Annual Report (Form 10-K), fiscal year 1994

ITEM 1.
Meridian Bancorp, Inc. ----------------------
Meridian Bancorp, Inc. (the "Registrant"), a multi-bank holding company registered under the federal Bank Holding Company Act of 1956, as amended, was incorporated as a Pennsylvania business corporation as a result of the statutory consolidation on June 30, 1983 of American Bancorp, Inc. and Central Penn National Corp. The Registrant's subsidiaries presently engaged in the business of banking are (i) Meridian Bank, formed in 1986 as a result of the merger of the Registrant's then-existing three banking subsidiaries (American Bank and Trust Co. of Pa., Central Penn National Bank and The First National Bank of Allentown), (ii) Delaware Trust Company, acquired in January 1988, and (iii) Meridian Bank, New Jersey, which commenced operations in April 1993 upon the acquisition of Cherry Hill National Bank.
Bank Subsidiaries - Meridian Bank, Delaware Trust Company and Meridian Bank, ----------------------------------------------------------------------------- New Jersey ----------
Meridian Bank conducts its business principally through 270 banking offices located in 29 eastern and central Pennsylvania counties.
Delaware Trust, a Delaware banking corporation, was incorporated in 1899 under the Delaware General Corporation Law and acquired banking powers through its merger in 1910 with Delaware Savings Bank, which was created in 1905 by a special act of the General Assembly of the State of Delaware. Delaware Trust operates 26 branches in New Castle, Kent and Sussex Counties, Delaware.
In January 1993, the Registrant caused the formation of Meridian Bank, New Jersey, a New Jersey state-chartered banking institution, to effect the acquisition of Cherry Hill National Bank, which was completed in April 1993. Meridian Bank, New Jersey operates 29 branches in seven southern New Jersey Counties.
At December 31, 1994, Meridian Bank, Delaware Trust and Meridian Bank, New Jersey had total deposits of $9.7 billion, $1.2 billion and $556 million, respectively, total loans of $8.7 billion, $972 million and $153 million, respectively, and total assets of $12.8 billion, $1.4 billion and $651 million, respectively.
Meridian Bank, Delaware Trust and Meridian Bank, New Jersey provide a wide variety of services, including secured and unsecured financing, real estate financing, checking, savings and time deposit accounts, as well as the offering of cash management and a variety of other specialized financial services to
individuals, businesses, municipalities and other governmental bodies. In addition, Meridian Capital Markets, Inc. a division of Meridian Bank, engages in the underwriting of municipal obligations and various other investment banking, mortgage banking and related activities permitted by law for banks.
Other Subsidiaries of the Registrant ------------------------------------
Meridian Life Insurance Company is a wholly-owned subsidiary of the Registrant that reinsures life insurance and accident and health insurance issued to borrowers in connection with loans and other extensions of credit made to such borrowers by the Registrant's subsidiary banks.
Meridian Funding Corp. is a wholly-owned subsidiary of the Registrant that issues commercial paper for the use of the Registrant and its subsidiaries.
Meridian Asset Management, Inc. ("MAM") and its subsidiaries, Meridian Trust Company and Meridian Investment Company, provide services formerly provided by the trust departments of the predecessors of Meridian Bank. These services include personal and corporate trust, asset management and related services and investment advisory services. Meridian Trust Company is a Pennsylvania trust company with full trust powers. Meridian Investment Company is an investment advisory firm registered with the Securities and Exchange Commission and the Pennsylvania Securities Commission. As of December 31, 1994, assets being administered in one or more fiduciary capacities by MAM or one of its subsidiaries had an aggregate market value of approximately $14.2 billion, of which MAM or one of such subsidiaries had sole or joint investment responsibility for approximately $5.7 billion. Meridian Trust Company of California was organized by MAM in 1989 and engaged in personal and corporate trust activities in California; a sale is pending for the business of Meridian Trust Company of California.
In addition to fiduciary services provided by MAM and its subsidiaries, Delaware Trust Capital Management, Inc., a Delaware bank and trust company and a wholly-owned subsidiary of Delaware Trust, performs trust and related financial services. Prior to the commencement of operations by Delaware Trust Capital Management, Inc. in January 1989, such services were performed by the Capital Management Group of Delaware Trust. As of December 31, 1994, assets being administered in one or more fiduciary capacities by Delaware Trust Capital Management, Inc. had an aggregate market value of approximately $14.8 billion, of which it had sole or joint investment responsibility for approximately $1.5 billion.
McGlinn Capital Management, Inc. is a registered investment advisory firm acquired in July 1994. Assets under management by McGlinn Capital Management as of December 31, 1994 had an aggregate market value of approximately $2.7 billion.
Meridian Securities, Inc. is registered as a broker with the Securities and Exchange Commission and the Pennsylvania Securities Commission and is a member of the National Association of Securities Dealers, Inc.
Meridian Capital Corp., a wholly-owned subsidiary of the Registrant, previously was a small business investment company licensed by the SBA. This subsidiary is presently inactive and the Registrant intends to liquidate it during 1995.
Meridian Acceptance Corp., a wholly-owned subsidiary of the Registrant, engages in the business of purchasing motor vehicle installment sale contracts originating in the State of New Jersey.
Meridian Commercial Finance Corporation was formed in 1994 to engage in secured commercial lending.
Until August 1990, Meridian Mortgage Corporation ("Meridian Mortgage") operated as a wholly-owned mortgage banking subsidiary of the Registrant. In August 1990, Meridian Mortgage became a wholly-owned subsidiary of Meridian Bank. During the third quarter of 1993, the Registrant decided to significantly reduce the scope of its mortgage banking business through a sale of substantially all of the mortgage servicing operations conducted by Meridian Mortgage.
Meridian Delaware Investments, Inc., a wholly-owned subsidiary of the Registrant, is a Delaware business corporation that invests in and holds certain investments.
Meridian Leasing, Inc. specializes in leasing office and business equipment. In October 1991, Meridian Leasing, Inc. was reorganized as a direct subsidiary of Meridian Bank.
Meridian Auto Leasing, Inc., a wholly-owned subsidiary of Meridian Bank, conducts the automobile leasing activities previously conducted by Meridian Bank.
Meridian Asset Servicing Corp. was formed in 1993 to hold title to and liquidate real estate acquired through foreclosure on defaulted loans.
Supervision and Regulation --------------------------
Various requirements and restrictions under the laws of the United States and the states in which the Registrant and its subsidiaries do business affect the Registrant and its subsidiaries.
General -------
The Registrant is a bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act of 1956, as amended (the "BHCA"). As a bank holding company, the Registrant's activities and those of its banking and nonbanking subsidiaries are limited to the business of banking and activities closely related or incidental to banking, and the Registrant may not directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve Board.
The Registrant's subsidiary banks are subject to supervision and examination by applicable federal and state banking agencies. All of the Registrant's subsidiary banks are insured by, and therefore subject to the regulations of, the Federal Deposit Insurance Corporation (the "FDIC"). In addition, Meridian Bank is a Pennsylvania bank and trust company and member of the Federal Reserve System subject to supervision and regulation by the Pennsylvania Department of Banking and the Federal Reserve Board. Delaware Trust Company is a Delaware banking corporation subject to supervision and regulation by the Delaware State Bank Commissioner, and Meridian Bank, New Jersey, is a New Jersey state bank subject to supervision and regulation by the New Jersey Department of Banking. The Registrant's subsidiary banks are also subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Registrant's subsidiary banks. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.
Holding Company Structure -------------------------
The Registrant's subsidiary banks are subject to restrictions under federal law which limit the transfer of funds by each of them to the Registrant and its nonbanking subsidiaries, whether in the form of loans, other extensions of credit, investments or asset purchases. Such transfers by any subsidiary bank to the Registrant or any nonbanking subsidiary are limited in amount to 10% of such subsidiary bank's capital and surplus and, with respect to the Registrant and all nonbanking subsidiaries, to an aggregate of 20% of such subsidiary bank's capital and surplus. Furthermore, such loans and extensions of credit are required to be secured in specified
amounts, and all such transactions are required to be on an arm's length basis.
The Federal Reserve Board has issued regulations under the BHCA that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the Federal Reserve Board, pursuant to such regulations, may require the Registrant to stand ready to use its resources to provide adequate capital funds to its banking subsidiaries during periods of financial stress or adversity. This support may be required at times when, absent such regulations, the bank holding company might not otherwise provide such support. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA"), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" (as described below) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency, up to specified limits. Under the BHCA, the Federal Reserve Board has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve Board's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled depository institution in danger of default.
Regulatory Restrictions on Dividends ------------------------------------
Dividend payments by Meridian Bank to the Registrant are subject to the Pennsylvania Banking Code of 1965 (the "Banking Code") and the Federal Deposit Insurance Act (the "FDIA"). Under the Banking Code, no dividends may be paid except from "accumulated net earnings" (generally, undivided profits). Under the FDIA, no dividends may be paid by an insured bank if the bank is in arrears in the payment of any insurance assessment due to the FDIC.
The declaration and payment of dividends by Delaware Trust to the Registrant are subject to the Delaware Banking Code and the FDIA. Under the Delaware Banking Code, no dividends may be paid except from "net profits" (generally, net income as defined under federal regulations and reported to the State Bank Commissioner). Additional restrictions apply unless Delaware Trust's surplus fund is equal to the amount of its common stock.
The declaration and payment of dividends by Meridian Bank, New Jersey to the Company are subject to the New Jersey Banking Act of 1948 and the FDIA. Under the New Jersey Banking Act of 1948, Meridian Bank, New Jersey cannot pay a cash dividend unless following such dividend, the Bank's surplus will equal at least fifty percent of the capital stock or the payment of the dividend will not reduce the Bank's surplus.
State and federal regulatory authorities have adopted standards for the maintenance of adequate levels of capital by banks. Adherence to such standards further limits the ability of banks to pay dividends.
Under these policies and subject to the restrictions applicable to the Registrant's subsidiary banks, such subsidiary banks could declare in the remainder of 1995, without prior regulatory approval, aggregate dividends of $101.2 million, plus net profits for the remainder of 1995.
The payment of dividends by any subsidiary bank may also be affected by other regulatory requirements and policies, such as the maintenance of adequate capital. If, in the opinion of the applicable regulatory authority a bank under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. The Federal Reserve Board and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions.
FDIC Insurance Assessments --------------------------
FIRREA created two deposit insurance funds to be administered by the FDIC - the Savings Association Insurance Fund ("SAIF") and the Bank Insurance Fund ("BIF"). On an aggregate basis, substantially all of Registrant's subsidiary banks' deposits are insured under the BIF; however, certain deposits assumed by Meridian Bank and Meridian Bank, New Jersey in connection with the purchase of failed institutions from the Resolution Trust Corporation are treated and assessed as SAIF-insured deposits. The FDIC has implemented a risk- related premium schedule for all insured depository institutions that results in the assessment of premiums based on capital and supervisory measures.
Under the risk-related premium schedule, the FDIC assigns, on a semiannual basis, each institution to one of three capital groups (well- capitalized, adequately capitalized or undercapitalized) and further assigns such institution to one of three subgroups within a capital group. The institution's subgroup assignment is based upon the FDIC's judgment of the institution's strength in light of supervisory evaluations,
including examination reports, statistical analyses and other information relevant to gauging the risk posed by the institution. Only institutions with a total capital to risk-adjusted assets ratio of 10.00% or greater, a Tier 1 capital to risk-adjusted assets ratio of 6.0% or greater and a Tier 1 leverage ratio of 5.0% or greater, are assigned to the well-capitalized group. As of December 31, 1994, Registrant's subsidiary banks were subject to FDIC deposit insurance assessments at the rate of $.23 for every $100 of deposits.
The FDIC has reported that it anticipates that the BIF could reach its statutory reserve ratio requirement in 1995. Consequently, the FDIC has proposed a significant reduction of assessment rates applicable to BIF members. While such a reduction in BIF assessment rates will result in lower deposit insurance premiums paid by Delaware Trust Company, and by Meridian Bank and Meridian Bank, New Jersey with respect to their deposits assessed at BIF rates, there can be no assurance when, if ever, the FDIC will adopt its proposed assessment rates. According to the proposed rate schedule, BIF institutions deemed to have the highest risk will pay up to $0.31 for every $100 of deposits annually while those deemed to have the least risk will pay $0.04 for every $100 of deposits annually. At the same time, the FDIC has indicated that it anticipates that the SAIF assessment rate in even the lowest risk-based category will not fall below the current rate of $0.23 for every $100 of deposits before 2002. Therefore, Meridian Bank and Meridian Bank, New Jersey could pay higher assessments on their deposits which are assessed at SAIF rates.
Capital Adequacy ----------------
The Federal Reserve Board adopted risk-based capital guidelines for bank holding companies, such as the Registrant. The guidelines were phased in over a two-year period ended December 31, 1992. Currently, the required minimum ratio of total capital to risk-weighted assets (including off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total capital is required to be "Tier 1 capital," consisting principally of common shareholders' equity, noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill. The remainder ("Tier 2 capital") may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, perpetual preferred stock, and a limited amount of the general loan loss allowance. During the two-year phase-in period, a limited portion of Tier 2 capital was permitted to be included as Tier 1 capital.
In addition to the risk-based capital guidelines, the Federal Reserve Board established minimum leverage ratio (Tier 1
capital to total assets) guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of 3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a leverage ratio of at least 1% to 2% above the 3% stated minimum. Each of the Registrant's subsidiary banks is subject to similar capital requirements adopted by its primary federal regulator. The Registrant and each of its subsidiary banks exceed all applicable capital requirements.
FDICIA requires each federal banking agency to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of non- traditional activities. In September 1993, the Federal Reserve Board, the Office of the Comptroller of the Currency ("OCC") and the FDIC issued a joint notice of proposed rulemaking seeking public comment on two alternative proposed revisions to the risk-based capital rules to take account of interest rate risk. Under the first alternative proposed, interest rate risk would be measured by either an internal bank model or a supervisory model. If interest rate risk in excess of 1 percent of assets is identified, the bank's risk-weighted assets would be increased, and the bank's risk-based capital ratio would accordingly decrease. A bank may be required to add capital if excess interest rate risk caused its risk-based capital ratio to fall below regulatory minimums. Under the second approach, the level of measured interest rate risk would be just one of several factors that examiners would consider when evaluating a bank's capital needs relating to interest rate risk. Other factors considered would include the quality of the bank's interest rate risk management, internal controls, and the overall financial condition of the bank, including earnings capacity, capital base and other identified risks. The Registrant is unable to predict the form in which these proposed regulations will ultimately be adopted or the effect such regulations would have on the operations and capital adequacy of the Registrant and the subsidiary banks.
The federal regulators adopted final rules relating to concentration of credit risk and risks of non-traditional activities effective on January 17, 1995. The agencies declined to adopt a quantitative test for concentrations of credit risk and, instead, provided that such risk would be considered in addition to other risks in assessing an institution's overall capital adequacy. Institutions with higher concentration of credit risk will be required to maintain greater levels of capital. Similarly, the federal agencies incorporated the evaluation of the risks of non-traditional activities into the overall assessment of capital adequacy. The agencies indicated that proposed rules regarding specific types of non-traditional activities will be promulgated from time to time.
Other Provisions of FDICIA --------------------------
FDICIA required the federal banking agencies to promulgate regulations specifying the levels at which an insured institution would be considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." Under these regulations, a bank is considered "well capitalized" if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any order or written directive to meet and maintain a specific capital level. An "adequately capitalized" bank is defined under the regulations as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% of greater, (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a bank with the highest composite regulatory examination rating) and (iv) does not meet the definition of a well capitalized bank. A bank will be considered (A) "undercapitalized" if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of a bank with the highest regulatory examination rating of 1); (B) "significantly undercapitalized" if the bank has (i) a total risk-based capital ratio of less than 6%, (ii) a Tier 1 risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than 3%; and (C) "critically undercapitalized" if the bank has a ratio of tangible equity to total assets of equal to or less than 2%. Notwithstanding the foregoing, the applicable federal bank regulator for a depository institution could, under certain circumstances, reclassify a "well capitalized" institution as "adequately capitalized" or require an "adequately capitalized" or "undercapitalized" institution to comply with supervisory actions as if it were in the next lower category. Such a reclassification could be made if the regulatory agency determines that the institution is in an unsafe or unsound condition (which could include unsatisfactory examination ratings).
Undercapitalized institutions, including significantly and critically undercapitalized institutions, are required to submit capital restoration plans to the appropriate federal banking regulator and are subject to restrictions on operations, including prohibitions on branching, engaging in new activities, paying management fees, making capital distributions such as dividends, and growing without regulatory approval.
Prior to December 31, 1992, each federal banking agency was required to review the accounting procedures it requires institutions it regulates to utilize in preparing reports or statements to be filed with such agency to ensure compliance with generally accepted accounting principles ("GAAP"). Additionally, certain accounting reforms require the federal banking agencies to implement regulations to require that "off balance sheet"
assets and liabilities be taken into account in the preparation of a depository institution's financial statements. Furthermore, the federal banking agencies must develop a method for and require disclosure of the fair value of a depository institution's assets and liabilities in financial statements.
Each depository institution must submit audited financial statements to its primary regulator and the FDIC, which reports are made publicly available. In addition, the audit committee of each depository institution must consist of outside directors and the audit committee at "large institutions" (as defined by FDIC regulation) must include members with banking or financial management expertise. The audit committee at "large institutions" must also have access to independent outside counsel. In addition, an institution must notify the FDIC and the institution's primary regulator of any change in the institution's independent auditor, and annual management letters must be provided to the FDIC and the depository institution's primary regulator. The regulations define a "large institution" as one with over $500 million in assets, which would include the Company. Also, under the rule, an institution's independent auditor must examine the institution's internal controls over financial reporting and perform agreed-upon procedures to test compliance with laws and regulations concerning safety and soundness.
