|
the
effect of the current financial crisis on our loan portfolio and our
investment portfolio, and our deposit and other
customers.
|
Management’s ability to predict results
or the effect of future plans or strategies is inherently
uncertain. These factors include, but are not limited to, general
economic conditions, changes in the interest rate environment, legislative or
regulatory changes that may adversely affect our business, changes in accounting
policies and practices, changes in competition and demand for financial
services, adverse changes in the securities markets and changes in the quality
or composition of Meridian Interstate Bancorp’s loan or investment
portfolios. Additional factors that may affect our results are
discussed in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2008 filed with the
Securities and Exchange Commission on March 15, 2009, under “Risk Factors,” as
subsequently amended, which is available through the SEC’s website at www.sec.gov. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such
statements. Except as required by applicable law or regulation,
Meridian Interstate Bancorp does not undertake, and specifically disclaims any
obligation, to release publicly the result of any revisions that may be made to
any forward-looking statements to reflect events or circumstances after the date
of the statements or to reflect the occurrence of anticipated or unanticipated
events.
Critical
Accounting Policies
The
Company’s significant accounting policies are described in Note 1 to the
consolidated financial statements included in the 2008 Annual Report on Form
10-K. The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates. Management has identified accounting for the allowance for
loan losses, other-than-temporary impairment of securities, foreclosed real
estate and income taxes as the Company’s most critical accounting
policies. The Company’s critical accounting policies have not changed
since December 31, 2008.
Selected
Financial Data
The
following is a summary of operating and financial condition information as of
and for the periods indicated:
|
|
Financial
Condition Highlights
|
|
|
|
At
|
|
|
At
|
|
|
|
March
31,
|
|
|
December
31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
1,128,767 |
|
|
$ |
1,065,352 |
|
Secuities
available for sale
|
|
|
278,707 |
|
|
|
252,529 |
|
Net
loans
|
|
|
737,922 |
|
|
|
704,104 |
|
Deposits
|
|
|
859,260 |
|
|
|
796,852 |
|
Borrowed
funds
|
|
|
65,221 |
|
|
|
65,486 |
|
Stockholders'
equity
|
|
|
187,046 |
|
|
|
189,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
7,652 |
|
|
$ |
5,838 |
|
Provision
for loan losses
|
|
|
546 |
|
|
|
131 |
|
Non-interest
income
|
|
|
1,093 |
|
|
|
3,176 |
|
Non-interest
expenses
|
|
|
9,677 |
|
|
|
9,312 |
|
Benefit
for income taxes
|
|
|
(370 |
) |
|
|
(108 |
) |
Net
loss
|
|
|
(1,108 |
) |
|
|
(321 |
) |
|
|
|
|
|
|
|
|
|
Interest
rate spread
|
|
|
2.55 |
% |
|
|
1.82 |
% |
Net
interest margin
|
|
|
3.04 |
% |
|
|
2.43 |
% |
Comparison
of Financial Condition at March 31, 2009 and December 31, 2008
Total
assets increased by $63.4 million, or 6.0%, to $1.1 billion at March 31,
2009. Securities available for sale increased $26.2 million, or
10.4%, from December 31, 2008, as the Company invested excess funds in money
market mutual funds as an alternative to federal funds sold.
Loan
growth continued in the first quarter of 2009, with total loans increasing by
$34.4 million, or 4.8%. Multi-family loans increased by $15.3
million, or 49.2%, while the one- to four-family residential loan
and
commercial
real estate loan portfolios increased by $9.8 million and $8.4 million,
respectively. Rate decreases have contributed to higher originations
for these products, with increased interest in both purchase and refinance
activity.
Deposits
increased by $62.4 million, or 7.8%, from December 31, 2008, with increases in
all deposit types, as local deposit competition has lessened. Money
market deposits increased by $31.9 million, or 18.4%, to $204.7 million at March
31, 2009. Certificates of deposit also increased by $20.2 million, or
4.9%, to $434.2 million.
Stockholders’
equity decreased by $2.8 million, to $187.0 million at March 31, 2009 from
$189.8 million at December 31, 2008, mainly due to in the net operating loss of
$1.1 million and a $1.5 million repurchase of the Company’s common stock, for
the Equity Incentive Plan.