Under FDICIA, each federal banking agency must prescribe certain safety and soundness standards for depository institutions and their holding companies. Three types of standards must be prescribed: asset quality and earnings, operational and managerial, and compensation. Such standards would include a ratio of classified assets to capital, minimum earnings, and, to the extent feasible, a minimum ratio of market value to book value for publicly traded securities of such institutions and holding companies. Operational and managerial standards must relate to: (i) internal controls, information systems and internal audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) interest rate exposure, (v) asset growth and (vi) compensation, fees and benefits. In November 1993, the federal banking agencies released proposed rules setting forth some of the required safety and soundness standards. Under such proposed rules, if the primary federal regulator determines that any standard has not been met, the regulator can require the institution to submit a compliance plan that describes the steps the institution will take to eradicate the deficiency. Failure to adopt or implement a compliance plan could lead to further sanctions by the responsible regulator. Pursuant to the Riegle Community Development and Regulatory Improvement Act of 1994 (the "Community Development Act"), federal banking agencies have been given the discretion to adopt safety and soundness guidelines rather than regulations. Holding companies such as the Company are no longer subject to the relevant statutory requirement.
Provisions of FDICIA relax certain requirements for mergers and acquisitions among financial institutions, including authorization of mergers of insured institutions that are not members of the same insurance fund, and provide specific authorization for a federally chartered savings association or national bank to be acquired by any insured depository institution.
Under FDICIA, all depository institutions must provide 90 days notice to their primary federal regulator of branch closings, and penalties are imposed for false reports by financial institutions. Depository institutions with assets in excess of $250 million must be examined on-site annually by their primary federal or state regulator or the FDIC.
FDICIA also sets forth Truth in Savings disclosure and advertising requirements applicable to all depository institutions.
Interstate Banking ------------------
Pennsylvania law permits a Pennsylvania bank holding company (such as the Registrant) to expand by acquiring banks located in any state of the United States or the District of Columbia the laws of which allow such expansion. Also, bank holding companies located in another state are permitted by Pennsylvania law to acquire banks and bank holding companies in Pennsylvania, but only if the other state has enacted reciprocal legislation. "Reciprocal" legislation generally means legislation that permits Pennsylvania bank holding companies to acquire banks in such states and permits bank holding companies in those states to acquire Pennsylvania banks.
On September 29, 1994, Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Law"), which amended various federal banking laws to provide for nationwide interstate banking, interstate bank mergers and interstate branching. The interstate banking provisions allow, effective September 29, 1994, for the acquisition by a bank holding company of a bank located in another state.
Interstate bank mergers and branch purchase and assumption transactions will be allowed effective June 1, 1997; however, states may "opt- out" of the merger and purchase and assumption provisions by enacting a law which specifically prohibits such interstate transactions. States may, in the alternative, enact legislation to allow interstate merger and purchase and assumption transactions prior to June 1, 1997. States may also enact legislation to allow for de novo interstate branching by out of state banks.
The Interstate Banking Law also contains provisions which allow affiliated banks, such as the Registrant's subsidiary banks
to receive deposits, renew time deposits, close loans, service loans and receive payments on loans and other obligations, as agent for an affiliated depository institution without being considered a branch of the affiliate depository institution. Registrant's subsidiary banks are in the process of implementing procedures under this provision, allowing for customers to utilize banking services across state lines.
Proposed Legislation --------------------
Legislation has been introduced in Congress, from time to time, that would repeal portions of the Glass Steagall Act, which forbids commercial banks from underwriting corporate securities and certain municipal securities. There is active consideration by Congress of such proposed legislation at this time. The Registrant is continuously evaluating whether it can and should avail itself of securities powers that may be permitted if such legislation is enacted.
Competition -----------
Meridian Bank, Delaware Trust, and Meridian Bank, New Jersey compete with numerous other banking and financial institutions in their respective markets. Commercial banks, savings and loan associations and credit unions actively compete for savings and time deposits and for many types of loans. Such institutions, as well as an undetermined number of consumer finance companies, investment counseling firms, insurance companies, stock brokerage firms, money market funds, equipment leasing companies and corporate trustees, in addition to retailers of goods and services who offer consumer credit, may be considered major competitors of Meridian Bank, Delaware Trust and Meridian Bank, New Jersey with respect to one or more of the services they offer.
Acquisitions and de novo expansion effected under the Interstate Banking Law may introduce new competitors to the Registrant's market area. Additionally, the manner in which banking institutions conduct their operations may change materially as the activities in which bank holding companies and their banking and nonbanking subsidiaries are permitted to engage increase, and funding and investment alternatives continue to broaden, although the long-range effects of these changes cannot be predicted, with reasonable certainty, at this time. These changes most probably will further narrow the differences and intensify competition between and among commercial banks, thrift institutions and other financial service companies.
The marketplace continues to see intense competition from financial institutions and nonbanks for deposits, credit and associated services. Further deregulation is expected to open up opportunities for new product offerings that will replace and complement existing product lines. The ability of the Registrant and its subsidiaries to remain competitive with such other
financial institutions offering similar services will depend upon how successfully the Registrant can respond to the rapidly evolving competitive, regulatory, technological, and demographic developments which affect its operations.
Employees ---------
As of December 31, 1994, the Registrant and its subsidiaries employed 6,939 persons on a full-time equivalent basis. The Registrant and its subsidiaries provide a full range of employment benefits and consider their relationships with their employees to be excellent.
ITEM 2.



ITEM 2. PROPERTIES
As of December 31, 1994, the Registrant, or a subsidiary of the Registrant, owned 200 properties in fee and leased 188. The properties owned in fee were at such date subject to liens, encumbrances or collateral assignments amounting in the aggregate to approximately $2.7 million.
The principal office of the Registrant and of Meridian Bank is owned in fee and is located at 35 North Sixth Street, Reading, Pennsylvania 19601. The principal office of Delaware Trust is leased and located at 900 Market Street Mall, Wilmington, Delaware 19899. The principal office of Meridian Bank, New Jersey is leased and is located at 176 Route 70, Medford, New Jersey 08055.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Registrant and certain of its subsidiaries are party (plaintiff or defendant) to a number of lawsuits. While any litigation has an element of uncertainty, management, after reviewing these actions with its legal counsel, is of the opinion that the liability, if any, resulting from all legal actions will not have a material effect on the consolidated financial condition or results of operations of the Registrant.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information, including principal occupation during the past five years, relating to each executive officer of the Registrant is set forth below:
Principal Occupation Name Age For Last Five Years ---- --- --------------------
Samuel A. McCullough 56 Chairman and Chief Executive Officer, Registrant since February 1988; prior thereto, President and Chief Executive Officer, Registrant from June 1983; also, a Director of the Registrant and Chairman, Meridian Bank.
Ezekiel S. Ketchum 59 President, Registrant since February 1988 and Chief Operating Officer since December 1992; prior thereto, Vice Chairman, Registrant from September 1984; also, a Director of the Registrant and President and Chief Executive Officer, Meridian Bank.
David E. Sparks 50 Vice Chairman and Chief Financial Officer, Registrant and Meridian Bank since February 1991; also a Director of the Registrant and Meridian Bank since 1993; prior thereto, Vice Chairman, Treasurer and Chief Financial Officer, Registrant and Meridian Bank from February 1990; prior thereto, Executive Vice President, Midlantic Corporation from 1985.
William M. Fenimore, Jr. 51 Group Executive Vice President, Chief Technology Officer and Head of Strategic Planning, Registrant and Meridian Bank, since September 12, 1994; prior thereto, Executive Vice President CoreStates Financial Corp., since 1988; prior, President, CEO Hamilton Bank, a subsidiary of CoreStates Financial Corp., since 1985.
P. Sue Perrotty 41 Group Executive Vice President and Head of Strategic Marketing and Distribution System Development, Registrant and Meridian Bank since
September 6, 1994; prior thereto, Executive Vice President, Registrant and Meridian Bank since July 1989; prior thereto, Senior Vice President, Registrant and Meridian Bank.
John F. Porter, III 60 Chairman, President and Chief Executive Officer, Delaware Trust Company since July 1988; prior thereto, President, Delaware Trust Company.
Paul W. McGloin 47 Executive Vice President, Registrant and Meridian Bank from July 1985.
Robert J. Unruh 48 Chairman, Meridian Securities, Inc. since April 1990; also, Executive Vice President, Registrant and Meridian Bank from February 1985.
Jan S. Berninger 38 President, Lehigh Valley Division, Meridian Bank since December 1992; prior thereto, Executive Vice President, Corporate and Commercial Banking, Delaware Valley Division, Meridian Bank, June 1992 to December 1992; prior thereto, Senior Vice President, Meridian Bank from 1986.
David R. Bright 55 President, Delaware Valley Division, Meridian Bank since February 1988; prior thereto, Executive Vice President, Berks/Schuylkill Division, Meridian Bank since 1987.
Thomas P. Dautrich 46 President, Susquehanna Valley Division, Meridian Bank since February, 1990; prior thereto, Executive Vice President, Registrant from December 1989; prior thereto, Senior Vice President, Registrant and Meridian Bank from 1986.
Alice D. Flaherty 46 Executive Vice President, Registrant and Meridian Bank
since December 1991; prior thereto, Senior Vice President, Registrant and Meridian Bank from 1985.
R. William Holland 51 Executive Vice President and Director of Human Resources, Registrant and Meridian Bank since August 8, 1994; prior thereto, Vice President Human Resources, University of Pennsylvania, Philadelphia, 1992 to 1994; prior, Vice President of Employment, Charles Schwab 1989-1992; and prior thereto, Vice President of Human Resources, Chase Manhattan Bank, 1986-1989.
Wayne R. Huey, Jr. 50 Executive Vice President, Registrant and Meridian Bank since January 1988; prior thereto, President Lehigh Valley Division, Meridian Bank from April 1986.
Richard E. Meyers 48 Executive Vice President, Registrant since 1983; also, Executive Vice President, Meridian Bank.
George W. Millward 45 Executive Vice President, Registrant since May 1992; prior thereto, managing associate, Coopers & Lybrand January 1987 to April 1992.
Thomas G. Strohm 45 Executive Vice President, Registrant since April 1991; prior thereto Senior Vice President, Registrant from 1986.
George W. Grosz 57 President and Chief Executive Officer of Meridian Asset Management, Inc. since May 16, 1994; prior thereto, Executive Vice President of Riggs National Bank, Washington, D.C. since 1987.
Michael J. Mizak, Jr. 43 Senior Vice President and Controller, Registrant and Meridian Bank since June 1991; prior thereto, Senior Vice President and Controller, Registrant from May 1990; prior thereto, Senior Vice President, Meridian Bank from May 1989; prior thereto, Senior Vice President, Registrant from November 1984.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Shares of the Registrant's Common Stock are traded nationally in the over-the-counter market under the symbol MRDN and are quoted on the NASDAQ National Market System. As of February 15, 1995, the Registrant had 26,880 shareholders of record holding the Registrant's Common Stock.
The following sets forth the quarterly ranges of high and low bid prices, and the closing sale price, for shares of the Registrant's Common Stock for the periods indicated. Such prices represent quotations between dealers and do not include mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions. The table also reflects cash dividends declared during the periods indicated.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following sets forth certain selected historical consolidated financial data of Meridian for the periods indicated.
(Dollars In Thousands, Except Per Share Data)
/(1)/ Calculation is based upon continuing operations. /(2)/ Reflects new dividend payment schedule adopted in the first quarter of 1992.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL HIGHLIGHTS
Meridian Bancorp, Inc. (Meridian) reported net income of $159.4 million in 1994 compared to $157.8 million in 1993, an increase of 1%. Earnings per fully diluted share were $2.75 in 1994 compared to $2.74 in 1993. The returns on average assets and on average common shareholders' equity were 1.10% and 13.26%, respectively, in 1994 compared to 1.11% and 14.17%, respec- tively, in 1993. Both years included the effects of accounting changes which reduced net in- come in 1994 by $2.7 million or $.05 per share and increased net income in 1993 by $7.2 million or $.13 per share. These accounting changes, which are discussed later, related to certain postemployment benefits in 1994 and income taxes in 1993. Income before accounting changes was $162.1 million in 1994 compared to $150.5 million in 1993, an increase of 8%. Earnings per fully di- luted share before accounting changes increased by 7%, from $2.61 in 1993 to $2.80 in 1994. The major changes in net income per fully diluted share between 1994 and 1993, and a discussion of such changes, is as follows.
Net interest income was $612.4 million in 1994 compared to $617.3 million in 1993, a decrease of less than 1%. On a taxable-equivalent basis, net interest income was $630.1 million in 1994 compared to $639.3 million in 1993. The net interest margin was 4.73% in 1994 compared to 4.96% in 1993. The net interest margin was affected in 1994 by asset and liability repricing in the current interest rate environment and the impact of bank acquisitions. The provision for possible loan losses was $27.3 million in 1994, down from $56.1 million in 1993. The decline over the past year resulted from continued improvement in loan quality. Non-performing loans declined to $90.3 million at December 31, 1994, or .93% of loans, from $127.6 million or 1.42% at the end of last year. The ratio of the allowance for possible loan losses to non-per- forming loans was 188% at December 31, 1994 compared to 136% a year ago. Total non-performing assets also declined to $121.7 million at December 31, 1994, or 1.24% of loans and assets acquired in foreclosures, compared to $178.8 million or 1.98% at year-end 1993. Net loans charged-off in 1994 were $32.5 million, or .35% of average loans, down from $51.3 million, or .59% of average loans, in 1993. The allowance for possible loan losses was 1.74% of total loans at December 31, 1994 compared to 1.93% a year ago. Non-interest income was $240.8 million in 1994 compared to $285.3 million in 1993, a decrease of $44.5 million, or 16%. Broker-dealer and investment bank- ing revenues decreased by $26.5 million because of reduced profitability on trading volumes resulting from financial market conditions and the current in- terest rate environment. In addition, mortgage banking fees declined by $18.5 million, reflecting lower origination and servicing volumes due to rising in- terest rates and the reduction in scope of Meridian's mortgage banking activi- ties. Also, net gains from securities transactions decreased by $22.3 million between the two years. An improvement in other revenues offset a portion of these declines. Trust revenues increased by $13.0 million between the two years, partially as a result of the acquisition of McGlinn Capital Management in July 1994. Service charges on deposits and fees for other customer services increased by $5.7 million over last year. Non-interest expenses were $593.2 million in 1994 compared to $636.9 million in 1993, a decrease of $43.7 million, or 7%. Expenses declined by $23.1 mil- lion, or 4%, between the two years exclusive of non-recurring merger expenses related to the Commonwealth acquisition and restructuring of Meridian's mort- gage banking activities in 1993 and expenses related to the downsizing of the mortgage banking activities in 1994. Total assets at December 31, 1994 were $15.1 billion compared to $14.1 bil- lion at the end of 1993. Total loans were $9.8 billion compared to $9.0 bil- lion a year ago, a 9% increase. Each of the major loan categories grew over the last twelve months. Total deposits were $11.4 billion at December 31, 1994, almost unchanged from the balance of a year ago. Meridian continues to fund a significant portion of its assets with deposits acquired in its local marketplace. Shareholders' equity was $1.22 billion or 8.07% of total assets at December 31, 1994 compared to $1.19 billion or 8.42% a year ago. Equity was impacted by Meridian's purchase of 1.8 million shares of common stock during 1994, as dis- cussed later. The ratio of tangible shareholders' equity to assets, which ex- cludes $136.2 million of intangible assets in 1994 and $96.8 million in 1993, was 7.23% at December 31, 1994 compared to 7.78% at December 31, 1993. Meridi- an's risk-based capital ratio was 12.73% of total risk weighted assets at De- cember 31, 1994, in excess of
the 10% regulatory requirement for well capitalized institutions. The ratio was 13.67% at December 31, 1993. Book value per common share was $21.50 at De- cember 31, 1994 compared to $20.39 at December 31, 1993, an increase of 5%.
NET INTEREST INCOME AND RELATED ASSETS AND LIABILITIES (INCLUDING DERIVATIVES)
Net interest income is the single largest component of Meridian's operating income. Net interest income totaled $612.4 million in 1994 compared to $617.3 million in 1993, a decrease of approximately 1%. Taxable-equivalent net inter- est income was $630.1 million in 1994 compared to $639.3 million in 1993, also a decrease of 1%. The level of net interest income results from the interac- tion between the volume and mix of interest-earning assets and the related funding sources, and the net interest margin. In 1994, the positive impact on net interest income of earning asset growth was offset by a 23 basis point de- cline in the net interest margin as a result of asset and liability repricing in the current interest rate environment. The net interest margin was 4.73% in 1994 compared to 4.96% in 1993, as can be seen in Table 1. Average interest-earning assets increased to $13.3 billion in 1994 from $12.9 billion in 1993, an increase of 3%. The mix of earning assets changed moder- ately, as a portion of loan growth was funded by reductions in investment se- curities. Loans accounted for 70% of average interest-earning assets in 1994 compared to 67% in 1993, while investment securities accounted for 25% and 27% of average interest-earning assets during 1994 and 1993, respectively. Average loans increased 8% to $9.4 billion in 1994 from $8.7 billion in 1993. Growth occurred in all loan categories, and is reflective of the improved eco- nomic environment within Meridian's marketplace. Average commercial loans in- creased 7%. Average consumer loans, primarily home equity and indirect automo- bile loans, increased 9%, despite the fact that student loans totaling approx- imately $223 million were sold during the third quarter of 1994. Average resi- dential mortgage loans increased 10%. Meridian's securities portfolios declined an average of 3% in the year, to $3.3 billion in 1994 from $3.4 billion in 1993. Principal paydowns on mort- gage-backed securities and proceeds from maturing securities were used to fund loan growth. Deposit balances declined slightly in 1994 and averaged $11.2 billion com- pared to $11.3 billion in 1993. Deposit balances increased as a result of Me- ridian's mid-year acquisition of branches of Security Savings Bank in New Jer- sey. These additional deposits offset the deposit runoff from prior years' ac- quisitions and the loss of escrow balances related to mortgage servicing rights sold in mid-1994. Average short-term borrowings increased to $1.5 billion in 1994 from $1.0 billion in 1993. Approximately 40% of short-term borrowings is comprised of securities sold under repurchase agreements, the majority with Meridian cus- tomers. Average balances of long-term debt decreased from $439 million in 1993 to $383 million in 1994, reflecting a decline in Federal Home Loan Bank borrowings.
INTEREST RATE RISK MANAGEMENT. The level and volatility of interest rates can have a significant impact on Meridian's profitability. The objective of inter- est rate risk management is to identify and manage the sensitivity of net in- terest income to changing interest rates and other market factors in order to achieve overall financial goals. Based on economic conditions, on and off-bal- ance sheet positions, asset quality and various other considerations, manage- ment establishes tolerance ranges for interest rate sensitivity and manages within these ranges. Meridian uses several tools to measure interest rate risk. Income simulation modeling, the primary risk measurement tool, is used to project net interest income in different interest rate environments. Simulation modeling considers not only the impact of changing interest rates but also other potential causes of variability, such as earning-asset volume and mix, yield curve relation- ships, loan spreads, customer preferences and general market conditions. Me- ridian also monitors the sensitivity of the market value of all assets, liabilities and off-balance sheet positions to changing interest rates. An interest rate sensitivity or gap analysis is used to supplement simulation modeling. Gap analysis classifies assets, liabilities and off-balance sheet po- sitions into maturity and repricing time intervals in order to identify poten- tial mismatches among these positions. A substantial portion of Meridian's lia- bilities, primarily savings and money market deposit accounts, do not have con- tractual maturities. In addition, certain consumer loans have prepayment options. For gap analysis purposes, these items are distributed among the vari- ous repricing time intervals based on historical and anticipated repricing pat- terns. Other adjustments are made to the analysis to reflect the impact of product pricing decisions, interest rate spread relationships and customer be- havior. These adjustments are necessarily subjective and will vary over time with loan and deposit changes, customer preferences and market conditions. Man- agement believes that this type of gap analysis provides a more realistic pic- ture of the interest rate risk characteristics of Meridian's balance sheet than an analysis based on contractual maturities. The gap position at December 31, 1994, as provided in Table 3, indicates a moderate liability sensitive position through the one-year time period.
DERIVATIVES. Meridian uses off-balance sheet derivative products as follows: . For interest rate risk management . In the securities unit (broker-dealer activities) Tables 4 and 5 provide information on derivative positions at December 31, 1994. Reference should also be made to Note 11 of Notes to Consolidated Finan- cial Statements for additional information on off-balance sheet derivative products. DERIVATIVES USED FOR INTEREST RATE RISK MANAGEMENT. Meridian's core banking businesses generate a mix of loans and deposits that tends to create an asset sensitive interest rate risk profile, primarily because retail core deposits do not reprice as quickly as loans. An asset sensitive position generally indi- cates that net interest income would increase in periods of rising interest rates and decrease in periods of declining interest rates. Meridian manages this tendency towards asset sensitivity through its securities and purchased funding portfolios and by the use of off-balance sheet derivative products. Meridian utilizes a variety of derivative instruments in managing interest rate risk, including interest rate swaps, options, forwards, caps and floors. These instruments provide an efficient means to achieve risk management goals, while sup-porting liquidity and capital management objectives. Interest rate swaps account for the majority of derivative products used for interest rate risk management purposes. Interest rate swaps involve the ex- change of fixed and floating interest payments based on an underlying notional amount. Meridian will generally receive a fixed rate and pay a floating rate in order to reduce the asset sensitive position associated with its core bank- ing businesses. Meridian uses interest rate swaps primarily to alter the repricing characteristics of its retail core deposits, including time depos- its, interest-bearing checking accounts, and savings and money market depos- its. The notional amount of interest rate swaps totaled $2.9 billion at December 31, 1994 compared to $2.3 billion at December 31, 1993. Because of the nature of risk being managed, the impact on net interest income of swaps for which Meridian receives a fixed and pays a floating interest rate will be positive during periods of declining rates and negative in periods of rising rates. Consistent with this profile, interest expense on deposits was reduced by $11.3 million in the rising rate environment of 1994 compared to a reduction of $43.6 million in interest expense in 1993.
As financial market conditions and balance sheet mix changes, management may elect to modify its interest rate risk profile. One means for achieving this objective is to terminate existing interest rate swaps. Accounting rules re- quire that any gains or losses resulting from terminations be amortized over the remaining life of the terminated contract. Deferred gains on terminated interest rate swaps were $905,000 at December 31, 1994 and will be completely amortized into income by early 1996. Deferred losses on terminated swaps to- taled $5.0 million at December 31, 1994 and will be completely amortized into income by year-end 1995. Meridian purchases interest rate floors to protect net interest income from the effects of declining interest rates or a flattening of the yield curve. In interest rate floor contracts, Meridian pays a premium to a counterparty for the right to receive payments if interest rates associated with a particular index fall below a predetermined level. Meridian has no future obligation to make additional premium or other payments to the counterparty. Premiums paid are amortized over the life of the contract. As of December 31, 1994, Meridian had $500 million of purchased floors based on London Inter-Bank Offered Rate (LIBOR) and U.S. Treasury rates. Derivative products, as with all financial instruments, contain elements of risk. A derivative product is subject to market risk in that the value of a contract will increase or decrease as a result of movements in market interest rates. Meridian continually monitors the sensitivity of its derivative con- tracts to changing interest rates. Unrealized gains and losses are calculated based on the replacement costs of the contracts. The decline in the market value of Meridian's interest rate contracts from year-end 1993 to 1994 is con- sistent with the rising interest rate environment of 1994. Unrealized gains and losses on derivative positions should be viewed in the context of the overall balance sheet. An unrealized loss on a derivative prod- uct used for interest rate risk management purposes is generally offset or mitigated by an unrealized gain on the asset or liability to which the deriva- tive contract relates. Meridian, as part of its asset and liability management process, continually monitors the impact of interest rate movements on the market value of not only its derivative positions, but also all other on and off-balance sheet positions. In a rising rate environment, fixed rate loan, investment and off-balance sheet positions will decline in market value, while core deposits and fixed rate, longer term borrowings will appreciate in value.
Credit risk exists to the extent that a derivatives contract has a positive market value and the counterparty to the transaction fails to perform under the terms of the contract. Current exposure is measured by calculating the cost to replace a derivative contract at current market rates. Potential expo- sure is estimated by calculating projected changes in replacement costs under different interest rate environments. Current and potential exposures are cal- culated and reviewed by management on an ongoing basis. Credit limits, consid- ering both current and potential exposures, are approved by the Meridian Credit Policy Committee. Credit risk is further managed by restricting counterparties to a select group of high quality institutions, by entering into netting arrangements and, where appropriate, by establishing collateral requirements. Meridian offers interest rate caps and floors to its banking customers, who typically request these products in conjunction with their management of vari- able rate loans. The total of customer interest rate caps and floors was ap- proximately $267 million at December 31, 1994. The repricing characteristics of loans made with optional features are monitored and considered in the asset and liability management and risk measurement processes previously discussed. DERIVATIVES USED IN THE SECURITIES UNIT (BROKER-DEALER ACTIVITIES). Meridian Securities uses various off-balance sheet derivative products to support cus- tomer needs and manage the market risks associated with the broker-dealer business. The securities unit acts as remarketing agent on tender option bonds totaling $256 million at year-end 1994 compared to $435 million at December 31, 1993. The premium paid for Treasury float con-tracts, which is included on the balance sheet in Other Assets, was $1.6 mil-lion at December 31, 1994 and represents the maximum exposure to Meridian from such contracts. Other derivative products used to manage risks associated with trading account positions include forward commitments to sell securities, which totaled $111 million at December 31, 1994 and averaged $88 million for the year. LIQUIDITY. The objective of liquidity management is to ensure that sufficient funding is available, at reasonable cost, to meet the ongoing and potential cash needs of Meridian and to take advantage of income producing opportunities as they arise. While the desired level of liquidity may vary depending upon a variety of factors, it is a primary goal of Meridian to maintain a high level of liquidity in all economic environments. Management considers Meridian's li- quidity position at the end of 1994 to be sufficient to meet its foreseeable cash flow requirements.
Liquidity management is influenced by several key elements, including Meridi- an's reputation, asset quality, the maturity structure of its assets and lia- bilities, cash flow generated by assets, and Meridian's ability to access funds in the capital markets. The single most important source of liquidity for Meridian is its core deposit base, which consists of deposits from custom- ers with long-standing relationships. Meridian continues to promote the acqui- sition of core deposits through its retail distribution systems and through selective banking acquisitions. Long-term debt and shareholders' equity also contribute to liquidity. In 1994, Meridian funded approximately 75% of total assets with core deposits acquired within its local marketplace and approxi- mately 85% of total assets with core deposits, long-term debt and sharehold- ers' equity. Meridian also places emphasis on the maintenance of an appropriate level of asset liquidity. Liquid assets include short-term money market investments, securities available for sale, and interest-bearing deposits with other banks. Cash flows from investment maturities and mortgage and asset-backed securities also provide a significant source of liquidity. Meridian is committed to maintaining additional funding flexibility through access to the debt and capital markets. Meridian Bank, Meridian's principal banking subsidiary, has access to a variety of money market sources of funds, such as federal funds purchased and securities sold under agreements to repur- chase, borrowings from the Federal Home Loan Bank, as well as to term funding through the issuance of bank notes, bank deposit notes, and subordinated debt. Meridian also has the capacity to issue securities under its shelf registra- tion statement filed with the Securities and Exchange Commission. As of Decem- ber 31, 1994, Meridian had debt and preferred equity securities registered but unissued under this registration statement totaling $175 million. The cost and availability of external funding is influenced by Meridian's credit ratings. The following is a summary of Meridian's and Meridian Bank's ratings at December 31, 1994, which are unchanged from a year ago.
Reference should also be made to the Statements of Cash Flows appearing in the Consolidated Financial Statements for additional information on liquidity. The statement of cash flows for 1994 reflects $555.0 million of cash provided by operations, $750.4 million used by investing activities and $359.6 million provided by financing activities. Operating activities include $159.4 million in net income for 1994. Investing activities are primarily comprised of sales and purchases of short-term investments, investment securities, investment securities available for sale and loans. Financing activities present the net change in Meridian's deposit accounts, short-term borrowings, long-term debt and shareholders' equity. Cash flows from operations and an increase in short- term borrowings were used to fund the increases in loans and investments during 1994. LOANS. The lending function is Meridian's principal business activity and it is Meridian's continuing policy to serve the credit needs of its customer base. The economy in Meridian's primary marketplace is broad-based and diverse and the loan portfolio reflects that diversity. Lending to individual consum- ers in this marketplace accounts for approximately one-third of total loans. The remainder of the portfolio consists predominantly of commercial loans and commercial real estate loans also in Meridian's primary marketplace. Loans were $9.8 billion at December 31, 1994 compared to $9.0 billion at December 31, 1993, an increase of 9%. Each of the major loan portfolios experienced growth over this time period. Commercial loans amounted to $5.9 billion at December 31, 1994 compared to $5.4 billion at December 31, 1993, a 9% increase. Meridian's commercial loan portfolio is oriented toward diversified, small and medium-sized businesses within Meridian's market area, with limits on the size of loans to any single borrower according to credit risk. These loans are predominantly in the serv- ices, real estate, and manufacturing industries. Credit risk associated with these borrowers is principally influenced by general economic conditions and the resulting impact on the borrower's operations. Geographical coverage of Meridian's commercial lending activity extends across central and eastern Pennsylvania, southern New Jersey and Delaware. Real estate-related commercial loans, including real estate construction and commercial mortgages, totaled $2.0 billion and represented 20% of total loans at December 31, 1994 compared to $1.9 billion and 21% one year ago. These portfolios are located primarily in markets in which Meridian has a local banking presence. Collateral types are diverse and include the real estate of borrowers who utilize the property in their businesses (owner-occupied) as well as real estate investors. At December 31, 1994, owner-occupied commercial mortgages comprised 8% of total loan outstandings compared to 9% at December 31, 1993. Investor-developer commercial mortgages comprised 9% at both year- end 1994 and 1993.
Commercial, financial and agricultural loans totaled $4.0 billion and repre- sented 41% of total loans at December 31, 1994 compared to $3.6 billion and 40% at the end of 1993. Consumer lending includes primarily loans to individuals in communities served by Meridian. These loans include open-ended credit arrangements, such as home equity loans, and closed-end loans subject to specific contractual payment schedules, such as installment loans. Consumer loans totaled $2.6 billion at December 31, 1994 compared to $2.5 billion at year-end 1993, an increase of 2%. Student loans aggregating $223 million were sold during the third quarter of 1994. This portfolio was sold due to the implementation of a federal government program for student loans. Exclusive of the impact of this sale, consumer loans increased by 11% over the twelve-month time period. Residential mortgage loans increased from $993.5 million at December 31, 1993 to $1.2 billion at December 31, 1994. INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE. Effective in the first quarter 1994, Meridian adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Secu- rities" which requires investments in equity securities with a readily deter- minable fair value and investments in all debt securities to be classified in one of three categories. The classification of securities is determined at the time of purchase. The three categories are (1) held to maturity--carried at amortized cost; (2) available for sale--carried at fair value (with unrealized gains and losses, net of related tax effect, recorded as a separate component of shareholders' equity); and (3) trading account--carried at fair value (with unrealized gains and losses recorded in the income statement). The carrying value of the investment portfolio at December 31, 1994 was $2.9 billion and net unrealized losses totaled $119.1 million. Such losses include gross unrealized losses of $123.3 million and gross unrealized gains of $4.2 million. Meridian has the intent and the ability to hold these securities un- til maturity. At the end of 1993, the carrying value of the investment portfo- lio was $2.8 billion and net unrealized gains were $28.6 million. The change in the value of the portfolio compared to year-end 1993 reflects the impact of the increase in interest rates during 1994. The average maturity of the in- vestment portfolio at December 31, 1994 was 2.5 years compared to 2.8 years at December 31, 1993. Securities expected to be held for an indefinite period of time are classi- fied as investment securities available for sale and are carried at fair val- ue. The fair value of this portfolio at December 31, 1994 was $435.0 million, with net unrealized losses of $10.7 million. Such losses include gross unrealized losses of $14.0 million and gross unrealized gains of $3.3 million. At year-end 1993, the carrying value of this portfolio, based on the lower of aggregate amortized cost or fair value, was $275.7 million, with net unrealized gains of $12.5 million. The average maturity of the portfolio of investment securities available for sale, which includes tax-exempt obliga- tions of states and municipalities, was 4.5 years at December 31, 1994 com- pared to 5.5 years at December 31, 1993.
Meridian's securities portfolios (investment securities and investment secu- rities available for sale) are comprised of U.S. Treasury and federal agency securities, mortgage-backed securities, tax-exempt obligations of states and municipalities, corporate securities, including privately issued asset-backed securities, and equity securities. U.S. Treasury and federal agency securities (other than mortgage-backed secu- rities) were $942 million at year-end 1994 and accounted for approximately 28% of total securities holdings. Mortgage-backed securities remain the largest component of Meridian's securities portfolios, accounting for approximately 52% of the total at year-end 1994. This portfolio is comprised of federal agency mortgage-backed securities and collateralized mortgage obligations which are backed by federal agency collateral or are AAA rated private issues. Meridian evaluates and closely monitors cash flow projections for all mort- gage-backed securities. The expected average life of mortgage-backed securi- ties at December 31, 1994, based on projected prepayment rates, was 2.9 years compared to 2.2 years at year-end 1993. Meridian's current credit guidelines call for purchases of securities issued by either the U.S. Treasury or federal agencies, or by states and municipalities or corporate entities that are rated A or higher by Moody's Investor Services, Inc. or Standard and Poor's Corporation. At December 31, 1994, the carrying value of state and municipal securities was $368.8 million, 93% of which was rated A or higher by the rating agencies. Securities rated Baa and below totaled $2.1 million and $22.7 million were non-rated. Non-rated securities are generally collateralized by letters of credit or are securities in which the principal and interest is supported by government obligations set aside in escrow accounts. At December 31, 1994, the carrying value of corporate securities, excluding AAA rated private mortgage-backed and asset-backed securities, was $9.2 million. Corporate securities rated Baa and below totaled $3.9 million and $3.8 million of such securities was non-rated. DEPOSITS. Total deposits were $11.4 billion at December 31, 1994, almost un- changed from the balance at the end of 1993. During the second quarter of 1994, Meridian assumed approximately $487 million of deposits of Security Savings Bank from the Resolution Trust Corporation. These additional deposits offset runoff from prior years' acquisitions and the loss of escrow balances related to mortgage servicing rights sold in mid-1994. SHORT-TERM BORROWINGS. At December 31, 1994, short-term borrowings totaled $1.8 billion compared to $791.7 million a year earlier, an increase of 129%. This category is comprised primarily of federal funds purchased and securities sold under agreements to repurchase and, at year-end 1994, $75 million of se- nior floating rate notes due in July 1995. LONG-TERM DEBT AND OTHER BORROWINGS. This category amounted to $372.2 million at December 31, 1994 compared to $421.3 million at December 31, 1993, a de- crease of 12%. Subordinated debt of $321.9 million is included in this catego- ry, along with capitalized lease obligations, longer-term borrowings from the Federal Home Loan Bank, and various other loans and mortgages payable. The de- crease in this category resulted from the repayment of certain borrowings from the Federal Home Loan Bank during 1994.