All
securities held by the Company as of March 31, 2009 and December 31, 2008 were
classified as available-for-sale and are carried at fair value. Unrealized gains
and losses, net of tax, are excluded from earnings and reported as a separate
component of stockholders’ equity. Gains or losses on the sale of
available-for-sale securities are determined using the specific identification
method. Premiums and discounts are recognized in interest income using the
effective interest method over the period to maturity. Carrying amounts and fair
values at March 31, 2009 and December 31, 2008 were as follows:
|
|
At
March 31,
|
|
|
At
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
(In
thousands)
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government – sponsored enterprises
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,000 |
|
|
$ |
1,003 |
|
Corporate
bonds
|
|
|
209,970 |
|
|
|
205,079 |
|
|
|
210,079 |
|
|
|
203,687 |
|
Mortgage-backed
securities
|
|
|
40 |
|
|
|
39 |
|
|
|
40 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt securities
|
|
|
210,010 |
|
|
|
205,118 |
|
|
|
211,119 |
|
|
|
204,730 |
|
Marketable
equity securities :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stocks
|
|
|
27,276 |
|
|
|
21,554 |
|
|
|
26,142 |
|
|
|
22,854 |
|
Money
market mutual funds
|
|
|
52,035 |
|
|
|
52,035 |
|
|
|
24,945 |
|
|
|
24,945 |
|
Total
marketable equity securities
|
|
|
79,311 |
|
|
|
73,589 |
|
|
|
51,087 |
|
|
|
47,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
securities available for sale
|
|
$ |
289,321 |
|
|
$ |
278,707 |
|
|
$ |
262,206 |
|
|
$ |
252,529 |
|
Securities
available for sale increased $26.2 million, or 10.4%, from $252.5 million at
December 31, 2008, as the Company invested excess funds in money market mutual
funds as an alternative to federal funds sold. 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. The Company recorded an impairment loss of
$124,000 on equity securities determined to be other-than-temporarily impaired
during the first quarter of 2009.
As of
March 31, 2009, the net unrealized loss on the total equity portfolio was $5.7
million. Twenty-seven equity securities had market value declines of
20% or more. The most significant market valuation decrease related
to any one equity security at March 31, 2009 is $517,000. Although
the issuers have shown declines in earnings as a result of the weakened economy,
no credit issues have been identified that cause management to
believe
the decline in market value is other than temporary, and the Company has the
ability and intent to hold these investments until a recovery of fair
value. In analyzing an equity issuer’s financial condition,
management considers industry analysts’ reports, financial performance and
projected target prices of investment analysts within a one-year time
frame.
At March 31, 2009, the aggregate
amortized cost of debt obligations owned by the Company was $210.0 million and
the aggregate market value was $205.1 million. Eleven corporate
bonds, from six issuers, had a market decline of greater than 20% of amortized
cost, with declines ranging from 22% to 50%. The aggregate unrealized
loss on these bonds at March 31, 2009 was $6.8 million and is presently
considered to be temporary.
Three bonds, from two issuers, had
been impaired greater than 20% for approximately seven
months. The issuers are consumer finance and commercial finance
subsidiaries of a major insurance company. The bonds had an amortized
cost of $7.0 million and unrealized losses of $3.3 million at March 31,
2009. 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 at March 31, 2009
was $2.4 million and $813,000, respectively. These bonds were issued
by a national media company with a significant revenue decline in
2008. These bonds mature in June of 2011.
Another bond, with a decline of
$665,000, was issued by a national insurance company, and has been impaired for
approximately four months. At March 31, 2009, the amortized cost of
this bond, which matures in July of 2012, was $3.0 million.
Three
bonds, from one issuer, had been impaired greater than 20% for approximately one
month. The amortized cost and aggregate unrealized loss on these
bonds at March 31, 2009 was $4.0 million and $1.1 million,
respectively. These bonds were issued by a national insurance
company. These bonds mature in September 2011 and June
2012.
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.
Loan
Portfolio Analysis
Our loan portfolio consists primarily
of residential, multi-family and commercial real estate, construction and land
development, commercial, and consumer loans and home equity lines of credit
originated primarily in our market area. There are no foreign loans outstanding.
Interest rates charged on loans are affected principally by the demand for such
loans, the supply of money available for lending purposes and the rates offered
by our competitors.
Loan
detail by category as of March 31, 2009 and December 31, 2008 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
March 31, 2009
|
|
|
At
December 31, 2008
|
|
(Dollars
in thousands)
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to
four-family
|
|
$ |
284,565 |
|
|
|
38.1
|
% |
|
$ |
274,716 |
|
|
|
38.6
|
% |
Multi-family
|
|
|
46,560 |
|
|
|
6.2 |
|
|
|
31,212 |
|
|
|
4.4 |
|
Commercial
real estate
|
|
|
277,825 |
|
|
|
37.2 |
|
|
|
269,454 |
|
|
|
37.7 |
|
Construction
|