PROVISION FOR POSSIBLE LOAN LOSSES AND RELATED CREDIT QUALITY
Meridian manages asset quality and controls credit risk through diversification of the loan portfolio and the application of policies designed to foster sound underwriting and loan monitoring practices. Meridian's credit administration function is charged with monitoring asset quality, establishing credit policies and procedures, and enforcing the consistent application of these policies and procedures across Meridian. Commercial loans are assigned risk ratings by loan officers. The appropriate- ness of these ratings, in addition to the overall lending process, is reviewed by credit policy personnel. A quarterly review and reporting process is in place for monitoring those loans that have been identified as problems or po- tential problems. A separate loan workout department is involved with the col- lection of problem loans. Because of their relatively homogeneous nature and small dollar size, consumer and residential mortgage loans are generally re- viewed in the aggregate. When establishing the appropriate levels for the provision and the allowance for possible loan losses, management performs an analysis of the loan portfo- lio by considering a variety of factors. This analysis includes periodic re- views by loan officers, credit review and loan workout personnel of all bor- rowers with aggregate balances of $500,000 or greater. Meridian also reviews, at least on a quarterly basis, problem borrowers with balances of $250,000 or greater, as well as selected lower balance loans. Consideration is given to the impact of current and anticipated economic conditions, the diversification of the loan portfolio, historical loss experience, delinquency statistics, re- views performed by loan officers who are primarily responsible for compliance with established lending policy, the financial strength of borrowers, and the adequacy of underlying collateral. Consideration is also given to examinations performed by regulatory authorities. Lending procedures and the loan portfolio are examined periodically by several banking regulatory agencies as part of their supervisory activities. To assist in determining the adequacy of the provision and the allowance, management first sets the allocated portion of the allowance for possible loan losses. For commercial loans, allocations of the allowance to individual loans are based on borrower-specific data determined by reviewing individual non- performing, delinquent, problem, and other loans and by considering those items described in the preceding paragraph. In addition, general allocations of the allowance are made to the commercial loan category. General allocations to commercial loans also consider the impact of current and anticipated economic conditions on both individual borrowers and the commercial loan portfolio taken as a whole. Consumer and residential mortgage loan allocations are determined in the aggregate and are based on recent charge-off history and delinquency trends, anticipated losses over the foreseeable future, and the impact of current and anticipated economic conditions in the local, regional and national economies. The unallocated portion of the allowance is that amount which, when added to the allocated allowance, brings the total allowance to the amount deemed adequate by management at the time. Management considers the unallocated portion of the allowance, which is determined by reviewing those items described in the preceding paragraph, as a subset of the entire allowance and, consequently, available to absorb losses anywhere within the loan portfolio.
The loan portfolio represents loans made primarily in Meridian's market area in eastern and central Pennsylvania and in Delaware and southern New Jersey. Management continues to monitor the economic conditions in this market area. The ultimate collectibility of a substantial portion of Meridian's loans, espe- cially its real estate loans, and the market value of other real estate owned, is susceptible to changes in economic conditions in this primary market area, as was especially evident over the past several years. Determining the level of the allowance for possible loan losses at any given date is difficult, particularly in a continually changing economy. Management must make estimates, using assumptions and information which are often subjec- tive and changing. Management continues to review Meridian's loan portfolio in light of a changing economy and possible future changes in the banking and reg- ulatory environment. In management's opinion, the allowance for possible loan losses is adequate at December 31, 1994. The balance in the allowance for possible loan losses was $169.4 million or 1.74% of total loans at the end of 1994 compared to $173.4 million or 1.93% of total loans at year-end 1993. The provision for possible loan losses represents charges made to earnings to maintain an adequate allowance for possible loan losses. The provision for possible loan losses was $27.3 million in 1994 com- pared to $56.1 million in 1993. The decline in the provision for possible loan losses reflects management's evaluation of the level of the allowance for pos- sible loan losses in light of, among other factors, improved asset quality trends, current economic conditions, the continued decline in non-performing loans and a decline in the amount of loans being charged off. The overall im- provement in asset quality was also evident in a decrease of $5.6 million in writedowns and other expenses associated with foreclosed real estate, from $10.9 million in 1993 to $5.3 million in 1994. Net charge-offs were $32.5 million or .35% of average loans in 1994 compared to $51.3 million or .59% of average loans in 1993. Recoveries were $19.7 mil- lion in 1994 compared to $11.2 million in 1993. The relationship of recoveries to charge-offs improved from 18% in 1993 to 38% in 1994. Table 14 presents a summary of various indicators of credit quality. At Decem- ber 31, 1994, non-performing assets as a percentage of period-end loans and as- sets acquired in foreclosures were 1.24% compared to 1.98% at the end of last year. Non-performing assets were $121.7 million at December 31, 1994 and de- creased by $57.1 million during 1994 from $178.8 million a year ago. Real es- tate-related non-performing assets were 62% of total non-performing assets at December 31, 1994 compared to 65% a year ago.
Non-performing loans were .93% of total loans at December 31, 1994 compared to 1.42% at the end of last year. Non-performing loans amounted to $90.3 million at December 31, 1994 and decreased by $37.3 million during the past year from $127.6 million a year ago. Non-performing assets and loans past due 90 or more days as to interest or principal at December 31, 1994 were $144.1 million or 1.47% of loans and assets acquired in foreclosures compared to $203.6 million or 2.25% one year ago, a decrease of $59.5 million. The ratio of the allowance for possible loan losses to non-performing loans was 188% at December 31, 1994 compared to 136% at year-end 1993. The coverage of non-performing assets was 139% at year-end 1994 compared to 97% at December 31, 1993. Possible future losses on foreclosed real estate will be charged di- rectly to earnings and not to the allowance for possible loan losses. Fore- closed real estate is carried at the lower of cost or fair value, less esti- mated costs of disposal. Non-performing assets are comprised of non-accrual loans, loans categorized as troubled debt restructurings, and assets acquired in foreclosures which in- cludes in-substance foreclosures. Non-performing assets do not include loans past due 90 days or more as to interest or principal which are well secured and in the process of collection, the majority of which represent residential mort- gage loans. Generally, a commercial loan is classified as non-accrual when it is deter- mined that the collection of interest or principal is doubtful, or when a de- fault of interest or principal has existed for 90 days or more, unless such loan is well secured and in the process of collection. When the accrual of in- terest is discontinued, unpaid interest is reversed through a charge to inter- est income. The majority of non-accrual loans are secured by various forms of collateral, the ultimate recoverability of which is subject to economic condi- tions and other factors. Residential mortgages which are 180 days or more delinquent are placed on nonaccrual status when total principal, interest, and escrow owed exceeds 80% of the property's appraised value. Properties are re- appraised when foreclo- sure proceedings are initiated. Consumer loans are charged-off when deemed un- collectible, which is generally at a time no later than 180 days past due. Non-accrual loans were $89.1 million at December 31, 1994 compared to $124.3 million one year ago, a decrease of $35.2 million, or 28%. The carrying value of non-accrual commercial loans at December 31, 1994 has already been reduced by charge-offs and payments to 63% of the aggregate carrying value when such loans were originally placed into a non-performing status. Payments of $14.2 million were received on these loans in 1994, almost all of which was applied as a reduction in the principal outstanding. Meridian's non-accrual loans include only three loans with balances in excess of $2.5 million (only one of which is over $5 million), indicating that a substantial portion of the risk is spread across a significant number of borrowers. These three loans aggregated $19.4 million or approximately 24% of total non-accrual loans at December 31, 1994. Table 16 classifies non-accrual loans according to various levels of payment performance.
A loan is categorized as a troubled debt restructuring if the original inter- est rate on the loan, repayment terms, or both, were restructured on a below- market basis due to a deterioration in the financial condition of the borrower. If restructured loans are not performing according to revised terms, such amounts are included in non-accrual loans. The level of assets acquired in foreclosures (except consumer related), in- cluding in-substance foreclosures, was $29.3 million at December 31, 1994 com- pared to $50.0 million a year ago. A loan is classified as an in-substance foreclosure when the borrower is perceived to have little or no equity in the project, the borrower appears to be unable or unwilling to rebuild equity or repay the loan in the foreseeable future, and the bank can reasonably antici- pate proceeds for repayment only from the operation or sale of the collateral. These assets are carried at the lower of cost or fair value, less estimated selling expenses. Assets acquired in foreclosures at December 31, 1994 have already been reduced by charge-offs and payments to 33% of the aggregate carrying value when such assets were originally placed into non-performing status. Assets acquired in foreclosures include only one property with a balance in excess of $2.5 million at year-end 1994, aggregating $6.6 million or approximately 23% of the total of such assets. Although the real estate market remained mixed during the year, Meridian was successful in disposing of portions of assets acquired in foreclosures. The balance of these assets at the end of 1994 was less than 60% of the balance at the beginning of the year. Reference should be made to Table 6 for a summary of the period-end balances in the loan portfolio. There has not been a significant change in the percent- age of each category to total loans from a year ago.
In addition, reference should be made to Table 17 for a breakdown of commer- cial loans by major industry and to Table 18 for a breakdown of commercial real estate loans by category. As can be seen in these tables, Meridian's portfolio of commercial loans and commercial real estate loans covers a wide range of borrowers. This diversification generally characterizes the economy of Meridian's primary market area. Of Meridian's commercial real estate loans, almost all, or 97%, are to borrowers for property in Pennsylvania, Delaware, and New Jersey, of which Pennsylvania has 80%, or the largest single share. In connection with the decision to extend credit to particular borrowers, Merid- ian takes into account, among other things, asset diversification and particu- lar risks presented by the different industries in which such borrowers com- pete, in light of changing economic circumstances. Loan concentrations are considered to exist when a multiple number of borrow- ers are engaged in similar activities and have similar economic characteristics which would cause their ability to meet contractual obligations to be similarly impacted by economic or other conditions. At December 31, 1994, Meridian's com- mercial loans and commitments did not have any industry concentration or other known concentration that exceeded 10% of total loans and commitments. Meridian has no foreign loan exposure. Meridian's largest industry exposures are in the automobile dealer and healthcare sectors. Information related to these portfo- lios at December 31, 1994 and 1993 is as follows (in thousands).
Potential problem loans consist of loans which are included in performing loans at December 31, 1994, but for which potential credit problems of the bor- rowers have caused management to have concerns as to the ability of such bor- rowers to comply with present repayment terms. At December 31, 1994, such po- tential problem loans, not included in Table 14, amounted to approximately $43 million compared to approximately $31 million one year ago. Depending on the state of the economy and the impact thereof on Meridian's borrowers, as well as other future events, these loans and others not currently so identified could be classified as non-performing assets in the future.
Meridian continues to service approximately $701 million of residential mort- gage loans on which there is potential credit loss. This servicing was either originated by Meridian or purchased with recourse from other financial institu- tions. These institutions have since experienced financial difficulties, in- cluding bankruptcies. As of December 31, 1994, reserves of $8.0 million have been established in recognition of potential losses related to the recourse servicing portfolio. Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" requires that certain impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or the fair value of the loan if the loan is collateral dependent. Statement No. 118 "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures" amends Statement No. 114 to al- low a creditor to use existing methods for recognizing interest income on an impaired loan. Both statements are effective in the first quarter of 1995. Based on management's analysis, the impact on Meridian's consolidated results of operations will not be material.
NON-INTEREST INCOME
Meridian's businesses generate various sources of non-interest income, such as trust revenues, mortgage banking fee income, broker-dealer and investment bank- ing revenues, securities gains, service charges on deposit accounts, and other service charges, commissions and fees. Non-interest income was $240.8 million in 1994 compared to $285.3 million in 1993, a decrease of $44.5 million, or 16%. Trust revenues were $54.7 million in 1994 compared to $41.7 million in 1993, an increase of 31%. Contributing to the higher level of revenues was the ac- quisition of McGlinn Capital Management Inc. in July 1994, and increases in personal trust, employee benefit and investment advisory fees. The market value of customers' assets administered by Meridian increased by 15% during the year from $27.5 billion at year-end 1993 to $31.7 billion at December 31, 1994. Included in the total at year-end 1994 are assets for which Meridian has investment management responsibility of $9.9 billion, including $2.7 billion from the McGlinn acquisition.
Mortgage banking revenues were $17.5 million in 1994 compared to $36.0 million in 1993. Revenues in 1993 were $69.7 million before the negative impact of the amortization and reserves of $33.7 million for purchased mortgage servicing rights, which was recorded as a reduction of revenues. Amortization of purchased mortgage servicing rights in 1994 was insignificant since all of such rights were sold or written-off during the past two years. Exclusive of this amortization charge, mortgage banking revenues declined by $52.2 million, or 75%, between the two years. This decrease reflects lower origination and ser- vicing volumes due to rising interest rates and the reduction in scope of Me- ridian's mortgage banking activities. Origination fees declined by $12.5 mil- lion, or 74%, between the two years. The reduction in origination volume and the decision to sell most of the mortgage loan servicing portfolio resulted in a decline of $19.9 million or 66% in servicing fee revenues between the two years. A decrease in gains on the sale of mortgage loan servicing also contributed to the decline in revenues. Financial data (in thousands) relevant to these gains is as follows.
Broker-dealer and investment banking revenues totaled $42.8 million in 1994 compared to $69.4 million in 1993, a decrease of 38%. Factors contributing to the decline in revenues are discussed in the "Industry Segments" portion of this narrative. Revenues also include valuation adjustments to interest-only collateralized mortgage obligation residuals, which are classified as invest- ment securities. The valuation of residuals was impacted by the decline in in- terest rates in 1993 and the impact on expected prepayment speeds and cash flows. As of December 31, 1994, Meridian had a net carrying value, after re- serves of $1.1 million, of $8.2 million in collateralized mortgage obligation residuals.
Service charges on deposits and fees for other customer services increased by 6% between the two years, from $97.2 million in 1993 to $102.9 million in 1994. Increases in certain fees for deposit products, as well as additional deposit accounts because of bank acquisitions over the past year, contributed to the higher level of service charges. Net securities gains were $3.0 million in 1994 compared to $25.3 million in 1993. The amount in 1994 included gains of $3.2 million and losses of $214 thousand. These gains are in addition to gains of $1.8 million from sales primarily of mortgage-related investments, which are included in broker-dealer and investment banking revenues. Included in the total for 1993 was a gain of $8.6 million on the sale of Meridian's common stock investment in Fidelity National Financial, Inc. This stock was acquired as part of the sale of Meridian's title insurance operations in 1992. A gain of $5.5 million was recognized in 1993 from the sale of investment securities available for sale in the first quarter of the year, mainly U.S. Treasury and federal agency securities with maturities of less than one year. Finally, a gain of $8.3 million was recognized in 1993 from the sale of some of Commonwealth's mortgage- backed investments related to the restructuring of this portfolio.
NON-INTEREST EXPENSES
Non-interest expenses were $593.2 million in 1994 compared to $636.9 million in 1993, a decrease of $43.7 million, or 7%. Expenses decreased by $23.1 mil- lion, or 4%, between the two years exclusive of non-recurring expenses related to the Commonwealth acquisition and restructuring of Meridian's mortgage bank- ing activities in 1993 and expenses related to the downsizing of the mortgage banking activities in 1994. A decline in operating expenses in the securities unit and the mortgage banking function was the primary reason for this decrease in expenses. Salaries and employee benefits, which represent the largest component of non- interest expenses, were almost unchanged between the two years, totaling $297.5 million in 1994 compared to $296.1 million in 1993. Lower levels of expense in the mortgage banking and securities units offset an increase in the banking unit. Full-time equivalent employment was 6,939 at December 31, 1994 compared to 6,917 a year ago. Effective January 1, 1994, Meridian adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." This statement establishes standards for employers who provide benefits to former employees after employment but before retirement. Such benefits include, among other things, severance, disability, and workers' compensation benefits. The implementation of these new accounting rules resulted in a charge of $4.2 million ($2.7 million after-tax or $.05 per share) in the first quarter of 1994.
Net occupancy expense was $45.4 million in 1994 compared to $42.6 million in 1993, an increase of 7%. Equipment expense increased from $38.0 million in 1993 to $38.7 million in 1994. The increases in both expense categories were related to expansion, banking acquisitions, and the upgrading of Meridian's data processing and operations capabilities. Other expenses were $211.7 million in 1994 compared to $242.6 million in 1993, a decrease of $30.9 million, or 13%. Almost half of the decline in ex- penses occurred in the mortgage banking function, where loan origination and servicing expense decreased by $7.0 million reflecting the reduction in scope of Meridian's mortgage banking activities. In addition, there was a decline of $5.1 million in the provision for recourse servicing. With respect to mortgage servicing portfolios purchased with recourse, the provisions charged to oper- ating expense were $10.4 million and $15.6 million in 1994 and 1993, respec- tively. Charge-offs and writedowns aggregated $4.1 million in 1994 and $13.8 million in 1993. FDIC deposit insurance expense decreased by $6.7 million between the two years. Other categories reflecting decreases between the two years included foreclosed real estate expenses, which declined by $5.6 million and profes- sional fees, mostly payments to outside consultants for enhancements to oper- ating systems, which declined by $3.2 million. Partially offsetting these de- creases were increases related to automated teller network charges and the am- ortization of intangible assets. A restructuring charge of $17.5 million was recorded in 1993 in the mortgage unit. This charge resulted from the restructuring plan approved by Meridian's Board of Directors and included: . $7.9 million for anticipated cash outflows related to various contract ter- mination, severance and legal and other sale-related costs. . $9.6 million to reflect the estimated fair market value of certain mortgage servicing intangibles and other related assets, which balances were then transferred to assets held for sale.
PROVISION FOR INCOME TAXES
The provision for income taxes for 1994 was $70.6 million compared to $59.1 million for 1993. The effective tax rate, which is the ratio of income tax ex- pense to income before income taxes, was 30% in 1994, up from 28% in 1993. The tax rate for both periods was less than the federal statutory rate of 35% pri- marily because of tax-exempt investment and loan income.
At December 31, 1994, deferred tax assets amounted to $84.1 million and de- ferred tax liabilities amounted to $65.5 million, which are included in other assets and other liabilities, respectively. No valuation allowance has been established for deferred tax assets because management believes that it is more likely than not that the deferred tax assets will be realized. Effective January 1, 1993, Meridian adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" which requires a change from the deferred method of accounting for income taxes to the asset and liability method. Under the asset and liability method, deferred tax assets and liabili- ties are recognized for the future tax consequences attributable to temporary differences between the financial statement and tax bases of existing assets and liabilities. Deferred tax assets and liabilities are measured using en- acted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The ef- fect on deferred tax assets and liabilities of a change in tax rates is recog- nized in income in the period that includes the enactment date of the rate change.
CAPITAL RESOURCES
The maintenance of appropriate levels of capital is a management priority. Overall capital adequacy and dividend policy are monitored on an on-going ba- sis and are reviewed quarterly by the Board of Directors. Meridian's principal capital planning goals are to maintain a strong capital base to support the risks inherent in various lines of business, to retain sufficient earnings to meet capitalization objectives, especially those related to growth and expan- sion, and to provide an adequate return to shareholders. Meridian is positioned to take advantage of market opportunities to strengthen capital. A shelf registration statement with the Securities and Ex- change Commission is available to facilitate the issuance of an additional $175 million of debt and preferred equity securities, if and when the need arises for capital and market conditions warrant. Total shareholders' equity was $1.22 billion at December 31, 1994 compared to $1.19 billion at the end of 1993, an increase of 2%. Net income for the year was $159.4 million and dividends declared during the year were $77.3 million, resulting in a common dividend payout ratio of 49%. Equity was impacted during 1994 by the implementation of two common stock purchase programs.
In January 1994 the Board of Directors authorized the purchase of up to one million shares to satisfy the company's obligations under the warrant to acquire 500,000 shares of Meridian's common stock issuable in connection with the acquisition of McGlinn Capital Management, and obligations under stock option and other employee benefit plans. During 1994, 638,854 shares were purchased in the open market and at December 31, 1994, 525,336 shares remained as treasury stock. In August 1994 the Board of Directors authorized the adoption of an Employee Stock Ownership Plan (ESOP), and Meridian announced that the trustee for the ESOP would purchase two million shares of common stock in the market. Pur- chased shares will be used for distribution to employees of Meridian and its affiliated companies as part of an additional qualified plan of deferred com- pensation. As of December 31, 1994, the ESOP had purchased 1,285,000 shares. Meridian's capital adequacy at December 31, 1994 can be determined by analyz- ing the capital ratios presented in Table 21. As can be seen in this table, Meridian's consolidated ratios at the end of 1994 exceeded all regulatory re- quirements. The risk-based capital ratio was 12.73% at December 31, 1994 com- pared to 13.67% at December 31, 1993. The ratio of tangible shareholders' eq- uity to assets, which excludes $136.2 million of intangible assets (goodwill and core deposit intangibles) was 7.23% at December 31, 1994 compared to 7.78% at December 31, 1993. The risk-based capital ratios of each of Meridian's com- mercial banks also exceeded regulatory requirements at the end of 1994, as shown in the table. Federal Reserve Board regulations define a well-capitalized institution as having a Tier 1 capital ratio of 6% or more, a total risk-based capital ratio of 10% or more, and a leverage ratio of 5% or more. Consolidated ratios at De- cember 31, 1994 exceeded these guidelines, as did the ratios of each of Merid- ian's commercial banks. The common stock of Meridian is traded in the over-the-counter market. The monthly average number of common shares traded in 1994 was 3.9 million com- pared to 4.0 million in 1993. Table 23 sets forth the high and low market price quotations for the periods indicated. Price quotations are available through the National Market System of the National Association of Securities Dealers Automated Quotation System. These prices represent quotations between dealers and do not include retail markups, markdowns or commissions, and may not represent actual transactions.
Book value per common share was $21.50 at December 31, 1994 compared to a market value of $26.63 per share. Book value and market value at the end of 1993 were $20.39 and $28.50, respectively. The market to book value ratio was 124% at the end of 1994 compared to 140% one year ago. Meridian's market capi- talization at December 31, 1994 was approximately $1.5 billion compared to $1.7 billion one year ago, a decrease of 9%. After-tax unrealized losses on investment securities and securities classi- fied as available for sale, which aggregated $7.2 million at December 31, 1994, were de ducted from shareholders' equity. The impact of recording this unrealized loss in equity at the end of 1994 was a reduction in book value per common share of $.13 and a reduction of 5 basis points in the shareholders' equity to assets ratio. Reference should be made to the Statement of Changes in Shareholders' Equity appearing in the Consolidated Financial Statements for a summary of the changes in total shareholders' equity for each of the years in the three-year period ended December 31, 1994.
INDUSTRY SEGMENTS
Table 24 presents a summary of the operating results of Meridian's two re- portable industry segments. BANKING. The banking unit provides a full range of retail and corporate bank- ing, and trust and asset management services to customers in central and east- ern Pennsylvania, as well as Delaware and southern New Jersey. Banking unit net income was $155.7 million in 1994 compared to $139.0 million in 1993, an increase of 12%. A decrease in the provision for possible loan losses, a decline in expenses in the mortgage banking unit, and an increase in trust revenues more than offset a decline in securities gains, and resulted in the increase in the banking unit's earnings this year compared to 1993. Net interest income on a taxable-equivalent basis was $623.1 million in 1994 compared to $629.9 million in 1993, a decrease of 1%. The net interest margin was 4.85% in 1994 compared to 5.04% in 1993. The net interest margin was af- fected in 1994 by asset and liability repricing in the current interest rate environment and the impact of bank acquisitions. Loans outstanding at December 31, 1994 were $9.8 billion compared to $9.0 billion at the end of 1993, a 9% increase. Total deposits at December 31, 1994 were $11.3 billion, almost unchanged from the balance of a year ago. Changes in these categories are discussed in the "Loans" and "Deposits" sections.
SECURITIES (BROKER-DEALER ACTIVITIES). Meridian Securities underwrites, brokers and distributes securities to municipalities, and institutional and individual investors. In addition, the unit buys, sells and securitizes mortgage loans and brokers loan servicing portfolios. The unit also provides investment banking services by acting as financial advisors in facilitating municipal and corporate transactions in the capital markets. The securities unit reported after-tax operating income of $3.7 million in 1994 compared to $18.7 million in 1993. The decline in income resulted primarily from a decrease in net revenues of $29.1 million, or 38%. Financial market conditions and the current interest rate environment resulted in reduced profitability on trading volumes and unfavorable valuation adjustments of the trading portfolios during 1994. The decline in revenues more than offset a decline in operating expenses, primarily salaries and incentive-related compensation expense. An analysis of the more significant components of revenues for the securities unit is as follows (dollars in thousands).
ANALYSIS OF 1993 COMPARED TO 1992
FINANCIAL HIGHLIGHTS. Net income was $157.8 million in 1993 compared to $136.7 million in 1992. The results for 1993 include the cumulative effect of adopting Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which increased net income by $7.2 million. The increase in net income, before the cumulative effect of the accounting change, was primarily due to the following: . An increase in net interest income of $44.1 million ($23.5 million after- tax). . A decrease in the provision for possible loan losses of $12.7 million ($9.0 million after-tax). . An after-tax loss of $33.7 million in the mortgage banking unit. . Expenses of $11.9 million related to Meridian's merger with Commonwealth less securities gains of $8.3 million at Commonwealth, resulting in a re- duction in pre-tax income of $3.6 million ($3.1 million after-tax). . An increase in other securities gains of $14.2 million ($9.2 million after- tax). The returns on average assets and on average common shareholders' equity in 1993 were 1.11% and 14.17%, respectively, compared to 1.00% and 13.63%, re- spectively, in 1992. Total assets at December 31, 1993 were $14.1 billion compared to $14.3 bil- lion at the end of 1992. Total loans increased 5% to $9.0 billion at Decem- ber 31, 1993. The consumer portfolio increased by 13% between the two years and the commercial portfolio grew by 4%. This growth was partially offset by a decline in residential mortgage loans. Total deposits were $11.3 billion at December 31, 1993, compared to $11.8 billion at December 31, 1992. The ratio of shareholders' equity to assets was 8.42% at December 31, 1993 compared to 7.41% at the end of 1992. Meridian's risk-based capital ratio was 13.67% at December 31, 1993 compared to 11.61% at the end of 1992. Book value per common share was $20.39 at December 31, 1993 compared to $18.75 at Decem- ber 31, 1992. NET INTEREST INCOME AND RELATED ASSETS AND LIABILITIES. Net interest income on a taxable equivalent basis increased 8% from $594.0 million in 1992 to $639.3 million in 1993. The growth in net interest income in 1993 was attrib- utable to a 3% increase in average interest-earning assets and to a 19 basis point improvement in the net interest margin, from 4.77% in 1992 to 4.96% in 1993.
Interest-earning assets averaged $12.9 billion in 1993, compared to $12.5 billion in 1992. Loans accounted for approximately one-half of the growth in earning assets. The net interest margin improved between the two years, mostly because rates on interest-bearing liabilities decreased faster than yields on interest-earning assets in the declining rate environment during this period. Average loans outstanding were $8.7 billion in 1993 compared to $8.4 billion in 1992, a 3% increase. Average commercial loans increased by 1% in 1993, re- flecting the weak loan demand in Meridian's marketplace. Average residential real estate mortgage loans declined by 14%, the result of accelerated pre-pay- ments of mortgages in the low interest rate environment that prevailed in 1993. Consumer loan growth was strong, with average outstandings increasing 16%. Most of the growth occurred in the home equity and indirect automobile loan categories, due to the low interest rate environment and enhanced market- ing efforts. Average deposits were $11.3 billion in 1993, almost unchanged from 1992. PROVISION FOR POSSIBLE LOAN LOSSES AND RELATED CREDIT QUALITY. The provision for possible loan losses was $56.1 million in 1993 compared to $68.8 million in 1992. The decline of $12.7 million resulted primarily from an improvement in loan quality. The overall improvement in asset quality was also evident in a decrease of $12.4 million in writedowns and other expenses associated with foreclosed real estate, from $23.3 million in 1992 to $10.9 million in 1993. Net loans charged-off were $51.3 million in 1993 compared to $84.6 million in 1992. The balance in the allowance for possible loan losses was $173.4 million or 136% of non-performing loans at December 31, 1993 compared to $165.5 mil- lion and 115% at the end of 1992. NON-INTEREST INCOME. Non-interest income was $285.3 million in 1993 compared to $242.9 million in 1992. Revenues from the mortgage banking, asset manage- ment, and securities activities were $147.0 million in 1993, an increase of $6.6 million, or 5%, over revenues of 1992. Increases in trust revenues and revenues in the securities unit more than offset a decline in revenues in the mortgage banking unit, primarily due to a decrease in servicing fees and an increase in the amortization of purchased mortgage servicing rights, which is recorded as a reduction of mortgage banking revenues. Gains on sales of mort- gage servicing increased during the year. The increase in revenues in the se- curities unit resulted from higher net trading gains, tender option bond fees, and retail brokerage commissions and fees. Service charges on deposits and fees for other customer services increased by $7.5 million, or 8%, between the two years. Net securities gains were $25.3 million in 1993 compared to $2.8 million in 1992. Included in the total for 1993 was a gain of $8.6 million on the sale of Meridian's common stock investment in Fidelity National Financial, Inc. This stock was acquired as part of the sale of Meridian's title insurance operations in 1992.
NON-INTEREST EXPENSES. Non-interest expenses were $636.9 million in 1993 com- pared to $561.9 million in 1992. The increase resulted primarily from the fol- lowing: . A restructuring charge of $17.5 million associated with reducing the scope of Meridian's mortgage servicing-related activities and an increase of $5.0 million in the provision for possible credit losses on mortgage servicing portfolios with recourse. . One-time expenses of $11.9 million related to the merger with Commonwealth. Exclusive of these changes in 1993, non-interest expenses would have in- creased by $40.6 million or 7% between the two years. Salaries and employee benefits were $296.1 million in 1993 compared to $255.5 million in 1992, an increase of 16%. An increase in staff levels because of acquisitions in the banking unit and ongoing expansion in the broker-dealer and investment banking function, an increase in commissions and other incen- tive-related compensation, merit increases for employees, and a 54% increase in medical and other employee-related insurance contributed to the higher level of personnel expense. Net occupancy expense was $42.6 million in 1993 compared to $41.3 million in 1992, an increase of 3%. Equipment expense increased from $37.1 million in 1992 to $38.0 million in 1993, or 2%. The increases in both expense categories were related to expansion, banking acquisitions, and the upgrading of Meridi- an's data processing and operations capabilities. The increase in other operating expenses from $228.0 million in 1992 to $242.6 million in 1993 resulted from several factors. Loan related expenses, primarily in Meridian's mortgage banking subsidiary, increased by $8.4 million in 1993. Included in this total was an increase of $5.0 million in the provi- sion for possible credit losses on mortgage servicing portfolios purchased with recourse. FDIC deposit insurance expense increased by $4.0 million be- tween the two years. Professional fees, mostly payments to outside consultants for enhancements to operating systems, increased by $4.0 million. Other cate- gories reflecting increases between the two years included advertising, ac- counting and legal fees, and educational development expenses. Partially off- setting these increases was a decline of $12.3 million in foreclosed real es- tate expenses. PROVISION FOR INCOME TAXES. The effective tax rate was 28% in 1993, up from 26% in 1992. The tax rate for both periods was less than the federal statutory rate of 35% in 1993 and 34% in 1992, primarily because of tax-exempt invest- ment and loan income.
QUARTERLY FINANCIAL DATA
Summarized quarterly financial data for 1994 and 1993 is presented in Table 25.
-------------------------------------------------------------------------------- Table 1: NET INTEREST INCOME, AVERAGE BALANCES AND RATES
(Dollars in Thousands)
/(1)/ The indicated interest income and average yields are presented on a taxable-equivalent basis. The taxable-equivalent adjustments included above are $17,708, $22,051, and $20,826 for 1994, 1993, and 1992, re- spectively. The effective tax rates used for the taxable-equivalent ad- justments were 35% for 1994 and 1993 and 34% for 1992. /(2)/ Loan fees of $14,168, $14,616, and $15,951 for 1994, 1993 and 1992, re- spectively, are included in interest income. Average loan balances in- clude non-accruing loans. /(3)/ Net Interest Spread is the arithmetic difference between the yield on interest-earning assets and the rate paid on interest-bearing liabili- ties. /(4)/ Net Interest Margin is computed by dividing net interest income by av- erage interest-earning assets.
------------------------------------------------------------------------------- Table 2: ANALYSIS OF IMPACT ON NET INTEREST INCOME OF CHANGES IN VOLUMES AND RATES OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(Dollars in Thousands)
/(1)/ The indicated interest changes are presented on a taxable equivalent basis, using an effective tax rate of 35% for 1994 and 1993 and 34% for 1992. /(2)/ The portion of the total change attributable to both volume and rate changes during the year has been allocated to volume and rate compo- nents based upon the absolute dollar amount of the change in each com- ponent prior to the allocation.
-------------------------------------------------------------------------------- Table 3: INTEREST RATE SENSITIVITY
DECEMBER 31, 1994 (Dollars In Thousands)
-------------------------------------------------------------------------------- Table 4: OFF-BALANCE SHEET DERIVATIVES--MATURITIES AND OTHER INFORMATION
DECEMBER 31, 1994 (Dollars in Thousands)
NOTES 1.Maturity information reflects contractual terms based on interest rates in effect at December 31, 1994. 2.Fixed rates shown are rates over the life of the swaps; floating rates rep- resent rates in effect at December 31, 1994.
------------------------------------------------------------------------------- Table 5: ACTIVITY IN INTEREST RATE SWAPS AND PURCHASED INTEREST RATE FLOORS RELATED TO INTEREST RATE RISK MANAGEMENT
NOTIONAL AMOUNTS (Dollars in Thousands)
------------------------------------------------------------------------------- Table 6: LOANS
DECEMBER 31, (Dollars in Thousands)
------------------------------------------------------------------------------- Table 7: COMMERCIAL LOAN MATURITIES AND INTEREST SENSITIVITY
DECEMBER 31, 1994 (Dollars in Thousands)
The maturity of loans is based upon contractual terms. Meridian may, howev- er, extend the stated maturity at prevailing rates and terms for economic and market reasons.
-------------------------------------------------------------------------------- Table 8: SECURITIES YIELDS BY MATURITY
DECEMBER 31, 1994 (Dollars in Thousands)
The weighted average yields are based on carrying value with effective yields weighted for the contractual or expected maturity of each security. Where applicable, yields are calculated on a taxable equivalent basis using a 35% tax rate. /(1)/ Includes primarily stock and other securities with no stated maturity.
------------------------------------------------------------------------------- Table 9: DEPOSITS BY MAJOR CLASSIFICATION
DECEMBER 31, (Dollars in Thousands)
------------------------------------------------------------------------------- Table 10: DEPOSITS BY TYPE OF DEPOSITOR
DECEMBER 31, (Dollars in Thousands)
------------------------------------------------------------------------------ Table 11: MATURITY OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
DECEMBER 31, (Dollars in Thousands)
-------------------------------------------------------------------------------- Table 12: ALLOWANCE FOR POSSIBLE LOAN LOSSES
(Dollars in Thousands)
-------------------------------------------------------------------------------- Table 13: ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
DECEMBER 31, (Dollars in Thousands)
/(1)/ Beginning in 1992, the method of allocating the allowance to individual commercial loans was changed. Allocations are now based primarily on historical chargeoff experience for each credit risk category of com- mercial loans.
-------------------------------------------------------------------------------- Table 14: CREDIT QUALITY
DECEMBER 31, (Dollars in Thousands)
------------------------------------------------------------------------------- Table 15: CHANGE IN NON-PERFORMING ASSETS
(Dollars in Thousands)
------------------------------------------------------------------------------- Table 16: PAYMENT PERFORMANCE OF NON-ACCRUAL LOANS
DECEMBER 31, 1994 (Dollars In Thousands)
/(1)/ Borrower has paid at least 85% of contractual obligations over the past six months. /(2)/ Borrower has paid between 25% and 85% of contractual obligations over the past six months. /(3)/ Borrower has paid less than 25% of contractual obligations over the past six months. (/4)/ Although contractually current, the borrower is in a specified period of demonstrating payment performance or the loan has a prior charge- off.
-------------------------------------------------------------------------------- Table 17: COMMERCIAL LOANS BY MAJOR INDUSTRY CLASSIFICATION
DECEMBER 31, (Dollars in Thousands)
*Less than one percent
------------------------------------------------------------------------------- Table 18: COMMERCIAL REAL ESTATE
DECEMBER 31, (Dollars in Thousands)
OUTSTANDING LOANS
/(1)/ The geographic distribution by state is as follows: Pennsylvania $1,578,445 (80%), Delaware $236,443 (12%), New Jersey $96,372 (5%), and all other states $63,927 (3%).
NON-ACCRUAL LOANS
/(2)/ The geographic distribution by state is as follows: Pennsylvania $19,577 (66%), Delaware $3,628 (12%), New Jersey $4,859 (17%), and all other states $1,557 (5%).
/(3)/ Includes Assets Considered to be in an In-Substance Foreclosure status. /(4)/ The geographic distribution by state is as follows: Pennsylvania $20,884 (79%), Delaware $417 (2%), and New Jersey $5,269 (19%).