|
|
91,794 |
|
|
|
12.3 |
|
|
|
91,652 |
|
|
|
12.9 |
|
Home
equity lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
credit
|
|
|
29,466 |
|
|
|
4.0 |
|
|
|
28,253 |
|
|
|
4.0 |
|
Total
real estate loans
|
|
|
730,210 |
|
|
|
97.8 |
|
|
|
695,287 |
|
|
|
97.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business loans
|
|
|
14,851 |
|
|
|
2.0 |
|
|
|
15,355 |
|
|
|
2.2 |
|
Consumer
loans
|
|
|
1,303 |
|
|
|
0.2 |
|
|
|
1,379 |
|
|
|
0.2 |
|
Total
loans
|
|
|
746,364 |
|
|
|
100.0
|
% |
|
|
712,021 |
|
|
|
100.0
|
% |
Net
deferred loan origination fees
|
|
|
(986 |
) |
|
|
|
|
|
|
(1,005 |
) |
|
|
|
|
Allowance
for loan losses
|
|
|
(7,456 |
) |
|
|
|
|
|
|
(6,912 |
) |
|
|
|
|
Loans,
net
|
|
$ |
737,922 |
|
|
|
|
|
|
$ |
704,104 |
|
|
|
|
|
Analysis
of Loan Loss Experience
The
allowance for loan losses is maintained at levels considered adequate by
management to provide for possible loan losses as of the consolidated balance
sheet reporting dates. The allowance for loan losses is based on
management’s assessment of various factors affecting the loan portfolio,
including portfolio composition, delinquent and non-accrual loans, national and
local business conditions and loss experience, and an overall evaluation of the
quality of the underlying collateral. Changes in the allowance for
loan losses during the three months ended March 31, 2009 and 2008 were as
follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
Beginning
balance
|
|
$ |
6,912 |
|
|
$ |
3,637 |
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
546 |
|
|
|
131 |
|
Charge
offs:
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
|
- |
|
|
|
- |
|
Commercial
business loans
|
|
|
- |
|
|
|
- |
|
Consumer
loans
|
|
|
(2 |
) |
|
|
- |
|
Total
charge-offs
|
|
|
(2 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
|
- |
|
|
|
- |
|
Commercial
business
|
|
|
- |
|
|
|
- |
|
Consumer
loans
|
|
|
- |
|
|
|
- |
|
Total
recoveries
|
|
|
- |
|
|
|
- |
|
Net
recoveries (charge-offs)
|
|
|
(2 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Ending
Balance
|
|
$ |
7,456 |
|
|
$ |
3,768 |
|
|
|
|
|
|
|
|
|
|
Allowance
to non-accrual loans
|
|
|
47.27 |
% |
|
|
127.95 |
% |
Allowance
to total loans outstanding
|
|
|
1.00 |
% |
|
|
0.64 |
% |
Net
recovery (charge-offs) to
average
loans outstanding
|
|
|
0.00 |
% |
|
|
0.00 |
% |
Provision
for Loan Losses
Management
made provisions of $546,000 and $131,000 for the quarters ended March 31, 2009
and 2008, respectively. We recorded net charge-offs of $2,000 in the
first quarter of 2009. The allowance for loan
losses was $7.5 million, or 1.0% of total loans outstanding as of March 31,
2009, as compared to $6.9 million, or 0.97% of total loans outstanding as of
December 31, 2008. The increase in the balance of the allowance
for loan losses is due to growth in the overall loan portfolio, increases in
non-accrual loans, increased levels of specific reserves on impaired loans, and
management’s ongoing analysis of loan loss factors, including further
deterioration of the national and local economic environment. The Company continues to
assess the adequacy of its allowance for loan losses in accordance with
established policies.
Management’s
Assessment of Asset Quality
Non-performing
assets include loans that are 90 or more days past due or on non-accrual status
and real estate and other loan collateral acquired through foreclosure and
repossession. Loans 90 days or more past due may remain on an accrual
basis if adequately collateralized and in the process of
collection. For non-accrual loans, interest previously accrued but
not collected is reversed and charged against income at the time a loan is
placed on non-accrual status. Payments received at the time a loan is
on non-accrual status are applied to principal. Interest income is
not recognized until the loan is returned to accrual status. Loans are returned
to accrual status when all the principal and interest amounts contractually due
are brought current and future payments are reasonably assured.
The
following table summarizes the non-performing assets at March 31, 2009
and December 31, 2008.
|
|
At
March 31,
|
|
|
At
December 31,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
Loans
accounted for on a non-accrual basis:
|
|
|
|
|
Real
estate loans:
|
|
|
|
|
|
|
One-to
four-family
|
|
$ |
4,021 |
|
|
$ |
3,962 |
|
Multi-family
|
|
|
- |
|
|
|
- |
|
Commercial
real estate
|
|
|
798 |
|
|
|
883 |
|
Home
equity lines of credit
|
|
|
- |
|
|
|
- |
|
Construction
|
|
|
10,906 |
|
|
|
9,387 |
|
Total
real estate loans
|
|
|
15,725 |
|
|
|
14,232 |
|
Commercial
business loans
|
|
|
- |
|
|
|
- |
|
Consumer
loans
|
|
|
49 |
|
|
|
- |
|
Total
non-accrual loans
|
|
|
15,774 |
|
|
|
14,232 |
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets
|
|
|
2,449 |
|
|
|
2,604 |
|
Total
nonperforming assets
|
|
$ |
18,223 |
|
|
$ |
16,836 |
|
|
|
|
|
|
|
|
|
|
Non-accrual
loans to total loans
|
|
|
2.11 |
% |
|
|
2.00 |
% |
Non-accrual
loans to total assets
|
|
|
1.40 |
% |
|
|
1.34 |
% |
Non-performing
assets to total assets
|
|
|
1.61 |
% |
|
|
1.58 |
% |
Non-performing
assets increased to $18.2 million, or 1.61% of total assets, at March 31,
2009 from $16.8 million at December 31, 2008. Non-performing assets
include foreclosed real estate of $2.4 million, $10.9 million of construction
loans, $4.0 million of residential mortgage loans, and $850,000 of other loans.