------------------------------------------------------------------------------- Table 19: COMPOSITION OF NON-INTEREST INCOME
(Dollars in Thousands)
-------------------------------------------------------------------------------- Table 20: COMPOSITION OF NON-INTEREST EXPENSES
(Dollars in Thousands)
------------------------------------------------------------------------------- Table 21: CAPITAL ADEQUACY
DECEMBER 31,
/(1)/ The minimum ratios required by the Federal Reserve Board guidelines are 4% for Tier 1 capital, 8% for total risk-based capital, and a leverage ratio of 3% plus an additional cushion of 100 to 200 basis points. /(2)/ Federal)Reserve Board guidelines define a well-capitalized institution as having a Tier 1 capital ratio of 6% or more, a total risk-based cap- ital ratio of 10% or more, and a leverage ratio of 5% or more.
------------------------------------------------------------------------------- Table 22: COMPOSITION OF RISK-BASED CAPITAL
DECEMBER 31, (Dollars in Thousands)
------------------------------------------------------------------------------- Table 23: PRICE RANGE OF COMMON STOCK
------------------------------------------------------------------------------- Table 24: INDUSTRY SEGMENTS
(Dollars in Thousands)
------------------------------------------------------------------------------- BANKING
/(1)/ Taxable equivalent basis. /(2)/ Gross revenues less interest expense.
-------------------------------------------------------------------------------- Table 25: SUMMARIZED QUARTERLY FINANCIAL DATA
(Dollars In Thousands, Except Per Share Data)
Amounts in this table have been rounded for presentation purposes and therefore may not equal annual totals.
/(1)/ Third quarter of 1993 includes a mortgage banking restructuring charge of $17,500 and expenses of $11,900 related to the Commonwealth merger.
Item 8.


Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
[LOGO OF KPMG PEAT MARWICK LLP APPEARS HERE]
The Board of Directors Meridian Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Meridian Bancorp, Inc. and its subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of manage- ment. Our responsibility is to express an opinion on these consolidated finan- cial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mate- rial misstatement. An audit includes examining, on a test basis, evidence sup- porting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement pre- sentation. We believe that our audits provide a reasonable basis for our opin- ion.
In our opinion, the consolidated financial statements referred to above pres- ent fairly, in all material respects, the financial position of Meridian Bancorp, Inc. and its subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally ac- cepted accounting principles.
As described in Notes 1 and 8, respectively, to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, Account- ing for Certain Investments in Debt and Equity Securities, and Statement of Fi- nancial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits, in 1994. Also, as described in Notes 8 and 10, respectively, to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Stan- dards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, in 1993.
/s/ KPMG PEAT MARWICK LLP APPEARS HERE
January 18, 1995
-------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
DECEMBER 31, (Dollars In Thousands)
See accompanying Notes to Consolidated Financial Statements.
-------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, (Dollars in Thousands, Except Per Share Data)
/(1)/ Reflects new dividend payment schedule adopted first quarter 1992.
See accompanying Notes to Consolidated Financial Statements.
-------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
See accompanying Notes to Consolidated Financial Statements.
-------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, (Dollars in Thousands)
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a description of the more significant accounting policies and reporting practices of Meridian Bancorp, Inc. and its subsidiaries (Merid- ian). They are in accordance with generally accepted accounting principles and have been followed on a consistent basis, except for the accounting changes described in the following notes.
Basis of Presentation The consolidated financial statements include the accounts of Meridian Bancorp, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain other amounts in prior period financial statements have been reclas- sified to conform with the presentation used in the 1994 financial statements. These reclassifications have no effect on net income.
Cash and Cash Equivalents In the accompanying Consolidated and Parent Company Statements of Cash Flows, cash and cash equivalents include cash on hand, amounts due from banks, fed- eral funds sold, and securities purchased under agreements to resell. The original maturities of such instruments are less than 90 days. Federal funds are sold and securities are purchased under agreements to resell for generally one-day periods. Relative to the Consolidated Statements of Cash Flows, income tax payments totaled $45.0 million in 1994, $66.1 million in 1993 and $52.3 million in 1992. Interest payments totaled $369.9 million in 1994, $345.0 million in 1993 and $469.9 million in 1992. Non-cash operating activity includes a transfer of $286.0 million from loans and other assets held for sale to trading account assets. Non-cash investing activity consists of net transfers of loans in liq- uidation to other real estate aggregating $29.8 million in 1994, $45.8 million in 1993 and $24.0 million in 1992; transfers of investment securities to in- vestment securities available for sale of $18.3 million in 1994, $415.0 mil- lion in 1993 and $945.2 million in 1992; a transfer of non-accrual residential mortgage loans of $8.0 million and foreclosed real estate of $7.3 million to loans and other assets held for sale in 1994; a transfer of purchased mortgage servicing rights and related assets of $36.0 million from other assets to loans and other assets held for sale in 1993. Noncash financing activity con- sists of stock and a warrant aggregating $7.0 million in 1994 and stock of $20.1 million in 1993 issued as a result of acquisitions.
Investment Securities Effective in the first quarter of 1994, Meridian adopted Statement of Finan- cial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", which requires investments in equity securities with a readily determinable fair value and investments in all debt securities to be classified, at the date of adoption, in one of three categories. The three categories are (1) held to maturity--carried at amortized cost; (2) available for sale--carried at fair value (with unrealized gains and losses, net of re- lated tax effect, recorded as a separate component of shareholders' equity); and (3) trading account--carried at fair value (with unrealized gains and losses recorded in the income statement). As a result of the implementation of Statement 115, after-tax unrealized losses on investment securities and secu- rities classified as available for sale, aggregated $7.2 million at December 31, 1994. The amortization of premiums and accretion of discounts to the expected matu- rity date of the related debt obligations are based on a method which approxi- mates a constant yield. When a determination is made that the decline in fair value below cost for a marketable equity or debt security is other than temporary, the cost basis of the individual security is written down to a new cost basis and the amount of the write-down is accounted for as a realized loss. Gains and losses on the sale of securities and unrealized gains and losses are computed on the specific identification method. Trading account securities are carried at fair value and unrealized gains or losses are included in the Consolidated Statements of Income.
Interest Rate Swaps Interest rate swaps, the principal derivative product used by Meridian, are a tool used mainly to alter the repricing characteristics of a portion of the core deposit base. There is no effect on the recorded total assets or liabili- ties of Meridian. Net amounts receivable or payable under agreements desig- nated for risk management purposes are recorded as adjustments to the interest income or expense of the associated asset or liability. Gains or losses re- sulting from the termination of interest rate swaps entered into for risk man- agement purposes are deferred and amortized over the remaining term of the swap contract.
Loans Loans are stated net of deferred fees and costs and unearned discount. Loan interest income is accrued using various methods which approximate a constant yield. Interest income is not accrued on commercial loans where management has de- termined that borrowers may be unable to meet contractual principal or inter- est payments, or where such payments are 90 or more days past due unless the loan is well secured and in the process of collection. Interest on loans that have been restructured is recognized according to the renegotiated terms. Residential mortgages which are 180 days or more delinquent are placed on nonaccrual status when total principal, interest, and escrow owed exceeds 80% of the property's appraised value. Properties are re-appraised when foreclo- sure proceedings are initiated. Consumer loans are charged-off when deemed un- collectible, which is generally at a time no later than 180 days past due. Loan origination and commitment fees and direct loan origination costs are deferred and recognized over the life of the related loans as an element of the yield. Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" requires that certain impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or the fair value of the loan if the loan is collateral dependent. Statement No. 118 "Accounting by Creditors for Impair- ment of a Loan--Income Recognition and Disclosures" amends Statement No. 114 to allow a creditor to use existing methods for recognizing interest income on an impaired loan. Both statements are effective in the first quarter of 1995. Based on management's analysis, the impact on Meridian's consolidated results of operations will not be material.
Allowance for Possible Loan Losses The allowance for possible loan losses is established through provisions for possible loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance. Subsequent recoveries, if any, are credited to the allowance. The balance in the allowance is based on a periodic evalua- tion of the loan portfolio and reflects an amount that in management's opinion is adequate to absorb losses inherent in the portfolio.
When establishing the appropriate levels for the provision and the allowance for possible loan losses, management performs an analysis of the loan portfo- lio by considering a variety of factors. This analysis includes periodic re- views by loan officers, credit review and loan workout personnel of all bor- rowers with aggregate balances of $500,000 or greater. Meridian also reviews, at least on a quarterly basis, problem borrowers with balances of $250,000 or greater, as well as selected lower balance loans. Consideration is given to the impact of current and anticipated economic conditions, the diversification of the loan portfolio, historical loss experience, delinquency statistics, re- views performed by loan officers who are primarily responsible for compliance with established lending policy, the perceived financial strength of borrow- ers, and the perceived adequacy of underlying collateral. Consideration is also given to examinations performed by regulatory authorities.
Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on the straight line method and is charged to operations over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight line basis over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter.
Other Assets Goodwill is the excess of the purchase price over the fair value of net as- sets of companies acquired through business combinations accounted for as pur- chases. Included in other assets is $94.7 million of goodwill that is being amortized using the straight line method over various periods not exceeding 15 years. Core deposit intangibles are a measure of the value of consumer demand and savings deposits acquired in business combinations accounted for as purchases. Included in other assets is $34.4 million of core deposit intangibles which are being amortized on an accelerated method, with at least two-thirds of the original balance being amortized within seven years following the date of ac- quisition. The recoverability of the carrying value of intangible assets is evaluated on an ongoing basis and permanent declines in value, if any, are charged to ex- pense. Assets acquired in foreclosures consist of real estate acquired through fore- closure or in settlement of debt and loans considered to be in an in-substance foreclosure status. These assets are carried at the lower of cost or fair value less estimated costs of disposal.
Trust Assets Assets held by Meridian in a fiduciary or agency capacity for customers are not included in the consolidated financial statements since such items are not assets of Meridian or its subsidiaries. Trust income is reported on the ac- crual method.
Mortgage Banking Prior to the third quarter of 1993, mortgage servicing fees received from permanent investors for servicing their loan portfolios were recorded as in- come when received. Mortgage loan servicing included collecting monthly mort- gagor payments, forwarding payments and related accounting reports to invest- ors, collecting escrow deposits for the payment of mortgagor property taxes and insurance, and paying taxes and insurance from escrow funds when due. In the third quarter of 1993 Meridian decided to refocus its mortgage activi- ties on the origination of residential loans and to substantially reduce the scope of its mortgage servicing business. Mortgage servicing intangibles and other related assets were carried at fair value and were included in mortgage loans and other assets held for sale in the consolidated balance sheet at De- cember 31, 1993. The majority of these assets were sold in 1994. Acquisition costs of mortgage servicing rights purchased prior to the third quarter of 1993 were capitalized and amortized in proportion to, and over the period of, estimated net servicing revenue (undiscounted servicing revenues in excess of undiscounted servicing costs). There was an insignificant amount of amortization in 1994 since all purchased mortgage servicing rights have been sold or written-off. Excess servicing fees were computed as the present value of the difference between the estimated future net revenues and normal servicing revenues as es- tablished by the federally sponsored secondary market makers. Resultant premi- ums were deferred and amortized over the estimated life of the related mort- gages using the constant yield method. The amortization of both purchased mortgage servicing rights and excess ser- vicing fees was recorded as a reduction of servicing revenue. Loans and other assets held for sale are carried at the lower of aggregate cost or fair value, with resulting gains and losses included in other income. The fair value calculation includes consideration of all open positions, out- standing commitments from investors and related fees paid.
Securities Operations Off-balance sheet derivative products used by the securities operations mostly include tender option bonds, treasury float agreements, and forward commitments to purchase and sell loans and securities. Tender option bonds represent a contingent liability to purchase securities. Realized gains and losses and net interest spread earned on these products are included in non- interest income. Treasury float agreements represent purchased option con- tracts. The premiums paid for these contracts are amortized over the option periods. Forward commitments to purchase and sell loans and securities consist primarily of forward commitments to sell mortgage-backed securities, which are used to hedge mortgage loans held in the trading account. These commitments are marked to fair value with unrealized gains and losses recorded in non- interest income. Collateralized mortgage obligation residuals, rights acquisi- tion contracts and guaranteed interest rate contracts are other financial in- struments and are included in the consolidated financial statements in invest- ment securities, investment securities available for sale and interest-bearing deposits, respectively.
Income Taxes Certain items of income and expense are included in one reporting period for financial accounting purposes and another reporting period for income tax pur- poses. Under the asset and liability method, deferred tax assets and liabili- ties are recognized for the future tax consequences attributable to temporary differences between the financial statement and tax bases of existing assets and liabilities.
Employee Benefits Meridian has a non-contributory defined benefit pension plan covering sub- stantially all employees who qualify as to age and length of service. The plan benefits are based on years of service and an earnings formula that considers average salaries during a defined period prior to retirement. The projected unit credit method is used to measure net periodic pension cost over employees' service lives. The plan is funded using the entry age actuar- ial cost method to the extent deductible under existing federal income tax regulations. Meridian currently provides postretirement health care and life insurance benefits to its employees. The medical portion is contributory and life insur- ance coverage is non-contributory to the participants. The expected cost of these benefits is accrued over the period the employee earns the benefits. There are currently no plan assets attributable to these postretirement bene- fits.
Effective January 1, 1995, all employees of Meridian and its subsidiaries with two years of service will participate in a non-contributory employee stock ownership plan. Compensation cost will be recognized based on the fair market value of the shares committed to be released to employees.
Treasury Stock The purchase of Meridian's common stock is recorded at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on a first-in-first-out basis.
Preferred Stock Meridian has 25 million shares of preferred stock authorized that carries a $25.00 par value per share. No shares of preferred stock were issued and out- standing as of December 31, 1994. Meridian's Board of Directors has the au- thority to issue preferred stock from time to time as a class without series, or in one or more series.
Common Stock Dividends Meridian adopted a new dividend payment schedule effective in 1992. In addi- tion to the dividend of $.30 per share paid on January 1, 1992 (declared No- vember 1991), the Board of Directors also declared dividends of $.30 per share in April, July and October 1992 for payment on June 1, September 1 and Decem- ber 1, 1992, respectively. Accordingly, a dividend was not declared in the quarter ended March 31, 1992.
Earnings Per Share Primary earnings per share is computed by dividing net income after deduction of any preferred stock dividends by the weighted average number of common stock and common stock equivalents outstanding during the year. There is cur- rently no preferred stock outstanding and the last time such stock was out- standing was 1989. Stock options and warrants are considered common stock equivalents and are included in the computation of the number of outstanding shares using the treasury stock method, unless such options are anti-dilutive. Fully diluted earnings per share gives effect to the assumed conversion of any convertible preferred stock as well as to the exercise of stock options. For the purposes of computing primary and fully diluted earnings per share begin- ning in 1995, committed to be released and allocated shares in the employee stock ownership plan will be considered outstanding.
NOTE 2: ACQUISITIONS In June 1994, Meridian Bank, New Jersey, a banking subsidiary of Meridian, assumed approximately $487 million of deposits and paid a premium of $42 mil- lion to the Resolution Trust Corporation, in exchange for the $14 million in home equity loans and $431 million in cash in connection with the acquisition of 29 branches of the former Security Savings Bank. The transaction was treated as a purchase for financial accounting purposes. In July 1994, Meridian acquired McGlinn Capital Management, Inc., an invest- ment advisory firm with $2.7 billion in assets under direct management at year-end 1994, for cash and a warrant for 500,000 shares of Meridian common stock. The transaction was treated as a purchase for financial accounting pur- poses. In August 1994, Meridian and United Counties Bancorporation of Cranford, New Jersey jointly announced the execution of a letter of intent to merge, subject to due diligence reviews and the negotiation of a definitive merger agreement. In December 1994 Meridian and United Counties announced that, as a result of prevailing equity market conditions and the inability of the parties to agree on certain terms of the plan of merger, the companies jointly decided to ter- minate their letter of intent and future merger discussions. NOTE 3: INVESTMENT SECURITIES, INVESTMENT SECURITIES AVAILABLE FOR SALE AND SECURITIES GAINS
Investment Securities A summary of the amortized cost and approximate fair value of investment se- curities included in the Consolidated Balance Sheets is as follows:
A summary of the gross unrealized gains and losses of investment securities is as follows:
The amortized cost and approximate fair value of investment securities at De- cember 31, 1994 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations.
Investment securities carried at approximately $1.9 billion at December 31, 1994 were pledged as collateral for public deposits, trust deposits, repurchase agreements, and certain other deposits as required by law. No securities of an individual issuer aggregated more than 10% of shareholders' equity at December 31, 1994. Tax-free income on investment securities for 1994, 1993 and 1992 amounted to $18.2 million, $20.6 million and $21.8 million, respectively.
Investment Securities Available For Sale A summary of the amortized cost and approximate fair value of investment secu- rities available for sale included in the Consolidated Balance Sheets is as follows:
A summary of the gross unrealized gains and losses of investment securities available for sale is as follows:
The amortized cost and approximate fair value of investment securities avail- able for sale at December 31, 1994 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations.
Total Securities Gains Total gains from securities transactions (excluding trading account securi- ties), which were included in the following categories in the non-interest in- come section of the Consolidated Statements of Income, are as follows:
Proceeds from the sale of securities for the years ended December 31, 1994, 1993 and 1992 were $82.1 million, $850.3 million and $474.7 million. Gross gains on these sales were of $3.2 million, $25.5 million and $6.1 million and gross losses were $214 thousand, $203 thousand and $3.4 million in 1994, 1993 and 1992, respectively.
NOTE 4: LOANS A summary of loans included in the Consolidated Balance Sheets is as follows:
Included within the loan portfolio are restructured loans and loans on which Meridian has discontinued the accrual of interest. Such loans amounted to $90.3 million, $127.6 million, and $143.6 million at December 31, 1994, 1993, and 1992, respectively. If these non-performing loans had been current in ac- cordance with their original terms and had been outstanding throughout the pe- riod, gross interest income for 1994, 1993, and 1992 would have increased $9.6 million, $9.5 million, and $13.5 million, respectively. Interest income on these non-performing loans included in income for 1994, 1993, and 1992 amounted to $868.0 thousand, $706.0 thousand, and $3.1 million, respectively. Tax-free income on loans for 1994, 1993, and 1992 amounted to $10.8 million $14.4 million, and $16.6 million, respectively.
NOTE 5: ALLOWANCE FOR POSSIBLE LOAN LOSSES A summary of activity in the allowance for possible loan losses follows:
NOTE 6: LONG-TERM DEBT AND OTHER BORROWINGS Long-term debt and other borrowings consisted of the following:
The floating rate subordinated notes bear interest at a rate of 1/8 of 1% above the arithmetic mean of London interbank offering quotations for three- month Eurodollar deposits, determined quarterly. The notes carry a floor in- terest rate of 5 1/8%. The notes are subordinate and junior in right of pay- ment to senior indebtedness of Meridian. Since December 1, 1988, Meridian has had the option to exchange the notes for capital securities or, under certain circumstances, cash, prior to the maturity of the notes on December 1, 1996. The effect of the capital securities which may be issued in connection with these notes has not been included in the computation of earnings per share. In December, 1993, Meridian received
approval from the Federal Reserve Bank to revoke its obligation to exchange the notes for capital securities at maturity. Meridian has long-term borrowings from the Federal Home Loan Bank which total $20 million. These borrowings require membership in the Federal Home Loan Bank of Pittsburgh and the maintenance of available collateral with a fair value which approximates the total amount of the outstanding debt. Meridian also has $8.4 million of collateralized borrowings from the Student Loan Marketing Association, due March 20, 1996, at a rate of 4.80%. The remaining long-term debt consists of debt of Meridian's banking subsidi- aries and is subordinated in the right of payment to the depositors of such subsidiaries. Substantially all of the notes are redeemable prior to maturity at certain amounts based on sinking fund provisions or, when applicable, ap- proval of the appropriate regulatory agency. Meridian has unused lines of credit of $30 million at December 31, 1994 and 1993. Meridian has short-term borrowings, primarily federal funds purchased and se- curities sold under agreement to repurchase, amounting to $1,813 million and $792 million at December 31, 1994 and 1993, respectively. The average interest rate paid on these borrowings was 4.31% and 2.96% for the years ended December 31, 1994 and 1993, respectively.
NOTE 7: DIVIDEND, CAPITAL AND OTHER REGULATORY RESTRICTIONS Various laws restrict the amount of dividends that can be paid to Meridian by its subsidiary banks without regulatory approval. Under current regulations, Meridian's subsidiary banks, without prior approval of bank regulators, may declare dividends to Meridian in 1995 totalling $101.2 million plus additional amounts equal to the net profits earned by such subsidiary banks for the pe- riod of January 1, 1995 through the date of declaration, less dividends previ- ously paid in 1995. The Federal Reserve Act also places restrictions on the amount of credit that may be extended to Meridian by its subsidiary banks. During 1994, there were no loans or advances made to Meridian by any of its subsidiary banks. Meridian's banking subsidiaries are required to maintain reserve balances with the Federal Reserve. These balances totalled $72.5 million at December 31, 1994 and averaged $153.4 million for the year then ended.
NOTE 8: EMPLOYEE BENEFIT PLANS Pension Plans Total pension expense for 1994, which includes several informal pension ar- rangements in addition to the Meridian plan, was $4.3 million. Total pension expense for 1993 and 1992 was $2.9 million and $59 thousand, respectively. Net periodic pension expense (credit) of the Meridian plan includes the fol- lowing components:
The following table sets forth the funded status of the Meridian plan and amounts recognized in the Consolidated Balance Sheets at December 31.
Net periodic pension expense is determined using certain assumptions as of the beginning of the year whereas the funded status of the plan is determined using assumptions as of the end of the year. The discount rate used in determining the actuarial present value of Meridi- an's projected benefit obligation was 8.25% in 1994, 7.0% in 1993 and 8.0% 1992. The expected long-term rate of return on plan assets was 9.5% in 1994, 1993 and 1992. The rate of increase in future compensation levels was 5.3% in 1994 and 1993 and 6.3% in 1992. The assets of the Meridian plan are administered by Meridian Asset Manage- ment, Inc., and consist primarily of common stock, fixed income securities such as obligations of the United States government and corporations, and units of certain common trust funds.
Other Post Retirement Benefits Meridian provides postretirement health care and life insurance plans to its employees. The medical portion is contributory and life insurance coverage is noncontributory to the participants. Effective January 1, 1993, Meridian adopted Statement of Financial Accounting Standards No. 106, "Employers' Ac- counting for Postretirement Benefits Other Than Pensions". The new accounting rules require the accrual of the expected cost of these benefits over the pe- riod the employee earns the benefits. Meridian elected to defer and amortize over 20 years the cumulative obligation for such benefits at the beginning of 1993. The annual expense of Meridian's postretirement benefits other than pensions under these new accounting rules was $4.6 million in 1994 compared to approxi- mately $4.5 million in 1993. The health care trend rate assumption used to de- termine accumulated benefit obligations applicable to these benefits was 10% for 1994 decreasing over time to an annual rate of 5.5% and remaining at that level thereafter. The discount rate used in determining the present value of the projected benefit obligation was 8.25%. Net periodic expense of the Meridian postretirement healthcare and life in- surance plans includes the following components:
The following table sets forth the funded status of the Meridian postretirement healthcare and life insurance plans and amounts recognized in the Consolidated Balance Sheets at December 31. There are currently no plan assets attributable to these postretirement benefits.
A change in the health care trend rate assumption of one percent would affect annual service cost by approximately $100,000 and the accumulated postretirement benefit obligation at December 31, 1994 by approximately $700,000.
Post-Employment Benefits Effective January 1, 1994, Meridian adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits". This statement establishes standards for employers who provide benefits to former employees after employment but before retirement. Such benefits include, among other things, severance, disability, and workers' compensation benefits. The implementation of these new accounting rules resulted in a charge of $4.2 mil- lion ($2.7 million after-tax or $.05 per share) in the first quarter of 1994.
Savings Plan Meridian also offers a savings plan which covers substantially all employees who qualify as to age and length of service. A participating employee must contribute at least 1% and may contribute a maximum of 10% of his or her com- pensation. Meridian will match up to the first 6% that each employee contrib- utes. Investment options include Meridian common stock. Contributions are charged to current expense. The total expense relating to the Meridian savings plan was $7.6 million in 1994, $7.1 million in 1993 and $6.5 million in 1992.
Employee Stock Ownership Plan Effective January 1, 1995, all employees of Meridian and its subsidiaries with two years of service will participate in a non-contributory employee stock ownership plan (ESOP). The ESOP is a leveraged plan and is funded through a direct loan from Meridian. The ESOP will acquire a total of 2,000,000 shares of Meridian common stock for distribution to eligible employ- ees ratably over a 20 year period. As of December 31, 1994, the ESOP had pur- chased 1,285,000 shares. Compensation cost will be recognized based on the fair market value of the shares committed to be released to employees. No com- pensation cost was recognized in 1994. Dividends on allocated shares will be paid to participants and will be charged to retained earnings. Dividends on unallocated shares and additional cash contributions from Meridian will be used by the ESOP for debt service.
Stock Option Plan Under Meridian's stock option plan, options to acquire a maximum of 3,500,000 shares of common stock may be granted to key officers. The plan provides for the granting of options at the fair market value of Meridian's common stock at the time the options are granted. Each option granted under the plan may be exercised within a period of ten years from the date of the grant; however, no option may be exercised within one year from the date of grant. A stock appreciation rights (SARs) plan grants SARs in tandem with stock op- tion grants, up to a maximum of 750,000 units. The exercise of SARs reduces the stock options otherwise exercisable; similarly, the exercise of stock op- tions cancels the corresponding SARs. There were no SARs outstanding at Decem- ber 31, 1994. Under Meridian's stock option plan, the exercisable option prices ranged from $10.50 to $33.00 at December 31, 1994. An analysis of the activity in this plan for the last three years follows:
NOTE 9: LEASES Meridian and its subsidiaries are committed under a number of capital and non-cancelable operating leases for facilities and equipment with initial or remaining terms in excess of one year. The minimum annual rental commitments under these leases at December 31, 1994 are as follows:
Total rental expense for all operating leases for 1994, 1993 and 1992 amounted to $21.7 million, $20.5 million, and $18.2 million, respectively.
NOTE 10: INCOME TAXES The provision for income taxes on income before changes in accounting princi- ples consists of the following:
Effective January 1, 1993, Meridian adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), which re- quires a change from the deferred method of accounting for income taxes to the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement and tax bases of ex- isting assets and liabilities. Deferred tax assets and liabilities are mea- sured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and li- abilities of a change in tax rates is recognized in income in the period that includes the enactment date of the rate change. As permitted by SFAS No. 109, Meridian has elected not to restate the finan- cial statements of any prior years. The implementation of these new tax ac- counting rules resulted in an increase in consolidated net income of $7.2 mil- lion in the first quarter of 1993. This amount represents the cumulative ef- fect of adopting SFAS No. 109 at the beginning of 1993. The impact of SFAS No. 109 on future periods is not expected to be material. At December 31, 1994, deferred tax assets amounted to $84.1 million and de- ferred tax liabilities amounted to $65.5 million. No valuation allowance has been established for deferred tax assets because management believes that it is more likely than not that the deferred tax assets will be realized. De- ferred tax assets are realizable primarily through carryback of existing de- ductible temporary differences to recover taxes paid in prior years and through future reversal of existing taxable temporary differences. The effective tax rate on income before changes in accounting principles is less than the federal statutory rate in each year as a result of the following items:
The components of deferred tax assets and liabilities are as follows:
NOTE 11: FAIR VALUES AND OTHER INFORMATION FOR FINANCIAL INSTRUMENTS, INCLUDING DERIVATIVES Statement of Financial Accounting Standards No. 105 "Disclosure of Informa- tion about Financial Instruments with Off-Balance Risk and Financial Instru- ments with Concentrations of Credit Risk", Statement No. 107 "Disclosures about Fair Value of Financial Instruments" and Statement No. 119 "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instru- ments" require the disclosure of estimated fair value of all asset, liability and off-balance sheet financial instruments, including derivatives, in addi- tion to risks and certain other information related to off-balance sheet in- struments. Fair value estimates of Meridian's financial instruments are made at a point in time, based on relevant market information and available information about the financial instrument. Fair values are based on quoted market prices for financial instruments where prices exist in the market. In cases where quoted market prices are not available, fair values are derived from estimates using discounted cash flow or other valuation techniques. Because a quoted market price does not exist for a significant portion of Meridian's financial instru- ments, fair value estimates are based on judgments regarding future cash flow expectations, perceived credit risk, interest rate risk, prepayment risk, eco- nomic conditions, and other factors. The estimates are therefore subjective and may not reflect the amount that could be realized upon immediate sale of the instrument. Changes in the assumptions could also significantly affect the estimates. Also, the estimates do not reflect any additional premium or dis- count that could result from the sale of Meridian's entire holdings of a par- ticular financial instrument. Only existing on and off-balance sheet financial instruments are subject to fair value estimates. A value is not assigned to fee-based businesses such as Meridian's asset management and trust operations. In addition, Meridian re- tains demand and savings deposits which aggregated $7.7 billion or 67% of all deposits at December 31, 1994. The value of such deposits results from the low-cost funding provided by these liabilities as compared to other funding sources. The substantial value of these deposits is not reflected in the fair value estimates because it is not a requirement of SFAS 107. The value of other non-financial instruments, such as property, plant and equipment is also not considered. In addition, tax implications related to the realization of unrealized gains and losses can significantly affect fair value and have not been considered in these estimates.
Because of these reasons, the aggregate fair values presented are not meant to represent an estimate of the underlying value of Meridian taken as a whole at December 31, 1994 and 1993. The carrying and estimated fair values of fi- nancial instruments of Meridian are as follows:
The following methods and assumptions were used by Meridian in estimating the fair value of its financial instruments: CASH AND DUE FROM BANKS. The carrying amounts reported in the balance sheet approximate fair value due to the short-term nature of these assets. SHORT-TERM INVESTMENTS. The carrying amounts of short-term investments on the balance sheet approximate fair value since the maturity of these instruments is generally 90 days or less. For short-term investments with maturities of greater than 90 days, fair value estimates are based on market quotes for sim- ilar instruments, adjusted for such differences between the quoted instruments and the instruments being valued as to maturity and credit quality. TRADING ACCOUNT ASSETS. Trading account assets are marked-to-market for fi- nancial reporting purposes and therefore already approximate fair value. The fair value of investment securities held for trading are based on quoted mar- ket prices. The fair value of mortgage loans held for trading are based on market prices for comparable instruments, adjusted for differences between the two instruments such as credit quality. INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE. The fair values of investment securities and investment securities available for sale are based on quoted market prices as of the balance sheet date. For certain instruments, fair value is estimated by obtaining quotes from independent se- curities dealers. In accordance with SFAS No. 115, investment securities available for sale are marked-to-market for financial reporting purposes and therefore already ap- proximate fair value. LOANS. Fair values are estimated for portfolios of loans with similar finan- cial characteristics. Loans are aggregated by commercial, residential real es- tate, and consumer categories. Each loan portfolio is further classified by variable rate or fixed rate loans and by performing or nonperforming loans. For performing variable-rate loans, carrying amounts approximate fair value, as these loans reprice frequently as market rates change. Additionally, most variable rate commercial loans are reviewed and extended on at least an annual basis. At the time of that review, these loans are repriced to reflect the current credit risk inherent in the loan. For performing fixed-rate loans, the fair value methodology varies according to each loan portfolio. Fair
values for residential real estate and consumer loans are estimated using quoted market prices, where available. Where quoted market prices are not available, quotations are obtained for similar instruments and adjusted for such differences in loan characteristics as maturity and credit quality. The fair value of performing fixed-rate commercial loans is estimated by discount- ing the expected cash flows by a discount rate that reflects the interest rate and credit risk inherent in the loan. The estimated maturity of these loans reflects both contractual maturity and management's assessment of prepayments, economic conditions, and other factors that may affect the maturity of the portfolio. The discount rate is based on the rate that would be currently of- fered for loans with similar terms to borrowers of similar credit quality. Nonperforming loans are included in each of the loan portfolios previously described. The fair value of nonperforming loans is estimated by discounting the expected return of principal over the period of time Meridian anticipates receiving principal payments on the loan. The discount rate used is a rate re- flective of the higher risk surrounding these assets compared to a performing loan. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS. The carrying value of certain financial instruments included in these categories, such as accrued interest receivable, approximates fair value. For other financial instruments, such as assets related to servicing certain loans, fair value is estimated by dis- counting the scheduled cash flows through estimated maturity by a discount rate that reflects the interest rate and credit risk inherent in the instru- ment. DEPOSITS. The fair value of deposits with no stated maturity, such as non-in- terest bearing deposits, NOW accounts, savings, and money market deposit ac- counts, is the amount payable on demand as of year end. For time deposits, fair value is estimated by discounting the contractual cash flows using a discount rate equal to the incremental borrowing rate for similar maturities. SHORT-TERM BORROWINGS. The carrying values of federal funds purchased, secu- rities sold under agreements to repurchase, and other short-term borrowings approximate fair values. LONG-TERM DEBT AND OTHER BORROWINGS. The fair values of long-term debt and other borrowings are estimated by discounting the contractual cash flows for each instrument. The discount rate applied is based on the current incremental borrowing rates for similar arrangements with similar maturities. ACCRUED INTEREST PAYABLE AND OTHER LIABILITIES. The carrying value of certain financial instruments included in these categories, such as accrued interest payable, approximates fair value. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS, INCLUDING DERIVATIVES. Meridian uses various off-balance sheet financial instruments, including derivatives, in conducting its business activities and in managing its balance sheet risks. The section of Management's Discussion and Analysis of Earnings and Financial Position titled Derivatives contains additional information on derivatives and is incorporated by reference into this Note 11. The value of these instruments is based on the amount that Meridian would ei- ther pay or receive to replace Meridian's position in these contracts. Fair values for Meridian's off-balance sheet financial instruments are calculated based on (1) market prices (forward rate agreements and interest rate swaps); (2) market prices for comparable instruments, adjusted for differences between the two instruments such as credit quality (mortgage loans sold or loan ser- vicing acquired with recourse, commitments to purchase or sell securities, tender option bonds, treasury float contracts, purchased interest rate con- tracts and other interest rate contracts); and (3) fees currently charged to enter into similar agreements, taking into account the remaining term of the agreement and the present credit risk assessment of the counterparty (commit- ments to extend credit and standby and commercial letters of credit). A discussion of each type of off-balance sheet financial instrument and its related risks is as follows: . Meridian has commitments to buy/sell mortgage-backed securities or loans with delivery at a future date but typically within 120 days. The risk as- sociated with these instruments is one of interest rate risk. In a declin- ing interest rate environment, commitments to sell mortgage-backed securi- ties or loans will decline in value. In a rising interest rate environment, commitments to buy mortgage-backed securities or loans will decline in val- ue. . Forward rate agreements are used in transactions with municipalities that generally have a debt payment due in the future. Under these agreements, Meridian agrees to deliver primarily securities, usually United States Treasury securities, that will mature on or before the required payment date. The type and associated interest rate of these securities is established when the agreement is entered into. The principal risk associated with forward rate agreements is interest rate risk to the extent the required securities have not been purchased. If in- terest rates fall, securities yielding the higher agreed upon fixed rate will be more expensive for Meridian to purchase. . Tender option bonds are also instruments associated with municipalities. A municipality generally issues a tax-free, fixed rate, long-term security in order to finance the origination of single family residential mortgages. The municipality enters into a tender option bond program with Meridian, which converts the fixed rate long-term instrument into a variable rate short-term product. Under the terms of this agreement, the municipality will pay a fixed rate to Meridian over the life of the underlying bond. Me- ridian, in turn, pays a short-term variable rate to the ultimate bondhold- er, who has the option to sell the bonds back to Meridian. Meridian also receives the right to remarket any purchased bonds at a short-term, tax- exempt, variable rate. The risk to Meridian in tender option bonds is one of interest rate risk in a rising rate environment. If interest rates increase, the rate paid on the short-term instrument will also increase and the spread between the fixed rate that Meridian receives and the short-term rate Meridian pays to bond- holders will decrease. If short-term rates exceed the fixed rate on the long- term instrument, then the short-term instrument will be sold at a dis-count and Meridian would incur a loss. Meridian's position in forward rate agreements and tender option bonds is sometimes hedged through the use of other interest rate sensitive financial instruments such as options. In addition, these two instruments have inter- est rate sensitivities that move in opposite directions. . A treasury float contract is created because a municipality, which has defeased a bond issue with government securities, has a mismatch in the timing of the maturity of the securities and the date the funds are needed to pay the debt service. Meridian will pay an up-front fee for the right to sell government securities to the municipality, generally at par. Meridian retains any profit between the sales price and the price at which Meridian acquired the securities. The maximum risk of loss cannot exceed the premium paid for these contracts which was $1.6 million at December 31, 1994 and is included on the consolidated balance sheets. . Interest rate swap agreements, the principal derivative product used by Me- ridian, involve the exchange of fixed and float ing rate interest payments without the exchange of the underlying contractual or notional amounts. These agreements are used as part of the asset and liability management process to alter the repricing characteristics of a portion of the core deposit base. Risk in these transactions involves the risk of counterparty nonperformance under the terms of the contract.