Interest income that would have been recorded for the quarter ended March 31,
2009 had nonaccruing loans and accruing loans past due 90 days or more been
current according to their original terms amounted to $345,000. At
March 31, 2009, the Company did not have any accruing loans past due 90 days or
more.
The
Company had impaired loans totaling $15.6 million and $12.5 million as of March
31, 2009 and December 31, 2008, respectively. At March 31, 2009,
impaired loans totaling $2.7 million had a valuation allowance of
$527,000. Impaired loans totaling $2.0 million had a valuation
allowance of $418,000 at December 31, 2008. The Company’s average
investment in impaired loans was $14.0 million and $3.1 million for the quarters
ended March 31, 2009 and 2008, respectively. Included in the
balance of impaired loans at March 31, 2009 are three troubled debt restructure
loans totaling $3.9 million.
Deposits
Deposits
are a major source of our funds for lending and other investment
purposes. Deposit inflows and outflows are significantly influenced
by general interest rates and money market conditions.
The
following table summarizes the period end balance and the composition of
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
March 31, 2009
|
|
|
At
December 31, 2008
|
|
(Dollars
in thousands)
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
NOW
and demand deposits
|
|
$ |
97,429 |
|
|
|
11.34 |
% |
|
$ |
92,051 |
|
|
|
11.55 |
% |
Money
market deposits
|
|
|
204,746 |
|
|
|
28.83 |
|
|
|
172,876 |
|
|
|
21.69 |
|
Regular
and other deposits
|
|
|
122,921 |
|
|
|
14.30 |
|
|
|
117,913 |
|
|
|
14.80 |
|
Certificates
of deposit
|
|
|
434,164 |
|
|
|
50.53 |
|
|
|
414,012 |
|
|
|
51.96 |
|
Total
|
|
$ |
859,260 |
|
|
|
100.00 |
% |
|
$ |
796,852 |
|
|
|
100.00 |
% |
Borrowings
At March
31, 2009 and December 31, 2008, long-term FHLB advances totaling $57.7 million
mature through April 2013, with a weighted average yield of 3.45%. At
March 31, 2009 and December 31, 2008, short-term borrowings consisted of federal
funds purchased from the Company’s affiliate bank amounting to $7,546,000 and
$7,811,000, respectively, with a weighted average rate of 0.35% and 0.91%,
respectively.
Results
of Operations for the Three Months Ended March 31, 2009 and March 31,
2008
Average
Balance Table
The
following table sets forth average balance sheets, average yields and costs, and
certain other information at and for the periods indicated.
|
|
For
The Three Months Ended March 31,
|
|
|
|
2009
|
|
2008
|
|
(Dollars
in thousands)
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
Yield/
Cost
(4)
|
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
Yield/
Cost
(4)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(1)
|
|
$ |
726,851 |
|
|
$ |
10,645 |
|
|
|
5.94
|
% |
|
$ |
567,832 |
|
|
$ |
9,183 |
|
|
|
6.50
|
% |
Securities
and certificates of deposit
|
|
|
262,955 |
|
|
|
2,790 |
|
|
|
4.30 |
|
|
|
259,907 |
|
|
|
2,877 |
|
|
|
4.45 |
|
Federal
funds sold
|
|
|
30,361 |
|
|
|
12 |
|
|
|
0.16 |
|
|
|
138,471 |
|
|
|
1,063 |
|
|
|
3.09 |
|
Total
interest-earning assets
|
|
|
1,020,167 |
|
|
|
13,447 |
|
|
|
5.35 |
|
|
|
966,210 |
|
|
|
13,123 |
|
|
|
5.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets
|
|
|
75,208 |
|
|
|
|
|
|
|
|
|
|
|
74,585 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
1,095,375 |
|
|
|
|
|
|
|
|
|
|
$ |
1,040,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits
|
|
$ |
36,610 |
|
|
|
46 |
|
|
|
0.51
|
% |
|
$ |
37,511 |
|
|
|
68 |
|
|
|
0.72
|
% |
Money
market deposits
|
|
|
183,199 |
|
|
|
1,027 |
|
|
|
2.27 |
|
|
|
140,123 |
|
|
|
1,153 |
|
|
|
3.30 |
|
Savings
and other deposits
|
|
|
122,990 |
|
|
|
302 |
|
|
|
1.00 |
|
|
|
145,970 |
|
|
|
395 |
|
|
|
1.09 |
|
Certificates
of deposit
|
|
|
427,534 |
|
|
|
3,888 |
|
|
|
3.69 |
|
|
|
445,869 |
|
|
|
5,295 |
|
|
|
4.78 |
|
Total
interest-bearing deposits
|
|
|
770,333 |
|
|
|
5,263 |
|
|
|
2.77 |
|
|
|
769,473 |
|
|
|
6,911 |
|
|
|
3.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances and other borrowings
|
|
|
67,752 |
|
|
|
532 |
|
|
|
3.19 |
|
|
|
35,913 |
|
|
|
374 |
|
|
|
4.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
|
838,085 |
|
|
|
5,795 |
|
|
|
2.80 |
|
|
|
805,386 |
|
|
|
7,285 |
|
|
|
3.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
|
|
58,705 |
|
|
|
|
|
|
|
|
|
|
|
51,801 |
|
|
|
|
|
|
|
|
|
Other
noninterest-bearing liabilities
|
|
|
9,078 |
|
|
|
|
|
|
|
|
|
|
|
24,033 |
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
905,868 |
|
|
|
|
|
|
|
|
|
|
|
881,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