The notional or contract amount does not represent the risks inherent in these agreements. The risk of loss can be approximated by estimating the cost, on a present value basis, of replacing an instrument at current market interest rates. Credit risk is managed by performing credit reviews and through ongoing credit monitoring procedures. . Purchased interest rate floors are also used as part of the asset and lia- bility management process to protect net interest income from the effects of declining interest rates or a flattening of the yield curve. In an in- terest rate floor contract, Meridian pays a premium to a counterparty for the right to receive payments if interest rates associated with a particu- lar index fall below a predetermined level. Risk in these transactions in- volves the risk of counterparty nonperformance under the terms of the con- tract. The notional or contract amount does not represent the risks inher- ent in these agreements. The maximum risk of loss cannot exceed the premium paid. . Interest rate options, caps, and floors involve the receipt of a fee by Me- ridian in exchange for assumption of the risk of interest rate movements beyond a predetermined level. Interest rate caps or floors are written to enable customers to manage their interest rate risks. . Commitments to extend credit assure prospective borrowers of financing for a specified period of time or at a specified rate and usually require the payment of a fee. The risk to Meridian in an undrawn loan commitment is limited by the terms of the contract. For example, Meridian may not be ob- ligated to advance funds if the customer's financial condition deteriorates or if the customer fails to meet specific covenants. An undrawn loan com- mitment represents both a potential credit risk once the funds are advanced to the customer and liquidity risk since the customer may demand immediate cash that would require a funding source. Meridian's credit review and ap- proval process for loan commitments is the same as the process used for loans. In addition, Meridian's Credit Policy Committee reviews customer re- quests for loan commitments and monitors outstanding commitments on an on- going basis. Meridian's current liquidity position continues to satisfy its needs for funds. In addition, since a portion of these loan commitments normally expire unused, the total amount of outstanding commitments at any point in time will not require a funding source. . Standby and commercial letters of credit are instruments issued by a bank that represents an obligation to guarantee payments on certain transactions of its customers. Meridian evaluates the creditworthiness of each of its letter of credit customers, using the same review and approval process that is used for loans. In addition, Meridian has established guidelines limit- ing the amount of total outstanding standby letters of credit to a speci- fied percentage of its shareholders' equity. Compliance with these guide- lines is monitored on a monthly basis. The amount of collateral received on loan commitments and on standby letters of credit is dependent upon the individual transaction and the creditworthi- ness of the customer. . Meridian originates and sells residential mortgage loans as part of various mortgage-backed security programs sponsored by United States government agencies or government-sponsored agencies, such as the Government National Mortgage Association, Federal Home Loan Mortgage Corporation and the Fed- eral National Mortgage Association. These sales are often subject to cer- tain recourse provisions in the event of default by the borrower. Meridian provides for potential losses against these mortgage-backed securities by establishing reserves at the time of sale and evaluates the adequacy of these reserves on an ongoing basis.
NOTE 12: COMMITMENTS AND CONTINGENCIES
Concentrations of Credit Risk Loan concentrations are considered to exist when a multiple number of borrow- ers are engaged in similar activities and have similar economic characteris- tics which would cause their ability to meet contractual obligations to be similarly impacted by economic or other conditions. At December 31, 1994, Me- ridian's commercial loans and commitments did not have any industry concentra- tion or other known concentration that exceeded 10% of total loans and commit- ments.
Legal Meridian and certain of its subsidiaries were party (plaintiff or defendant) to a number of lawsuits. While any litigation has an element of uncertainty, management, after reviewing these actions with its legal counsel, is of the opinion that the liability, if any, resulting from all legal actions will not have a material effect on the consolidated financial condition or results of operations of Meridian.
NOTE 13: INDUSTRY SEGMENTS Meridian operates principally in two business segments--banking and securities (broker-dealer activities). Selected financial information for these segments is as follows.
/(1)/ Taxable equivalent basis. /(2)/ Gross revenues less interest expense.
NOTE 14: MERIDIAN BANCORP, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
CONDENSED STATEMENTS OF INCOME
CONDENSED STATEMENTS OF CASH FLOWS
Interest payments totaled $13,616, $10,682 and $6,456 in 1994, 1993 and 1992, respectively. Noncash financing activity consists of stock and a warrant aggre- gating $6,972 in 1994 and stock of $20,063 in 1993 issued as a result of merg- ers. Income tax refunds were $626 in 1994.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference is the following information included in the Proxy Statement relating to the Registrant's Annual Meeting of Shareholders to be held on April 25, 1995 (the "Proxy Statement"), filed by the Registrant with the Securities and Exchange Commission: with respect to the directors of the Registrant, the section captioned "Election of Directors (Matter No. 1); General." Information regarding executive offices of the Registrant is presented in Part I, Item 4A of this Form 10-K.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference is the information included in the Proxy Statement under the headings "Election of Directors (Matter No. 1); Compensation Paid to Executive Officers." "Election of Directors (Matter No. 1); Executive Employment Agreements" and "Election of Directors (Matter No. 1); Compensation Committee Interlocks and Insider Participation."
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference is the following information included in the Proxy Statement: (1) with respect to shares owned by certain beneficial owners, the section captioned "General; Principal Shareholders" and (2) with respect to shares owned by directors and executive officers, the section captioned "Election of Directors (Matter No. 1); Security Ownership of Management."
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference is the information included in the Proxy Statement under the heading "Election of Directors (Matter No. 1); Certain Transactions."
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
A.1. Financial Statements (included under Item 8)
(a) Meridian Bancorp, Inc. and Subsidiaries
- Independent Auditors' Report - Consolidated Balance Sheets - Consolidated Statements of Income - Consolidated Statements of Changes in Shareholders' Equity - Consolidated Statements of Cash Flows - Notes to Consolidated Financial Statements
2. All financial schedules are omitted because they are not applicable, the data are not significant or the required information is shown in the Annual Report. (The information that would be shown in Meridian Bancorp, Inc.'s (Parent Company Only) Statements of Changes in Shareholders' Equity is identical to the information supplied in the Consolidated Statements of Changes in Shareholders' Equity which appears herein.)
3. Exhibits (numbered as in Item 601 of Regulation S-K)
(3.1) Articles of Incorporation of Meridian Bancorp, Inc., as amended (included herein).
(3.2) By-laws of Meridian Bancorp, Inc., as amended, incorporated herein by reference to Exhibit 3.2 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.
(4) Agreement to furnish instruments defining the rights of holders of long-term debt of Meridian Bancorp, Inc. and its consolidated subsidiaries, incorporated herein by reference to Exhibit 4 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.
(9) Voting Trust Agreement (none).
(10.1) Meridian Bancorp, Inc. Executive Annual Incentive Plan, as amended, incorporated herein by reference to Exhibit 10.1 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.2) Meridian Bancorp, Inc. Retirement Restoration Plan, as amended, incorporated herein by reference to Exhibit 10.2 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.3) Meridian Bancorp, Inc. Stock Option Plan, as amended, incorporated herein by reference to Exhibit 10.3 of the Annual Report on Form
10-K of the Registrant for the year ended December 31, 1991.*
(10.4) Meridian Bancorp, Inc. Stock Appreciation Rights Plan, incorporated herein by reference to Exhibit 10.4 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1992.*
(10.5) Meridian Bancorp, Inc. Directors' Deferred Compensation Plan dated July 1, 1983, incorporated herein by reference to Exhibit 10.8 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1990.*
(10.6) Form of Deferred Compensation Agreements entered into on January 12, 1987 between Meridian Bancorp, Inc. and Samuel A. McCullough, incorporated herein by reference to Exhibit 10.6 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.7) Form of Directors' Deferred Compensation Agreement, incorporated herein by reference to Exhibit 10.7 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.8) Termination Agreement between Meridian Bancorp, Inc. and Samuel A. McCullough dated as of July 1, 1986, incorporated herein by reference to Exhibit 10.8 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.9) Termination Agreement between Meridian Bancorp, Inc. and Ezekiel S. Ketchum dated as of July 1, 1986, incorporated herein by reference to Exhibit 10.9 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.10) Termination Agreement between Meridian Bancorp, Inc. and Russell J. Kunkel dated as of July 1, 1986, incorporated herein by reference to Exhibit 10.11 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.11) Termination Agreement between Meridian Bancorp, Inc. and David E. Sparks dated as of January 23, 1990, incorporated herein by
reference to Exhibit 10.22 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1990.*
(10.12) Meridian Bancorp, Inc. Supplemental Salary Reduction Plan, as amended, incorporated herein by reference to Exhibit 10.14 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.13) Meridian Bancorp, Inc. Supplemental Executive Retirement Plan, incorporated herein by reference to Exhibit 10.15 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.14) Meridian Bancorp, Inc. Executive Intermediate Performance Plan adopted January 1, 1990, incorporated herein by reference to Exhibit 10.23 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1990.*
(10.15) Rights Agreement dated as of July 25, 1989 between Meridian Bancorp, Inc. and Meridian Trust Company, as Rights Agent, incorporated herein by reference to Exhibit 1 of the Registration Statement on Form 8-A of the Registrant, filed on August 14, 1989.
(10.16) Amendment to Rights Agreement, dated as of June 28, 1994, between Meridian Bancorp, Inc. and Meridian Trust Company, as Rights Agent, incorporated herein by reference to Exhibit 2.2 of Amendment No. 1, filed July 25, 1994, to the Registration Statement on Form 8-A of the Registrant, filed August 14, 1989.
(11) Statement regarding Computation of Per Share Earnings (included herein).
(12) Statement regarding Computation of Ratios (not applicable).
(18) Letter regarding Change in Accounting Principles (not applicable).
(21) List of Subsidiaries of the Registrant (included herein).
(22) Published Report Regarding Matters Submitted to a Vote of Security Holders (none).
(23) Consent of KPMG Peat Marwick LLP (included herein).
(24) Power of Attorney (none).
(27) Financial Data Schedules (included herein).
(28) Information from reports furnished to state insurance regulatory authorities (not applicable).
(99) Additional Exhibits (none).
________________________ *Denotes compensatory plan or arrangement.
B.1 Reports on Form 8-K.
On November 30, 1994, Meridian filed a Current Report on Form 8-K dated November 4, 1994 with the Commission, reporting information under Items 5 and 7. The Form 8-K did not contain any financial statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MERIDIAN BANCORP, INC. (Registrant)
/s/ Samuel A. McCullough ---------------------------------- Samuel A. McCullough, Chairman and Chief Executive Officer
Date: March 28, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/ Samuel A. McCullough Chairman, Chief March 28, 1995 ----------------------------- Executive Officer Samuel A. McCullough and Director (Principal Executive Officer)
/s/ David E. Sparks Vice Chairman, March 28, 1995 ----------------------------- Chief Financial David E. Sparks Officer and Director (Principal Financial Officer)
/s/ Michael J. Mizak, Jr. Senior Vice March 28, 1995 ----------------------------- President and Michael J. Mizak, Jr. Controller (Principal Accounting Officer)
/s/ DeLight E. Breidegam, Jr. Director March 28, 1995 ----------------------------- DeLight E. Breidegam, Jr.
/s/ Thomas F. Burke, Jr. Director March 28, 1995 ----------------------------- Thomas F. Burke, Jr.
Director March 28, 1995 ----------------------------- Robert W. Cardy
/s/ Harry Corless Director March 28, 1995 ----------------------------- Harry Corless
/s/ William D. Davis Director March 28, 1995 ---------------------------- William D. Davis
/s/ Julius W. Erving Director March 28, 1995 ---------------------------- Julius W. Erving
/s/ Fred D. Hafer Director March 28, 1995 ---------------------------- Fred D. Hafer
/s/ Joseph H. Jones Director March 28, 1995 ---------------------------- Joseph H. Jones
/s/ Lawrence C. Karlson Director March 28, 1995 ---------------------------- Lawrence C. Karlson
/s/ Ezekiel S. Ketchum Director March 28, 1995 ---------------------------- Ezekiel S. Ketchum
/s/ Sidney D. Kline, Jr. Director March 28, 1995 ---------------------------- Sidney D. Kline, Jr.
/s/ George W. Leighow Director March 28, 1995 ---------------------------- George W. Leighow
/s/ Joseph F. Paquette, Jr. Director March 28, 1995 ---------------------------- Joseph F. Paquette, Jr.
/s/ Daniel H. Polett Director March 28, 1995 ---------------------------- Daniel H. Polett
/s/ Lawrence R. Pugh Director March 28, 1995 ---------------------------- Lawrence R. Pugh
Director March 28, 1995 ---------------------------- Paul R. Roedel
/s/ Wilmer R. Schultz Director March 28, 1995 ---------------------------- Wilmer R. Schultz
Director March 28, 1995 ---------------------------- Robert B. Seidel
Director March 28, 1995 ---------------------------- Judith M. von Seldeneck
/s/ George Strawbridge, Jr. Director March 28, 1995 ---------------------------- George Strawbridge, Jr.
/s/ Anita A. Summers Director March 28, 1995 ---------------------------- Anita A. Summers
/s/ Earle A. Wootton Director March 28, 1995 ---------------------------- Earle A. Wootton
EXHIBIT INDEX
Page Number Sequentially Numbered Number Description Original ------ ----------- ------------
(3.1) Articles of Incorporation of Meridian Bancorp, Inc., as amended (included herein).
(3.2) By-laws of Meridian Bancorp, Inc., as amended, incorporated herein by reference to Exhibit 3.2 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.
(4) Agreement to furnish instruments defining the rights of holders of long- term debt of Meridian Bancorp, Inc. and its consolidated subsidiaries, incorporated herein by reference to Exhibit 4 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.
(9) Voting Trust Agreement (none).
(10.1) Meridian Bancorp, Inc. Executive Annual Incentive Plan, as amended, incorporated herein by reference to Exhibit 10.1 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.2) Meridian Bancorp, Inc. Retirement Restoration Plan, as amended, incorporated herein by reference to Exhibit 10.2 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.3) Meridian Bancorp, Inc. Stock Option Plan, as amended, incorporated herein by reference to Exhibit 10.3 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.4) Meridian Bancorp, Inc. Stock Appreciation Rights Plan, incorporated herein by
reference to Exhibit 10.4 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1992.*
(10.5) Meridian Bancorp, Inc. Directors' Deferred Compensation Plan dated July 1, 1983, incorporated herein by reference to Exhibit 10.8 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1990.*
(10.6) Form of Deferred Compensation Agreements entered into on January 12, 1987 between Meridian Bancorp, Inc. and Samuel A. McCullough, incorporated herein by reference to Exhibit 10.6 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.7) Form of Directors' Deferred Compensation Agreement, incorporated herein by reference to Exhibit 10.7 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.8) Termination Agreement between Meridian Bancorp, Inc. and Samuel A. McCullough dated as of July 1, 1986, incorporated herein by reference to Exhibit 10.8 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.9) Termination Agreement between Meridian Bancorp, Inc. and Ezekiel S. Ketchum dated as of July 1, 1986, incorporated herein by reference to Exhibit 10.9 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.10) Termination Agreement between Meridian Bancorp, Inc. and Russell J. Kunkel dated as of July 1, 1986, incorporated herein by reference to Exhibit 10.11 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.11) Termination Agreement between Meridian Bancorp, Inc. and David E. Sparks dated as of January 23, 1990, incorporated herein by reference to Exhibit 10.22 of the Annual Report on Form 10-K of the
Registrant for the year ended December 31, 1990.*
(10.12) Meridian Bancorp, Inc. Supplemental Salary Reduction Plan, as amended, incorporated herein by reference to Exhibit 10.14 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.13) Meridian Bancorp, Inc. Supplemental Executive Retirement Plan, incorporated herein by reference to Exhibit 10.15 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1991.*
(10.14) Meridian Bancorp, Inc. Executive Intermediate Performance Plan adopted January 1, 1990, incorporated herein by reference to Exhibit 10.23 of the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1990.*
(10.15) Rights Agreement dated as of July 25, 1989 between Meridian Bancorp, Inc. and Meridian Trust Company, as Rights Agent, incorporated herein by reference to Exhibit 1 of the Registration Statement on Form 8-A of the Registrant, filed on August 14, 1989.
(10.16) Amendment to Rights Agreement, dated as of June 28, 1994, between Meridian Bancorp, Inc. and Meridian Trust Company, as Rights Agent, incorporated herein by reference to Exhibit 2.2 of Amendment No. 1, filed July 25, 1994, to the Registration Statement on Form 8-A of the Registrant, filed August 14, 1989.
(11) Statement regarding Computation of Per Share Earnings (included herein).
(12) Statement regarding Computation of Ratios (not applicable).
(18) Letter regarding Change in Accounting Principles (not applicable).
(21) List of Subsidiaries of the Registrant (included herein).
(22) Published Report Regarding Matters Submitted to a Vote of Security Holders
(none).
(23) Consent of KPMG Peat Marwick LLP (included herein).
(24) Power of Attorney (none).
(27) Financial Data Schedules (included herein).
(28) Information from reports furnished to state insurance regulatory authorities (not applicable).
(99) Additional Exhibits (none).