189,507 |
|
|
|
|
|
|
|
|
|
|
|
159,575 |
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
1,095,375 |
|
|
|
|
|
|
|
|
|
|
$ |
1,040,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
7,652 |
|
|
|
|
|
|
|
|
|
|
$ |
5,838 |
|
|
|
|
|
Interest
rate spread (2)
|
|
|
|
|
|
|
|
|
|
|
2.55
|
% |
|
|
|
|
|
|
|
|
|
|
1.82
|
% |
Net
interest margin (3)
|
|
|
|
|
|
|
|
|
|
|
3.04
|
% |
|
|
|
|
|
|
|
|
|
|
2.43
|
% |
Average
interest-earning assets to
average
interest-bearing liabilities
|
|
|
|
|
|
|
121.73 |
% |
|
|
|
|
|
|
|
|
|
|
119.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Loans on non-accrual status are included in average
balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing
liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
Net interest margin represents net interest income divided by average
interest-earning assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
Annualized.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Results
We
recorded a net loss of $1.1 million, or $.05 per share (basic and diluted), for
the quarter ended March 31, 2009, compared to a net loss of $321,000 for the
quarter ended March 31, 2008. Earnings per share information is not
applicable for the quarter ended March 31, 2008, as shares were not outstanding
for the entire quarter. The 2009 net loss
includes pre-tax charges of $2.1 million relating to the retirement of the
Company’s CFO and an Executive Vice President and the settlement of an
arbitration agreement with a former employee. The 2008 net loss
includes a $3.0 million pre-tax contribution of stock to the Company’s
charitable foundation, which was made as part of the Company’s minority stock
offering.
Analysis
of Net Interest Income
Net interest income for the quarter
ended March 31, 2009 was $7.7 million, an increase of $1.8 million, or 31.1%,
from the quarter ended March 31, 2008. The Company experienced
a $324,000 increase in total interest and dividend income, mainly as a result of
loan growth, and a $1.6 million decrease to interest expense on deposits, due to
lower rates paid. The net interest margin was 2.43% for the quarter
ended March 31, 2008, 2.97% for the quarter ended December 31, 2008, and 3.04%
for the quarter ended March 31, 2009.
Interest income on federal funds sold
decreased $1.1 million, due to lower average balances in 2009. Funds received in
the Company’s offering were invested in federal funds sold during the first
quarter of 2008. In 2009, management is utilizing money market mutual funds as
an alternative investment for excess cash balances.
Growth in
the loan portfolio throughout 2008 impacted interest earned, as the average loan
balance increased from $567.8 million for the quarter ended March 31, 2008, to
$726.9 million for the quarter ended March 31, 2009. Loan interest
income increased $1.5 million, or 15.9%, to $10.6 million, and loan yields of
5.94% and 6.50% were earned during the quarters ended March 31, 2009 and 2008,
respectively.
Interest expense on deposits decreased
$1.6 million, or 23.8%, from $6.9 million to $5.3 million, as the average cost
of deposits decreased from 3.61% to 2.77% for the quarters ended March 31, 2008
and 2009, respectively. The total average balance of interest bearing
deposits was $769.5 million and $770.3 million for the quarters ended March 31,
2008 and 2009, respectively, with a $43.1 million increase to the average
balance of money market funds offset by a decrease to the average balance of
savings and certificates of deposit of $23.0 million and $18.3 million,
respectively.
An increase in the average balance of
borrowings, from $35.9 million for the quarter ended March 31, 2008 to $67.8
million for the quarter ended March 31, 2009 impacted interest
expense. The average borrowing rate declined from 4.19% to 3.19%,
while borrowing expense increased from $374,000 to $532,000 for the quarters
ended March 31, 2008 and 2009, respectively.
Non-interest Income
Non-interest
income for the first quarter of 2009 was $1.1 million, compared to $3.2 million,
for the first quarter of 2008. The Company recorded an impairment loss of
$124,000 on securities determined to be other-than-temporarily impaired during
the first quarter of 2009, compared to gains on sales of securities of $2.3
million for the first quarter of 2008. The Company recorded
$183,000 in gains on sale of mortgage loans during the first quarter of 2009,
compared to $19,000 in the 2008 comparable quarter, as saleable residential loan
origination volume has increased in 2009 due to lower rates.
Non-interest
Expenses
Non-interest
expenses increased $365,000, or 3.9%, from $9.3 million to $9.7 million for the
quarters ended March 31, 2008, and 2009, respectively. Salaries and
benefits expense increased $2.2 million. In the first quarter of
2009, the Company recorded salary and benefit expense of $2.1 million related to
the retirement of its CFO and an Executive Vice President, and to the settlement
of an arbitration agreement with a former employee. The Company also
incurred expenses relating to the Company’s Equity Incentive Plan, pursuant to
which initial grants were made during the fourth quarter of
2008. Professional service fees increased $343,000 primarily as
a
result of
legal expenses related to the settlement of employee benefit and litigation
matters. In the first quarter of 2008, the Company made a pre-tax $3.0
million contribution to the Company’s charitable foundation in conjunction with
its stock offering. Other non-interest expense increased by $451,000,
primarily as a result of increased FDIC insurance assessment in
2009.
Income Tax
We
recorded a tax benefit of $370,000 and $108,000, a 25.0% and 25.2% effective tax
rate, for the quarters ended March 31, 2009 and 2008, respectively, due to the
net operating loss in both years. 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. After an analysis of the components of the deferred tax asset,
the Company recorded an increase of $75,000 to the valuation allowance against
the deferred tax asset during the first quarter of 2009. As of March
31, 2009, the total valuation allowance against the deferred tax asset is
$575,000.
Liquidity
and Capital Management
Liquidity
Management. Liquidity is
the ability to meet current and future financial obligations of a short-term
nature. Our primary sources of funds consist of deposit inflows, loan
repayments, maturities of and payments on investment securities and borrowings
from the Federal Home Loan Bank of Boston. While maturities and
scheduled amortization of loans and securities are predictable sources of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition.
We regularly adjust our investments in
liquid assets based upon our assessment of (1) expected loan demand,
(2) expected deposit flows, (3) yields available on interest-earning
deposits and securities and (4) the objectives of our asset/liability management
policy.
Our most liquid assets are cash and
cash equivalents. The levels of these assets depend on our operating,
financing, lending and investing activities during any given
period. At March 31, 2009, cash and cash equivalents totaled $29.8
million. In addition, at March 31, 2009, we had $108.1 million of
available borrowing capacity with the Federal Home Loan Bank of Boston,
including a $9.4 million line of credit. On March 31, 2009, we had
$57.7 million of advances outstanding.
A significant use of our liquidity is
the funding of loan originations. At March 31, 2009, we had $153.0
million in total loan commitments outstanding. Unused portions of
existing loans include $77.3 million in unadvanced portions of construction
loans, $25.4 million in unused home equity lines of credit, $2.0 million in
unused business lines of credit, $728,000 in unused commercial letters of
credit, and $779,000 in unadvanced revolving lines of credit. Commitments to
fund new loans include $5.9 million in commitments to fund one- to four-family
residential real estate loans, $37.6 million in commitments to fund commercial
real estate and construction loans, $18.5 million in commitments to originate
construction loans, $1.2 million in commitments to originate home equity lines
of credit, $2.2 million in commitments to originate residential construction
loans and $50,000 in commitments to originate other
loans. Historically, many of the commitments expire without being
fully drawn; therefore, the total amount of commitment does not necessarily
represent future cash requirements. We also have a seven year
contract with our core data processing provider with an outstanding commitment
of approximately $5.8 million as of March 31, 2009, 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 March 31, 2009 totaled $310.7 million, or
72% of certificates of deposit. If these maturing deposits do not
remain with us, we will be required to utilize other sources of
funds. Historically, a significant portion of certificates of deposit
that mature have remained at the Company. We have the ability
to attract and retain deposits by adjusting the interest rates offered, and
total certificates of deposit have increased in 2009.
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 March 31, 2009, both Meridian Interstate Bancorp and
East Boston Savings Bank exceeded all of their respective regulatory capital
requirements. East Boston Savings Bank is considered “well capitalized” under
regulatory guidelines.
We may use capital management tools
such as cash dividends and common share repurchases. However,
Massachusetts Commissioner of Banks regulations restrict stock repurchases by
Meridian Interstate Bancorp within three years of the stock offering unless the
repurchase: (i) is part of a general repurchase made on a pro rata basis
pursuant to an offering approved by the Commissioner of the Banks and made to
all stockholders of Meridian Interstate Bancorp (other than Meridian Financial
Services with the approval of the Commissioner of Banks); (ii) is limited to the
repurchase of qualifying shares of a director; (iii) is purchased in the open
market by a tax-qualified or nontax-qualified employee stock benefit plan of
Meridian Interstate Bancorp or East Boston Savings Bank in an amount reasonable
and appropriate to fund the plan; or (iv) is limited to stock repurchases of no
greater than 5% of the outstanding capital stock of Meridian Interstate Bancorp
where compelling and valid business reasons are established to the satisfaction
of the Commissioner of Banks. In addition, pursuant to Federal
Reserve Board approval conditions imposed in connection with the formation of
Meridian Interstate Bancorp, Meridian Interstate Bancorp has committed (i) to
seek the Federal Reserve 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.
The Company completed the repurchase of
414,000 shares of common stock for the 2008 Equity Incentive Plan in the first
quarter of 2009. Also during the quarter, the Commonwealth of
Massachusetts Office of the Commissioner of Banks approved the Company’s
application to repurchase up to 5% of its outstanding common stock not held by
its mutual holding company parent, or 517,500 shares of its common
stock.
Off-Balance
Sheet Arrangements. In the normal course of operations, we
engage in a variety of financial transactions that, in accordance with generally
accepted accounting principles, are not recorded in our financial
statements. These transactions involve, to varying degrees, elements
of credit, interest rate and liquidity risk. Such transactions are used
primarily to manage customers’ requests for funding and take the form of loan
commitments and lines of credit. We had no investment in derivative
securities at March 31, 2009.
For the three months ended March 31,
2009, we engaged in no off-balance sheet transactions reasonably likely to have
a material effect on our financial condition, results of operations or cash
flows.
Item
3. Quantitative and Qualitative Disclosures about
Market Risk
Interest
Rate Risk Management. Our earnings and the market value of our
assets and liabilities are subject to fluctuations caused by changes in the
level of interest rates. We manage the interest rate sensitivity of
our interest-bearing liabilities and interest-earning assets in an effort to
minimize the adverse effects of changes in the interest rate
environment. Deposit accounts typically react more quickly to changes
in market interest rates than mortgage loans because of the shorter maturities
of deposits. As a result, sharp increases in interest rates may
adversely affect our earnings while decreases in interest rates may beneficially
affect our earnings. To reduce the potential volatility of our
earnings, we have sought to improve the match between asset and liability
maturities and rates, while maintaining an acceptable interest rate
spread. Our strategy for managing interest rate risk
emphasizes: originating loans with adjustable interest rates; selling
the residential real estate fixed-rate loans with terms greater than 15 years
that we originate; and promoting core deposit products and short-term time
deposits.
We have an Asset/Liability Management
Committee to coordinate all aspects involving asset/liability
management. The committee establishes and monitors the volume,
maturities, pricing and mix of assets and funding sources with the objective of
managing assets and funding sources to provide results that are consistent with
liquidity, growth, risk limits and profitability goals.
Net
Interest Income Simulation Analysis. We analyze our interest rate
sensitivity position to manage the risk associated with interest rate movements
through the use of interest income simulation. The matching of assets and
liabilities may be analyzed by examining the extent to which such assets and
liabilities are “interest sensitive.” An asset or liability is said to be
interest rate sensitive within a specific time period if it will mature or
reprice within that time period.
Our goal is to manage asset and
liability positions to moderate the effects of interest rate fluctuations on net
interest income. Interest income simulations are completed quarterly
and presented to the Asset/Liability Committee and the board of directors. The
simulations provide an estimate of the impact of changes in interest rates on
net interest income under a range of assumptions. The numerous assumptions used
in the simulation process are reviewed by the Asset/Liability Committee and the
Executive Committee on a quarterly basis. Changes to these assumptions can
significantly affect the results of the simulation. The simulation incorporates
assumptions regarding the potential timing in the repricing of certain assets
and liabilities when market rates change and the changes in spreads between
different market rates. The simulation analysis incorporates management’s
current assessment of the risk that pricing margins will change adversely over
time due to competition or other factors.
Simulation analysis is only an estimate
of our interest rate risk exposure at a particular point in time. We continually
review the potential effect changes in interest rates could have on the
repayment of rate sensitive assets and funding requirements of rate sensitive
liabilities.
The simulation uses projected repricing
of assets and liabilities on the basis of contractual maturities, anticipated
repayments and scheduled rate adjustments. Prepayment rates can have a
significant impact on interest income simulation. Because of the large
percentage of loans we hold, rising or falling interest rates have a significant
impact on the prepayment speeds of our earning assets that in turn affect the
rate sensitivity position.
When
interest rates rise, prepayments tend to slow. When interest rates fall,
prepayments tend to rise. Our asset sensitivity would be reduced if prepayments
slow and vice versa. While we believe such assumptions to be reasonable, there
can be no assurance that assumed prepayment rates will approximate actual future
mortgage-backed security and loan repayment activity. Our interest
rate risk assumptions and profile have not changed materially from December 31,
2008.
Item
4. Controls and Procedures
(a)
Disclosure Controls and Procedures
Meridian Interstate Bancorp’s
management, including Meridian Interstate Bancorp’s principal executive officer
and principal financial officer, have evaluated the effectiveness of Meridian
Interstate Bancorp’s “disclosure controls and procedures,” as such term is
defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”). Based upon their evaluation, the
principal executive officer and principal financial officer concluded that, as
of the end of the period covered by this report, Meridian Interstate Bancorp’s
disclosure controls and procedures were effective for the purpose of ensuring
that the information required to be disclosed in the reports that Meridian
Interstate Bancorp files or submits under the Exchange Act with the Securities
and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms and (2)
is accumulated and communicated to Meridian Interstate Bancorp’s management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required
disclosure.
(b)
Internal Control over Financial Reporting
There have not been any changes in
Meridian Interstate Bancorp’s internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the fiscal quarter to which this report relates that have materially affected,
or are reasonably likely to materially affect, Meridian Interstate Bancorp’s
internal control over financial reporting.
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings
Periodically,
there have been various claims and lawsuits against us, such as claims to
enforce liens, condemnation proceedings on properties in which we hold security
interests, claims involving the making and servicing of real property loans and
other issues incident to our business. We are not a party to any
pending legal proceedings that we believe would have a material adverse effect
on our financial condition, results of operations or cash flows.
For information regarding our risk
factors, see “Risk Factors,” in our 2008 Annual Report on Form 10-K, filed with
the SEC on March 15, 2009, which is available through the SEC’s website at www.sec.gov. As
of March 31, 2009, the risk factors of Meridian Interstate Bancorp have not
changed materially from those reported in the annual report. The
risks described in Meridian Interstate Bancorp’s annual report are not the only
risks that we face. Additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition and/or operating
results.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
(a.)
|
–
(b.) Not applicable.
|
|
(c.)The
following table sets forth information with respect to any purchase made
by or on behalf of the Company during the indicated
periods:
|
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
|
January
1 – 31, 2009
|
-
|
-
|
-
|
164,000
|
|
|
|
|
|
February
1 – 28, 2009 (1)
|
164,000
|
$ 8.95
|
164,000
|
-
|
|
|
|
|
|
March
1 – 31, 2009 (2)
|
-
|
-
|
-
|
517,500
|
Total
|
164,000
|
$ 8.95
|
164,000
|
517,500
|
|
|
|
|
|
(1) The
Company completed the repurchase of 414,000 shares of common stock for the 2008
Equity Incentive Plan in the first quarter of 2009.
(2) In
March 2009, the Commonwealth of Massachusetts Office of the Commissioner of
Banks approved the Company’s application to repurchase up to 5% of its
outstanding common stock not held by its mutual holding company parent, or
517,500 shares of its common stock.
Item
3. Defaults Upon Senior Securities
Not
applicable.
Item
4. Submission of Matters to a Vote of Security
Holders
None.
Item
5. Other Information
None.
Item
6.
|
|
|
|
3.1
|
Amended
and Restated Articles of Organization of Meridian Interstate Bancorp,
Inc.*
|
3.2
|
Amended
and Restated Bylaws of Meridian Interstate Bancorp,
Inc.*
|
4
|
Form
of Common Stock Certificate of Meridian Interstate Bancorp,
Inc.*
|
10.1
|
Form
of East Boston Savings Bank Employee Stock Ownership
Plan*
|
10.2
|
Form
of East Boston Savings Bank Employee Stock Ownership Plan Trust
Agreement*
|
10.3
|
East
Boston Savings Bank Employee Stock Ownership Plan Loan Agreement, Pledge
Agreement and Promissory Note*
|
10.4
|
Form
of Amended and Restated Employment Agreement*
|
10.5
|
Form
of East Boston Savings Bank Employee Severance Compensation
Plan*
|
10.6
|
Form
of Supplemental Executive Retirement Agreements with certain
directors*
|
10.7
|
Form
of Separation Agreement with Robert F. Verdonck incorporated by reference
to the Form 8-K filed on June 9, 2008
|
10.8
|
Form
of Separation Agreement with Leonard V. Siuda incorporated by reference to
Form 8-K filed on April 7, 2009
|
10.9
|
Form
of Separation Agreement with Philip F. Freehan incorporated by reference
to Form 8-K filed on April 7, 2009
|
10.10
|
Form
of Supplemental Executive Retirement Agreement with Richard J. Gavegnano
filed as an exhibit to Form 10-Q filed on May 14, 2008
|
10.11
|
Form
of Employment Agreement with Richard J. Gavegnano incorporated by
reference to the Form 8-K filed on January 12, 2009
|
10.12
|
Form
of Employment Agreement with Deborah J. Jackson incorporated by reference
to the Form 8-K filed on January 22, 2009
|
10.13
|
Form
of Supplemental Executive Retirement Agreement with Deborah J. Jackson
incorporated by reference to the Form 8-K filed on January 22,
2009
|
10.14
|
2008 Equity Incentive
Plan**
|
10.15
|
Amendment
to Supplemental Executive Retirement Agreements with certain directors
incorporated by reference to the Form 10K-A filed on April 8,
2009
|
21
|
Subsidiaries
of Registrant*
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
|
_______________________________
|
|
|
*
|
Incorporated
by reference to the Registration Statement on Form S-1 of Meridian
Interstate Bancorp, Inc. (File No. 333-146373), originally filed with the
Securities and Exchange Commission on September 28,
2007.
|
**
|
Incorporated
by reference to Appendix A to the Company’s Definitive
Proxy Statement for its 2009 Annual Meeting, as filed with the Securities
and Exchange Commission on April 24,
2009.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
MERIDIAN INTERSTATE
BANCORP, INC.
|
|
(Registrant)
|
|
|
|
|
Dated: May
11, 2009
|
/s/ Richard J. Gavegnano
|
|
Richard
J. Gavegnano
|
|
Chairman
and Chief Executive Officer
|
|
(Principal
Executive Officer)
|
|
|
|
|
Dated: May
11, 2009
|
/s/ Deborah J. Jackson
|
|
Deborah
J. Jackson
|
|
President
and Acting Chief Financial Officer
|
|
(Principal
Financial and Accounting
Officer)
|
28